A legal action initiated by shareholders on behalf of a corporation against the corporation’s management (officers and/or directors) or, sometimes, against a third party is a specific type of litigation. It arises when the corporation itself fails to take action against those who have allegedly harmed it. For example, if a board of directors knowingly approves a transaction that enriches themselves at the expense of the company and its shareholders, and the board refuses to pursue legal remedies, a shareholder can bring a lawsuit to seek redress for the corporation.
This type of legal proceeding serves as a crucial mechanism for corporate governance and accountability. It ensures that those entrusted with managing a corporation’s affairs act in the best interests of the company and its shareholders. Historically, it has played a significant role in addressing instances of corporate fraud, mismanagement, and self-dealing, helping to protect shareholder value and maintain market integrity. Successful actions can result in monetary damages awarded to the corporation, corporate governance reforms, or removal of culpable directors or officers.
