Whether a claim is direct or derivative determines the procedural requirements, who controls it, and who recovers.

The test. Who suffered the harm, and who would receive the benefit of a recovery. If the injury is to the company and the shareholder’s loss is merely the reduction in the value of their holding, the claim is derivative.

Typical derivative claims. Waste, mismanagement, excessive compensation, usurpation of opportunity, and self-dealing.

Typical direct claims. Denial of voting rights; denial of inspection rights; interference with the right to transfer; dilution of a particular holder’s interest through an issuance to the controller; breach of a shareholder agreement; and in most states, oppression of a minority holder in a closely held company.

Closely held companies. Many states permit a claim that would be derivative to proceed directly where there is no risk of multiple suits, no prejudice to creditors, and no unfair distribution of the recovery — a significant relaxation.

Pleading both in the alternative, with a clear articulation of the injury for each.

Consequences of getting it wrong. A direct claim that is actually derivative is dismissed for failure to plead demand, frequently after the limitation period has run.