A derivative suit allows a shareholder to bring a legal claim in the name of the corporation when the people responsible for managing the corporation have failed to pursue it. This lesson explains the relationship between shareholders and corporate management, why derivative suits exist, and the challenges shareholders may face.
Shareholders are traditionally described as the owners of a corporation, but they generally do not manage its daily operations. Instead, shareholders appoint directors, and directors appoint officers and other executives to manage the business.
All flashcards
What is a derivative suit?
A lawsuit a shareholder brings in the corporation’s name to pursue an alleged injury to the corporation, typically when management has not pursued the claim.
Why is the suit called “derivative”?
The shareholder’s ability to pursue the claim derives from the corporation’s alleged injury. The shareholder acts for the corporation rather than asserting only a separate personal claim.
What is a demand in a derivative suit?
A request that the corporation’s decision-makers pursue the alleged corporate claim before the shareholder seeks to bring the action.
Who receives the recovery in a successful derivative suit?
The corporation receives the proceeds because the alleged harm and claim belong to it.
How can derivative suits deter misconduct?
The possibility of litigation can create a legal risk for insiders who act improperly.
Quiz questions
In the general US procedure described, what may a special litigation committee do after being appointed by the board?Answer: Move to dismiss the shareholder’s action.
At the preliminary stage of a statutory derivative claim in England and Wales, what must the claimant establish?Answer: A prima facie case.
Under section 165 of New Zealand’s Companies Act 1993, what is required to bring a derivative action?Answer: Court leave and a showing that the action is in the company’s best interests.
What is one reason derivative shareholder suits are described as extremely rare in continental Europe?Answer: Some company laws require claimants to hold a minimum number of shares.
In India, the described derivative suits are brought under legal provisions concerning what?Answer: Oppression and mismanagement.
Based on the Wikipedia article Derivative suit, licensed CC BY-SA 4.0. Adapted into a summary, flashcards and quizzes.