Duhaime's Law Dictionary

Derivative Action Definition:

A class action brought for a wrong done to a corporation.

In NPV, Justice Welsh of the Newfoundland Court of Appeal adopted these words:

"A derivative action is an action brought in the name or on behalf of a corporation or any of its subsidiaries, or an intervention in an action brought by or against the corporation or its subsidiary, by a shareholder or other complainant, to assert or defend rights to which the corporation or its subsidiary is entitled.

"It is always a class action brought or conducted in a representative capacity, and it is, therefore, binding upon all of the shareholders, rather than just the complainant."

In his Third Edition of Principles of Modern Company Law, Professor Gower wrote:

"The dispute is not an internal one between those interested in the company, but one between the company on the one hand and third parties on the other, and it makes no difference in principle that the third parties happen to be the directors or controlling shareholders of the company. If anyone other than the company is allowed to appear as plaintiff it is an anomaly allowed only as a matter of grace to prevent a serious wrong from going unremedied because the wrongdoers control the company. Where such an action is allowed the member is not really suing on his own behalf nor on behalf of the members generally, but on behalf of the company itself. Although, as we shall see, he will have to frame his action as a representative one on behalf of himself and all the members other than the wrong-doers, this gives a misleading impression of what really occurs. The plaintiff shareholder is not acting as a representative of the other shareholders but as a representative of the company, and the action will necessarily present features quite different from those in the normal representative action.

"This has been less clearly recognised here than in the United States, where such actions have been infinitely more frequent and the appropriate rules elaborated to an extent unknown here. And there this type of action has been given the distinctive name of a derivative action, recognising that its true nature is that the individual member sues on behalf of the company to enforce rights derived from it."


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