STATUTORY DERIVATIVE ACTIONS

Effectiveness Of The Statutory Derivative Actions

Effectiveness Of The Statutory Derivative Actions

Introduction

The report focuses on analysis of a statement, “The statutory derivative claim has replaced the derivative action at common law and it is more easily accessible to shareholders. There are concerns that there would be an increase of shareholder litigation against directors because the two-stage procedure cannot effectively deter shareholders' frivolous claims against directors”. The common law derivative action developed as a result of decades of case law in common law jurisdictions. UK continues to retain the common law derivative action within their respective legal frameworks, despite both having enacted statutory derivative actions. This paper considers the situations in which the common law derivative action continues to have practical application in each of these jurisdictions. It then considers whether the common law derivative action should be abolished in these jurisdictions, and if so, what significant changes should be made to the statutory derivative action framework concurrent with this proposed abolition.

Discussion

This paper considers the common law derivative action by asking several related questions. First, to what extent does it remain useful and relevant, given that many jurisdictions have replaced it with a statutory derivative action? This question considers in the context of UK, both of which have retained the common law derivative action within their legal framework concurrent with statutory derivative actions. The next question is whether the common law derivative action should be abolished in these jurisdictions. The paper will also consider what changes would be made to the statutory derivative action regime in UK, if the common law derivative action patently abolishes in these jurisdictions, in order to ensure sufficient protection for minority shareholders and an effective corporate governance regime.

The Common Law Derivative Action

It have the support of a majority of the members, or worse, themselves constitute a majority of the members. The company is most unlikely to take action against the wrongdoing directors. However, as a breach of duty is a wrong to the company, it is the company who is the proper plaintiff. Since the company is a separate entity from its members, only the company (and not its members) can sue to enforce a companies rights. However, various exceptions to this principle have evolved over time, one of which is the development of the common law derivative action. The common law derivative action seeks to empower a minority shareholder to take action on behalf of the company, in circumstances where the wrongdoing director is in control of the company and thus resulting in the company not taking action to redress the wrong done to it. In order for a common law derivative action to be brought, a fraud on the minority must be shown.

While there is no comprehensive and de?nitive statement on the meaning of a fraud on the minority, it suggested that the following must be shown in order for a fraud on the minority to be established. First, that the majority shareholders obtained a bene?t; next, that this bene?t obtained at the expense ...