A derivative suit is one in which shareholders of a corporation sue the directors or officers for a failure of proper management. The suing shareholders are considered to be acting on behalf of the corporation because management has committed fraud or failed to protect the company’s interests. Some states require the shareholder to have been a shareholder of the corporation at the time the act or omission occurred.
Once a derivative suit has been filed against a corporation, the company either can proceed with the suit, move to dismiss the suit or ask to investigate the matter. Most states require court approval for a settlement or discontinuance of a derivative suit.