Breach of fiduciary duty questions often arise in shareholder derivative actions. These lawsuits involve a shareholder of a corporation who files suit derivatively—that is, on the corporation’s behalf rather than in her own individual capacity—to recover for some alleged wrong done to the corporation itself. In such cases, the directors of the corporation often have conflicted interests and may even have participated or acquiesced in the wrongdoing. The mechanism of a derivative suit allows aggrieved shareholders to bring a lawsuit on the corporation’s behalf that these compromised directors likely would refuse to bring themselves. These principles are not limited to corporations but also apply to other forms of corporate governance, including limited liability companies.
The Appellate Division, First Department, recently issued a decision that clarifies when individual shareholders have standing to bring a derivative action. In Sajust, LLC v. Mendelow, 198 A.D.3d 582 (1st Dep’t 2021), the court affirmed the dismissal of the plaintiff’s complaint on the ground that the plaintiff lacked standing to bring a breach of fiduciary duty claim in its individual capacity where that claim was truly derivative in nature.