Future Business Leaders of America (FBLA) Business Law Practice Exam

What legal action can a shareholder take to rectify harm to a corporation?

1. Derivative suit

2. Class action lawsuit

3. Direct suit

4. Securities fraud claim

The correct answer is: Derivative suit

A derivative suit is a legal action that allows a shareholder to file a lawsuit on behalf of the corporation, typically against third parties, including the corporation's own directors or officers. This type of suit is important in cases where the corporation is harmed, but the management is unwilling or unable to take action to rectify that harm. In a derivative suit, the shareholder essentially steps into the shoes of the corporation to seek relief; any recovery from the lawsuit would go to the corporation instead of the individual shareholder. This mechanism helps ensure that those in control of a corporation adhere to their fiduciary duties and act in the best interests of the company and its shareholders. While other options like a class action lawsuit or a direct suit may provide avenues for legal redress, they do not specifically address the framework in which a shareholder can act to remedy harm to the corporation itself. A class action involves a group of individuals with similar claims, and a direct suit focuses on harm specifically to the individual shareholder rather than providing a remedy for the corporation as a whole. Securities fraud claims pertain to violations of securities laws but don't typically involve the corporation's internal governance issues that a derivative suit would address. Thus, the derivative suit is the appropriate and most commonly used legal action for a