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Business Law Today (July 16, 2018)


The distinction between direct and derivative claims follows necessarily from the concept of a legal person being separate and distinct from its owners, raises and resolves a question of standing, has serious practical consequences in litigation, and is central to the governance of any business entity. In a closely held business, the distinction usually protects the deal the owners have made for themselves. On some occasions, however, the distinction helps shelter a miscreant majority owner who has managed to harm a fellow owner indirectly.

This column will briefly describe the three approaches to the direct-derivative distinction found in the case law, explain why the “direct harm” approach is logically and doctrinally correct, and outline the distinction’s practical consequences. With that information as background, the column will address the issue reflected in the column’s caption—that is, how can a party to a contract lack standing to sue another party for breach?