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Direct vs. Derivative

Direct vs. Derivative Claims:

What is the difference? And why does it matter to the minority shareholder?

direct vs derivative

Direct vs. Derivative - How to Tell the Difference 

"Direct" claims are based on legal rights that belong to the individual shareholder. The plaintiff shareholder brings his own claim in his own name to vindicate the violation of legal duties to himself and seeking a legal remedy for his own benefit. "Derivative" claims are very different. The cause of action in a derivative claim belongs to the corporation, not the shareholder. The shareholder asserts the cause of action in a derivative suit on behalf of the corporation, as a sort of legal representative or "next friend," because the management of the corporation refuses to do so. The legal duties in a derivative claim are duties that are owed to the corporation, not the shareholder, and the legal remedy that the court awards is for the benefit of the corporation, not the individual shareholder. While the shareholder is the named plaintiff in a derivative action and the corporation is named as a nominal defendant, the corporation is the true plaintiff, and the shareholder as the representative of the plaintiff owes fiduciary duties to the corporation and to the shareholders collectively in conducting the lawsuit.

Examples of suits that must be brought derivatively

Breach of fiduciary duty or fraud

An action against directors and officers for breaching their fiduciary duties belongs to the corporation and must be asserted derivatively by a shareholder. The rationale for this rule is that the directors’ duties of loyalty and care run to the corporation, not to the individual shareholders. If the corporation is unwilling to join the suit as a plaintiff because it is controlled by the defendants, it may be named as a nominal defendant.

Breach of statutory duties

The liability of an officer or director for breach of his statutory duties also runs to the corporation and may properly be asserted in a derivative action. 

Sale of control

An action to recover the premium obtained by certain shareholders through the wrongful sale of corporate control may be asserted derivatively. Unlike the usual derivative action, however, the benefit of any recovery will accrue only to the minority shareholders who were harmed by the wrongful sale and not to the selling shareholders or their successors in interest. 

Other rights belonging to the corporation

A cause of action for fraud, breach of confidential relationship and conspiracy must be brought derivatively if the injuries alleged were suffered by the corporation and not the shareholder in his individual capacity.  It has also been held that a cause of action for failure to assert a legal malpractice claim by the officers and directors of the corporation is properly a derivative action.  

Houston Business Lawyer Eric Fryar About the author: Houston Business Lawyer Eric Fryar is a published author and recognized expert in the field of shareholder oppression and the rights of small business owners. Eric has devoted his practice almost exclusively to the protection of shareholder rights over the last 25 years. Learn more

 

Next: Derivative Actions in Closely-Held Corporations >

 

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This post represents our opinion regarding the relevant shareholder oppression and minority ownership rights law. However, not everyone agrees with us, and the law is changing quickly in this area. This page may not be up to date. Be sure to consult with qualified counsel before relying on any information of this page. See Terms and Conditions.

 

 

 

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