Shareholder Derivative Action Research Articles

A Study on Shareholder Derivative Actions in India: Ambiguities and Hurdles in Effective Corporate Governance

A Study on Shareholder Derivative Actions in India: Ambiguities and Hurdles in Effective Corporate Governance

Section 241 of the Companies Act, 2013: a Positive Approach Towards Shareholder Derivative Action Suits in India

Section 241 of the Companies Act, 2013: a Positive Approach Towards Shareholder Derivative Action Suits in India

Comparative Derivative Litigation Analysis

Shareholder-derived litigation refers to the litigation system when the legitimate rights and interests of the company are infringed by others, especially by the controlling shareholders, parent company, directors, and managers. As an important system to protect the interests of shareholders shareholder derivative actions have been controversial in practice and do not work well as a remedy. This article will focus on the advantages of relaxing derivative actions while pointing out the problems in current judicial practice and suggesting possible solutions for improving derivative actions in the future.

Shareholder Derivative Action Suits- Time to Take Inspiration from the U.K?

Shareholder Derivative Action Suits- Time to Take Inspiration from the U.K?

Director Pay Disputes in Japanese Courts: 1953 to 2018

This paper reviews a set of 230 judicial decisions collected by the author which Japanese courts rendered in disputes over claims of corporate directors to their pay between 1953 and 2018 in order to investigate what role litigation in the courts has played in relation to Japan's executive compensation practices. These all centered around either Article 361 of the Companies Act or its predecessor Article 269 of the Commercial Code, the main rule governing director compensation. The paper makes four findings which shed light on this question. The first insight is that Japanese courts, and particularly the Tokyo District Court, deal with director compensation disputes quite frequently. This has particularly been the case since the turn of the century, with decisions appearing at a rate of roughly ten per year since 2000. The second insight is that the nature of these litigated disputes differs drastically from the shareholder derivative action narrative developed in the American literature. Article 361 could be loosely described as a type of “Say on Pay” rule, which requires the pay of the board of directors be set either in the articles of incorporation or by a resolution of the shareholders meeting. This procedural requirement has lent itself to a fairly diverse set of uses in the Courts. Broadly speaking these fall into one of two categories. On the one hand, in keeping with its purpose, the rule has been used by both shareholders and corporations themselves to challenge director entitlements to pay. On the opposite side it has been used with even greater frequency in lawsuits initiated by directors claiming remuneration from corporations. A third insight which follows from the second is that in Japan with respect to director pay litigation in the Courts could more accurately be described as a mechanism for directors rather than shareholders. The vast majority of cases which this study uncovered are in fact lawsuits initiated by directors seeking to enforce claims for remuneration against the corporation, with shareholder lawsuits being far less common. The reason for this lies primarily in the fourth and final insight, which is the important role the courts have played in developing the rule itself. Taking a provision that consisted of a single line which left an enormous number of issued unanswered the Courts developed a fairly extensive set of rules governing how it, and by extension how decisions on director pay, operated. In particular the cumulative effect of these has been to give boards of directors, and particularly the representative directors who exercise control over them, a great deal of independent power to set the pay of individual directors. This in turn has put the pay of individual directors, and particularly those who run afoul of the representative directors, at some risk which has led many to turn to the courts to try to enforce their claims.

ICP Investments v Uppal Housing: Pushing Shareholder Derivative Actions in India to the Brink

Although not codified under statute, the derivative action has been the mainstay of shareholder remedies for wrongs caused to the company. Conventional jurisprudence has recognised the derivative action under common law. However, the Delhi High Court in ICP Investments v Uppal Housing went against the grain to hold that derivative actions are subsumed within section 241 of the Companies Act, which deals with direct actions, and that a derivative action is per se not maintainable under common law. In this Note, I argue that this finding is unsustainable in law. First, it represents an inchoate appreciation of the distinction between corporate wrongs and personal wrongs of shareholders. Second, it is not at all clear that the oppression, prejudice and mismanagement remedy under section 241 of the Act is wide enough to assimilate derivative actions. Third, the Court’s ruling fails to square up with procedural and remedial considerations.

