Also known as: shareholder derivative actions · shareholders derivative action · shareholders' derivative action · shareholder's derivative action · derivative suit · derivative action · stockholder derivative action
Written by attorneys · grounded in primary & secondary sources — see below
A procedural device by which a shareholder or member sues on behalf of a corporation or other entity to enforce a right belonging to the entity that those in control have failed to assert. The plaintiff must satisfy statutory prerequisites including contemporaneous ownership and demand or futility. Any recovery belongs to the entity rather than the individual plaintiff.
Stephen Shaw acquired his membership interest in Synergy Systems after managers allegedly diverted funds to a related entity. Shaw files a derivative action on the LLC's behalf. Because he was not a member when the conduct occurred and did not acquire the interest by operation of law, the court dismisses the suit for lack of standing.
Samuel Soto was expelled from Summit Bank LP after discovering underpricing by the general partners. Soto later files a derivative action challenging the conduct that occurred while he was still a partner. The court dismisses because Soto is no longer a partner at the time the action is commenced.
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Stella Shapiro brings a successful derivative action on behalf of Sapphire Holdings LLC recovering diverted profits. The court orders the judgment paid directly to the LLC. Shapiro receives no personal share of the proceeds beyond possible expense reimbursement.
Spencer Silver wins a derivative judgment for Sterling Manufacturing LP after proving the general partner misappropriated opportunities. The settlement funds are paid to the partnership. Silver must immediately remit any amounts he receives to the entity.
Samantha Stone prevails in a derivative action for Synergy Systems LLC that recovers substantial damages. The court awards her reasonable attorneys' fees and costs from the LLC's recovery. The remainder of the judgment remains with the company.
Sierra Santos, a shareholder of a Delaware corporation, files a derivative action in federal court naming the corporation as a plaintiff. The corporation is antagonistic to the claim. The court realigns the corporation as a defendant to determine whether diversity jurisdiction exists.
The plaintiff must be a member when the action is commenced and must have been a member when the conduct occurred or have acquired the interest by operation of law. The plaintiff must also make a demand on the appropriate decision makers or show that demand would be futile.
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The statute requires the plaintiff to be a partner at the time the action is commenced. Expulsion before filing defeats standing even if the plaintiff held the interest when the challenged conduct occurred.
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Any judgment, settlement, or other benefit belongs to the LLC or limited partnership. The plaintiff must remit any proceeds received and may obtain only court-awarded expenses from the recovery.
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A member may proceed immediately if the demand is rejected, if waiting the full period would cause irreparable injury to the company, or after the statutory waiting period has expired without action by the managers or members.
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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…