What is Derivative Action? A Guide to Shareholder Lawsuits

Q: Who can file a derivative action?

Any shareholder who meets specific ownership criteria can file a derivative action.

Q: What happens to the proceeds of a successful derivative action?

The proceeds are awarded to the corporation, not the individual shareholder who filed the suit.

Definition & Meaning

A derivative action, also known as a stockholder's derivative suit, is a legal action initiated by a shareholder on behalf of a corporation. This type of lawsuit is filed against insiders, such as directors and management, to address issues like fraud, mismanagement, or self-dealing that may harm the corporation. The shareholder essentially steps into the corporation's shoes, claiming that the board is not fulfilling its duty to act in the best interest of the company and its shareholders. The goal is to enforce or defend the corporation's legal rights, with any financial recovery going to the corporation itself, not to the individual shareholder who initiated the action.

Table of content

Legal Use & context

Derivative actions are primarily used in corporate law when shareholders believe that the corporation's leadership is failing to protect the company's interests. This legal remedy is often pursued in cases of alleged misconduct by directors or management. Shareholders may utilize legal forms to initiate these actions, and resources like US Legal Forms can provide templates to help manage the process effectively.

Key legal elements

Real-world examples

Here are a couple of examples of abatement:

Example 1: A shareholder discovers that the company's CEO has been misappropriating funds for personal use. The shareholder files a derivative action to hold the CEO accountable and recover the lost funds for the corporation.

Example 2: A group of shareholders believes that the board of directors is ignoring a lucrative business opportunity that could benefit the corporation. They file a derivative suit to compel the board to consider the opportunity. (hypothetical example)

State-by-state differences

State	Key Differences
Delaware	Derivative actions are common; shareholders must meet specific standing requirements.
California	California has unique procedural rules for derivative actions, including the demand requirement.
New York	Shareholders must demonstrate that they made a demand on the board before filing a suit.

This is not a complete list. State laws vary, and users should consult local rules for specific guidance.

Comparison with related terms

Term	Definition
Direct Action	A lawsuit filed by a shareholder against the corporation itself for personal grievances, rather than on behalf of the corporation.
Class Action	A lawsuit filed by a group of individuals with common claims against a defendant, which is different from a derivative action that focuses on corporate governance.

Common misunderstandings

What to do if this term applies to you

If you believe that the corporation you are a shareholder in is being harmed by its leadership, consider the following steps:

Review your shareholding status to ensure you meet the requirements for filing a derivative action.
Document any evidence of misconduct or mismanagement.
Petition the board of directors to take action on the issue.
If the board fails to act, consult legal resources or templates available through US Legal Forms to initiate a derivative action.

If the situation is complex, seeking professional legal advice may be necessary.

Find the legal form that fits your case

Browse our library of 85,000+ state-specific legal templates.

This field is required

Quick facts

Typical fees: Varies; may include attorney fees and court costs.
Jurisdiction: Primarily corporate law within state courts.
Possible penalties: Recovery of damages awarded to the corporation.

Key takeaways

Frequently asked questions

What is a derivative action?

A derivative action is a lawsuit filed by a shareholder on behalf of a corporation against insiders for misconduct.