Introduction written by Tanya Dmitronow and Julia Pizzi. Full analysis written by Sarah Gold and Richard Spinogatti.

Although they often involve overlapping issues, shareholder derivative lawsuits are fundamentally different from securities class actions. While the object of a securities class action is to hold the company (and, perhaps, its directors and officers) liable for harming investors and obtain money from the company (or others) as a result, a derivative action seeks relief for the company by asserting the company’s own claim against its directors, officers, and/or third parties. In other words, a securities class action is a contingent liability from the company’s perspective, but a derivative action is a contingent asset.

Because the claims at stake in a derivative action are the company’s, it is up to the company to determine whether to assert them. Thus, a shareholder wishing to file a derivative action will either (i) first make a demand on the company’s board requesting that the company take action regarding the underlying misconduct, or (ii) allege in a derivative complaint that the company could not have properly considered the demand. This latter option, known as “demand futility,” allows a shareholder to bypass the company’s initial review of the derivative claims, on the grounds that the board could not have exercised independent and disinterested business judgment in evaluating a demand.

As one might expect, the Delaware courts have established comprehensive analyses on shareholder derivative actions in general, and the demand futility requirements in particular. Although this law is well-developed and courts often defer to Delaware based on this expertise, the same allegations can sometimes result in a finding of demand futility in one jurisdiction but not in another. The below article illustrates this issue, as seen in a recent shareholder derivative case involving the manufacturer of Botox Cosmetic that was pursued in parallel proceedings in Delaware and California.

CONTINUE READING the full analysis written by Sarah Gold and Richard Spinogatti.

Photo of Julia Alonzo Julia Alonzo

Julia Alonzo is a senior counsel in the Litigation Department with a focus on securities and corporate governance litigation. She is experienced in complex civil securities matters and parallel proceedings, including federal securities class actions, shareholder derivative lawsuits, internal investigations, and SEC investigations.

Julia Alonzo is a senior counsel in the Litigation Department with a focus on securities and corporate governance litigation. She is experienced in complex civil securities matters and parallel proceedings, including federal securities class actions, shareholder derivative lawsuits, internal investigations, and SEC investigations. In addition, Julia has represented numerous companies facing litigation relating to pending M&A transactions. Julia is also a member of Proskauer’s Asset Management Litigation team.

Julia writes on topics relating to all aspects of civil securities litigation. She regularly updates a definitive treatise on shareholder derivative law, Shareholder Derivative Litigation: Besieging the Board. She is also the co-editor of Proskauer’s Corporate Defense & Disputes blog, which focuses on federal securities litigation, as well as the Minding Your Business blog on commercial litigation.

Julia maintains an active pro bono practice, with a focus on asylum, child welfare issues, and housing law.

Photo of Richard Spinogatti Richard Spinogatti

Richard Spinogatti is a senior counsel in the Litigation Department. Rich has more than 40 years of experience in federal and state courts in New York and other jurisdictions across the nation. In addition to litigating, trying cases, and arguing appeals at all…

Richard Spinogatti is a senior counsel in the Litigation Department. Rich has more than 40 years of experience in federal and state courts in New York and other jurisdictions across the nation. In addition to litigating, trying cases, and arguing appeals at all levels, he has advised national and international clients in connection with internal investigations and represented them in civil and criminal investigations, in administrative proceedings before federal, state and local government agencies, and before industry regulatory organizations.

Through his extensive representation of international, national, regional and local accounting firms, Rich has developed a broad knowledge of accounting, auditing and related professional services, and the complex regulatory structure governing the accounting profession. Rich is frequently called upon to consult with accountants and other professionals in pre-litigation contexts to avoid or minimize exposure risks. He has lectured and taught seminars for partners and employees of accounting firms on subjects ranging from accountants’ liability to litigation support.