Written by attorneys · grounded in primary & secondary sources — see below
A procedural device by which a member of a limited liability company or partner in a limited partnership sues on behalf of the entity to enforce a right that the entity itself has failed to pursue.
Sources & Authorities· 11 primary sources
Select any source to read its text and confirm it supports the definition.
Cases
Federal Rules
Uniform Acts
How it applies
Common Examples
6
Member Status At Commencement
Stephen Shaw acquired his membership interest in Sterling Manufacturing after the managers diverted company funds. He files a derivative action in state court to recover the diverted assets. Because Shaw was not a member when the conduct occurred and his interest did not devolve by operation of law, the court dismisses the suit for lack of standing.
Partner Standing Requirement
Sophia Singh became a limited partner in Summit Bank after the general partners engaged in self-dealing. She commences a derivative action to recover the misappropriated funds. The court dismisses because Singh was not a partner at the time of the misconduct and acquired her status by purchase rather than by operation of law.
Skylar Sullivan, a member of Skyline Construction, obtains a judgment in a derivative action that returns misappropriated equipment to the company. The court orders the equipment transferred directly to Skyline Construction rather than to Sullivan personally.
Partnership Recovery Rule
Sebastian Santos wins a derivative judgment requiring repayment of partnership funds that the general partner had diverted. The court directs that the repayment be made to Sierra Solutions, the limited partnership, and not to Santos individually.
Fee Award From Recovery
Sarah Sullivan prevails in a derivative action that restores substantial assets to Sterling Manufacturing. The court awards her reasonable attorneys fees and costs out of the assets recovered for the company.
Jurisdictional Alignment
Simone Sanders brings a derivative action in federal court against the directors of Summit Bank for breach of fiduciary duty. The court realigns the bank as a defendant for diversity purposes because the bank is antagonistic to the claims.
Shaffer v. Heitner433 U.S. 186 (1977)
Common questions
Frequently Asked
3
Who may bring a derivative action on behalf of an LLC?+
Only a person who is a member at the time the action is commenced and who was a member when the conduct occurred or whose membership devolved by operation of law may maintain the action.
Supporting sources
What happens to any recovery obtained in a derivative action?+
Any proceeds or benefits belong to the limited liability company or limited partnership, not to the plaintiff.
Supporting sources
When may a court award fees to the derivative plaintiff?+
If the action is successful in whole or in part, the court may award the plaintiff reasonable expenses, including attorneys fees and costs, from the recovery of the limited liability company.
Supporting sources
433 U.S. 186 (1977)Conflict of Laws
…incorporated under the laws of Delaware with its principal place of business in Phoenix, Ariz. On May 22, 1974, he filed a shareholder's derivative suit in the Court of Chancery for New Castle County, Del., in which he named as defendants Greyhound, its wholly owned subsidiary Greyhound Lines, Inc., and 28 present or former officers or…
Business Associations RelationshipsLiability rules related to business associations · Liability of corporate officers and directors under the Model Business Corporation Act (2016)NEXTGENIntermediate