What Is Securities Law? 

What is a securities class action?

A securities class action is a case brought pursuant to Federal Rule of Civil Procedure 23 on behalf of a group of persons who purchased the securities of a particular company during a specified period of time (the class period). The complaint generally contains allegations that the company and/or certain of its officers and directors violated one or more of the federal or state securities laws. A suit is filed as a class action because the members of the class are so numerous that joinder of all members is impracticable. For a case to proceed as a class action, there should be a well-defined commonality of interest in the questions of law and fact involved in the case. Further, the plaintiffs must establish that a class action is superior to other available methods for the fair and efficient adjudication of the controversy and that the prosecution of separate actions by individual class members would create a risk of inconsistent and varying adjudications.

What laws protect individual investors against fraud by company management?

The Securities Act of 1933 and the Securities Exchange Act of 1934 are the main federal laws which prohibit such conduct. In addition, the states have securities laws, known as blue sky laws, which are also designed to protect individual investors.

What is a shareholder derivative action?

Unlike a class action, brought on behalf of investors, a shareholder derivative action is a lawsuit brought by a shareholder of a public company on behalf of and for the benefit of the company itself against the directors and/or officers of that company. In a derivative action, shareholders “step into the shoes” of the directors and officers of a company and bring litigation that the board would be unwilling to pursue on its own. Such unwillingness typically relates to the fact that the board members themselves are alleged to have participated in the misconduct and thus would be unlikely to “sue themselves.”

Shareholder derivative litigation can recover money damages back to the company for financial or reputational harm caused by the conduct of its insiders, and also can be used to improve the governance of public companies in order to guard against such harms in the future. The objectives of these actions are primarily: (i) to recover monetary damages from responsible corporate actors and their director and officer liability policies for the benefit of company; and (ii) to force the company to implement corporate governance improvements and reforms. Should these objectives be met, the company and its shareholders both benefit: the company benefits via return of funds to its coffers and/or better corporate governance; the shareholders benefit because of the company’s improved corporate governance, which can result in corporate goodwill and in an increase in share price.

Any shareholder of a company can serve as a plaintiff in a shareholder derivative action provided that the shareholder has held stock in the company continuously at least from the period in which the wrongful conduct began and through the present, generally provided that they continue to hold at least one share through the conclusion of the litigation. While courts frequently give deference to shareholders with larger holdings when selecting a Lead Plaintiff in shareholder derivative actions, courts will consider other factors as well, including which plaintiff was the first to file a complaint, the quality of the pleadings filed, and the experience of plaintiff ’s counsel.

What laws provide shareholder derivative standing?

Shareholder derivative actions generally arise out of violations of state corporation laws, and as such, they are traditionally brought in state courts. However, shareholder derivative actions can be brought in federal court under certain circumstances. Under Delaware state law, which governs a majority of U.S. companies that are incorporated there, and also serves as a model for other state laws, directors and officers of publicly traded companies owe fiduciary duties to the companies that they serve.  These duties include the duties of:

  • Loyalty, which requires directors and officers to not use their positions of trust and confidence to further their private interests;
  • Care, which requires that directors use that amount of care which ordinarily careful and prudent people would use in similar circumstances; and
  • Good Faith, which requires corporate fiduciaries to act with a genuine attempt to advance corporate welfare — to not act in a manner unrelated to a pursuit of the corporation’s best interests.

    Breaches of the three (3) duties form the foundation of the claims underlying shareholder derivative actions.

What Harm Is Required To Bring A Shareholder Derivative Action

The harm alleged by the plaintiff must be to the company itself, and not to the shareholder personally. directly. Moreover, because company officers and directors are traditionally charged with preserving the interests of the company, a shareholder in a derivative action must be able to demonstrate that a litigation demand on the board to pursue the action was either wrongfully refused, or that making a litigation demand prior to filing suit would have been futile due to the self-interest of the members of the board.

To learn more about the firm’s securities litigation practice, contact us today!