Corporations Bar Practice Exam

A derivative suit in corporate law refers to a legal action that is initiated by a shareholder on behalf of the corporation to enforce a cause of action belonging to the corporation. This type of suit is typically filed when the corporation's management or board of directors fail to take action on a valid claim or when they are the ones that may be liable for the harm being complained about.

In a derivative suit, the shareholder seeks to protect the interests of the corporation, often in situations where corporate wrongdoing has occurred, such as breaches of fiduciary duty, fraud, or mismanagement. The shareholder, being part-owner of the corporation, stands in the shoes of the corporation to seek remedy for injuries suffered by the corporation, which could benefit all shareholders overall.

This legal mechanism helps to hold directors and officers accountable for their actions and to ensure that they are acting in the best interests of the corporation and its shareholders. Thus, the essence of a derivative suit is that it seeks to enforce a corporate right, preserving the value and integrity of the corporation for all shareholders. This distinguishes it from other types of suits that may involve direct harm to a shareholder or actions initiated solely by corporate leadership.