Business & Fiduciary Litigation

What is a shareholder derivative action?

A derivative action is a lawsuit brought by a shareholder on behalf of the corporation against directors, officers, or majority shareholders for harm done to the corporation. Recovery typically goes to the corporation, not the individual shareholder. Demand or demand futility is a procedural prerequisite.

The derivative action is one of corporate law's most consequential procedural devices. When those in control of a corporation won't sue themselves for their own misconduct, shareholders can sue on the corporation's behalf — capturing the recovery for the corporation rather than for themselves directly.

The procedural prerequisite — demand.

Before filing, the shareholder must either (1) make a pre-suit demand on the board that the corporation pursue the claim, or (2) plead with particularity that demand would be futile because a majority of the board is conflicted, lacks independence, or faces a substantial likelihood of liability.

Why the choice matters.

A pre-suit demand is often refused on business-judgment-rule grounds; the refusal carries substantial deference. Pleading demand futility preserves the shareholder's ability to drive the case, but the futility allegations must satisfy the heightened Aronson/Marciano (or analogous state-law) standard with concrete facts.

Recovery.

Recovery in a successful derivative case goes to the corporation, not the shareholders directly. The shareholder's reward is often attorney's fees (where the suit confers a substantial benefit) and indirect benefit through improved corporate value.

D&O coverage.

Defendants in derivative actions typically have D&O coverage, but the insured-vs-insured exclusion can apply in narrow situations and the policy may exclude intentional misconduct. Coverage analysis is part of every defense strategy.

See our fiduciary litigation practice for more.

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