You find it by accident. A vendor mentions a company you have never heard of, and a week of digging shows that your co-owner has been routing the business’s best work through a second entity he owns alone. Or the bank statements show payments to a relative for work no one did. You are furious, and you are ready to sue. Then your lawyer asks a question that changes everything. Is this your claim, or the company’s?
That question is not a technicality. In Illinois, getting it wrong can end a meritorious case before it is heard. Some wrongs done inside a company belong to you personally to sue over. Others belong to the company itself, and you may pursue them only derivatively, by stepping into the company’s shoes after clearing a set of procedural gates. Knowing the difference is the difference between recovering and being dismissed.
Direct or derivative: whose claim is it?
A claim is direct when the injury is yours in particular, distinct from the harm felt by the owners as a group. It is derivative when the wrong primarily injured the company, and you are harmed only because the company was. The appellate court in Caparos v. Morton explained that a shareholder may bring a direct action where he has suffered an injury different from that of other shareholders, and may bring a derivative action for harm to the corporation, and may sometimes pursue both. Diverted corporate funds and stolen opportunities usually injure the company first, which makes them derivative, while a personal freeze-out or a refused buyout is often direct.
Why the law makes you ask the board first
Because a derivative claim belongs to the company, the law generally requires you to demand that the company pursue it before you may pursue it yourself. For corporations, 805 ILCS 5/7.80 sets out that demand requirement and what the complaint must allege. Demand can be excused as futile where the very people you would ask are the wrongdoers, or are so beholden to them that an honest decision is not possible, but futility must be pleaded with particular facts, not assumed. The Illinois LLC Act sets a parallel framework for derivative actions by members. These gates are where unprepared cases die, and where a well-built one earns the right to proceed.
Who controls the money if you win?
This is the point that surprises owners most. In a derivative suit, the recovery generally belongs to the company, not to you, because you sued to repair the company’s injury. That can still be exactly the right move when the company holds the value you are fighting over, but it also means a defendant who controls the company will fight hard over who steers the claim and where any recovery lands. It is one reason these cases are often paired with direct claims for oppression or breach of fiduciary duty, where any recovery runs to you. Our practitioner’s checklist on Illinois derivative claims walks through the traps in more detail.
The same rules give the defense its openings. A defendant can challenge whether you fairly represent the company’s interests, whether you owned an interest at the time of the wrong, and whether you skipped or botched the demand. He can argue the claim is really the company’s and dismiss a direct theory, or argue it is really yours and defeat a derivative one. The pleading is not paperwork. It is the case.
Three steps matter at the start. First, map each wrong to the right owner of the claim before you file, because the same facts can support a direct claim, a derivative claim, or both, and the labels carry different rules. Second, decide the demand question early and plead futility with specific facts if you rely on it. Third, preserve the financial trail, the transfers, the related entities, the payments, because derivative claims rise and fall on documents rather than recollection.
A co-owner who loots the company is betting you will either sue the wrong way or not at all. Illinois gives you a path to make the company whole and, often, to recover for yourself at the same time. The owners who win are the ones who answer the whose-claim question before they walk into court.
What is demand futility, and how do I plead it?
Demand futility is the doorway that lets you skip the formal demand when asking would be pointless. It is not enough to say the board would have refused. You must plead specific facts showing that a majority of the decision-makers are themselves the wrongdoers, stand to benefit from the challenged transaction, or are so controlled by the wrongdoers that they could not weigh a demand honestly. Conclusions will not carry it. The complaint has to name names and describe conduct, which is why the investigation that precedes filing matters as much as the filing itself.
What is a special litigation committee?
It is the company’s most powerful response to a derivative suit. The board can appoint a committee of disinterested members to investigate the claim and decide whether pursuing it serves the company. If the committee is genuinely independent and its investigation is thorough and conducted in good faith, a court may defer to its recommendation, including a recommendation to dismiss. The committee is not a rubber stamp, and its independence and process are themselves litigated, but it is the mechanism a well-advised company uses to take control of a derivative claim.
Does the same framework apply to LLCs?
Yes, with its own statutory home. The Illinois LLC Act provides for derivative actions by members and sets parallel requirements about demand and standing. The labels and the gates track the corporate model closely enough that the analysis feels familiar, but the controlling documents are the LLC Act and the operating agreement, not the Business Corporation Act.
Can I lose my standing by selling or being bought out?
You can. A derivative plaintiff generally must have owned an interest at the time of the wrong and must keep that interest through the litigation, because the claim belongs to the company and you sue as its representative. A buyout or a merger that ends your ownership can end your standing to pursue a derivative claim, which is one more reason these claims are often paired with direct claims that survive in your own name.
What our clients say
“I won my case as a plaintiff hands down. In the process, Mr. Lubin even got me awarded the attorney fees and all my costs and interest, and got the other party’s attorney sanctioned by the Cook County judge.”
Sahil S., in one of our Google reviews. DiTommaso Lubin, P.C. holds a 5.0 rating across more than one hundred client reviews on its Chicago and Oakbrook Terrace Google profiles. Prior results do not guarantee a similar outcome, and every case turns on its own facts.
If a co-owner has diverted your company’s money or opportunities, the way you frame the claim decides whether you recover, so the first decisions matter. Call DiTommaso Lubin, P.C. at 630-333-0333 for a free consultation, or contact us online. This post is for general information and is not legal advice.
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Peter S. Lubin and James V. DiTommaso are Chicago business litigation lawyers who try cases throughout Illinois. Peter is a graduate of the University of Chicago Law School, where he has taught trial practice for decades, and he has been recognized as an Illinois Super Lawyer. He has served as lead counsel in more than one hundred class actions and has handled more than one hundred shareholder, LLC, derivative, breach of fiduciary duty, and fraud matters, on both the plaintiff and the defense side. Crain’s Chicago Business credited him with the largest class action settlement of the year for a $40 million recovery in Erikson v. Ameritech, and the firm has been named DuPage County Law Firm of the Year. The firm and its lawyers have represented clients such as McDonald’s, Motorola, and Experian, and have litigated against companies including AT&T and General Motors. James DiTommaso, a graduate of Chicago-Kent College of Law with a certificate in business law, has served with the Illinois Appellate Court and has argued a case before the Illinois Supreme Court. He litigates these disputes in the Illinois trial and appellate courts and in the federal courts. When you hire this firm, the lawyers whose names are on the door are the ones who handle your case.