A shareholder derivative action is a lawsuit brought by a shareholder on behalf of the corporation to enforce a right that the corporation itself has failed to pursue. In closely held businesses, derivative actions are frequently the mechanism by which minority shareholders seek to hold controlling shareholders, officers, and directors accountable for breaches of fiduciary duty, self-dealing, and other misconduct. Mississippi's Business Corporation Act establishes a detailed procedural framework for derivative proceedings that shareholders must follow — and failure to comply with these requirements can result in dismissal before the merits are ever reached.[1]
Standing Requirements
To bring a derivative action in Mississippi, the plaintiff must be a shareholder of the corporation at the time the action is filed. The statute defines "shareholder" broadly to include beneficial owners whose shares are held in a voting trust or by a nominee. However, the plaintiff must also have been a shareholder at the time of the act or omission complained of, or must have become a shareholder by operation of law from a person who was a shareholder at that time. This contemporaneous ownership requirement prevents outsiders from purchasing shares after the fact for the purpose of bringing litigation.[2]
Additionally, the plaintiff must fairly and adequately represent the interests of the corporation in enforcing the right. A shareholder whose interests are fundamentally adverse to the corporation — or who is pursuing the action for personal reasons unrelated to the corporation's welfare — may be disqualified from serving as the derivative plaintiff. The Mississippi Supreme Court addressed this issue in Landrum v. Livingston Holdings, where the court upheld the disqualification of a derivative plaintiff whose conduct and motivations were found to be inconsistent with fairly representing the corporation's interests.
The Demand Requirement
Before filing a derivative action, the shareholder must make a written demand upon the corporation to take suitable action. The shareholder must then wait ninety days from the date the demand was made before filing suit, unless the shareholder has been notified that the demand has been rejected, or unless irreparable injury to the corporation would result from waiting the full ninety days.[3]
The demand must be specific enough to put the corporation on notice of the alleged wrongdoing and the action the shareholder wants the corporation to take. A vague or conclusory demand may be found insufficient. Unlike some other jurisdictions, Mississippi does not have a "demand futility" exception — the demand is a universal prerequisite that cannot be excused simply because the shareholder believes the board would refuse it.
The Board's Response: The Business Judgment Rule
After receiving a demand, the board of directors may investigate the allegations and determine whether pursuing the action is in the best interests of the corporation. If the board (or a committee of independent directors) determines in good faith, after a reasonable investigation, that the action is not in the corporation's best interests, the corporation may move to dismiss the derivative proceeding. The court will grant the dismissal if it finds that the determination was made by qualified directors (who are independent and disinterested) and that the investigation was conducted in good faith.[4]
This is where the business judgment rule intersects with derivative litigation. The business judgment rule protects the board's decision to reject the demand, so long as the process was fair and the directors who made the decision were truly independent. In closely held corporations, finding independent directors can be difficult — the board may consist entirely of the individuals whose conduct is being challenged, or their family members and business associates.
Settlement and Discontinuance
A derivative proceeding may not be settled or voluntarily dismissed without court approval. This requirement protects the corporation and the other shareholders by ensuring that the derivative plaintiff does not settle the action for personal consideration (a "strike suit" settlement) or abandon the action in exchange for a private benefit. The court must find that the proposed settlement is fair and reasonable to the corporation before approving it.
Practical Considerations
For minority shareholders considering a derivative action, the procedural requirements are exacting and the path to success is narrow. The demand requirement adds at least ninety days to the timeline and gives the controlling group an opportunity to preempt the litigation. The standing and adequacy requirements mean the plaintiff's own conduct will be scrutinized. And the business judgment rule provides a powerful defense to the board's decision not to pursue the claim.
Despite these hurdles, derivative actions remain an essential tool for corporate accountability — particularly in closely held businesses where the usual mechanisms of corporate governance (board oversight, shareholder votes, market discipline) may not function effectively. Minority shareholders who believe that those in control are mismanaging the corporation or enriching themselves at the corporation's expense should consult with experienced corporate litigation counsel to evaluate their options and ensure that the procedural requirements are met from the outset.