Shareholders' Derivative Action Definition and Legal Meaning

On this page, you'll find the legal definition and meaning of Shareholders' Derivative Action, written in plain English, along with examples of how it is used.

What is Shareholders' Derivative Action?

History and Meaning of Shareholders' Derivative Action

A shareholders derivative action is a legal action where one or more shareholders sue a corporation's management or board of directors on behalf of the corporation. The purpose of the lawsuit is to seek relief for harm caused to the corporation by management's actions, inactions, or improper conduct. It is called a "derivative" action because the shareholder is not suing on his or her own behalf, but on behalf of the corporation. Thus, any recovery or judgment obtained is for the benefit of the corporation itself, and indirectly, its shareholders.

Derivative actions date back to the 19th century when courts established a legal right for shareholders to take action to enforce fiduciary duties owed to a corporation. As corporations grew larger and more complex, the need for shareholders to protect their interests by taking legal action against corporate mismanagement became more important. Derivative actions have become an important tool for shareholders to hold corporate management and directors accountable for their actions.

Examples of Shareholders' Derivative Action

1. Shareholder A files a derivative action against the board of directors of a company, alleging that they have breached their fiduciary duties by engaging in activities that harm the company's reputation.
2. Shareholder B initiates a derivative action against the company's management for wasting corporate assets on excessive executive compensation.
3. Shareholder C sues the corporation's directors for failure to adequately supervise and monitor the company's compliance with environmental regulations.

Legal Terms Similar to Shareholders' Derivative Action

1. Direct Action: In contrast to derivative action, a direct action is a lawsuit brought by a shareholder on his or her own behalf, for damages or relief intended for the shareholder, rather than the corporation.
2. Fiduciary Duty: A legal obligation imposed on a person or entity, such as a board of directors, to act in the best interests of another party, such as a corporation, and not to do any harm to that party.
3. Corporate Governance: The system of rules and practices by which a corporation is directed and controlled, including authority, decision-making, accountability, and stewardship.