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Simple English definitions for legal terms
shareholder derivative suit
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A quick definition of shareholder derivative suit:
A shareholder derivative suit is a legal action brought by a shareholder or group of shareholders on behalf of a corporation against its directors, officers, or other third parties who have breached their duties. The lawsuit is not personal but belongs to the corporation, and any damages awarded go to the corporation instead of the shareholder. Shareholders 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 interests of the corporation. Shareholders must meet certain requirements to file a derivative suit, including being a shareholder at the time of the act or omission that the suit complains about and making a written demand requiring the corporation to take suitable action before the action. The suit should not be collusive, and the complaint should allege with particularity any efforts made by the plaintiff to obtain the desired action from the directors or members. 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 shareholder derivative suit is a legal action brought 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 example, if a corporation's board of directors makes false statements that cause the company's stock value to drop, a shareholder can bring a derivative suit on behalf of the corporation to recover damages. The damages awarded would go to the corporation, not the shareholder.
A shareholder can only bring a derivative suit if the corporation has a valid cause of action but has refused to use it. The shareholder must also be a current shareholder at the time of the act or omission that the suit complains about and must maintain shareholder status throughout the entire judgment.
Unlike a direct suit, where a shareholder can sue a director or officer for personal injury, a derivative suit is brought to protect the interests of the corporation. The shareholder must make a written demand requiring the corporation to take suitable action before initiating the suit. If the corporation rejects the demand or will suffer irreparable harm if they wait, the shareholder can initiate the suit.
A derivative suit can be dismissed if most of the qualified directors, who do not have material interests in the suit, determine in good faith after conducting a reasonable inquiry that the suit is not in the best interests of the corporation.
Overall, a shareholder derivative suit is a legal action brought by a shareholder on behalf of a corporation to protect its interests against directors, officers, or other third parties who breach their duties.