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Derivative Or Direct?
A sometimes confusing area of corporate litigation concerns whether a claim asserted by a stockholder in a lawsuit against a corporation's officers and directors is a “derivative” claim brought on behalf of the corporation, or a “direct” claim brought by the stockholder on his or her own behalf rather than the corporation's. The distinction is important, as the proper characterization of a stockholder claim can have a significant impact on the parties and how the lawsuit proceeds, in some instances determining whether it proceeds at all. In a new opinion, Tooley v. Donaldson, Lufkin & Jenrette, Inc., No. 18414 (Del. S. Ct. April 2, 2004), the Delaware Supreme Court has cleared up some of the confusion, holding that a claim is derivative whenever the corporation has suffered the alleged harm and will be the beneficiary of the relief granted by the court.
Derivative v. Direct Claims
It is axiomatic that a corporation's board of directors has the right and the obligation to manage and direct the corporation's affairs, including litigation against those who have wronged the corporation. At times, however, a board may be unwilling or unable to pursue a lawsuit on the corporation's behalf. This is particularly true where the subject of the putative lawsuit concerns the conduct of the directors themselves. Hence, courts of equity created the stockholder's derivative lawsuit, which allows a stockholder to pursue claims on behalf of the corporation that the board does not pursue. It has been characterized as an “ingenious device” for holding corporate fiduciaries accountable for their activities. R. Clark, Corporate Law 639-40 (1986).
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