Legal Memorandum: Derivative Actions by Shareholders in UT

Issue: What must be alleged in a pleading to assert a derivative claim under Utah law?

Generally, a shareholder cannot sue a corporation for a claim that properly belongs to the corporation.  Shareholders may, however, “sue individually to remedy individual injuries.”  Torian v. Craig, 2012 UT 63, ¶ 16, 289 P.3d 479.  To determine whether an injury is individual or derivative, Utah courts are to consider “‘(1) who suffered the alleged harm (the corporation or the suing stockholders individually); and (2) who would receive the benefit of the recovery or other remedy (the corporation or the stockholders individually)?'” Id. ¶ 24 (quoting Gentile v. Rossetti, 906 A.2d 91, 97 (Del. 2006)).

Because the right to sue for remedies for wrongs against the corporation belongs to the corporation, a shareholder cannot usually pursue those remedies, but must instead ask corporate management to do so.  See Dansie v. City of Harriman, 2006 UT 23, ¶ 26, 134 P.3d 1139.  “To protect the right of the corporation to govern its own affairs, plaintiffs bringing a derivative claim must first make demand on the corporation ‘to have an action brought and prosecuted in the name of the corporation . . . .'”  GLFP, Ltd. v. CL Mgmt., Ltd., 2007 UT App. 131, ¶ 17, 163 P.3d 636 (quoting Dansie, 2006 UT 23, ¶ 21).  In addition, the plaintiff’s complaint must strictly comply with the pleading requirements set forth in Utah R. Civ. P. 23A.

Rule 23A states:

(a) The complaint in a derivative action brought by one or more shareholders or members to enforce a right of […]

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