Ii. [§ 9.2] Shareholders' Derivative Action Lawsuits

• Jurisdiction: Maryland

II. [§ 9.2] SHAREHOLDERS' DERIVATIVE ACTION LAWSUITS

John Smith is a shareholder of the Harris Corporation. The corporation publishes medical textbooks. The Chief Executive Officer of the corporation ascertained that a key employee had been stealing money from the business for over five years. The total amount stolen was in excess of $250,000. The method and scheme used by the employee was a sophisticated plan relating to inaccurate reporting of transactions on the corporation's books and records. The Chief Executive Officer properly discharged the employee, but refused to institute suit on behalf of the corporation against the employee to recover the funds taken. The former employee was the husband of the Chief Executive Officer's sister.

John Smith, a shareholder, instituted a shareholders' derivative action for trover and conversion against the former employee.

COMPLAINT

Shareholders' Derivative Action

John Smith (hereinafter "Smith"), Plaintiff, for the use of himself and all of the common stockholders of and for the use of Harris Corporation, by his attorneys, Sonia P. Hernandez and Hernandez & Hernandez, P.A., sues Harris Corporation (hereinafter "Corporation") and George Peale (hereinafter "Peale"), Defendants, and states:
1. Plaintiff Smith is a resident of Baltimore County, Maryland and is a minority shareholder of Harris Corporation.
2. Defendant Harris Corporation is a Maryland corporation with its principal place of business in Baltimore County, Maryland, where it engages in the business of publishing medical textbooks.
3. Defendant Peale was the Financial Administrator of Harris Corporation.
4. On January 21, 2022, Ron Johnson, the Chief Executive Officer of Harris Corporation, terminated the employment of Defendant Peale. The basis of this termination was the admission by Defendant Peale that he had stolen large sums of money, amounting in the aggregate to Two Hundred Fifty Thousand Dollars ($250,000), over a period of five (5) years from Harris Corporation.
5. Notwithstanding the conduct of Defendant Peale, the Corporation, by and through its Board of Directors and its attorneys, has refused to take legal action as would be necessary to obtain all of the monies that are due and owing to Harris Corporation, despite demand by Smith for such action to occur.
6. This failure and refusal is without any justification whatsoever, as no valid defense exists to Defendant Peale's obligation to pay the Corporation for the full amount of the money he stole.
7. Plaintiff Smith further petitioned the other shareholders to compel commencement of legal action against Defendant Peale. Said demand and petition have been ignored.
8. Plaintiff Smith is, and has been, a shareholder of Harris Corporation since 1988.
9.Upon information and belief, Plaintiff Smith avers that one reason Harris Corporation does not institute suit against Defendant Peale is because Defendant Peale is married to the Chief Executive Officer's sister.
10. Defendant Peale's theft of the Two Hundred Fifty Thousand Dollars ($250,000), was intentional, without permission or justification, and constituted a conversion of Harris Corporation's money.
WHEREFORE, Plaintiff demands this Court to enter judgment in favor of Plaintiff, to the use of all the common stockholders and for the use of Harris Corporation, against Defendant Peale in excess of Seventy-Five Thousand Dollars ($75,000) in compensatory damages, plus interest, attorney's fees, and costs.

__________
Sonia P. Hernandez
AIS No. 0123456789
Hernandez & Hernandez, P.A.
Exelon Building
1310 Point Street
Baltimore, Maryland 21231
Phone: (410) 555-1234
Fax: (410) 555-1235
Email: SPHernandez@HernandezLaw.com

Attorneys for Plaintiff

COMMENT

Derivative actions instituted by corporate shareholders assert on behalf of the corporation those claims that the corporation cannot or will not institute itself. Indeed, an action for damages for injuries to a corporation must be brought derivatively in the name of the corporation. Wasserman v. Kay, 197 Md. App. 586, 610, 14 A.3d 1193, 1207 (2011). Derivative suits may claim breaches of fiduciary duties owed to the corporation by officers, directors, or other shareholders, as well as claims against third parties. See Provident Bank v. DeChiaro Ltd. P'ship, 98 Md. App. 596, 634 A.2d 973 (1993) (holding that a limited partner can file a derivative action to enforce a right of a limited partnership to the same extent that a stockholder may bring an action for a derivative suit under the corporation laws of Maryland), cert. denied, 334 Md. 210, 638 A.2d 752 (1994); Yost v. Early, 87 Md. App. 364, 589 A.2d 1291 (1991) (claim for mismanagement of one corporation and for misappropriation and waste of corporate funds and assets for personal use); Deborah A. DeMott, Shareholder Derivative Actions: Law & Practice (Callaghan 2021-2022 ed.); see also Indep. Distribs. v. Katz, 99 Md. App. 441, 637 A.2d 886 (discussing a derivative claim asserting corporate opportunity doctrine by minority shareholders), cert. denied, 335 Md. 697, 646 A.2d 363 (1994). As stated by the court in Wasserman,

Reasons for derivative actions include: (1) the prevention of several lawsuits by shareholders against the same defendants; (2) protection of corporate creditors by putting assets back into the corporation; and (3) protection of all shareholder interests by increasing the value of their shares. At the same time, derivative suits adequately compensate claimant shareholders by increasing the value of their shares.

Wasserman, 197 Md. App. at 610-11, 14 A.3d at 1207.

Mona v. Mona Elec. Group, Inc., 176 Md. App. 672, 934 A.2d 450 (2007), is a case that included both direct claims against individuals and a derivative claim against a corporation. It provides a useful illustration of the distinction between alleged breaches of fiduciary duty in a general tort context—breaches that the Maryland courts have held do not constitute a separate cause of action (see §§ 3.206-3.209, supra)—and breaches of fiduciary duty in a corporate management and governance context, where the Maryland courts seem to accept...