Rule 23.1.Derivative actions by shareholders

A derivative action is a lawsuit brought by a shareholder or member, not to recover for a personal injury, but to enforce a right that belongs to the corporation or unincorporated association itself — one the entity's own leadership has declined or failed to pursue. Rule 23.1 sets the ground rules for bringing one. The complaint must be verified, meaning the plaintiff swears to its truth rather than merely signing it the way a lawyer signs an ordinary pleading. It must also establish standing by alleging that the plaintiff held the shares, membership, or interest at the time of the transaction being challenged, or that the plaintiff's interest came to them afterward by operation of law, such as through inheritance.

The heart of the rule is what's often called a demand requirement. The complaint has to describe, in detail, what the plaintiff did to ask the corporation's directors or the association's comparable leadership to take the desired action before suing on the entity's behalf. If the plaintiff never made that request, the complaint has to explain why not — for instance, that making the request would have accomplished nothing because the same people who'd have to authorize the suit are the ones accused of wrongdoing. Courts use this requirement to keep derivative litigation a last resort, pursued only after the entity's own leadership has had a chance to address the problem from the inside.

Even after those threshold requirements are met, the suit can't go forward if the plaintiff isn't positioned to protect the interests of other shareholders or members in the same situation — a derivative plaintiff stands in for a group, not just a personal claim. And because a settlement or dismissal of a derivative suit can affect everyone the plaintiff represents, the rule requires court approval before the case can be dismissed or compromised, along with notice to the shareholders or members in whatever form the court directs.