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CALIFORNIA CORPORATE & SECURITIES LAW

Shareholder Derivative Action Or Shareholder Derivative Suit?

A legal proceeding brought in a representative capacity is sometimes referred to as a “shareholder’s derivative action” and sometimes as a “shareholder’s derivative suit”.  Which is correct?

It turns out that the General Corporation Law doesn’t use the term “derivative”.  Section 800 of the Corporations Code refers to an action “instituted or maintained in right of any domestic or foreign corporation by any holder of shares or of voting trust certificates”.  Section 800 also eschews the word “suit”.  However, the GCL elsewhere refers to a “a shareholder suing in a representative suit against the officers or directors of the corporation for violation of their authority”.  Cal. Corp. Code § 208(a).

Historically, legal proceedings at common law were referred to as “actions” while proceedings in equity were denominated as “suits”.  This historical distinction, however, is no longer generally observed.  The Court of Appeal, for example, has explained that a “shareholder derivative suit is an action in equity.”  Nelson v. Anderson, 72 Cal. App. 4th 111, 127 (1999).  Perhaps even more oddly, Chapter 5 of the Social Purpose Corporations Law is entitled “Shareholder derivative actions” while Section 2900 (which is the only section located in Chapter 5) refers to a “derivative lawsuit”.

“Of a strange nature is the suit you follow.”

The word “suit” has taken on a wide variety of meanings.  In addition to a form of legal proceeding, the word can be used to refer to a matching attire, the wooing of a potential lover, and even a category of playing cards (e.g., hearts or diamonds).  The word itself is derived from the Latin deponent verb sequi, meaning to follow.  Thus, non sequitur translates as “it does not follow” and a sequel is something that follows.  Thus, William Shakespeare is engaging clever wordplay when he has Portia say “Of a strange nature is the suit you follow.” in Act 4, Scene 1 of The Merchant of Venice (emphasis added).

 

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