The True Exception to the Rule in Foss v. Harbottle: Statutory Derivative Action Revisited

Abstract

In corporate law, the derivative action mechanism allows minority shareholders to file and litigate on behalf of the company a lawsuit against a corporate insider whose action has allegedly injured the company. The derivative action is a mechanism that corporate law furnishes to tackle agency problems because the corporate insiders who should initiate such claims occasionally become caught in a conflict of interests. The derivative action is an essential and well-known corporate governance device, the purpose of which is to ensure that agency problems that inherently trouble business entities do not hamper attempts to obtain redress from wrongdoers whose actions have injured the company especially in instances of fraud. This paper discusses the paradigm shift from the strict protection offered majority shareholders by the rule in Foss v. Harbottle to a greater recognition of individual shareholders’ rights, thereby giving a liberal interpretation to the true exception thus, making the rule less of a practical barrier to shareholder right enforcement