Direct Suits

A direct suit is one in which a shareholder sues on his own behalf to redress an injury to his interest as a shareholder.

If the harm affects many shareholders, the plaintiff may maintain his direct suit as a class action, in which he sues as the representative for the injured shareholders.

Direct causes of action include:

• suits to compel payment of dividends;
• to enforce the right to inspect corporate records;
• to protect preemptive rights;
• to enforce the right to vote; and
• to recover for breach of a shareholders' agreement, a preincorporation agreement or a contract with a shareholder. 

Derivative Suits

A derivative suit is one in which a shareholder sues on behalf of the corporation to redress a wrong to it when the corporation fails to enforce its right.  A derivative suit is an equitable action.

In a derivative suit, the plaintiff must allege in her complaint that she was a stockholder at the time of the transaction complained of or that her shares thereafter devolved upon her by operation of law (e.g., inheritance) from a person who was a stockholder at that time.

A shareholder must first attempt to persuade the board to enforce the corporation's right.  His complaint must allege "with particularity" his efforts to secure from the board of directors such action as he desires.

If demand upon the directors would be futile it will be excused, but the reasons must be alleged with particularity in the complaint.

If the board is not disinterested, or if, after demand, the board refuses to act, some jurisdictions require the shareholder to make a demand upon the corporate shareholders, unless that would be futile.

A derivative action may not be maintained if it appears that the plaintiff does not fairly and adequately represent the interests of the shareholders similarly situated in enforcing the right of the corporation.

Since stockholders in a derivative suit stand in the shoes of the corporation, they are subject to the same defenses that could have been raised against the corporation.

In its discretion, the court may order the corporation to pay expenses, including counsel fees, to a successful derivative action plaintiff.

Court approval is generally required for the compromise or dismissal of any class action or derivative suit.

Notice of the proposed compromise or dismissal must be given to all members of the class in such manner as the court directs.