Also known as: stockholder's derivative action · stockholders' derivative action · stockholder derivative action · shareholder's derivative action · derivative suit · derivative action
Written by attorneys · grounded in primary & secondary sources — see below
A procedural mechanism by which a shareholder or member enforces a right belonging to the corporation or unincorporated association when those in control refuse to act. The plaintiff must have been a shareholder or member at the time of the challenged conduct and at commencement of the suit. Any recovery belongs to the entity rather than the individual plaintiff.
Sebastian Santos held a membership interest in Sapphire Holdings when its managing members diverted funds to a related entity they controlled. He sent a written demand that the managers cause the LLC to sue for recovery of the diverted assets. The managers took no action within a reasonable time. Santos then filed a derivative action on behalf of Sapphire Holdings to enforce the LLC's claim.
Sofia Stern was a limited partner in Sterling Manufacturing when the general partner diverted a valuable contract opportunity to an affiliate it owned. She delivered a detailed written demand requesting that the general partner cause the partnership to sue. Eleven months passed with only vague assurances and no lawsuit filed. Stern commenced a derivative action on behalf of the partnership to recover the lost opportunity.
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Selena Singh filed a successful derivative action on behalf of Spectrum Financial after its managers engaged in self-dealing. The court entered a judgment awarding damages to the LLC. Singh sought to retain a portion of the recovery for herself. The court directed that the entire judgment belong to Spectrum Financial.
Scott Summers brought a derivative action on behalf of Sentinel Security after the general partner failed to pursue a breach-of-contract claim. The parties reached a settlement. Summers requested that the settlement funds be paid directly to him. The court ordered the funds paid to the partnership instead.
Sylvia Santos prevailed in a derivative action on behalf of Sapphire Holdings after proving that managers had wasted corporate assets. The judgment produced a substantial monetary recovery for the LLC. Santos petitioned the court for reimbursement of her reasonable attorneys' fees and costs. The court awarded those expenses from the LLC's recovery.
Simon Stern filed a derivative action in federal court on behalf of a corporation against its directors for breach of fiduciary duty. The corporation was named as a nominal plaintiff in the complaint. Because the corporation's interests were antagonistic to the claim, the court realigned it as a defendant for purposes of determining diversity jurisdiction.
Yes. The governing statutes require that the plaintiff be a member both when the conduct occurred and when the action is commenced. Status acquired later by operation of law or agreement may also suffice in limited circumstances.
Any judgment, settlement, or other recovery belongs to the limited liability company or limited partnership, not to the individual plaintiff. The plaintiff must remit any proceeds received directly to the entity.
Yes. When 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.
Yes. A derivative action on behalf of a limited liability company may not be voluntarily dismissed or settled without court approval. Notice to members or shareholders is also required in the manner the court directs.
…Shoe Co. v. Washington , 326 U. S., at 319, with that State to give its courts jurisdiction over appellants in this stockholder's derivative action. This argument is based primarily on what Heitner asserts to be the strong interest of Delaware in supervising the management of a Delaware corporation. That interest is said to derive from…