shareholder derivative suit
A shareholder derivative suit, or a stockholder’s derivative action, or is a lawsuit filed by a shareholder on behalf of the corporation against directors, officers, or third parties who have harmed the corporation by breaching their duties. The claim belongs to the corporation, not the shareholder, and any recovery goes to the corporation. The shareholder may recover reasonable litigation costs.
This differs from a direct suit, where a shareholder sues for personal harm. In a derivative suit, the corporation has the legal claim but fails to act, and the shareholder sues to protect corporate interests.
To bring a derivative suit, the shareholder must:
- Have been a shareholder at the time of the misconduct or have acquired shares by operation of law
- Maintain shareholder status throughout the case
- Fairly and adequately represent the corporation's interests
- Make a written demand asking the corporation to act and wait 90 days, unless the demand is rejected, or a delay would cause harm
The suit must not be collusive to create federal jurisdiction and must detail efforts to prompt corporate action or explain why none were made, as required by the Federal Rules of Civil Procedure Rule 23.1.
For LLCs, the same rules apply, with slight differences:
- The waiting period after demand is a “reasonable time”
- Demand may be excused if futile
- In member-managed LLCs, the demand is made on members; in manager-managed LLCs, the demand is made on managers
A derivative suit may be dismissed if a majority of disinterested directors determine in good faith, after reasonable investigation, that the suit is not in the corporation’s best interest. Any dismissal or settlement requires court approval, and notice must be given to shareholders as directed by the court.
[Last reviewed in June of 2025 by the Wex Definitions Team]
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