Shareholder Derivative Action Process - Explained

The video explains the process for shareholders to bring a derivative action on behalf of a corporation. It covers the concept of derivative action, where shareholders sue officers or directors for damages caused to the corporation. The process involves making a demand on the corporation, which may be rejected or ignored by the board. Shareholders can then proceed to court if they demonstrate the board's failure to act in the corporation's best interest. The business judgment rule protects directors unless gross negligence or bad faith is shown. A special committee may evaluate the need for litigation, and shareholders can bypass the demand if it's deemed futile due to conflicts of interest.

What is the primary purpose of a derivative action?

• To directly increase shareholder dividends

• To hold officers or directors accountable for damages to the corporation

• To reduce corporate taxes

• To increase the number of shares available

What is the first step shareholders can take to initiate a derivative action?

• Request a meeting with the CEO

• Sell their shares

• Make a demand on the corporation to sue the responsible parties

• File a lawsuit directly in court

What protects directors from being easily sued by shareholders?

• The corporate liability shield

• The director's immunity clause

• The business judgment rule

• The shareholder protection act

What must shareholders demonstrate to the court if the board refuses to sue?

• That the shareholders are in agreement

• That the corporation is profitable

• That the board is violating its duties to the corporation

• That the board is acting in good faith

What is the role of a special committee in the derivative action process?

• To approve all shareholder demands

• To determine the appropriateness of litigation

• To oversee daily operations

• To manage the corporation's finances

When might shareholders bypass making a demand on the corporation?

• When the board has already agreed to sue

• When demand is considered futile due to conflicts of interest

• When the shareholders are in the minority

• When the corporation is performing well

What situation might indicate a conflict of interest in the board's decision-making?

• The board regularly consults with shareholders

• The board is composed of independent members

• The chairman and CEO are the same person

• The board has no financial interest in the outcome