Also known as: derivative suit · derivative action · shareholder derivative suit
Written by attorneys · grounded in primary & secondary sources — see below
A lawsuit brought by a member or partner on behalf of a limited liability company or limited partnership to enforce a right belonging to the entity. The plaintiff must satisfy statutory standing rules including current ownership and often a prior demand on managers or members. Any recovery belongs to the entity rather than the individual plaintiff.
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Darius Dixon held a membership interest in Decker Electronics when managers steered contracts to an affiliate. After the managers refused his written demand to sue, Darius filed a derivative action. Because he remained a member at filing and had held the interest at the time of the conduct, the court permitted the suit to proceed.
Destiny Davis was a limited partner in Duarte Shipping when general partners underpriced sales to a related entity. After expulsion she discovered the conduct and filed suit. The court dismissed the action because she was no longer a partner when the complaint was filed.
Doris Duffy prevailed in a derivative suit on behalf of Dynamic Solutions after proving managers diverted opportunities. The judgment awarded damages directly to the LLC. Doris received no personal payment and promptly remitted any funds that reached her.
David Dawson succeeded in a derivative action for Dominion Capital after showing general partners had diverted a contract. The settlement proceeds were paid to the partnership. Dawson immediately transferred any amounts he received to the partnership treasury.
Deborah Dunn obtained a partial judgment in a derivative suit for Decker Electronics. The court awarded her reasonable attorneys' fees and costs from the amount recovered for the LLC. The remainder stayed with the company.
Diego Duarte filed a derivative suit against the managers of Dynamic Solutions alleging failure to monitor compliance risks. Because the managers faced personal liability for the same oversight failures, the court excused the demand requirement as futile.
The plaintiff must be a member when the action is commenced and must have been a member when the conduct occurred or have acquired status by operation of law. A prior demand on the appropriate decision makers is also required unless futility is shown.
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A former partner generally cannot maintain the action because the statute requires current partner status at the time the suit is filed. Expulsion before commencement defeats standing even if the partner held the interest during the challenged conduct.
…is material to a sue decision. A sue decision' is a decision by a shareholder whether or not to institute a representative or derivative suit alleging a state-law cause of action." Gelb, Rule 10b-5 and Santa Fe —Herein of Sue Facts, Shame Facts, and Other Matters, 87 W. Va. L. Rev. 189, 198, and n. 52 (1985), quoting Borden,…
…methods employed by corporate boards to deal with it have received much attention by commentators. See, e.g., Brown, Shareholder Derivative Litigation
…of the second and third of these classes may frequently be able to circumvent the Birnbaum limitation through bringing a derivative action
…operational issues. Id. When the business judgment rule is applied to defend directors against personal liability, as in a derivative suit
…further relief as . . . seems meet and just.” [^maj-2]: In form, the plaintiff s bill of complaint presents, at least in part, a
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Any judgment, settlement, or other benefit belongs to the LLC or limited partnership. The plaintiff must immediately remit any proceeds received and may seek only court-approved expenses from the recovery.
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Demand is excused when it would be futile because the managers are conflicted or when waiting the statutory period would cause irreparable injury to the company. Ongoing diversion of assets can support a finding of irreparable harm.
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The complaint must state with particularity facts showing that the decision maker lacked independence, failed to act in good faith, or did not conduct a reasonable inquiry. General allegations of bias are insufficient.
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