Five tools for defending against copycat derivative actions

It’s tough enough dealing with a class action or whistle-blower suit targeting your company. The situation gets much more complex when a shareholder simultaneously pursues a copycat derivative action. These derivative suits repeat the allegations from another direct suit against the company but assert them on behalf of the company against its officers and directors, claiming they breached their fiduciary duties by participating in or failing to prevent the wrongdoing alleged in the initial suit. Although the shareholder plaintiffs who bring these copycat derivative suits purport to be acting in the corporation’s best interest, they presume the corporation is culpable for the wrongdoing alleged in the underlying litigation, even while the corporation is contesting that claim.

These copycat derivative suits can be a huge headache for corporate counsel. They can multiply litigation costs, distract the company’s leaders and subject the company to duplicative discovery from different plaintiffs and inconsistent rulings from different courts. Worse, they can jeopardize the company’s defense in the underlying direct suit.