Stockholders' Derivative Action Definition and Legal Meaning

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

What is Stockholders' Derivative Action?

(n) The application of his rights, like suing the company for mismanagement etc derived because of the share held by him as a share holder of the company to safeguard his interest as a shareholder.

History and Meaning of Stockholders' Derivative Action

Stockholders' Derivative Action is a term used in corporate law, describing a lawsuit filed by shareholders on behalf of the corporation against third parties. The action is derivative in the sense that the shareholder sues not for direct benefit, but for the benefit of the corporation. It is often filed in cases where the corporation's board of directors or officers have failed to take legal action on behalf of the company.

The right of stockholders to bring a derivative action stems from common law principles in England, dating back to the 19th century. The concept was later adopted into American law, and today, most states have statutes that govern the procedure for bringing a derivative action.

Examples of Stockholders' Derivative Action

  1. A group of shareholders files a derivative action against a corporation's board of directors, alleging breach of fiduciary duty regarding executive compensation decisions.

  2. Shareholders bring a derivative action against a company's officers and directors, claiming they allowed the company to engage in illegal activities.

  3. A shareholder files a derivative action on behalf of the corporation to recover damages resulting from a third-party's infringement of a patent owned by the corporation.

Legal Terms Similar to Stockholders' Derivative Action

  1. Class Action - A lawsuit filed by a group of people who suffered a similar harm or injury.

  2. Direct Action - A legal action brought by an individual or entity to protect their own rights, as opposed to a derivative action brought on behalf of a corporation.

  3. Shareholder Oppression - A term used to describe situations where majority shareholders or corporate officers abuse their power to the detriment of minority shareholders.