Wells Fargo and company: shareholder derivative action - should the case succeed in federal court for the board of directors

Wells Fargo and company: shareholder derivative action - should the case succeed in federal court for the board of directors

Wells Fargo and company: shareholder derivative action - should the case succeed in federal court for the board of directors

A shareholder derivative suit is an action allowed by the courts available for shareholders who believe that they have been harmed by actions of the board of directors and management. In most instances, particularly in the US state of Delaware, the actions are not allowed to proceed. The rationale being that the business judgment rule applies and as a consequence boards of directors are not held responsible for bad decisions and as a result, the business judgment is held to be supreme. Thus they are presumed to act with diligence, without self-interest and in the best interests of the corporation. In the case of the action against Wells Fargo and Company, Judge Tigar of the Northern District of California, has allowed the action to go ahead, on the basis that the directors had been negligent on multiple actions with respect to several proceedings by Federal Agencies against the bank and furthermore that the directors failed to hold senior management to account when concerns were raised from several sources about malfeasance occurring in the bank. The paper suggests the arguments both for the plaintiffs and the defendants in the case.

In the shareholder derivative action whether shareholders can be parties of the settlement

In the shareholder derivative action whether shareholders can be parties of the settlement

The Shareholder Derivative Action and Good Corporate Governance in China: Why Is the Excitement Actually for Nothing?

Despite the high expectation for the shareholder derivative action to play an important role in improving corporate governance in China, only one lawsuit has ever been brought since it was formally introduced in 2005, so far as listed companies are concerned. Above all, the 1% minimum shareholding that plaintiffs are required to satisfy by law is a barrier to derivative suits. However, it is impossible to establish and reduce the threshold figure to an appropriate level, and actually the minimum shareholding requirement as a mechanism for screening out frivolous litigation is inherently flawed. On the other hand, the nature of the derivative action determines that the strategy based upon judicial control rather than a minimum shareholding requirement cannot work properly in China, where the judiciary is weak, unsophisticated and riddled with corruption. When the judicial system is in such a state of condition, it is unrealistic that the derivative action — and, indeed, the private enforcement of law in general — can play a significant role in corporate governance. The findings in this paper raise a question of how corporate governance can indeed be improved in a country where the judiciary is incompetent to perform its role.

Making Shareholder Derivative Actions Happen in China: How Should Lawsuits Be Funded?

There has been a high expectation for the derivative action, which was introduced into China in 2005 when the Company Law 1993 was extensively amended, to play an important role in corporate governance in China. But this expectation may not be fulfilled, because, among other things, the Law does not provide for how derivative actions should be financed. By way of a comparative study, this article investigates what rules are appropriate for derivative action funding in China. The general conclusion is that the common law indemnity order is inherently defective, because it entails that judges impose financial obligations on a company before the merit of an underlying claim is ascertained. The American contingent fee is most favourable and the established rules could be reformed to make the arrangement neutral so as to discourage frivolous litigation. Lastly, the special barrier of filing fees in China has to be cleared in order for derivative actions to be actually taken.

(Pathway to Minority Shareholder Protection: Derivative Actions in the Peoplees Republic of China)

