A shareholder derivative suit is a lawsuit brought by a shareholder on behalf of a corporation against a third party. Often, the third party is an insider of the corporation, such as an executive officer or director. Shareholder derivative suits are unique because under traditional corporate law, management is responsible for bringing and defending the corporation against suit. Shareholder derivative suits permit a shareholder to initiate a suit when management has failed to do so. To enable a diversity of management approaches to risks and reinforce the most common forms of corporate rules with a high degree of permissible management power, many jurisdictions have implemented minimum thresholds and grounds (procedural and substantive) to such suits.
Purpose and difficulties
Under traditional corporate business law, shareholders are the owners of a corporation. However, they are not empowered to control the day-to-day operations of the corporation. Instead, shareholders appoint directors, and the directors in turn appoint officers and/or relatively less powerful executives to manage day-to-day operations.
Derivative suits refer to one or more shareholders bringing an action (lawsuit) in the name of the corporation against a party or parties allegedly causing harm to the latter. If the directors, officers, or employees of the corporation are not willing to file an action, a shareholder may first petition them to proceed. If such petition fails, they may take it upon themself to bring an action on behalf of the corporation. Any proceeds (damages and interest in English law) of a successful action are awarded to the corporation and not to the shareholder(s) as the controlling claimant.[1]
Procedure
In most jurisdictions, a shareholder must satisfy various requirements to prove that he has a valid standing before being allowed to proceed. The law may require the shareholder to meet qualifications such as the minimum value of the shares and the duration of the holding by the shareholder; to first make a demand on the corporate board to take action; or to post bond, or other fees in the event that he does not prevail.
Derivative suits in the United States
In the United States, corporate law is based on state law. Although the laws of each state differ, the laws of the states such as Delaware, New York, California, and Nevada where corporations often incorporate, institute a number of barriers to derivative suits.
Generally in these states, and under the American Bar Association guidelines, the procedure of a derivative suit is as follows. First, eligible shareholders must file a demand on the board.[2] The board may either reject, accept, or not act upon the demand. If after a period of time the demand has been rejected or has not been acted upon, shareholders may file suit.[3]
See also
References
- shareholder derivative suit LII / Legal Information Institute, retrieved 2026-04-02^
- MBCA § 7.42^
- MBCA § 7.42(2)^
- MBCA § 7.44(d)^