In a derivative action, what is typically required before a shareholder may sue on behalf of the corporation?

In a derivative action, what is typically required before a shareholder may sue on behalf of the corporation?

• A. Standing to Sue
• B. Written Demand Unless Futile
• C. Court Approval Required
• D. Notice to All Shareholders

Answer: (B)

In derivative actions, the shareholder is asking the corporation’s own directors to sue for the corporation’s harm. The typical first step is a written demand to the corporation’s board asking them to bring the suit. This requirement lets the board address the issue and use corporate resources to handle it, rather than having a shareholder sue on the corporation’s behalf without giving the board a chance to act. The demand can be excused if making it would be futile—for example, when the directors are not independent or are themselves involved in the alleged wrongdoing, so they could not honestly consider the suit in the corporation’s best interests. If the board either rejects the demand or fails to respond in a timely manner, the shareholder may then proceed with the derivative action. Standing matters in a derivative suit are about who may bring the suit, not the pre-suit step itself, and court approval is not a general prerequisite to filing. Notice to all shareholders is not part of the standard pre-suit requirement.

In derivative actions, the shareholder is asking the corporation’s own directors to sue for the corporation’s harm. The typical first step is a written demand to the corporation’s board asking them to bring the suit. This requirement lets the board address the issue and use corporate resources to handle it, rather than having a shareholder sue on the corporation’s behalf without giving the board a chance to act.

The demand can be excused if making it would be futile—for example, when the directors are not independent or are themselves involved in the alleged wrongdoing, so they could not honestly consider the suit in the corporation’s best interests. If the board either rejects the demand or fails to respond in a timely manner, the shareholder may then proceed with the derivative action.

Standing matters in a derivative suit are about who may bring the suit, not the pre-suit step itself, and court approval is not a general prerequisite to filing. Notice to all shareholders is not part of the standard pre-suit requirement.