A shareholder with a grievance usually cannot simply sue — the claim generally belongs to the corporation, and a derivative proceeding requires standing under D.C. Code § 29–305.51 first. Two further features of D.C. law shape these cases: directors are judged by a standard of conduct (§ 29–306.30) that is deliberately separate from the standard of liability (§ 29–306.31), and a dissolution petition can be converted into a forced purchase of the petitioner’s shares at fair value under § 29–312.24.
Who can bring a derivative claim?
A derivative claimant must have been a shareholder at the time of the act complained of, or have taken the shares by operation of law from someone who was, and must fairly and adequately represent the corporation’s interests.
A shareholder shall not commence or maintain a derivative proceeding unless the shareholder: (1) Was a shareholder of the corporation at the time of the act or omission complained of or became a shareholder through transfer by operation of law from one that was a shareholder at that time; and (2) Fairly and adequately represents the interests of the corporation in enforcing the right of the corporation. ( July 2, 2011, D.C. Law 18-378, § 2, 58 DCR 1720 .) Section References This section is referenced in § 29-306.09 . Previous § 29–305.50. Definitions. Next § 29–305.52. Demand.
D.C. Code § 29–305.51 — Standing
An LLC member, by contrast, has an express direct action — see LLC member disputes. Which entity was formed years ago therefore decides the procedural route today.
What standard applies to the directors?
A D.C. director discharging the role must act in good faith and in a manner the director reasonably believes to be in the best interests of the corporation.
(a) Each member of the board of directors, when discharging the duties of a director, shall act: (1) In good faith; and (2) In a manner the director reasonably believes to be in the best interests of the corporation.
D.C. Code § 29–306.30(a) — Standards of conduct for directors
⭐ Falling short of that section does not itself create liability. D.C. sets a separate and more demanding liability threshold:
(a) A director shall not be liable to the corporation or its shareholders for any decision to take or not to take action, or any failure to take any action, as a director, unless the party asserting liability in a proceeding establishes that:…
D.C. Code § 29–306.31(a) — Standards of liability for directors
Officers are addressed separately again by § 29–306.42. See breach of fiduciary duty.
Can a shareholder have the company dissolved?
On the statutory grounds, yes — § 29–312.20 sets them out, § 29–312.21 the procedure, and § 29–312.23 the decree if grounds are established.
(a) If, after a hearing, the Superior Court determines that one or more grounds for judicial dissolution described in § 29-312.20 exist, it may enter a decree dissolving the corporation and specifying the effective date of the dissolution, and the clerk of the court shall deliver a certified copy of the decree to the Mayor, who shall file it.
D.C. Code § 29–312.23 — Decree of dissolution
The buyout that usually ends these cases
In a proceeding under § 29–312.20(a)(2) to dissolve a corporation, the company or one or more shareholders may elect to purchase the petitioner’s shares at fair value, and that election is generally irrevocable.
(a) In a proceeding under § 29-312.20(a)(2) to dissolve a corporation, the corporation may elect or, if it fails to elect, one or more shareholders may elect to purchase all shares owned by the petitioning shareholder at the fair value of the shares. An election pursuant to this section shall be irrevocable unless the court determines that it is equitable to set aside or modify the election.
D.C. Code § 29–312.24(a) — Election to purchase in lieu of dissolution
| Step | Time limit |
|---|---|
| File the election to purchase | Within 90 days of the petition, or later if the court allows |
| Corporation notifies other shareholders | Within 10 days of the election |
| Other shareholders join the purchase | Within 30 days of the effective date of that notice |
| Petitioner discontinues, settles or sells | Not permitted after an election, unless the court finds it equitable |
The election is irrevocable unless the court finds it equitable to set aside or modify it.
Frequently asked questions
Why can’t I sue in my own name?
Because the loss is usually the corporation’s, not yours personally. A derivative proceeding puts the claim where it belongs, and § 29–305.51 controls who may bring one.
Do I need to have owned shares at the time?
§ 29–305.51 requires the shareholder to have been a shareholder at the time of the act or omission complained of, or to have become one by operation of law from someone who was.
Is a bad business decision a breach?
Not on its own. § 29–306.30 sets the standard of conduct and § 29–306.31 sets a separate, higher bar for holding a director liable.
Can they force me to sell my shares?
In a dissolution proceeding under § 29–312.20(a)(2), the corporation or other shareholders may elect to purchase your shares at fair value under § 29–312.24 — and once elected, you generally cannot discontinue or sell without the court’s leave.
When can a derivative proceeding actually be commenced?
Not immediately. D.C. Code § 29–305.52 requires a written demand on the corporation to take suitable action and then 90 days to expire, unless the shareholder is told sooner that the demand is rejected, or waiting the 90 days would cause irreparable injury to the corporation.
Which court controls the timetable once the company starts its own inquiry?
The Superior Court. Under D.C. Code § 29–305.53, if the corporation commences an inquiry into the allegations made in the demand or the complaint, the court may stay the derivative proceeding for such period as it considers appropriate.
How does a company get a derivative case dismissed?
Through a good-faith determination by qualified directors. D.C. Code § 29–305.54(a) requires dismissal on the corporation’s motion where the deciding group has determined in good faith, after a reasonable inquiry on which its conclusions are based, that maintaining the proceeding is not in the corporation’s best interests.
Who pays the director’s legal fees while the case runs?
Often the company, and sometimes it has no choice. D.C. Code § 29–306.53 permits advancing funds against a signed affirmation and an undertaking to repay, and § 29–306.52 requires indemnification of a director who was wholly successful, on the merits or otherwise, in defending the proceeding.
Sources and legal authorities
- D.C. Code § 29–305.51 — Standing
- D.C. Code § 29–306.30 — Standards of conduct for directors
- D.C. Code § 29–306.31 — Standards of liability for directors
- D.C. Code § 29–306.42 — Standards of conduct for officers
- D.C. Code § 29–312.20 — Grounds for judicial dissolution
- D.C. Code § 29–312.23 — Decree of dissolution
- D.C. Code § 29–312.24 — Election to purchase in lieu of dissolution
General information about D.C. law, not legal advice. Which rule applies depends on the entity, the agreement and the facts.
Related: Business Ownership & Partner Disputes · LLC Member Disputes · Breach of Fiduciary Duty · Business Dissolution · Business Litigation. Call (301) 901-3109 or use the contact page.