Note on characterization of direct and derivative claims

Tooley's simpler inquiry ("Who has been harmed and to whom will a remedy flow?") makes it easier for litigants and courts to determine the nature of the claims being brought. Where the corporation has been harmed by the actions of the board and where the remedy flows back to the corporation, such claims are derivative in nature. For example, a decision by the board of directors results in a fall or a drop in the stock price, the corporation has been harmed. To the extent there is a remedy available in that case, it would flow back to the corporation (e.g. damages paid by the board back to the corporation). Consequently, such stock drop cases are derivative. Other typical derivative claims are claims against the board for engaging in self-dealing transactions or other transactions that result in harm to the corporation.

In another example, if the board took an action to restrict the rights of stockholders to vote in an annual meeting, claims challenging the board's action would be direct. The stockholder has been harmed because their votes have been compromised and any remedy (restoring their right to vote) would flow back to the stockholder. Other typical direct claims where stockholder rights are directly implicated include (but are not limited to) challenges to restrictions under the certificate of incorporation or bylaws.