MBE Rules · Business Associations
Direct vs. Derivative Claims
Direct vs. derivative claims (Cal.)
The rule
Injuries to the corporation (mismanagement, waste) must be pursued derivatively; injuries distinct to the shareholder (voting rights, dividend discrimination, minority oppression) support direct suits — California follows the injury-based test.
In plain English
In California, the type of injury determines whether a shareholder can sue directly or must bring a derivative action on behalf of the corporation. If the injury affects the corporation as a whole, such as mismanagement or waste, the claim must be derivative. However, if the injury is specific to the shareholder, like voting rights violations or discrimination in dividends, the claim can be pursued directly.
Worked example
Shareholder A discovers that the corporation's management has been wasting assets, leading to financial losses for the company. Shareholder A attempts to sue the management directly for these losses. However, the court determines that the claim must be brought as a derivative action since the injury is to the corporation, not to Shareholder A personally.
Memory hook
Injuries to the corporation? Go derivative; injuries to the shareholder? Go direct!
The trap
Exams often present fact patterns where the nature of the injury is ambiguous, leading students to misclassify the type of claim. Students may confuse personal grievances with corporate injuries, resulting in incorrect claim types.
How examiners test it
Questions typically involve scenarios where a shareholder faces issues that could be interpreted as either direct or derivative claims, testing the student's ability to identify the correct basis for the lawsuit based on the nature of the injury.
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