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An Introduction to the Law of Corporations: Cases and Materials, Fall 2017

Direct and Derivative Suits

Officers and directors of Delaware corporations are subject to the jurisdiction of Delaware courts under Delaware's long-arm statute for lawsuits related to the corporation and their duties as directors and officers of the corporation. By virtue of incorporating in Delaware and maintaining an agent in Delaware for service of process, directors of a Delaware corporation, no matter where they are, can be served by making service on the corporation's agent as listed in the corporation's certificate of incorporation.

Stockholders may bring different kinds of litigation against the corporation. Direct suits are brought on behalf of the stockholder in the stockholder's capacity as a stockholder and seek to vindicate the rights of the stockholder. Derivative suits are brought by stockholders on behalf of the corporation and seek to vindicate the rights of the corporation. Stockholders seeking to bring a derivative action on behalf of the corporation must comply with  the requirements of Chancery Rule 23.1.

Many times the most important question in stockholder litigation turns on the type of litigation that is at issue. Stockholders may attempt to characterize the litigation as direct in order to maintain control, while boards may attempt to characterize the question before the court as derivative in order to assert control over the litigation and end it. Understanding the distinction between direct and derivative suits can be confusing. However, there is a coherent test (Tooley) for determining which is which.

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