Also known as: shareholders' derivative suit · shareholder derivative suit · stockholder's derivative suit · derivative suit · derivative action · stockholder derivative suit
Written by attorneys — see sources below.
An action brought by an owner of a business entity to enforce a right belonging to the entity rather than to the owner personally. The owner must have held ownership status both when the underlying conduct occurred and when the suit commences. Any recovery belongs to the entity, though a successful plaintiff may receive court-awarded expenses from that recovery.
Simone Sanders acquired her membership interest in Silverline Industries before its managers diverted a valuable contract to a personal venture. She remains a member when she files suit to recover the lost opportunity for the LLC. Because she held status at both relevant times, the court permits the action to proceed on the entity's behalf.
Scott Summers held his limited partnership interest in Sentinel Security when the general partner diverted a government contract. He still holds the interest at filing and makes a written demand that goes unanswered for four months. The court allows the derivative action because Summers satisfies the contemporaneous-ownership rule.
Sasha Stone brings a successful derivative action on behalf of Spectrum Financial after managers misappropriated funds. The judgment awards the LLC several million dollars. The court directs that the entire sum be paid to Spectrum Financial rather than to Stone personally.
Steven Silva prevails in a derivative suit for Sapphire Technologies after the general partner entered a self-dealing lease. The parties reach a settlement that restores the overpaid rent to the partnership. The court orders the funds paid directly to Sapphire Technologies.
Spencer Silver's derivative action on behalf of Silverline Industries produces a substantial recovery after the court finds managers breached fiduciary duties. Because the suit succeeded, the court awards Silver reasonable attorneys' fees and costs from the LLC's recovery.
Sofia Stern files a derivative suit in Delaware against nonresident directors of a Delaware corporation for alleged mismanagement. The directors own no property in Delaware other than their corporate stock. The court must determine whether sequestration of that stock supplies a constitutional basis for personal jurisdiction.
On May 22, 1974, appellee Heitner, a nonresident of Delaware who owned one share of stock in the Greyhound Corporation, filed a shareholder's derivative suit in the Court of Chancery for New Castle County, Delaware. The complaint named as defendants Greyhound Corporation, its wholly owned subsidiary Greyhound Lines, Inc., and twenty-eight present or former officers and directors of one or both corporations. Heitner alleged that the individual defendants had violated their fiduciary duties by causing the corporations to engage in activities that resulted in a private antitrust judgment of over thirteen million dollars and a criminal contempt fine of six hundred thousand dollars, both arising from events in Oregon. The individual defendants resided primarily in Arizona and conducted their business there. Simultaneously with the complaint, Heitner filed a motion for sequestration of the Delaware property of the individual defendants pursuant to Del. Code Ann., Tit. 10, § 366. The Court of Chancery granted the motion the same day and appointed a sequestrator who seized approximately eighty-two thousand shares of Greyhound common stock belonging to nineteen defendants, along with options belonging to two others and certain debentures, warrants, and stock unit credits. The stock certificates were not physically present in Delaware, but Del. Code Ann., Tit. 8, § 169 deemed the situs of ownership of all stock in Delaware corporations to be in the state, allowing the sequestrator to place stop-transfer orders on the corporation's books. The value of the sequestered stock was approximately one point two million dollars. All twenty-eight defendants received notice of the suit by certified mail to their last known addresses and by publication in a New Castle County newspaper. The twenty-one defendants whose property had been seized entered special appearances and moved to quash service of process and vacate the sequestration order. They argued that the ex parte sequestration procedure violated due process and that they lacked sufficient contacts with Delaware to sustain jurisdiction. The Court of Chancery rejected these arguments in a letter opinion, and the Delaware Supreme Court affirmed the judgment in Greyhound Corp. v. Heitner, 361 A. 2d 225 (1976). The United States Supreme Court noted probable jurisdiction and heard argument on February 22, 1977. The individual defendants whose property was seized became the appellants before the Court. Greyhound Corporation and its subsidiary appeared in the action and moved to dismiss on the ground that the sequestration statute was unconstitutional. The sequestration order remained in effect pending resolution of the constitutional questions presented.
View caseOnly a person who is a member or partner both when the conduct giving rise to the claim occurred and when the action is commenced may maintain the suit. Status that devolves by operation of law or under the governing agreement from a qualifying owner also suffices.
All proceeds or benefits, whether from judgment, settlement, or compromise, belong to the entity and not to the individual plaintiff. The plaintiff must immediately remit any proceeds received to the entity.
Yes. If the action succeeds in whole or in part, the court may award the plaintiff reasonable expenses, including attorneys' fees and costs, from the entity's recovery.
The owner must first make a demand on the managers or general partners requesting that the entity bring suit, unless demand would be futile. The managers or partners must then fail to act within a reasonable time.
No. A derivative action on behalf of an LLC or corporation may not be voluntarily dismissed or settled without court approval, and notice to owners may be required.
…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…