What Is a Shareholder Derivative Action?
When directors, officers or managers harm the company through self-dealing, waste or mismanagement, the injury belongs to the company, not to an individual owner. Because those same insiders usually control the decision to sue, Texas law lets a shareholder or member step in and pursue the claim on the company's behalf.
Requirements for a Derivative Lawsuit in Texas
For most Texas corporations, a shareholder must:
- Have been a shareholder when the misconduct occurred
- Fairly and adequately represent the corporation's interests
- Make a written demand on the corporation to take action
- Wait 90 days after the demand, unless it is rejected earlier or waiting would cause irreparable harm
Similar rules apply to LLC members.
Closely Held Company Exception
Texas law treats closely held businesses differently. For a corporation with fewer than 35 shareholders and no publicly traded shares, the demand and waiting requirements do not apply to claims against directors, officers or shareholders, and a court may treat the claim as a direct action when justice requires. A similar rule applies to LLCs with fewer than 35 members. This can make derivative claims faster and more practical for owners of Texas family and privately held businesses.
Defending Directors, Officers and Companies
We also represent companies and individual directors and officers named in derivative suits. Early defenses may include lack of standing, failure to make a proper demand, the business judgment rule, exculpation provisions in the governing documents and limitations. In larger companies, an independent committee may evaluate whether pursuing the claim serves the company.
Common Derivative Claims
- Breach of fiduciary duty by directors, officers or managers
- Corporate waste and excessive compensation
- Self-dealing and related-party transactions
- Diverted corporate opportunities
- Misuse of company assets
Texas Business Court
Certain derivative proceedings may be heard in the Texas Business Court, which opened in September 2024 with a division in Dallas. Cases involving more than $5 million or a publicly traded company may qualify.
Derivative Action Attorneys for Dallas and Texas Businesses
We represent shareholders, members and companies in Dallas, Fort Worth, Plano, Houston, Austin and San Antonio. Schedule a free consultation or call 214-935-1628.
Shareholder Derivative Actions: Frequently Asked Questions
Who receives the money in a derivative lawsuit?
The company. Because the claim belongs to the business, any recovery generally goes to the company, though in closely held companies a court may direct recovery to the shareholder.
What is the difference between a direct and a derivative claim?
A direct claim seeks recovery for harm to you personally, such as breach of your shareholder agreement. A derivative claim seeks recovery for harm to the company.
Can I recover attorney's fees in a derivative action?
A court may order the company to pay reasonable expenses, including attorney's fees, if the proceeding results in a substantial benefit to the company.
Can a company dismiss a derivative lawsuit?
In some cases, independent directors or a court-appointed panel may determine the suit is not in the company's best interest, which can lead to dismissal. The closely held exception limits this.
Do derivative rules apply to Texas LLCs?
Yes. Texas has derivative provisions for LLC members, including a closely held exception for LLCs with fewer than 35 members.