Chinese Abstract: 本文基于对50多个案例中法院判决的分析，阐述在《中华人民共和国公司法》（2006年1月生效）明确规定派生诉讼前后，股东派生诉讼的执行情况与发展态势。此外，我们介绍在当代中国企业组织和公司治理的独特环境，批判派生诉讼的制度设计，并提出相应的改革建议。我们发现中国派生诉讼的制度设计在某些方面是具有创新性的，适合中国的实际情况。例如，法律除了规定针对内部人士和信义义务人的纵向诉讼之外，还允许针对控制股东或大股东的横向诉讼。同时，我们也发现一些制度设计方面的瑕疵。例如，原告在立案方面存在障碍，原告向董事会提出的诉讼请求、以及此类请求的赦免与拒绝等问题尚不明晰，不必要的区分针对公司信义义务人的派生诉讼的过错要求与针对以控制股东为代表的其他人的派生诉讼的过错要求。我们还发现在法律正式规定派生诉讼前后，原告和主审法官对于这一制度的利用是非常大胆甚至是过于激进的。正如中国法院对公司法其他规定的适用，派生诉讼的适用似乎完全限于闭锁型公司。对有大量股东的股份有限公司不适用派生诉讼，这点是非常出人意料的。因为2006年公司法修订中规定的派生诉讼的目的恰恰就是为了给予这类公司的小股东一个途径去追究内部人士和控制股东肆意渎职的法律责任。此外，派生诉讼是以注意义务为代表的公司法原则的必要载体。而我们注意到一些中国法院对此类原则缺乏理解或持谨慎态度。本文是以英文发表的“Pathway to Minority Shareholder Protection: Derivative Actions in the People’s Republic of China”的中文译文。该文原载于D. Puchniak等主编的《派生诉讼在亚洲：比较研究和功能性研究》（剑桥大学出版社，2012年8月），并构成该书的一章。English Abstract: Using a dataset of Chinese judicial opinions arising in over fifty cases, this paper analyses the development and current implementation of shareholder derivative actions in the courts of the People’s Republic of China (“PRC”), both before and after the derivative lawsuit was explicitly authorized in the PRC’s 2006 Company Law effective January 1, 2006. In addition, we describe the very unique ecology of enterprise organization and corporate governance in modern China, and critique the formal design of the derivative action and offer reform suggestions. We find the design of the Chinese derivative lawsuit to be, in some respects, innovative and appropriate for Chinese circumstances. For instance, the statutory scheme permits “horizontal” claims against controlling or oppressive shareholders in addition to “vertical” claims against orthodox insiders and fiduciaries. At the same time, we find certain design flaws, including standing-based obstacles for plaintiffs, a lack of clarity regarding demand, demand excuse and refusal, and an unnecessary distinction regarding the required wrong underlying derivative actions directed at corporate fiduciaries, on one hand, and others (such as controlling shareholders), on the other. In implementation, we find extremely robust -- even overly-aggressive -- use of the mechanism by both plaintiffs and deciding judges before and after its formal recognition in law. As in other applications of the corporate law before the courts in China, this use of the derivative action seems to be entirely limited to the closely-held form of corporation. The absence of application with respect to the widely-held, joint stock, form of company is striking because the derivative lawsuit itself was included in the 2006 PRC Company Law revision precisely so as to give minority shareholders in such widely-held companies a way to hold insiders and controlling shareholders accountable at law for rampant malfeasance. In addition, we note the way in which some PRC courts are wary or uncomprehending of the underlying corporate law doctrines for which the derivative action is a necessary vehicle, particularly the duty of care. This is a Chinese language translation of a chapter originally published in the English language in “Pathway to Minority Shareholder Protection: Derivative Actions in the People’s Republic of China” in D. Puchniak et al. (eds.), The Derivative Action in Asia: A Comparative and Functional Approach (Cambridge University Press, August 2012).

Is Israel's public funding feasible to solve funding problems with shareholder derivative actions in China?

In order to solve funding problems with shareholder derivative actions, funding provided by public authorities (public funding) is proposed to be applied. Israel is a country where such funding is used. This article studies the Israeli experience of public funding of derivative actions, and further examines its potential for China. Through the investigation of Chinese judicial system, social background (the 'inside system' theory, 'local protectionism', GDP worship) and deficiencies of potential regulatory authorities of public funding (lacks of independence), a negative conclusion is made but future potential for public funding in China still proves to be remained.

