DERIVATIVE SUITS

Question 1

What is a Derivative Suit?

Answer 1

When a Shareholder sues to enforce the rights of the corporation.

If the Corporation could have brought the suit itself, it is a derivative suit.

Question 2

Why Derivative Suit?

Answer 2

Because the bad doers may be the directors-those charged with duties who otherwise would bring suits, but in this case, they wouldn’t bring a suit against themselves,

or

there is a breach and the directors have not brought suit (eg. a breach of contract claim).

Question 3

Shareholder’s Standing to Bring Derivative Suit

Answer 3

(1) must have owned stock when the claim arose, or
(2) acquired the stock by operation of law from someone who did own it at the time (operation of law: divorce or inheritance-NOT purchased or gifted)
(3) must make a demand to the directors first, to bring a direct lawsuit*
* **Not required when demand would be futile (i.e. directors are the wrondoers)