Rule 23.1.Derivative Actions

Rule 23.1 applies when a shareholder or member sues derivatively — on behalf of a corporation or unincorporated association — to enforce a right the entity itself could assert but has not enforced. The suit cannot go forward if it turns out the plaintiff does not adequately represent the interests of other shareholders or members who are similarly situated in enforcing that same right.

Rule 23.1(b) sets out what the verified complaint must allege: that the plaintiff held shares or membership at the time of the transaction being challenged, or that its shares or membership later passed to it by operation of law; that the suit is not a collusive device to create jurisdiction the court would not otherwise have; and, with particularity, what effort the plaintiff made to get the desired action from the directors or comparable governing authority — and, if necessary, from the shareholders or members themselves — along with the reasons no such effort was made or no action resulted. This is the demand requirement at the heart of derivative litigation: before suing on the entity's behalf, a shareholder ordinarily has to show it asked the entity's own decision-makers to act, and explain why that request went nowhere or why making it would have been futile.

Because a derivative suit belongs to the entity and its owners as a group, not to the named plaintiff alone, Rule 23.1(c) requires court approval before the action can be settled, voluntarily dismissed, or compromised, and notice of any proposed resolution must reach the shareholders or members in whatever manner the court directs.