(Shareholder Derivative Action in China: An Updated Empirical Study in 2013)

Chinese Abstract: 本文对于我国新公司法下的股东派生诉讼制度进行实证研究，从案件的总体数目、年度分布、地域分布、涉案公司类型和股权情况、诉讼当事人、诉讼理由、前置程序以及成本收益等方面全面揭示和评估该制度的实施情况，并从法解释学和立法论等角度提出相关完善建议。本文发现，该制度已经得到了积极运用，并产生了实质性的诉讼利益；但与国外不同，我国目前针对股份有限公司的判例极少，而几乎所有的判例都是发生在有限责任公司的场合，这不符我国引入该制度的立法初衷，没有充分发挥其功能。从比较法经济学的角度，本文认为其原因在于，公司法对于股份有限公司中派生诉讼的原告资格限制过于严格，以及诉讼成本与收益的严重失衡导致了提起股东派生诉讼的激励不足。另外，基于实证数据，本文建议被告范围应当采取广义解释，公司的诉讼地位应确定为第三人，前置程序应当允许公司以正当理由阻止诉讼，并且扩展豁免请求范围。 English Abstract: This paper represents an update on the empirical study of China's shareholder derivative litigation as published in ‘Shareholder Derivative Litigation in China: Empirical Findings and Comparative Analysis’ (2012) 27(4) Banking and Finance Law Review 619. While the initial BFLR paper includes a sample of cases during the four year period of 2006 to 2009, this subsequent paper adds the cases decided in 2010, rendering the statistics more complete and more comparable with similar studies in overseas jurisdictions. Further, more qualitative data obtained through interviews are provided to complement and test the quantitative data. It is found that the change in the case sample does not significantly affect the validity of the findings and arguments put forward in the initial BFLR paper.

Pathway to Minority Shareholder Protection: Derivative Actions in the People's Republic of China

Using a dataset of Chinese judicial opinions arising in over fifty cases, this paper analyses the development and current implementation of shareholder derivative actions in the courts of the People’s Republic of China (“PRC”), both before and after the derivative lawsuit was explicitly authorized in the PRC’s 2006 Company Law effective January 1, 2006. In addition, we describe the very unique ecology of enterprise organization and corporate governance in modern China, and critique the formal design of the derivative action and offer reform suggestions. We find the design of the Chinese derivative lawsuit to be, in some respects, innovative and appropriate for Chinese circumstances. For instance, the statutory scheme permits “horizontal” claims against controlling or oppressive shareholders in addition to “vertical” claims against orthodox insiders and fiduciaries. At the same time, we find certain design flaws, including standing-based obstacles for plaintiffs, a lack of clarity regarding demand, demand excuse and refusal, and an unnecessary distinction regarding the required wrong underlying derivative actions directed at corporate fiduciaries, on one hand, and others (such as controlling shareholders), on the other. In implementation, we find extremely robust – even overly-aggressive -- use of the mechanism by both plaintiffs and deciding judges before and after its formal recognition in law. As in other applications of the corporate law before the courts in China, this use of the derivative action seems to be entirely limited to the closely-held form of corporation. The absence of application with respect to the widely-held, joint stock, form of company is striking because the derivative lawsuit itself was included in the 2006 PRC Company Law revision precisely so as to give minority shareholders in such widely-held companies a way to hold insiders and controlling shareholders accountable at law for rampant malfeasance. In addition, we note the way in which some PRC courts are wary or uncomprehending of the underlying corporate law doctrines for which the derivative action is a necessary vehicle, particularly the duty of care. An updated and edited version of this paper was published as a chapter entitled “Pathway to Minority Shareholder Protection: Derivative Actions in the People’s Republic of China” in D. Puchniak et al. (eds.), The Derivative Action in Asia: A Comparative and Functional Approach (Cambridge University Press, August 2012).

Japan – Shareholder derivative action: safeguards against abuse

Koji Takahashi (An IALS Associate Research Fellow) examines some aspects of the derivative action operating in Japan enabling shareholders to enforce directors’ liability on behalf of the company. Published in the Letter from … section of Amicus Curiae - Journal of the Institute of Advanced Legal Studies and its Society for Advanced Legal Studies. The Journal is produced by the Society for Advanced Legal Studies at the Institute of Advanced Legal Studies, University of London.

