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Current Developments in the Commercial Divisions of the
New York State Courts by Schlam Stone & Dolan LLP
Posted: November 11, 2018

Plaintiff Asserting Derivative Claims Must be Represented by Counsel

On November 1, 2018, Justice Schecter of the New York County Commercial Division issued a decision in Park v. Song, 2018 NY Slip Op. 28343, holding that a plaintiff asserting derivative claims must be represented by counsel, explaining:

Whether a derivative plaintiff can maintain claims without being represented by counsel is a question of first impression under New York law. The answer is well settled in Delaware and in the Second Circuit; shareholders are required to have counsel. The rationale underlying those courts’ determinations applies with equal force in New York State; therefore, plaintiffs must retain counsel to prosecute their derivative claims.

In New York, as in Delaware, it is black letter law that a stockholder has no individual cause of action against a person or entity that has injured the corporation. Rather, if demand requirements have been satisfied (unless futile), a stockholder can assert a derivative claim to recover for injury to the business entity. Because a derivative plaintiff is really seeking to vindicate the rights of the corporation, and not simply its own rights, derivative claims are considered to belong to the corporation itself.

Additionally, in New York, like in Delaware, corporations and LLCs cannot be represented by individual shareholders or members; they must be represented by counsel. When the party to an action is a fictional person—a legal entity with limited liability—the general rule is that it cannot represent itself but must be represented by a licensed practitioner answerable to the court and other parties for his or her conduct in the matter.

The Delaware Court of Chancery has held that because a derivative plaintiff seeks to ‘enforce a right of a corporation, and corporations appearing in this Court may only do so through counsel the derivative plaintiff who asserts the rights of the corporation must also be represented by counsel. The Second Circuit concurs. There is no reason for a different conclusion here.

The concern, of course, is that a derivative action implicates the rights of all shareholders and members who will ultimately be bound by the findings made and the outcome reached in the litigation. It is therefore essential that one pursuing derivative claims be capable of doing so on behalf of all who would be affected. A plaintiff who is unfamiliar with corporate law and unrepresented by counsel runs the risk of losing an otherwise meritorious case due to lack of familiarity with well settled, yet complex rules applicable to derivative litigation, imperiling the rights of others with ownership in the entity.

Any inconvenience to the plaintiffs here is heavily outweighed by the general policy concerns requiring that a business organization be represented by counsel. A successful derivative plaintiff, moreover, is entitled to an award of attorneys’ fees. Thus, if plaintiffs’ derivative claims have merit—and many have already survived a motion to dismiss—and there is a possibility of collecting damages, there should be no shortage of lawyers in New York City willing and capable of representing them.

(Internal quotations and citations omitted).

This decision illustrates another of the special requirements for derivative actions (an action where a shareholder brings an action on behalf of a corporation or other business entity). Even though an individual may be bringing the claims, the claims belong to the corporation, and so the derivative action plaintiff must be represented by a lawyer, just like the corporation would have been required to do had it brought the claims directly. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding bringing an action on behalf of a corporation or other business entity.

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