Also known as: derivative demand · shareholder derivative demand · derivative demand letter
A derivative demand is a formal written request from a shareholder asking a company's board of directors to investigate and pursue legal action, on the company's behalf, against directors or officers accused of harming the company.
A derivative demand is a letter a shareholder sends to a company's board of directors demanding that the board investigate alleged wrongdoing by directors or officers and, if warranted, sue them on the company's behalf. Because the alleged harm is to the corporation itself, the right to sue belongs to the company, so a shareholder generally cannot go straight to court: in many states and under the Model Business Corporation Act the shareholder must first make this demand and wait before filing, while in Delaware the shareholder must either make a demand or plead in the complaint that a demand would be futile. After receiving a demand, the board often forms a special committee of independent directors to investigate the allegations and decide whether pursuing litigation serves the company's interests. If the board refuses the demand, the shareholder may then file a derivative lawsuit, but generally must show the refusal was wrongful. For a venture-backed startup, even a demand that never becomes a lawsuit forces the board to run and pay for an investigation, which is where D&O coverage becomes relevant.
A derivative demand is a formal written demand by a shareholder asking a company's board of directors to investigate and pursue legal action, on the company's behalf, against directors or officers accused of harming the company. Because the wrong is done to the corporation rather than to the shareholder personally, the claim belongs to the company, and the demand is usually the required first step before a shareholder can bring a derivative lawsuit. The board can investigate and then pursue the claim, resolve it, or decline to act.
The board reviews the demand and typically appoints a special committee of independent directors to investigate the allegations and decide whether litigation is in the company's best interest. The board can accept the demand and sue, negotiate a resolution, or refuse it. If the board refuses, the shareholder may file a derivative lawsuit, but generally must allege that the refusal was wrongful and not protected by the business judgment rule.
Many D&O policies respond to the costs a company incurs investigating a shareholder derivative demand, sometimes through a dedicated derivative demand investigation cost provision with its own sublimit. Coverage and the sublimit amount vary by policy, and some carriers treat these investigation costs differently from defending an actual derivative lawsuit. Report the demand to your D&O carrier promptly and check how your policy defines derivative demand costs, because notice timing and those definitions determine what gets reimbursed.
Definitions are educational and may be modified by your specific policy language, endorsements, and state rules. For regulatory guidance, refer to the California Department of Insurance or the NAIC.
Last updated: July 2026.