Derivative Suit
What does "Derivative Suit" mean in law?
A derivative suit is a lawsuit brought by a shareholder on behalf of the corporation to enforce a corporate cause of action that the corporation's board has failed or refused to pursue. The shareholder does not sue for personal injury but rather steps into the corporation's shoes, and any recovery flows to the corporation rather than to the individual plaintiff. To bring a derivative suit, the shareholder must typically satisfy the demand requirement by first making a demand on the board to take action or demonstrating that such demand would be futile because a majority of the board is interested or lacks independence. The distinction between derivative and direct claims is critical because derivative suits carry additional procedural requirements including contemporaneous ownership and court approval of settlements.
Definition
A derivative suit is a lawsuit brought by a shareholder on behalf of the corporation to enforce a corporate cause of action that the corporation's board has failed or refused to pursue. The shareholder does not sue for personal injury but rather steps into the corporation's shoes, and any recovery flows to the corporation rather than to the individual plaintiff. To bring a derivative suit, the shareholder must typically satisfy the demand requirement by first making a demand on the board to take action or demonstrating that such demand would be futile because a majority of the board is interested or lacks independence. The distinction between derivative and direct claims is critical because derivative suits carry additional procedural requirements including contemporaneous ownership and court approval of settlements.
Example
After the board refused to investigate the CEO's alleged embezzlement, a shareholder filed a derivative suit on the corporation's behalf, arguing that demand on the board was futile because a majority of directors were beholden to the CEO.