Shareholder Derivative Actions: From Cradle To Grave.

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Shareholder Derivative Actions: From Cradle To Grave.

I. DERIVATIVE ACTIONS BROUGHT IN STATE AND FEDERAL COURT

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A. Defining Derivative Claims 1. What Is A Derivative Action? a. A derivative action is actually two causes of action: it is an action to compel the corporation to sue and it is an action brought by a shareholder on behalf of the corporation to redress harm to the corporation. See Aronson v. Lewis, 473 A.2d 805, 811 (Del. 1984) ("The nature of the action is two-fold. First, it is the equivalent of a suit by the shareholders to compel the corporation to sue. Second, it is a suit by the corporation, asserted by the shareholders on its behalf, against those liable to it."); Brown v. Tenney, 532 N.E.2d 230, 232 (Ill. 1988) (a derivative action is in effect two actions: "one against the directors for failing to sue; the second based upon the right belonging to the corporation.").

b. A derivative action allows shareholders to monitor and redress harm to the corporation caused by management where it is unlikely that management will redress the harm itself. Meyer v. Fleming, 327 U.S. 161, 167 (1946) ("[T]he purpose of the derivative action [is] to place in the hands of the individual shareholder a means to protect the interest of the corporation from the misfeasance and malfeasance of 'faithless directors and mangers'" (quoting Cohen v. Beneficial Indus. Loan Corp., 337 U.S. 541, 548 (1949)); Kamen v. Kemper Fin. Servs., Inc., 500 U.S. 90, 95 (1991) (same); Jones v. H. F. Ahmanson & Co., 1 Cal. 3d 93 (1969) ("A shareholder's derivative suit seeks to recover for the benefit of the corporation and its whole body of shareholders when injury is caused to the corporation that may not otherwise be redressed because of failure of the corporation to act. Thus, 'the action is derivative, i.e., in the corporate right, if the gravamen of the complaint is injury to the corporation, or to the whole body of its stock or property without any severance or distribution among individual holders, or if it seeks to recover assets for the corporation or to prevent the dissipation of its assets.").

c. An action is derivative when brought by a shareholder on behalf of the corporation for harm suffered by all shareholders in common. See Levine v. Smith, 591 A.2d 194, 200 (Del. 1991) ("A shareholder derivative suit is a uniquely equitable remedy in which a shareholder asserts on behalf of a corporation a claim belonging not to the shareholder, but to the corporation."); Lewis v. Knutson, 699 F. 2d 230, 237-38 (5th Cir. 1983) ("When an officer, director, or controlling shareholder breaches [a] fiduciary duty to the corporation, the shareholder has no 'standing to bring [a] civil action at law against faithless directors and managers,' because the corporation and not the shareho...

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