Also known as: shareholders' derivative suit · shareholder derivative suit · stockholder's derivative suit · derivative suit · derivative action · stockholder derivative suit
Written by attorneys · grounded in primary & secondary sources — see below
An action brought by an owner of a business entity to enforce a right belonging to the entity rather than to the owner personally. The owner must have held ownership status both when the underlying conduct occurred and when the suit commences. Any recovery belongs to the entity, though a successful plaintiff may receive court-awarded expenses from that recovery.
Simone Sanders acquired her membership interest in Silverline Industries before its managers diverted a valuable contract to a personal venture. She remains a member when she files suit to recover the lost opportunity for the LLC. Because she held status at both relevant times, the court permits the action to proceed on the entity's behalf.
Scott Summers held his limited partnership interest in Sentinel Security when the general partner diverted a government contract. He still holds the interest at filing and makes a written demand that goes unanswered for four months. The court allows the derivative action because Summers satisfies the contemporaneous-ownership rule.
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Sasha Stone brings a successful derivative action on behalf of Spectrum Financial after managers misappropriated funds. The judgment awards the LLC several million dollars. The court directs that the entire sum be paid to Spectrum Financial rather than to Stone personally.
Steven Silva prevails in a derivative suit for Sapphire Technologies after the general partner entered a self-dealing lease. The parties reach a settlement that restores the overpaid rent to the partnership. The court orders the funds paid directly to Sapphire Technologies.
Spencer Silver's derivative action on behalf of Silverline Industries produces a substantial recovery after the court finds managers breached fiduciary duties. Because the suit succeeded, the court awards Silver reasonable attorneys' fees and costs from the LLC's recovery.
Sofia Stern files a derivative suit in Delaware against nonresident directors of a Delaware corporation for alleged mismanagement. The directors own no property in Delaware other than their corporate stock. The court must determine whether sequestration of that stock supplies a constitutional basis for personal jurisdiction.
Only a person who is a member or partner both when the conduct giving rise to the claim occurred and when the action is commenced may maintain the suit. Status that devolves by operation of law or under the governing agreement from a qualifying owner also suffices.
All proceeds or benefits, whether from judgment, settlement, or compromise, belong to the entity and not to the individual plaintiff. The plaintiff must immediately remit any proceeds received to the entity.
Yes. If 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.
The owner must first make a demand on the managers or general partners requesting that the entity bring suit, unless demand would be futile. The managers or partners must then fail to act within a reasonable time.
No. A derivative action on behalf of an LLC or corporation may not be voluntarily dismissed or settled without court approval, and notice to owners may be required.
…incorporated under the laws of Delaware with its principal place of business in Phoenix, Ariz. On May 22, 1974, he filed a shareholder's derivative suit in the Court of Chancery for New Castle County, Del., in which he named as defendants Greyhound, its wholly owned subsidiary Greyhound Lines, Inc., and 28 present or former officers or…