Shareholder Derivative Litigation

In a shareholder derivative case, a current shareholder brings a lawsuit on behalf of the company and against certain third parties, which usually include current and/or former officers and directors of the company. Accountants and lawyers which have provided services to the company can also be named as defendants if their actions caused harm to the Company.

The causes of action asserted in a shareholder derivative action typically include claims for breach of fiduciary duty, insider trading, negligence, and unjust enrichment.

The necessity for a shareholder derivative action stems from the fact that a corporation is an inanimate object and can only act through its officers and directors. If such persons have abused the corporation for their own profit or gain, they cannot be expected to bring suit against themselves. A shareholder derivative action is thus effectively the only means available to hold the faithless fiduciaries liable for the harm they caused to the company and its shareholders.

Shareholder derivative actions are based on state corporate law, which has long recognized the right of shareholders to bring suit to hold officers and directors liable when they have abused their positions of trust and confidence. The California Supreme Court has stressed the fact that “shareholders may … bring a derivative suit to enforce the corporation's rights and redress its injuries when the board of directors fails or refuses to do so.” Grosset v. Wenaas, 42 Cal. 4th 1100, 1108 (2008). Scholars agree. As Professor Ballantine, who was one of the foremost authorites on corporate law, and has been frequently quoted by courts with approval, explained:

"Great evils, however, will result if undue obstacles are placed in the path of a shareholder who has legitimate grounds for suing. The derivative action is practically the only remedy for calling the management to account for its wrongs against the corporation and to obtain
restitution. Where a derivative suit is against outsiders for wrongs against the corporation the directors can usually be expected to decide impartially on the advisability of suing. But the management cannot be expected to sue themselves for their own misdeeds. By such
wrongs the value of each shareholder's shareholdings will be depreciated and impaired to a greater or less extent."

The lawyers at Bottini & Bottini, Inc. have a long and distinguished history of successfully representing shareholders in derivative actions. In addition to having successfully litigated dozens of shareholder derivative actions during his career, Frank A. Bottini is one of only a handful of plaintiff's lawyers to have ever been hired by a corporation's Special Litigation Committee to pursue claims on the corporation's behalf. Mr. Bottini served as co-lead counsel in In re Brocade Communications Systems, Inc. Derivative Litigation, (Santa Clara, Calif. Sup. Ct. Case No 1:05cv041683). The Brocade case was one of the highest-profile derivative cases in the United States and involved the backdating of stock options by the Company’s former CEO Gregory Reyes and former V.P. of Human Resources Stephanie Jensen, both of whom were convicted of criminal securities violations in related criminal actions before the United States District Court for the Northern District of California. As a result of Mr. Bottini’s vigorous prosecution of the action, Brocade formed a Special Litigation Committee, which thoroughly investigated the claims. Moreover, based on Mr. Bottini’s exceptional work over a two-year period, Brocade’s Special Litigation Committee hired Mr. Bottini’s firm as co-counsel, along with Dewey & LeBoeuf LLP. Ultimately, over $24 million was recovered for the company as a result of the litigation.

In 2014, Bottini & Bottini recovered $20 million in a derivative case on behalf of Career Education, Inc. The case was litigated in the United States District Court for the Northern District of Illinois and Plaintiff survived a motion to dismiss brought pursuant to F.R.C.P. 23.1. In denying the motion to dismiss, the Court held that Plaintiff had adequately alleged demand futility under the stringent Caremark standard.

Mr. Bottini's prior firm, Johnson Bottini, LLP was also retained by the trustee of Artes Medical, Inc. (“Artes”) to pursue claims for breach of fiduciary duty and corporate waste against Artes’ former officers and directors after Artes went bankrupt. See Leslie Gladstone, as Chapter 7 Trustee for Artes Medical, Inc. v. Christopher J. Reinhard, et al., Case No. 37-2008-00091039-CU-NP-CTL (San Diego Superior Court). After three years of litigation, the case was settled for a $3 million recovery for the estate.