SUING YOUR BUSINESS PARTNER – UNDERSTANDING THE DIFFERENCE BEWEEN DIRECT AND DERIVATIVE SUITS
|
Aspect |
Direct Lawsuits |
Derivative Lawsuits |
| Definition | Claims brought by shareholders for injuries suffered personally. | Claims brought by shareholders on behalf of the corporation for harm to the corporation. |
| Harm Addressed | Direct harm to the shareholder’s interests, such as in Little v. Cooke, where tax damages were recognized as direct damages. | Harm to the corporation that indirectly affects shareholders, such as mismanagement or fraud affecting corporate valuation. |
| Beneficiary of Recovery | Any recovery goes directly to the shareholder(s) filing the suit. | Recovery goes to the corporation, potentially benefiting all shareholders. |
| Standing Requirements | Shareholder must prove a direct harm distinct from that suffered by other shareholders. | Shareholder must demonstrate that the harm affects the corporation primarily. |
| Procedural Requirements | Generally, fewer procedural hurdles compared to derivative suits. | Includes a pre-suit demand on the board, known as the “derivative demand” requirement, to demonstrate the board’s refusal or failure to address the issue itself. |
| Impact on Shareholder Rights | Can address issues like voting rights infringements, improper dividends, or breach of fiduciary duties directly affecting the shareholder. | Focuses on issues affecting the governance and management of the corporation. |
| Legal Precedents in Virginia | Based on specific harms to individual shareholder rights, as demonstrated in Little v. Cooke regarding direct tax damages. | Governed by cases like Simmons v. Miller, emphasizing harm to the corporation and the necessity of procedural compliance. |
