What requirement isn’t necessary to bring a shareholder derivative suit?

Think about a shareholder derivative suit as a way for a company to sue its own leaders if they’ve caused harm to the company. It’s not about a personal grudge or a private payoff. It’s about the corporation—the people who own it and the people who run it—getting a remedy when the board or officers lose their way. With that in mind, one line from a classic exam question can trip you up: does a shareholder have to own at least 10% of the company to bring a derivative suit? The quick answer is no. The 10% threshold is not a universal requirement. Let me break down why that matters and how the other conditions fit together.

What a derivative suit is, in plain terms

• A derivative suit is brought by a shareholder on behalf of the corporation.

• The core harm is to the corporation itself, usually due to actions (or failures to act) by directors or officers.

• The goal isn’t to line the shareholder’s pockets; it’s to recover for the company and, by extension, for all shareholders.

Think of it like this: you’re not suing for your own lost profits, you’re stepping in to fix a misdeed that harmed the business as an entity. It’s a governance mechanism that keeps corporate conduct in check when the directors won’t fix things themselves.

The essential requirements (the “must-haves”)

Here’s the framework you’ll see on exams and in practice. These are the essentials that keep a derivative suit grounded in the corporation’s interests.

1. Contemporaneous stock ownership

• The shareholder must own stock at the time the alleged wrongdoing occurred, or acquire that ownership by operation of law (for example, through inheritance or a stock transfer).

• Why this matters: it ensures the plaintiff has a real stake in the company’s welfare during the relevant period.

• Think of it as a condition that ties the plaintiff’s interests to the company’s health during the alleged harm.

2. Adequate representation of the corporation’s interests

• The plaintiff must fairly and adequately represent the corporation’s interests.

• This isn’t a mere personal hobbyhorse; the suit must be aligned with the company’s best interests, and the plaintiff must be free of conflicts that would compromise the corporation’s position.

• The court wants to avoid a derivative suit that’s really a proxy for the plaintiff’s private gain.

3. Making demand on directors before suit (or proving demand futility)

• In most jurisdictions, you have to give the board a chance to address the problem first by making a demand.

• If the board can remedy the issue, the derivative suit may be dismissed or stayed.

• There’s a nuance: sometimes the demand is excused if it would be futile—for example, when the directors are themselves implicated in the wrongdoing or are beholden to the same bad actors.

• This is about respecting corporate governance and avoiding frivolous poking at management when a quick fix is possible.

The not-so-universal rule you’ll see in questions

C. Owner must hold at least 10% of shares

• This is the tricky one. It’s tempting to latch onto a clear numerical threshold, but that’s not a universal rule.

• Some jurisdictions don’t impose a fixed percentage requirement at all. Instead, they focus on contemporaneous ownership (as noted above) and the ability to fairly represent the corporation’s interests.

• In other words, you can have a derivative suit brought by a minority owner who held shares only briefly during the relevant period, or by someone who acquired shares by operation of law. There isn’t a universal 10% bar.

Why this distinction matters beyond a test question

• The lack of a universal ownership threshold reflects how practical corporate governance is. A tiny shareholder could still have a legitimate stake if they’ve seen a breach that harmed the company and they meet the other conditions, especially if they can demonstrate demand futility.

• On the flip side, some states do set floor thresholds in certain contexts, or they tailor rules depending on the size of the company or the type of corporate entity. The key is to understand what the court will look for: a real ownership link to harm, a proper representation, and a governance-driven path to resolution.

Digress a moment to a relatable image

Picture a neighborhood association. If the treasurer starts siphoning funds, the president or a handful of board members could step in, bring a suit, and say, “Let’s fix this for all residents.” The representative must genuinely own a stake in the association’s wellbeing during the period of misconduct, and they must have the badge to request the board to fix the mess before heading to court. If a newcomer shows up with a personal vendetta and claims a big stake—unless their involvement passes the ownership and governance tests—the court isn’t ready to treat it as a derivative action for the association.

How the pieces fit together in practice

• Ownership timing matters: you can’t retroactively pretend you owned shares when the harm occurred if you didn’t. If you inherited shares after the misdeed, you still might have standing for a derivative suit if the timing works with the “acquired by operation of law” route.

• Representation matters: the court asks whether the plaintiff has the corporation’s best interests at heart and whether they can push for the company’s best outcome without becoming a mouthpiece for someone else’s agenda.

• Demand dynamics: the demand on directors is an accessibility gate. If the board would clearly address the issue without procedural gymnastics, the case might settle at the boardroom level rather than in court. If the board is the problem, excuse the demand and move forward.

Exam traps and practical reminders

• Don’t fixate on 10% as a universal rule. The question asks for the requirement that is NOT necessary, and the correct answer is the ownership percentage—because it isn’t a universal gate.

• Remember the trio: contemporaneous ownership, adequate representation, and demand on directors (or a justified excuse for not demanding).

• Be mindful of “demand futility” as a separate, nuanced concept. It’s part of the demand requirement and often the second line of defense against a suit that would be better handled by the board’s oversight rather than a court.

• If you’re ever unsure, revert to the core logic: derivative suits exist to protect the corporation, not to reward a shareholder. That guiding principle helps sort out tricky hypotheticals.

A quick, memorable framework you can hold onto

• Ownership: yes, but not necessarily 10%. Must be contemporaneous or acquired by operation of law.

• Representation: yes, the plaintiff must represent the corporation’s interests well.

• Demand: yes, usually make a demand on the directors; otherwise, show why demand is futile.

• Purpose: the suit is about the corporation, not the shareholder’s personal gain.

A little analogy to anchor the idea

Think of the board as the ship’s captain and crew. If someone spots a leak (a wrong doing) and the captain isn’t fixing it, a responsible passenger (the shareholder) can raise a flag. The passenger must have had a stake in the ship during the voyage and must not be acting as a spy for a rival crew. They also should be capable of presenting the ship with a fair plan to repair the hull. The 10% figure? It’s not a universal rule for this scenario—the real test is whether the passenger’s actions will benefit the ship as a whole.

Closing thoughts

When you’re confronted with the question about what’s NOT necessary for bringing a shareholder derivative suit, the right answer isn’t a shouty number about percentages. It’s a reminder of how derivative suits are designed to function: ownership at the right time, proper representation, and a respectful, well-timed demand to the board. The ownership threshold—often cited in study guides and classroom debates—doesn’t have the universal weight some people expect. The practical rule of thumb is simple: if you meet the core three conditions, you’ve got a solid basis for a derivative action; if you don’t, the door tends to stay closed.

If you’re talking through this with a study buddy or jotting notes before a mock scenario, try this concise checklist:

• Do I have contemporaneous ownership (or ownership acquired by operation of law)?

• Am I capable of adequately representing the corporation’s interests?

• Have I made a proper demand on the directors, or can I prove demand futility?

• Is there a universal 10% ownership requirement? No—there isn’t.

With that framework in hand, derivative suits become less about memorization and more about understanding governance, fiduciary duties, and the practical mechanics of corporate accountability. And that’s exactly the kind of clarity that helps the topic stay meaningful long after you’ve moved on to the next chapter.

If you’d like, I can tailor a quick, mnemonic-friendly summary or whip up a few practice scenario prompts to reinforce these points in a real-world setup. The more you see these conditions in action, the more intuitive they’ll feel when they show up on a test or in a case discussion.