When a corporation is wronged by its own directors, officers, or controlling shareholders, it should, in theory, sue on its own behalf. But what happens when the people running the company are the ones causing the harm? 

That is exactly where derivative actions come in. A derivative lawsuit is filed by a shareholder on behalf of the corporation when the board refuses or fails to act. Any recovery from the suit goes back to the company, not the individual shareholder. 

Why Derivative Actions Exist in Corporate Law. 

The logic is straightforward. Corporate boards have a fiduciary duty to act in the company’s best interest. 

When they breach that duty through self-dealing, fraud, or gross negligence and still refuse to pursue legal remedies, shareholders need a legal mechanism to hold them accountable. 

Derivative suits serve two functions: 

• They force accountability on corporate insiders
• They deter future misconduct by directors and officers

Without this mechanism, bad actors inside a company could simply vote not to sue themselves. 

The Demand Requirement Is the First Legal Hurdle. 

Before filing a derivative suit, a shareholder must typically make a formal demand on the board asking it to take legal action. This is required under both federal rules (Rule 23.1) and most state laws. 

If the board refuses, the shareholder must show that the refusal was not a valid business judgment. This is harder than it sounds. 

When Can Demand Be Excused? 

In some states, Delaware being the most important, a shareholder can skip the demand requirement if they can show it would be futile. Courts apply specific tests to decide this. 

Delaware uses the United Food & Commercial Workers Union v. Zuckerberg standard (2021), which asks whether a majority of the board faces a substantial likelihood of personal liability. If yes, demand may be excused. 

Delaware Sets the Standard for Most Derivative Litigation. 

Because the majority of large U.S. corporations are incorporated in Delaware, its Court of Chancery effectively sets the national standard for how derivative suits are handled. Key legal benchmarks from Delaware case law include: 

Case	Significance
Aronson v. Lewis (1984)	Established the original two-part demand futility test
Caremark Int’l (1996)	Set the standard for oversight liability claims
Zuckerberg (2021)	Replaced Aronson with a unified three-part test

Other states generally follow Delaware’s lead, though some apply different procedural standards. 

The Numbers Behind Derivative Litigation in the U.S. 

Derivative suits are more common and more costly than many executives realize. Here are some important things you should know: 

• In 2023, over 200 derivative lawsuits were filed against U.S. public company directors and officers, according to Cornerstone Research. 
• M&A-related derivative suits account for a growing share of filings, with deal litigation spiking after large acquisitions. 
• Directors and Officers (D&O) insurance claims tied to derivative actions averaged $14.6 million per claim in recent years, per Marsh’s D&O survey data. 
• A 2022 NERA Economic Consulting report found that derivative settlements in federal court averaged $26 million per resolved case. 

Special Litigation Committees Can Block a Lawsuit. 

Even after a derivative suit is filed, the board can form a Special Litigation Committee (SLC), a group of independent directors tasked with evaluating the claim. If the SLC recommends dismissal, courts may defer to that judgment. 

However, courts scrutinize SLC independence carefully. If the committee members have ties to the accused directors, their recommendation carries little weight. 

The Core Litigation Risks Companies and Directors Face. 

Derivative suits expose directors to personal liability, reputational damage during discovery, D&O insurance gaps, and indemnification disputes. 

One often-overlooked risk: even a dismissed suit can surface damaging internal disclosures that affect share price and investor confidence. 

Derivative actions are a meaningful check on corporate misconduct, but they are also a serious litigation risk for boards that do not take their fiduciary duties seriously. 

For any director, officer, or counsel operating in U.S. corporate law, understanding this framework is not optional.