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

What typically triggers a derivative suit in corporate law?

1. Harm against the corporation that the board does not address

2. A change in corporate leadership

3. A shareholder's desire for profit

4. Accusations against a corporate officer

The correct answer is: Harm against the corporation that the board does not address

A derivative suit in corporate law is primarily triggered by harm against the corporation that the board of directors has failed to address. In such a suit, a shareholder brings a claim on behalf of the corporation against third parties, often corporate executives or directors, when those individuals are perceived to have acted improperly or neglected their duties, resulting in damage to the corporation itself. The fundamental principle behind this type of lawsuit is to protect the interests of the corporation and, by extension, its shareholders. Since the board of directors is usually in control of the corporation's operations, if they choose not to take action against wrongdoing that harms the company, shareholders can step in and seek justice through a derivative suit. This creates a mechanism to hold directors and officers accountable, ensuring that they act in the best interest of the corporation rather than their own. The other possibilities listed do not necessarily lead to a derivative suit. A change in corporate leadership may result in various challenges but is not a direct trigger for such legal action. A shareholder's desire for profit does not constitute harm to the corporation itself; it reflects personal financial interests. Similarly, while accusations against a corporate officer may raise concerns, they alone do not justify a derivative suit unless there is demonstrable harm to the corporation that the board