Corporate Law

2 Pages 615 Words

In a derivative suit, the nominal plaintiff shareholder sues on a right derived from the

corporation. The corporation is made a party to the suit so that it may be bound by the judgment.

Although derivative suits assert corporate rights, the corporation is normally aligned as a party

defendant because the suit is generally prosecuted over the opposition of the corporation’s

management. Like direct suits that are brought as class actions, derivative suits are subject to a

number of procedural rules, which are designed to ensure that the nominal plaintiff shareholder

acts in the interest of shareholders as a group.

In a successful derivative suit, damages are paid to the corporation, not the shareholders. Even

though the right is being asserted in a derivative suit “belongs” to the corporation, it is not

immediately obvious why the recovery is not paid to the shareholders as the corporation’s

owners. One reason is that, if the corporation has been injured, awarding recovery only to the

shareholders would bypass the creditors, whose securities have been devalued by the breach.

Indeed, if the corporate assets have been severely depleted, giving the damages directly to the

shareholders could have the same effect as an illegal dividend by an insolvent corporation. On

the other hand, applying this theory to a solvent corporation would seem to be inconsistent with

the theory that the directors owe fiduciary duties only to shareholders and not to creditors.

A second rationale for the peculiar aspect of the derivative suit which gives the damages to the

corporation rather than directly to the shareholders (the nominal plaintiff) is that this avoids the

problems involved in fashioning direct relief to shareholders. Public corporation shares trade at

various times before or after disclosure of the wrong at prices that may or may not reflect the full

extent of...