Black-letter propositions
- 01
A direct claim redresses injury to the owner personally; a derivative claim enforces an entity right and recovery goes to the entity.
- 02
Derivative standing ordinarily requires ownership at the relevant time and throughout litigation plus adequate representation.
- 03
Demand on the board may be universally required or excused as futile under jurisdictional law.
- 04
A special litigation committee's independence, process, and conclusions receive the jurisdiction's specified review.
- 05
Settlement or dismissal requires court oversight in derivative cases.
- 06
Closely held owners may receive partnership-like duties or alternative oppression remedies depending on law.
Use this attack sequence under time
Frame the issue
Ask who suffered primary injury and who receives recovery.
Resolve the next checkpoint
Classify direct or derivative.
Resolve the next checkpoint
Test contemporaneous and continuous ownership.
Resolve the next checkpoint
Apply demand and committee rules.
Finish the conclusion
Address fees, settlement, and closely held remedies.
Common wrong turns
- Calling a claim direct does not make it so.
- Share-price decline from injury to the corporation is ordinarily derivative.
- Demand futility tests differ materially by jurisdiction and supplied law controls.
Worked example
A director diverts corporate cash, reducing every share's value equally.
The primary injury is to the corporation and recovery belongs to it, so the claim is derivative despite the shareholder's economic loss.
Practice this topic
Closely held corporations
Cornell defines a close corporation as one held by a limited number of shareholders and not publicly traded. It can generally be run directly by the shareholders without a formal board or formal annual meeting, and is exempt from a number of the formal rules that usually govern corporations. It is also called a closely held corporation.
NCBE's MEE outline lists close corporations and special control devices as share transfer restrictions, special agreements allocating authority, resolutions of disputes and deadlocks, and option or buy-sell agreements.
Litigation
NCBE lists shareholder and member litigation as its own topic, covering direct, derivative and class litigation. The Wex summaries cited here do not define derivative suits, so state the test your course teaches for whether an injury is to the corporation or to the shareholder directly.
In a closely held setting, ask whether the claim belongs to the company, to the complaining owner or to a class of owners, and what procedural steps the jurisdiction requires.
What a close corporation is exempt from
Cornell's entry says a close corporation can generally be run directly by the shareholders, without a formal board of directors and without a formal annual meeting. It is exempt from a number of the formal rules that usually govern corporations. Because those formalities may be missing, check the shareholder agreement and any buy-sell terms before you decide who controls a dispute.
Frequently asked questions
What is the controlling rule for direct, derivative, and closely held claims?+
Owner litigation classification turns on whose right was violated and who should receive recovery, followed by standing, demand, and judicial-control rules.
How should I analyze direct, derivative, and closely held claims on the bar exam?+
Classify direct or derivative. Test contemporaneous and continuous ownership. Apply demand and committee rules. Address fees, settlement, and closely held remedies.
What is a close corporation?+
A corporation held by a limited number of shareholders and not publicly traded, which can generally be run directly by shareholders.
How does a close corporation differ from a public one?+
It is exempt from a number of the formal rules that usually govern corporations, such as a formal board or annual meeting, per Cornell.
What are special control devices for close corporations?+
Share transfer restrictions, special agreements allocating authority, resolution of disputes and deadlocks, and option or buy-sell agreements.
What types of shareholder litigation does NCBE list?+
Direct litigation, derivative litigation and class litigation are all listed under the outline's heading for shareholder and member litigation.
Does Cornell's summary define derivative suits?+
No. The sources cited here do not, so state the rule your course teaches for direct versus derivative claims.