The Shareholder Derivative Action and Good Corporate Governance in China: Why the Excitement is Actually for Nothing

Despite high expectations that shareholder derivative actions would serve as an important tool for improving corporate governance in China, only one lawsuit has been brought against a publicly listed Chinese company since such actions were formally introduced in 2005. Among the various barriers to such suits, and perhaps the most difficult obstacle for plaintiffs to surmount, is holding the requisite minimum of 1 % of corporate shares. It is difficult to reduce the threshold figure to a more accessible level, in part because using the minimum shareholding requirement as a mechanism for screening out frivolous litigation is inherently flawed. Yet, attempting to screen frivolous litigation through a judicial determination on the merits of a suit rather than using a minimum shareholding requirement is unlikely to work properly in China. The judiciary is weak, unsophisticated, and riddled with corruption. When the judicial system is in such a condition, it is unrealistic to expect that a derivative action specifically, or indeed, the private enforcement of law in general, can play a significant role in corporate governance. This paper considers these points, and examines how to improve corporate governance in a country with a weak judiciary.

Shareholder's Derivative Action in Japan

Shareholder's Derivative Action in Japan

Shareholder Derivative Action in Europe: Monitoring the Management for Breach of Fiduciary Duty

The derivative action exerted by shareholders (i.e., by a single shareholder or by a minority of them) is usually activated to assert before the court administrators’ managing responsibility. Falling within the wider topic of the defence of shareholder minorities and considered as one of the pillars of corporate governance, the above mentioned subject tends to be a control tool as to the accurate execution of the managerial task. However, according to the most important empirical analysis, the action is still little used. I'm actually investigating the reasons for this phenomenon.

Why Don’t Shareholders Sue? Derivative Actions as a Test of Convergence in Chilean Corporate Law

The existence of a shareholder derivative action seems to be indicative of a jurisdiction’s convergence towards what the academic literature has referred to as the standard shareholder oriented model of corporate law. In the course of an ongoing deliberate process of junction towards such model, during the year 2000, Chilean legislation provided for a derivative action expressly intended to promote minority shareholders' protection. Interestingly, however, since its enactment no single derivative suit has been filed, despite that in several litigated cases there were grounds to be found for a shareholders' claim for compensation of corporate damages. One of such cases resulted in the imposition of a historical fine by the regulatory agency of publicly held corporations and securities markets (Superintendencia de Valores y Seguros, SVS), to high officers of the major Chilean electricity company (commonly known as the 'Chispas' case). The factual configuration of the case was extremely appealing. Following the privatization of its formerly state held property, the control over Enersis was exercised by a group of key managers through a twofold mechanism: First, pursuant to a 29 percent stake in the stock of Enersis which was held by a close corporation named Chispas (hence the popular denomination of the case); and, second, by means of several proxies granted to the key managers by a number of minority shareholders in Enersis. In 1997, the key managers sold to Endesa Espana 51 percent of their shares in Chispas, which conferred control over this company but not over Enersis. Thus, the key managers also agreed to exercise the authorities attached to their capacities as directors and officers of Enersis according to the acquiring party's best interest, in exchange for a surcharge on the price for the remaining 49 percent stake in Chispas. In this context, where there seemed to be reasonable grounds for a derivative action, one is inclined to question why no such action was filed by the minority shareholders in Chispas. The object of our investigation is to claim that shareholder passivity in this and similar cases may be explained as a result of cost related considerations with respect to the procedural design of a derivative action. This, in turn, may work as a test case for the convergence thesis in Chilean corporate practice, and shed light over the more general issue of the conditions for an effective transplantation of derivate actions. Therefore, our normative claim is that since plaintiff shareholders may only benefit indirectly from a derivative suit according to their pro rata shareholding, Chilean law should improve their means to shift costs of litigation to defeated defendants or beneficiated companies. The positive claim is that, at least on the Chispas case, Chilean judicial practice regarding the statutory exception of 'plausible cause' has discouraged shareholder activism in the derivative litigation context.