Rule 23.1.Derivative Actions by Shareholders

A derivative action lets a shareholder step into the corporation’s shoes to pursue a right the corporation could assert but has not. Because the shareholder is suing on behalf of the corporation rather than in an individual capacity, Rule 23.1 imposes safeguards beyond ordinary pleading requirements.

The complaint must be verified, and it must allege that the plaintiff was a shareholder at the time of the transaction being challenged, or that the shares later came to the plaintiff by operation of law — a requirement meant to keep someone from buying into a corporation solely to manufacture a lawsuit over past conduct. The complaint must also describe with particularity what efforts, if any, the plaintiff made to get the corporation’s directors, and if necessary its shareholders, to pursue the claim directly, and explain why those efforts failed or were not made.

The action cannot go forward if the plaintiff does not adequately represent the interests of similarly situated shareholders. And because the litigation and its outcome affect shareholders who are not before the court, the case cannot be dismissed or compromised without court approval, and shareholders must be given notice of a proposed dismissal or compromise in whatever manner the court directs.