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Simple English definitions for legal terms
stockholder's derivative action
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A quick definition of stockholder's derivative action:
A stockholder's derivative action is a lawsuit brought by a shareholder on behalf of a corporation against its directors, officers, or other third parties who breach their duties. The claim of the suit belongs to the corporation, and the damage awards go to the corporation instead of the shareholder. A shareholder can only sue when the corporation has a valid cause of action but has refused to use it. The purpose of the suit is to protect the interest of the corporation. A shareholder must meet certain requirements to file a derivative suit, including being a shareholder at the time of the act or omission that the suit complained about and making a demand in writing requiring the corporation to take suitable action before the action. A derivative suit is different from a direct suit, where a shareholder can bring a direct suit against a director or officer if the corporation breached its duty and caused their actual injury.
A more thorough explanation:
A stockholder's derivative action, also known as a shareholder derivative suit, is a lawsuit filed by a shareholder or group of shareholders on behalf of a corporation against its directors, officers, or other third parties who breach their duties. The purpose of the suit is to protect the interests of the corporation, not the individual shareholder. The damages awarded in the suit go to the corporation, not the shareholder.
For a shareholder to bring a derivative suit, the corporation must have a valid cause of action, but have refused to use it. The shareholder may ask for reasonable costs paid for litigation. A derivative suit is different from a direct suit, where a shareholder can sue a director or officer if the corporation breached its duty and caused their actual injury.
Example 1: A corporation's board of directors makes false statements that cause the corporation to suffer a loss in share value. The corporation refuses to take action against the board of directors. A shareholder can bring a derivative suit on behalf of the corporation against the board of directors for breach of duty.
Example 2: A corporation's CEO embezzles funds from the corporation. The corporation takes action against the CEO, and the CEO is removed from their position. A shareholder cannot bring a derivative suit because the corporation has already taken action against the CEO.
These examples illustrate how a derivative suit can only be brought when the corporation has a valid cause of action, but has refused to use it. The purpose of the suit is to protect the interests of the corporation, not the individual shareholder.