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Derivative Action Lawsuits: Protecting the Interests of a Family-Owned Corporation

If the interest of a family-owned corporation part of an estate or trust has been violated, a derivative action lawsuit can be filed on behalf of those shareholders alleged to be harmed by improper fiduciary conduct. In probate litigation matters, family-owned corporation interests can complicate execution of an estate or trust. Derivative actions filed on behalf of inheritors of the shares of a family-owned business are subject to what is called “demand futility” analysis in court. This double-bind principle can be frustrating for beneficiaries seeking timely transfer of estate or trust family-owned business shareholder assets.

 

Demand Futility and Exceptions

The rule of “demand futility” is enforced by a court if it is determined that the plaintiffs who have filed a claim against a party allegedly making an independent and disinterested business judgment of detriment to the other shareholders. Such lawsuits are often dismissed by the courts, however, on a motion of the defense. The reason for dismissal? “Demand futility” – where it is deemed that the corporation suing itself is not in majority interests on basis of no adequately cited exception.  

 

Invocation of the demand futility exception rule, requires that a plaintiff evidence that the defense has not properly exercised independent and disinterested business judgment. For example, in New York (Lerner v. Prince, 2014 NY S Slip Op 03763 [119 AD3d 122]), the law states a plaintiff must properly exhibit that a shareholder was “interested” in the alleged transactions breaching fiduciary duty to the corporation, and the estate or trust

 

Meeting Demand Requirements

Control of a family-owned corporation part of an estate or trust interest is a form of “ownership.” If the court finds that reverting the independent and disinterested business judgment of the defendant would pose further detriment to the corporation, dissolving the interests of the other shareholders, a derivative action will be dismissed on grounds of insufficient evidence.

 

In New York (Central Laborers’ Pension Fund v. Blankfein, 2013 NY Slip Op 05857 [111 AD3d 4])., as in Delaware where most corporations are registered in the United States, derivative actions must also be supported by plaintiff adherence to demand requirements. There must be evidence that the party(s) misconduct resulted in:    

 

“(i) [illegitimate] personal financial benefit that was not shared by the other stockholders from the challenged conduct; (ii) might suffer a ‘materially detrimental impact’ from the proposed legal action; or (iii) was incapable, due to domination and control, of objectively evaluating a demand to assert the company’s claims.”

 

An estate law attorney can advise clients if a derivative action will be in their best interests in a probate litigation matter.

 

Contact an Estate Law Attorney

Family-owned corporations part of an estate or trust are valuable shareholder assets that can be protected from fiduciary breach with the assistance of an attorney. Ettinger Law Firm is a licensed attorney practice in New York specializing in estate planning and probate litigation. Contact Ettinger Law Firm for consultation about filing a derivative action involving a probate litigation matter.

See Related Blog Posts

Business Ownership and Estate Planning: Recapitalization

Estate Planning and Buy-Sell Agreements for Your Business

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