Derivative action lawsuits can occur in Washington when shareholders discover wrongdoing. The shareholder must hold shares with the company they’re suing to file the lawsuit. Derivative action intends to hold the wrongdoer accountable and, possibly, recover damages caused by the activity.
Before taking derivative action
Before filing a lawsuit, shareholders ask the corporation’s board of directors to remedy the situation. The board can either do nothing, investigate the claim itself or appoint an investigative committee. Business disputes often stop at this stage if the necessary action is taken.
The shareholders can proceed with the derivative action lawsuit if the board’s response is unacceptable. The lawsuit is filed on behalf of the corporation. Any damages paid go directly to the corporation. The shareholders benefit when the company succeeds, and the lawsuit is a way to protect the corporation’s integrity and reputation.
Derivative action lawsuit examples
A health and human safety derivative action lawsuit involves physical harm or death to the public.
For example, Pacific Gas and Electric shareholders filed a derivative action lawsuit claiming that gross mismanagement by corporate leaders caused a natural gas pipeline explosion. The explosion killed several people and destroyed homes. Pacific Gas and Electric was ordered to pay $90 million to settle the claim.
Another type of derivative action lawsuit involves inappropriate behavior, as in the case of Well Fargo. A derivative action lawsuit claimed that bank directors allowed bank employees to get bonuses and boost sales by creating fake accounts on behalf of customers. The settlement included corporate reforms and a $240 million cash payment.
Other types of derivative action lawsuits include those involving massive fraud, conflicts of interest and conflicts of interest. Note that some derivative action lawsuits never involve money. In some cases, shareholders want to see a change in corporate leadership or a change in how the corporation operates. It depends on what type of action is the basis for the lawsuit.