Also known as: shareholder derivative suit · derivative suit · derivative suits · derivative action · stockholder derivative suit
Written by attorneys — see sources below.
A procedural mechanism by which a shareholder or member sues to enforce a right belonging to the entity when those in control refuse to act. The claim belongs to the entity rather than the individual plaintiff. Recovery therefore flows to the entity and any resulting expenses may be shifted from that recovery.
Skylar Sullivan became a member of Sterling Dynamics before the managers diverted a key contract to themselves. She made a written demand on the managers to sue and they refused. Sullivan then filed a derivative action in her capacity as a current member. The court permitted the suit to proceed because Sullivan satisfied the contemporaneous-ownership and demand requirements.
Scott Summers acquired his limited-partner interest by operation of law after the general partners had already misappropriated partnership funds. Summers filed a derivative action once he became a partner. The court allowed the action because his status satisfied the ownership requirement even though the misconduct predated his admission.
Steven Silva prevailed in a derivative action on behalf of Synergy Systems and obtained a $2 million judgment. The court ordered the entire sum paid to the LLC rather than to Silva. Silva immediately remitted the check to the company as required by the governing statute.
Santiago Sanchez settled a derivative claim for Sapphire Holdings after proving the general partner had diverted partnership assets. The settlement check was made payable to the limited partnership. Sanchez forwarded the funds directly to the partnership accounts without retaining any portion.
Simone Sanders succeeded in a derivative action that recovered $1.5 million for Sterling Manufacturing. The court approved reasonable attorneys' fees and costs to be paid from that recovery. Sanders received her fee award only after the LLC had been made whole.
Samuel Soto brought a derivative suit seeking money damages for corporate mismanagement. The defendants demanded a jury trial on the underlying claims. The court recognized that the action carried a Seventh Amendment jury-trial right because the claims were legal in nature.
Petitioners, who were stockholders in the Lehman Corporation, a closed-end investment company, brought a derivative action in federal district court against the corporation's directors and its brokers, Lehman Brothers. They alleged that Lehman Brothers had obtained control through an illegally large representation on the board in violation of the Investment Company Act of 1940 and used that control to extract excessive brokerage fees from the corporation. The complaint charged the directors with converting corporate assets and with gross abuse of trust, gross misconduct, willful misfeasance, bad faith, and gross negligence. It also accused both the directors and Lehman Brothers of breaching fiduciary duties, committing waste and spoliation, and violating the brokerage contract. Petitioners requested that the defendants account for and pay to the corporation their profits and gains and its losses. They demanded a jury trial on the corporation’s claims. The district court denied the motion to strike the jury demand in part. It held that only the shareholder’s initial claim to speak for the corporation would be tried to the judge while the corporation’s underlying claims would be tried to a jury if the corporation itself had brought suit. Finding substantial grounds for difference of opinion, the district court certified the question for interlocutory appeal under 28 U.S.C. § 1292(b). The Court of Appeals for the Second Circuit reversed, holding that a derivative action is entirely equitable in nature and that no jury is available to try any part of it. Because of the conflict among the circuits, the Supreme Court granted certiorari.
View caseOnly a person who is a member or partner at the time the action is commenced may bring the suit. The plaintiff must also satisfy demand requirements or show that demand would be futile.
Supporting sources
Any judgment, settlement, or other benefit belongs to the entity itself and not to the individual plaintiff. The plaintiff must immediately remit any proceeds received to the company or partnership.
Supporting sources
Yes. When the action succeeds in whole or in part, the court may award the plaintiff reasonable expenses, including attorneys' fees and costs, payable from the entity's recovery.
Supporting sources
A court will dismiss the derivative action if a qualified, independent committee of directors or managers determines in good faith after reasonable inquiry that continuing the suit is not in the entity's best interests.
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…