Derivative Action Definition and Legal Meaning
On this page, you'll find the legal definition and meaning of Derivative Action, written in plain English, along with examples of how it is used.
What is Derivative Action?
n. A corporate shareholder’s lawsuit that is filed against the management, directors, and/or other corporate shareholders for a management failure. Due to the directors and management failing to exercise their authority on behalf of the company and its shareholders, the suing shareholder claims to be acting on behalf of the corporation. These suits arise when fraud occurs, there’s mismanagement, self-dealing and/or dishonesty which the officers and board of directors are ignoring.
History and Meaning of Derivative Action
A derivative action, also known as a shareholder derivative suit or derivative lawsuit, is a type of legal action filed by a shareholder or group of shareholders against the directors, officers, or other shareholders of a corporation. The purpose of a derivative action is to hold those in charge of managing the corporation accountable for a breach of their fiduciary duties, such as fraud, mismanagement, self-dealing, or other actions that harm the corporation and its shareholders.
The concept of derivative action originated in common law, and it is now recognized in most jurisdictions with corporate law. Derivative actions serve as an important tool for shareholders to protect their interests and ensure that corporate managers act in the best interests of the corporation and its stakeholders.
Examples of Derivative Action
A group of shareholders files a derivative action against a corporation's board of directors, alleging that the board failed to take action to prevent a financial fraud scheme that has cost the corporation millions of dollars.
A shareholder files a derivative action against the officers and directors of a corporation for causing the corporation to engage in self-dealing transactions that unfairly benefit insiders and detriment shareholders.
A shareholder files a derivative action against a corporation after a merger or acquisition, alleging that the corporation's management failed to adequately explore alternatives or negotiate the best terms possible, resulting in a poor deal for the corporation and its shareholders.
Legal Terms Similar to Derivative Action
Fiduciary duty - the legal obligation of a person in a position of trust or authority to act in the best interest of another person or entity, such as a corporate officer's duty to act in the best interest of the corporation and its shareholders.
Breach of fiduciary duty - a violation of the legal obligation of a fiduciary to act in the best interest of another person or entity, such as a corporate officer engaging in self-dealing transactions.
Shareholder oppression - a type of shareholder lawsuit that is filed when minority shareholders are unfairly treated by the majority shareholders or corporate management.