Derivative Litigation

Normal rules of standing allow you to sue only if you were the one injured. If the dean steals my lunch, you probably can't sue on my behalf. I own that claim. And I'll waive it until I get tenure.

Similarly, if a director steals from the corporate treasury, the corporation has been harmed. The right to sue the director belongs to the corporation. It is a litigation asset, and like all other corporate assets, the corporation's board is charged with managing it.

But what if they don't manage it? In the example of the dean stealing my lunch, I'd prefer to go hungry rather than upset the dean. You might see similar dynamics at the corporate board. If a board member is accused of stealing, the other board members may hesitate to investigate and punish the theft. This is especially true if all the the directors are accused together. If only the board can punish the board for stealing, we should expect a lot more theft.

This section will discuss how we distribute the right to sue. We typically want the board to vindicate the corporation's interests and manage litigation assets. But if there are good reasons to expect the directors to be biased, we may allow the shareholders to sue on the corporation's behalf. A shareholder derivative suit is a lawsuit brought by a shareholder on behalf of the corporation. The shareholder's suit "derives" from the corporation's right to sue. This is in contrast to a direct shareholder suit. A direct shareholder suit is a lawsuit brought by a shareholder on the shareholder's own behalf.

How do we tell who was harmed? If a director steals from the corporation, that harms the corporation, but it also harms the shareholders, who now face lower dividends and share prices. In this section we'll look at how courts draw that line, where the exceptions and alternative structuring apply, and how we keep derivative suits fair to other shareholders.