What is the Difference Between a Shareholder Derivative Suit vs. a Direct Claim?

Shareholders in corporations play an interesting role in governing those corporations. By virtue of owning a small portion or “share” of the company, a shareholder has some power to affect change within the corporation, including actions against the corporation. There are two main types of actions against a company: direct claims and derivative suits. What does each mean?

Direct Claims

If a shareholder is looking to assert a claim that the corporation violated its duty to that shareholder, then he or she would file a direct claim. The purpose of the claim is to seek damages for harm that occurred to the shareholder as a result of the corporation’s violation of their duty.

A direct claim is often used by shareholders in small corporations, particularly with minority shareholders who are alleging unfair treatment at the hands of the majority shareholders. Here, the individual shareholder is seeking redress of wrongs committed by the corporation’s board or other shareholders that directly affect the individual shareholder. Other causes of action that can be brought through direct action are fraud, conspiracy, and breach of statutory duties.

Derivative Suits

Derivative suits, on the other hand, are claims that belong to the corporation, but are brought by a shareholder on behalf of the corporation because the corporation’s management is either unwilling or unable to do so. The shareholders filing the suit do so as a representative or “friend” of the corporation. It is an effective method of taking action when a shareholder believes management should or shouldn’t have done something. It can also be used to expose fraud and other breaches of fiduciary duty that occur within the corporation. A derivative suit can be particularly crucial when the fraud is entrenched within the corporation and the perpetrators may also be the management themselves.

Minority shareholders can also bring derivative suits in the event of a wrongful sale of corporate control by the majority shareholders. While the minority shareholders are filing in the shoes of the corporation, any proceeds recovered from the wrongful sale will go only to the minority shareholders who suffered damages as a result of the wrongful sale. The majority shareholders who sold control and their successors get nothing.

While a claim for breach of fiduciary duty can only be brought as a derivative suit, other claims can be brought by either individual shareholders as direct claims or as a derivative action on behalf of the corporation. These include breach of statutory duties, breach of confidential relationship, and conspiracy.

Whether you are an individual shareholder looking to preserve your individual rights or want to file a derivative suit against the corporation’s management, your best weapon is a knowledgeable and experienced attorney who understands these types of claims and knows how they work. Our firm is experienced and confident in handling Florida business law matters, so give us a call today to see how we can help at (305) 431-5678.