Derivative Action

A lawsuit brought by a shareholder of a corporation on its behalf to enforce or defend a legal right or claim, which the corporation has failed to do.

A derivative action, more popularly known as a Stockholder's Derivative Suit, is derived from the primary right of the corporation to seek redress of legal grievances through the courts. The procedure to be followed in such an action is governed by the rules of federal Civil Procedure and state provisions, where applicable.

derivative action

n. a lawsuit brought by a corporation shareholder against the directors, management and/or other shareholders of the corporation, for a failure by management. In effect, the suing shareholder claims to be acting on behalf of the corporation, because the directors and management are failing to exercise their authority for the benefit of the company and all of its shareholders. This type of suit often arises when there is fraud, mismanagement, self-dealing and/or dishonesty which are being ignored by officers and the Board of Directors of a corporation. (See: corporation)

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By law, C generally has no standing to directly sue the other shareholders, but he does have a 'derivative right' to ask the company to sue them."The problem, Pachman added, is that sometimes derivative actions are nothing more than nuisance suits "undertaken only to obtain a settlement from the company on behalf of the shareholder bringing the action; in fact, there's no benefit to the company itself." This amendment "provides procedures to facilitate the dismissal of spurious actions," he noted.

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Derivative actions are lawsuits brought by shareholders, on behalf of a corporation, against a third partyin this case, against Sinova's other two co-owners.