Derivative Claim

A derivative claim is a legal action brought by a shareholder on behalf of a company for wrongs done to it, typically when those in control of the company are the ones responsible for the alleged misconduct.
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Derivative Claim

Overview

A derivative claim is a type of litigation initiated by a shareholder on behalf of a company to address wrongs or misconduct inflicted upon the company. This typically occurs when those responsible for such wrongs, such as directors or majority shareholders, are in control of the company, potentially preventing it from suing in its own name.

Examples

  1. Director Misappropriation: If company directors misuse company funds for personal gain, a shareholder may bring a derivative claim to recover the misspent funds.
  2. Violation of Corporate Duty: When majority shareholders act in a way that benefits them at the expense of the company’s minority shareholders, such as by approving unfair transactions, a derivative claim can be sought.
  3. Fraud or Breach of Trust: If directors engage in fraud or breach their fiduciary duties, a shareholder can file a derivative action to rectify these transgressions.

Frequently Asked Questions (FAQs)

Q: What is the primary purpose of a derivative claim? A: The primary purpose is to allow shareholders to enforce the rights of the company and ensure those controlling the company cannot abuse their power to the detriment of the company and its shareholders.

Q: What must shareholders prove to bring a derivative claim? A: Shareholders must prove to the court that the company has suffered from wrongs committed by those in control and that pursuing the claim is in the best interest of the company, among other legal prerequisites.

Q: Who benefits from a successful derivative claim? A: The company and, indirectly, all its shareholders benefit from the successful resolution of a derivative claim since any recoveries or remedies are awarded to the company.

Q: Why doesn’t the company just sue directly? A: In cases where those in control of the company, such as directors or majority shareholders, are the ones being accused of wrongdoing, a direct lawsuit may not be feasible or may be prevented by those in power.

Q: Can any shareholder bring a derivative claim? A: Generally, shareholders must meet certain criteria, including showing they fairly represent the interests of similarly affected shareholders and that they have tried to resolve the issue internally before turning to litigation.

  • Fiduciary Duty: The legal obligation of one party to act in the best interest of another. In companies, directors owe fiduciary duties to the company and its shareholders.
  • Minority Shareholder: A shareholder who holds a smaller portion of a company’s shares, often possessing less influence over company decisions compared to majority shareholders.
  • Corporate Governance: The system by which companies are directed and controlled, involving rules and practices that guide the board of directors in managing a company.
  • Shareholder Agreement: A legal document outlining the rights and obligations of shareholders within a company.

Online References

Suggested Books for Further Studies

  • “The Law of Derivative Actions in the US, UK, and Australia” by Ivan Paul Belli
  • “Shareholder Derivative Litigation: Besieging the Board” by Lyman Johnson and David Millon
  • “Corporate Governance Principles, Policies, and Practices” by Bob Tricker

Accounting Basics: “Derivative Claim” Fundamentals Quiz

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