Not every shareholder lawsuit is a good-faith effort to protect a company’s interests. Sometimes, it is something else entirely: a strategic play in a broader personal dispute. South Carolina courts are now on high alert for this kind of abuse. In 2024, the South Carolina Court of Appeals established a new standard for determining whether a derivative plaintiff is actually fit to bring claims on behalf of a company. The decision provides a clear framework to weed out lawsuits that are more about leverage than legitimacy.
The Rise of the Tactical Derivative Lawsuit
A derivative action allows a shareholder to step into the company’s shoes and bring claims when the company’s managers or directors have failed to do so. It is supposed to be a tool of last resort, reserved for situations where internal remedies have failed and wrongdoing is harming the company.
But derivative suits can also be misused. Plaintiffs with personal grievances against managers or business partners may use these claims as pressure tactics. Courts around the country have recognized the problem and have dismissed suits where the shareholder is really just pursuing a private agenda.
South Carolina’s Test: A Focus on Motive, Not Just Merits
In Boathouse at Breach Inlet, LLC v. Stoney, the South Carolina Court of Appeals adopted a multi-factor test to determine whether a shareholder is a proper representative in a derivative action. The court made clear that it will consider the totality of the circumstances. There is no bright-line rule, but there are clear warning signs that a suit may be motivated by something other than corporate interest.
The factors include:
- Economic antagonism between the plaintiff and the company or other shareholders
- The remedy being sought and whether it primarily benefits the plaintiff personally
- Whether the plaintiff is actually driving the litigation or acting as a figurehead
- The plaintiff’s level of familiarity with the claims
- Whether there are other lawsuits pending between the plaintiff and the defendants
- The scale of the plaintiff’s personal interest compared to the interest in the derivative claim
- Evidence of personal animus or vindictiveness
- Whether other shareholders support or oppose the lawsuit
This test allows courts to filter out lawsuits that masquerade as corporate governance actions but are really just leverage in a personal standoff.
Practical Implications for South Carolina Businesses and Their Lawyers
The Boathouse framework is a powerful tool for business owners and defense counsel. When a derivative suit is filed, the first question should be: is this really about the company?
If the plaintiff is suing to gain an upper hand in another dispute, or if their stake in the company is minimal compared to their personal grievance, there may be a strong argument that they are not a proper representative. Likewise, if the plaintiff is unfamiliar with the claims or has no real shareholder backing, that too may warrant early dismissal.
For companies, this decision reinforces the importance of documenting internal disputes and shareholder communications. If litigation appears likely, early evidence of the plaintiff’s motives or other pending disputes can be critical in challenging standing at the outset.
The Bottom Line
The derivative suit is a serious tool. It should not be treated like a negotiating chip. South Carolina’s courts now have a clear and flexible standard to ensure that only proper shareholder representatives are allowed to use it. For businesses facing this kind of litigation, Boathouse provides a strong foundation to push back.
