A derivative suit is an action a stockholder brings in the name and on behalf of the corporation to redress a wrong done to the corporation, typically by its own directors or officers, when the corporation itself fails to act because those in control are the wrongdoers. The stockholder must have been a shareholder at the time of the act, exhaust intra-corporate remedies (such as demanding action from the board), and not be guilty of forum shopping. Intra-corporate disputes, including derivative suits, fall under special commercial courts (designated Regional Trial Courts) governed by the rules on intra-corporate controversies.
What can a minority stockholder do when the directors or officers running the corporation are the ones harming it — self-dealing, wasting assets, breaching their duties — and the board (controlled by the wrongdoers) will not sue? The answer is a derivative suit.
The Problem a Derivative Suit Solves
A wrong done to the corporation is normally the corporation’s to redress, through its board. But when the wrongdoers control the board, the corporation will never sue itself. The derivative suit breaks this deadlock: a stockholder sues in the name of the corporation, on its behalf, to recover for the harm done to it. Any recovery generally goes to the corporation, not the suing stockholder personally — because the wrong was to the corporation.
The Requirements
Because a derivative suit is an exception to the rule that the corporation acts through its board, the courts require:
- The plaintiff was a stockholder or member at the time of the acts or transactions complained of (and generally still is);
- The plaintiff exhausted intra-corporate remedies — typically by demanding that the board or the appropriate body take action, which was refused or ignored (unless demand would be futile because the wrongdoers control the board);
- The cause of action belongs to the corporation, not merely to the stockholder personally; and
- The suit is not a nuisance or harassment and there is no forum shopping.
Derivative vs. Individual and Class Suits
It matters what kind of harm occurred:
- A derivative suit redresses a wrong to the corporation (recovery to the corporation);
- An individual suit redresses a wrong to a stockholder personally (such as denial of a specific stockholder right); and
- A class or representative suit redresses a wrong to a group of stockholders sharing a common interest.
Bringing the wrong type — suing individually for a corporate wrong, or vice versa — can defeat the case.
Intra-Corporate Disputes and the Special Commercial Courts
A derivative suit is one kind of intra-corporate controversy — a dispute arising from the relationships within a corporation, such as between stockholders, between a stockholder and the corporation, or among directors and officers. Examples include disputes over elections, corporate control, stockholder rights, and management. These are governed by the Interim Rules of Procedure Governing Intra-Corporate Controversies and are heard by designated Regional Trial Courts acting as special commercial courts, not ordinary civil courts. The special rules feature streamlined, summary-type procedures to resolve corporate disputes efficiently.
Practical Advice
- If insiders are harming the corporation and the board will not act, a derivative suit may be the remedy — but you must have been a stockholder at the time and generally make a demand on the board first.
- Identify the right type of suit — corporate wrong (derivative), personal wrong (individual), or group wrong (class).
- File in the special commercial court, following the intra-corporate rules; these cases are technical, so get corporate-litigation counsel.
Frequently Asked Questions
What is a derivative suit? An action a stockholder brings in the name and on behalf of the corporation to redress a wrong done to it, usually by its own directors or officers, when the corporation fails to act because the wrongdoers control the board. Recovery generally goes to the corporation.
What are the requirements for a derivative suit? The plaintiff must have been a stockholder at the time of the acts, must exhaust intra-corporate remedies such as demanding action from the board, the cause of action must belong to the corporation, and there must be no forum shopping.
How is a derivative suit different from an individual suit? A derivative suit redresses a wrong to the corporation, with recovery to the corporation. An individual suit redresses a wrong to a stockholder personally, such as denial of a stockholder right. Bringing the wrong type can defeat the case.
Where are intra-corporate disputes filed? In designated Regional Trial Courts acting as special commercial courts, governed by the Interim Rules on Intra-Corporate Controversies, not ordinary civil courts.
This commentary is for general informational purposes only and does not constitute legal advice. For guidance specific to your situation, please consult a licensed attorney.
If insiders are harming your company or you face an intra-corporate dispute, our firm can pursue or defend the case. You may reach us via Viber or WhatsApp, call us at 0995 433 5550, or send an email to vivasnobles@gmail.com. We look forward to hearing from you.