Shareholder Lawsuits: Derivative v Direct

Oct 25, 2016 | Featured, News

By J. Steven Collins

A clear standard in Tennessee now exists to determine whether a shareholder’s lawsuit is to be denominated a direct lawsuit or a derivative lawsuit. In Keller v. Estate of McRedmond, 2016 Tenn. LEXIS 506 (Tenn. July 11, 2016), the Tennessee Supreme Court overruled its prior decision in the case of Hadden v. City of Gatlinburg, 746 S.W.2d 687, 689 (Tenn. 1988), which set forth a complicated, multi-pronged test to determine whether a lawsuit was properly deemed a direct shareholder lawsuit or a derivative shareholder lawsuit. The Supreme Court in Keller said of its prior decision that “the standard set forth in Hadden is far from clear.”

Now a court will determine whether a shareholder’s lawsuit should be characterized and litigated as a direct lawsuit or as a derivative lawsuit “solely on the following questions: (1) Who suffered the alleged harm (the corporation or the suing stockholders, individually); and (2) Who would receive the benefit of any recovery or other remedy (the corporation or the stockholders, individually)?”

If the corporation is sued for a direct or derivative shareholder claim and the plaintiff gets it wrong, the suit is subject to a motion to dismiss.  If a derivative lawsuit is incorrectly filed as a direct lawsuit or vice versa, the corporation files a motion to dismiss for failure to state a claim on which relief can be granted and the court grants the motion.

The corporation can then seek recovery of up to $10,000 of its attorney fees and litigation expenses incurred in the lawsuit under another relatively new law in Tennessee, TCA § 20-12-119 (2012 amendment), which provides that a defendant successfully filing a motion for dismissal for failure to state claim may seek and receive a remedy of attorney’s fees and expenses up to $10,000.00.


J. Steven Collins serves in an Of Counsel role in Spicer Rudstrom’s Knoxville office. He is an experienced litigation attorney practicing in employment law, domestic relations, and premises liability. He has achieved an AV Preeminent rating from Martindale-Hubbell, is past president of the Knoxville Bar Association, and is a graduate of Leadership Knoxville.