Also known as: stockholders derivative suit · stockholder derivative suit · stockholder's derivative suits · shareholder's derivative suit · derivative action · derivative suit
Written by attorneys — see sources below.
A procedural mechanism by which an owner of an entity interest enforces a right belonging to the entity when those in control decline to do so. The owner must satisfy contemporaneous ownership and demand requirements before commencing the action. Any recovery belongs to the entity rather than the individual plaintiff.
Simone Sanders acquired her membership interest in Silverline Industries after the managers diverted a key contract. She filed a derivative action the following month. The court dismissed the suit because Simone was not a member when the conduct occurred.
Sasha Stone sent a written demand to the general partner of Southland Foods LP requesting suit over a diverted opportunity. Four months later the general partner had taken no action. Sasha filed a derivative suit and the court permitted it to proceed.
Sofia Stern prevailed in a derivative action on behalf of Synergy Systems LLC and obtained a damages award. The judgment directed payment to the LLC rather than to Sofia personally. She immediately remitted the funds to the company accounts.
Sylvia Santos obtained a settlement in a derivative action for Sterling Dynamics LP. The court ordered the proceeds paid directly to the partnership. Sylvia received no personal distribution from the recovery.
Solomon Silver succeeded in a derivative action for Silverline Industries LLC. The court awarded him reasonable attorneys fees and costs paid from the LLC recovery. The award compensated the expenses incurred in prosecuting the claim.
Sarah Sullivan brought a derivative suit on behalf of a corporation alleging breach of fiduciary duty by directors. She demanded a jury trial on the underlying claims. The court evaluated whether the claims were legal or equitable 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 caseThe plaintiff must be a member or partner both at the time of the challenged conduct and when the action is commenced. The plaintiff must also make a demand on the appropriate managers or partners unless demand would be futile.
Any judgment, settlement, or other recovery belongs to the entity itself. The plaintiff must remit any proceeds received to the entity immediately.
If the action succeeds in whole or in part, the court may award the plaintiff reasonable expenses including attorneys fees from the entity's recovery.
The right depends on whether the underlying corporate claims are legal or equitable in nature. Courts examine the character of the claims to determine whether a jury is available.
…considered the applicability in a federal diversity action of a forum state statute making the plaintiff in a stockholder's derivative action liable for litigation expenses, if ultimately unsuccessful, and entitling the corporation to demand security in advance for their payment. The trial court ruled the statute inapplicable,…