A shareholder sues on the corporation's behalf where the board has failed to act. Recovery belongs to the corporation rather than the shareholder. Pre-suit demand on the board is required unless excused as futile.
Special litigation committees may seek dismissal.
Alternative Names:
Derivative Suit, Derivative Action
Why it Matters?
Demand futility is the threshold battleground, since the plaintiff must plead particularized facts showing the board could not have exercised independent business judgment on a demand. Most derivative complaints are dismissed at that stage. Where demand is excused, a special litigation committee of independent directors may investigate and move to dismiss, and courts review that determination under varying levels of deference by state.
Frequently Confused with
Related terms
Frequently asked questions
Who receives the recovery?
What is the threshold requirement?
