Also known as: stockholder derivative suits · stockholders' derivative suit · shareholder derivative suit · shareholder derivative suits · derivative suit · derivative action
Written by attorneys · grounded in primary & secondary sources — see below
A procedural mechanism by which an owner of an entity enforces a right belonging to the entity when those in control have failed to act. The owner must satisfy contemporaneous ownership and demand requirements before proceeding. Any recovery belongs to the entity rather than the individual plaintiff.
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Selena Singh acquired her membership interest in Solstice Ventures six months after managers diverted a corporate opportunity. When she later filed a derivative action to recover the opportunity for the LLC, the court dismissed the suit because Singh was not a member when the conduct occurred. The contemporaneous-ownership rule barred her claim even though she held an interest at the time of filing.
Spencer Silver sent a written demand to the general partner of Southland Foods requesting suit against a supplier for breach of contract. After four months of inaction and only vague assurances, Silver filed a derivative action. The court allowed the suit to proceed because the general partner had not brought an action within a reasonable time after the demand.
Santiago Sanchez prevailed in a derivative action on behalf of Sapphire Technologies that produced a $2 million judgment. The court ordered the entire recovery paid directly to the LLC rather than to Sanchez personally. Sanchez received only reimbursement of reasonable expenses from the LLC's recovery under the applicable statute.
Sydney Santos obtained a settlement in a derivative action for Starlight Media after proving the general partner had diverted funds. The court directed that the settlement proceeds be paid to the limited partnership. Santos could seek only an award of reasonable attorneys' fees and costs from the partnership's recovery.
Sean Steele won partial relief in a derivative action for Solstice Ventures that recovered misappropriated assets. The court awarded Steele reasonable attorneys' fees and costs from the LLC's recovery even though the suit did not succeed on every claim. The award reflected the benefit conferred on the entity.
Solomon Silver prosecuted a derivative action that invalidated an unfair voting trust and restored voting rights to all shareholders. Although no monetary fund was created, the court permitted Silver to recover litigation expenses from the corporation. The benefit to all shareholders justified spreading the costs across the entity.
The plaintiff must be a member both when the action is commenced and when the underlying conduct occurred. The plaintiff must also make a demand on the managers or other members unless demand would be futile. These requirements ensure the plaintiff has a proper stake and that those in control first have an opportunity to act.
Supporting sources
…of treating a corporation as a resident of the incorporating State seems to me particularly appropriate in the context of a shareholder derivative suit, for the State realistically may perceive itself as having a direct interest in guaranteeing the enforcement of its corporate laws, in assuring the solvency and fair management of its…
…held applicable in a diversity action a state statute requiring plaintiffs, as a prerequisite to pur
…However, an increasing number of lower courts have acknowledged that a corporation may receive a “substantial benefit” from a derivative suit
…articulated in Cohen v. Beneficial Industrial Loan Corp. , 337 U. S. 541, 545-547 (1949). Cohen was a stockholder
The demand requirement is satisfied when the general partners fail to bring suit within a reasonable time after receiving a proper demand. Courts evaluate reasonableness by considering the complexity of the claim, any conflict of interest, and whether the general partner took concrete steps toward litigation. Vague assurances without action do not satisfy the requirement.
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Any judgment, settlement, or other benefit belongs to the entity itself, not to the individual plaintiff. The plaintiff may receive only reasonable expenses, including attorneys' fees, from the entity's recovery when the action succeeds in whole or in part. This rule prevents the plaintiff from obtaining a personal windfall.
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No. A derivative action on behalf of a limited liability company or limited partnership may not be voluntarily dismissed or settled without court approval. Notice to other owners may also be required so that they can object or participate in the decision.
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