Derivative Suits Flashcards
Derivative Suit
It’s a suit in equity against a corporation to compel it to sue a third party.
-Recovery goes to the corporation and thereby enhance the value of the stock and assets of the corporation of all current shareholders
Direct v. Derivative Suit
Direct:
Alleges a direct loss to the SH
Brought by the SH in their own name
Cause of action belongs to the SH in their individual capacity
Arises from an injury directly to the SH
Derivative:
Alleges a loss to the SH that derives from a loss to the corporation
Brought by a SH on the corporation’s behalf
Cause of action belongs to the corporation as an entity
Arises out of an injury done to the corporation as an entity—the SH’s injury is derivative of the corporation’s injury; the SH’s injury is a secondary injury
Standing for a derivative suit
A shareholder may not commence or maintain a derivative proceeding unless:
-The SH was a SH of the corporation at the time of the act or omission complained of or became a shareholder through transfer by operation of law from one who was a SH at that time
Role of SH
The shareholder is in a fiduciary role – he is a “self chosen representative” and so courts find it reasonable to impose standards of “responsibility, liability, and accountability”
MBCA: DEMAND REQUIREMENT
- No shareholder may commence a derivative proceeding until:
- The SH made a written demand to the corporation to take suitable action; and
- 90 days have expired from the day the demand was made UNLESS:
- The SH was earlier notified that the demand was rejected by the corporation or
- Irreparable injury to the corporation would result by waiting for the expiration of the 90-day period.
Do derivative suit settlements require court approval?
Yes, to be approved, the settlement is supposed to be fair, reasonable and adequate
Who can bring derivative suits and what hurdles do they face?
(1) Contemporaneous ownership requirement: only SH of a corporation can bring a derivative suit
