Also known as: derivative suits · derivative action · derivative actions · shareholder derivative suit · stockholder derivative suit
Written by attorneys · grounded in primary & secondary sources — see below
A lawsuit brought by a shareholder or member to enforce a right belonging to the corporation, limited liability company, or limited partnership when those in control have failed to act. The plaintiff must have been a member or partner at the time of the challenged conduct and at commencement of the suit. Any recovery belongs to the entity rather than the individual plaintiff.
Damian Decker acquired his membership interest in Dixon Foods after the managers had already diverted a corporate opportunity. When Damian later filed a derivative suit to recover the opportunity for the LLC, the court dismissed the action because Damian was not a member when the conduct occurred.
Denise Donovan, a limited partner in Duffy Construction, sent a written demand to the general partner requesting suit over a diverted contract. After four months passed with no action and only vague assurances, Denise filed a derivative suit. The court allowed the action to proceed because the general partner had not brought suit within a reasonable time.
Select any source to read its text and confirm it supports the definition.
Devon Drake brought a successful derivative action on behalf of Drake Logistics that produced a $500,000 judgment against a manager for self-dealing. The court ordered the entire recovery paid directly to the LLC even though Devon had funded the litigation personally.
Darius Dixon, a limited partner, obtained a settlement in a derivative suit for Davenport Pharmaceuticals that returned misappropriated funds. The court required Darius to remit every dollar of the settlement proceeds to the partnership rather than retaining any portion personally.
Danielle Dixon prevailed in a derivative suit that recovered $200,000 for Dixon Foods. The court awarded her reasonable attorneys' fees and costs from the LLC's recovery, recognizing that the litigation had conferred a substantial benefit on the company.
Doris Duffy filed a derivative suit in Delaware against nonresident directors of a Delaware corporation, relying solely on the directors' ownership of company stock to establish jurisdiction. The court dismissed the action for lack of minimum contacts with the forum.
Only a person who is a member both when the challenged conduct occurred and when the action is commenced may maintain the suit. The status must exist at both times unless it devolved by operation of law or under the operating agreement.
Supporting sources
All proceeds belong to the limited liability company or limited partnership, not the plaintiff. The plaintiff must immediately remit any funds received to the entity.
Supporting sources
If the action succeeds in whole or in part, the court may award reasonable expenses, including attorneys' fees, from the entity's recovery. The award compensates the plaintiff for conferring a benefit on the company.
Supporting sources
Yes, the member must first make a demand on the managers or other members requesting that the company bring the action, unless the demand would be futile.
Supporting sources
No, a derivative action on behalf of a limited liability company may not be voluntarily dismissed or settled without court approval.
Supporting sources
…of treating a corporation as a resident of the incorporating State seems to me particularly appropriate in the context of a shareholder derivative suit, for the State realistically may perceive itself as having a direct interest in guaranteeing the enforcement of its corporate laws, in assuring the solvency and fair management of its…