Also known as:derivative securities · derivatives · derivative · financial derivative
Written by attorneys · grounded in primary & secondary sources — see below
A financial instrument whose value depends on the price of an underlying asset such as corporate stock. The instrument grants the holder rights to buy or sell the asset at a set price without immediate ownership of the asset itself.
Sources & Authorities
How it applies
Common Examples
6
Shareholder Option Holder Sues
David Dawson held call options on Diamond Manufacturing stock. After learning of board misconduct that depressed the share price, he filed suit on the corporation's behalf. Because he was not a shareholder when the conduct occurred, the court dismissed the action under the contemporaneous ownership rule.
LLC Member Exercises Put
Dwight Dorsey acquired a put option on Dillon Energy membership interests through operation of the operating agreement. He commenced a derivative action alleging manager self-dealing. The court allowed the suit because Dorsey's status as a member devolved from a prior member who held the interest at the time of the conduct.
Select any source to read its text and confirm it supports the definition.
Cases
Federal Rules
Uniform Acts
Model Codes
Restatements
Study Supplements
Dustin Donovan received a call option on limited partnership interests by operation of law after his parent's death. He brought a derivative action to enforce partnership rights. The court permitted the action because Donovan's partner status arose from a person who was a partner when the challenged conduct occurred.
Inquiry into Option Grants
Derek Douglas alleged that officers issued themselves improper call options. The corporation began an internal inquiry into the grants. The court stayed the derivative proceeding for ninety days to allow the inquiry to conclude.
Proceeds from Option Suit
Danielle Dixon brought a derivative action over mismanagement involving put options. The suit settled for a cash recovery paid to the LLC. The court ordered that the entire settlement amount belong to the company rather than to Dixon personally.
Special Committee Reviews Option Claims
Dominic Drake sued over undisclosed risks in derivative securities held by the partnership. The limited partnership appointed a special litigation committee to investigate. The court stayed discovery while the committee completed its review of whether the claims served the partnership's best interests.
Common questions
Frequently Asked
3
Must a plaintiff hold the underlying stock or only a derivative security to bring a derivative action?+
A plaintiff must be a shareholder or member at the time the action is commenced and usually at the time of the conduct. Holding only an option or other derivative security does not satisfy the ownership requirement unless the instrument itself confers membership status under the governing agreement.
Who receives the recovery when a derivative action involving options succeeds?+
Any proceeds or benefits belong to the corporation or LLC, not the individual plaintiff. The plaintiff may receive reasonable expenses from the recovery if the action succeeds in whole or in part.
Can a court stay a derivative action while the company investigates option-related claims?+
Yes. When the corporation or partnership begins an inquiry into the allegations, the court may stay the proceeding for a reasonable period to permit completion of that inquiry.
377 U.S. 426 (1964)Business Associations
…under § 27 of the Act.[^maj-2] The court held Wis. Stat., 1961, § 180.405 (4), which requires posting security for expenses in derivative actions, applicable to both counts, except that portion of Count 2 requesting declaratory relief. It ordered the respondent to furnish a bond in the amount of $75,000 thereunder and, upon…