What is a shareholder derivative action?
Shareholders have a limited right to participate in the governance of a corporation. Even if a shareholder believes that corporate management has abused its power or received illegal profits, the shareholder may not be permitted to sue in his own name due to the fact that the claim actually belongs to the corporation. In that instance, the shareholder may be able to sue the company’s officers and directors in the name of the corporation. The lawsuit is called a “derivative” action because the shareholder is not suing the corporation in his own name, but rather he is bringing a claim on behalf of the corporation to recover damages suffered by the corporation. In a shareholder derivative suit, all shareholders benefit if a recovery is received by the corporation. Typically, the attorney who handled the case is compensated out of the corporation’s recovery.
