Question

Ray is a shareholder of Small Biz Company (SBC). When the directors fail to undertake an action to redress a wrong suffered by SBC, Ray files a suit on the firm’s behalf. Refer to Fact Pattern 20-1. Ray’s suit is a shareholder’s Group of answer choices ​duty-of-care suit. ​duty-of-loyalty suit. ​business-judgment rule suit. ​derivative suit.

Answer 1

Ray is a shareholder of a small company. When the director falls to undertake an action it falls under derivative suit.

Explanation:

• Derivative suit is referred to as a law suit that is brought by the shareholder in behalf of the company against the third party.
• If in a company the employees, the directors as well as the officers are not ready to file a complain against the third party then the shareholder has the right to file a complaint against the third party.
• Derivative suit is normally filed by the shareholder when there is a mismanagement in the company. To stop the illegal work this action is being taken.