What is a derivative suit, and how does it differ from a direct action?

• A. A derivative suit asserts corporate injury brought by a shareholder on behalf of the corporation; a direct action asserts injury to the shareholder.
• B. A derivative suit asserts injury to the shareholder personally.
• C. A derivative suit is the same as a direct action.
• D. A derivative suit must be approved by the board before filing.

Answer: (A)

The key idea is who is harmed and who gets the remedy. A derivative suit is a lawsuit brought by a shareholder to enforce the corporation’s rights when the company itself has been harmed by the actions of its directors or officers. The relief in a derivative suit goes to the corporation, not to the individual shareholder who sues. In contrast, a direct action is brought by a shareholder to redress injuries suffered personally by the shareholder, not injuries to the company.

So this choice captures the essential distinction: the derivative suit targets corporate injury and acts on behalf of the corporation, while a direct action targets the shareholder’s own injuries. The other statements blur who is injured or misstate the relationship between the two types of suits.