Bringing a Shareholder Derivative Suit in Arizona

A shareholder derivative suit is a legal action brought in behalf of a corporation against a director, officer, insider or third party, alleging a wrongful act against the corporation. In Arizona, a shareholder can bring suit where the corporation itself has failed or is unable or unwilling to act due to conflicts of interest, deadlock or other obstacles.

In Arizona, only a shareholder of the corporation has standing to bring a derivative suit. Under A.R.S. § 10-742, standing means that the shareholder had ownership of stock at the time of the alleged wrongdoing or when the claim arose. The standing requirement ensures that the lawsuit is brought by a person who has a direct interest in the corporation’s well-being.

The shareholder bringing suit also must show that the corporation has been asked to take action or that such a demand would be futile. The “demand futility” standard applies if the shareholder believes that bias, conflicts of interest or other factors would prevent the board from acting, this must be demonstrated to the court’s satisfaction. 

Shareholder derivative suits assert claims that the corporation has suffered harm due to action or inaction by its officers, directors or other insiders. A plaintiff may include allegations of:

• Breach of fiduciary duty — Officers and directors owe fiduciary duties to the corporation and its shareholders. They violate those duties if they make decisions and take actions that benefit themselves at the expense of the corporation.
• Fraud or misrepresentation — Deceptive practices by directors, officers, insiders or third parties may have caused the corporation financial harm.
• Waste of corporate assets — Corporate assets might have been dissipated through improper transactions, such as side deals by directors or officers that do not benefit the corporation.
• Illegal or improper transactions — These can include illegal contracts, self-dealing, insider trading or violations of state or federal laws or regulations. 

A shareholder derivative suit seeks to redress the wrong done to the corporation and to protect its assets. Courts have discretion in determining appropriate remedies, which may include:

• Monetary damages — These include restitution for losses incurred by the corporation due to the alleged wrongful actions.
• Injunctions — A court may issue an order enjoining continuation of harmful conduct, such as blocking a merger, preventing future breaches of fiduciary duties and halting illegal actions.
• Disgorgement — Courts may order wrongdoers to return money or property they obtained as a result of their misconduct.
• Attorneys’ fees — The court may order the defendants to pay the prevailing shareholder his or her attorneys’ fees and costs in the case.

Derivative suits provide shareholders with a potent tool for addressing wrongs to the corporation that are being committed from within. However, these suits demand careful investigation and preparation, which require the attention of a skillful Arizona corporate attorney.

The Law Offices of Donald W. Hudspeth P.C. in Phoenix provides determined representation for plaintiffs and defendants in shareholder derivative lawsuits. Call us at 866-696-2033 or contact us online to schedule a consultation.