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Shareholder derivative lawsuits stemming from COVID

by | Oct 28, 2021 | Fiduciary Duty |

Numerous types of shareholder disputes exist. Shareholder derivative lawsuits, albeit rarer, do occur. With the increasing frequency of these claims in response to COVID-19 measures taken by various organizations, it is important for shareholders and executives to understand how these claims work.

What is a derivative shareholder dispute?

The best way to understand a derivative shareholder dispute is by contrast to more common shareholder disputes. Most shareholder lawsuits assert damages to the shareholder or a group of shareholders. In a derivative shareholder suit, the shareholders bring a claim that asserts injury or damage to the entity, not to the shareholders themselves.

The idea here is that the damages that occur to the organization also harm the shareholders. According to JDSupra, “the injury to the equity holders is the general diminution of the value of their investment because the entity as a whole has been injured.” The entity incurs the damages, not to the shareholder, but the shareholders bringing the claim, hence what makes the claim “derivative.”

In essence, these claims can be seen as breach of fiduciary duty claims against a company’s executives, brought by the shareholders on behalf of the entity.

How does COVID play a part in these claims?

Since the outbreak of the pandemic, there has been a marked increase in shareholder derivative lawsuits stemming from COVID-19. In many cases, shareholders have filed lawsuits (on behalf of the entities in which they hold shares) against executives for their poor responses to the pandemic, reasoning that such executive actions relating to COVID-19 have decreased the overall overall value of the company.

Specifically, derivative lawsuits assert either a failure to implement proper safety measures for employees, customers and the public, or that public statements made by the company regarding the company’s health, its safety protocols or the pandemic itself led to litigation costs or damage to the company’s reputation.

These claims, however, are not limited to corporations and can arise in numerous commercial contexts.

For shareholders, it is important to consolidate all interested shareholders on the front end, if possible, to bring a unified claim. For executives, it is important to prepare strong defense against lawsuits of this kind, working with experienced legal counsel to protect the company.