What Are Derivative Claims in Business Disputes?

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What Are Derivative Claims in Business Disputes?

Business disputes may involve direct claims or derivative claims.

In a direct claim, a business seeks financial compensation for an injury caused by another’s action or inaction, such as a garden variety breach of contract claim. Similarly, a direct claim could involve an individual corporate shareholder who claims that a corporate officer caused him or her direct personal harm. The injured party may seek damages or equitable relief, such as the specific performance of a contract or the disgorgement of profits that should have gone to the plaintiff but instead were improperly funneled to the defendant. Direct claims may be brought by the business itself, a corporate shareholder, or a member of a limited liability company (LLC).

Derivative claims, on the other hand, are brought by one owner on behalf of all owners—whether LLC members or corporate shareholders. Unlike in a direct claim, the claimed harms are not unique to a single member or shareholder; rather, the misconduct harms the company itself and, therefore, the harm to each of the company’s members or shareholders is derivative of the company-wide harm. Some common examples of derivative claims are breach of fiduciary duty or fraud by corporate officers or directors, breach of statutory duties by an officer, and other causes of action that allege the violation of rights that caused injury to the corporation itself.

Arizona law regarding derivative claims is governed by statute, with respect to both corporations and LLCs. Regardless of the business entity, the procedures for filing a derivative claim are similar. Only someone who was an owner at the time of the incident has the authority to bring a derivative claim. The claim must be brought reasonably and fairly on behalf of all shareholders or members of the business entity. There also are certain notice requirements and prerequisites that you must fulfill prior to filing a derivative claim.

Williams Mestaz, L.L.P., handles the legal matters of countless individuals and businesses facing a wide variety of business-related disputes. We will protect your rights and build a strong case on your behalf, whatever type of issues your business dispute involves. Call our office at (602) 256-9400 to set up an appointment to speak with us today.

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