Derivative suit

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A Shareholder's derivative suit is an action brought by a shareholder not on its own behalf, but on behalf of the corporation. The shareholder brings an action in the name of the corporation against the parties allegedly causing harm to the corporation; such actions are often brought against directors or officers of the corporation itself when their conduct is in violation of a fiduciary duty owed to the shareholders, vis-a-vis the corporation. Any proceeds of the action go to the corporation.

An action brought by a minority shareholder is liable to be defeated by the Foss v. Harbottle principle. But exceptions have been evolved to the principle laid down in that case primary among them being "the ultra vires exception" and the "fraud on minority" exception.

According to Blair and Stout's "Team Production Theory of Corporate Law", the purpose of the suit is not to protect the shareholders of the corporation but the corporation as a whole. That is why, they say, standing in such a suit can be shifted from shareholders to creditors as corporations near insolvency. (See: Credit Lyonnais Bank Nederaland v. Pathe Communication Corp) Civ. A. No. 12150, 1991 Del. Ch. LEXIS 215 (Del. Ch. Dec. 30, 1991).

In New Zealand these can be brought under the Companies Act 1993 section 165 only with the leave of the court. It must be in the best interest of the company to have this action brought so benefits to company must outweigh the costs of taking action.