Also known as: shareholder's derivative action · shareholders derivative action · shareholder derivative action · shareholders' derivative suit · derivative action · derivative suit · stockholder derivative action
Written by attorneys · grounded in primary & secondary sources — see below
A lawsuit brought by one or more shareholders or members to enforce a right belonging to the corporation or entity when those in control have failed to act. The claim remains corporate property, so any recovery belongs to the entity rather than the individual plaintiff.
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Spencer Silver, a member of Silverline Industries, learned that the managing members had diverted a contract to their own venture. Silver sent a written demand to the managers requesting that the LLC sue to recover the opportunity. When the managers took no action within a reasonable time, Silver commenced a derivative action on the LLC's behalf.
Sabrina Shah, a limited partner in Stonehaven Properties, discovered that the general partner had diverted a development opportunity. Shah delivered a detailed written demand asking the general partner to cause the partnership to sue. After four months passed with no suit filed, Shah filed a derivative action to enforce the partnership's claim.
Sydney Santos, a member of Synergy Systems, prevailed in a derivative action that recovered diverted funds for the LLC. The court ordered the judgment proceeds paid directly to the company. Santos received no personal share of the recovery beyond possible expense reimbursement.
Sierra Santos, a limited partner in Skyline Construction, obtained a judgment in a derivative action that restored misappropriated assets to the partnership. The court directed that all proceeds belong to the partnership. Santos remitted any funds received to the entity as required.
Sasha Stone, a member of Silverline Industries, succeeded in a derivative action that produced a substantial recovery for the LLC. The court awarded Stone reasonable attorneys' fees and costs from the LLC's recovery. The award compensated the effort without diminishing the net benefit to the company.
Sarah Sullivan, a shareholder who prevailed in a derivative suit that enhanced share value through cancellation of improperly issued stock, sought reimbursement of litigation expenses. The court spread the costs among all shareholders by awarding fees against the corporation. The award recognized the common benefit conferred on the remaining shares.
A court must dismiss the action on the corporation's motion if a majority of qualified directors or a committee of qualified directors determines in good faith after reasonable inquiry that maintaining the suit is not in the entity's best interests. The plaintiff must allege with particularity facts showing the determination failed to meet statutory requirements to overcome the motion.
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…contacts are lacking in a given case, I am convinced that as a general rule a state forum has jurisdiction to adjudicate a shareholder derivative action centering on the conduct and policies of the directors and officers of a corporation chartered by that State. Unlike the Court, I therefore would not foreclose Delaware from asserting…
…Loan Corp. held that a federal diversity court must apply a state statute requiring a small stockholder in a stockholder
…held applicable in a diversity action a state statute requiring plaintiffs, as a prerequisite to pur
…from the instant case. There, the Court upheld a state law that required a shareholder who wished to file a shareholder's
…However, an increasing number of lower courts have acknowledged that a corporation may receive a “substantial benefit” from a derivative suit
The burden shifts to the corporation to prove that the determination was made in good faith after a reasonable inquiry and that dismissal serves the entity's best interests. Particularized allegations of board disqualification trigger this shift rather than leaving the burden on plaintiffs.
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A plaintiff may file early only upon a showing that irreparable injury to the entity would result from waiting the full period. Generalized concerns about possible asset dissipation fall short of the required clear showing of imminent and irreparable harm.
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An oral request made in a meeting attended by the managing member and all other members satisfies the demand requirement when it places the responsible parties on notice and gives them an opportunity to act. The rule does not mandate written form or exclusivity so long as the managers receive a clear request.
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Demand is excused when the general partners face a disabling conflict of interest that renders impartial response impossible. Ownership of the entity alleged to have received diverted opportunities creates such a conflict and supports futility.
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