When the company sits on both sides
In derivative litigation the company is formally the party on whose behalf the claim is brought, while the directors and officers accused of wrongdoing are the defendants. That arrangement creates an unusual posture. The company often needs counsel separate from the individual defendants, because its interests may not line up with theirs, and the board has to decide how to respond to a pre-suit demand or to a complaint filed without one. How courts treat a board's refusal of a demand, and when a shareholder can skip the demand altogether, depends on the law of the state where the company is organized. A New York corporation and a Delaware corporation headquartered in the same office can therefore face different analyses.
Independent directors and the record they build
Boards facing a serious demand sometimes form a committee of directors who have no personal stake in the challenged conduct, with its own counsel, to investigate and recommend what the company should do. A committee's conclusions carry weight largely because of its independence and the care of its process, so the choice of members, the documents reviewed, and the minutes of its deliberations all become part of the case. Directors and officers named as defendants should notify the company's D&O insurer promptly and keep their communications about the dispute with counsel rather than with each other. Shareholders often begin with a request to inspect books and records, and how the company handles that request can shape what follows.
LLCs, partnerships, and another meaning of the term
Derivative claims are not limited to corporations. Members of an LLC and limited partners in a partnership can often bring claims on the entity's behalf, although the operating or partnership agreement may affect how those claims proceed. A separate use of the phrase refers to disputes over financial derivatives such as swaps and other hedging contracts, which usually turn on the master agreement, the confirmations, and how a termination or valuation was calculated; those are commercial contract disputes and are handled differently. When you contact us, we start by identifying which kind of matter this is, which state's law governs the entity, and whose interests each lawyer in the room represents.
