The direct/derivative distinction
relates to whether or not a shareholder may bring a particular claim
for their own benefit or, rather, whether the claim must be brought on a derivative basis
for the benefit of the corporation. Essentially, if it is the corporation
that has been injured, including by a director’s breach of fiduciary duty, the claim is derivative. It has from time to time been argued that, however, in closely held corporations, this distinction
should be eliminated, and shareholders
should, for their personal benefit, be able to pursue redress. Kentucky courts have carefully followed
the direct versus derivative
distinction, sometimes utilizing
a “real party in interest” analysis. In addition, the direct versus derivative
distinction has
of late been applied in the context of LLCs.
In
opposition to
the direct versus derivative
distinction,
plaintiffs have
in numerous cases
argued that
Section 7.01
of the ALI’s Principles
of Corporate
Governance should
be applied to the effect that, in a closely held corporation, shareholders should
be able to bring a direct action for breach of fiduciary duty. There is no published Kentucky
decision in which
this argument
has been accepted. There are, however, at least two trial courts that have rejected this suggestion.
First, in Snyder v. Baumgardner, No. 09-CI-04445 (Jefferson Circuit
Court, Div. 4, Cunningham, J), in an Order dated April 15, 2010,
that was rejected the suggestion that
pursuant to Section 7.01(d) of the Principles
of Corporate
Governance the plaintiff should be permitted to proceed on an individual, rather than a derivative basis, Judge Cunningham writing
that the Principles had
not been adopted by Kentucky courts.
Second,
in Fenley v. Fencroft Company, No. 10-CI-0998 (Jefferson Circuit
Court, Div. 2, Shake, J.), in an Opinion and Order dated April 25, 2011,
while discussing
the ALI Principles
of Corporate
Governance § 7.01 and the suggestion that, based thereon, the individual
shareholder should
be allowed to proceed on an individual rather
than derivative
basis, it was written that:
“While the ALI materials are certainly reasonable
and make interesting reading, they are not the law of Kentucky and there exists at this time no exception [from the derivative action rules] for closely held corporations.”
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