Derivative Suits: A Shield for Minority Shareholders
Added on 2019-09-20
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Introduction to the StudyIn today’s world with the high focused media reports on the scandals prevailing in thecorporate world, links the financial crises to the negligible protection forwarded to the minorityshareholders. The studies linked to this topic of lesser protection to the minority shareholderssuggests that the majority shareholder have the tendency to expropriated minority shareholder,and in so doing makes the maximum benefit out of it.1The protection of minority shareholders isimportant because, the growth in the economy gets stimulated by this and also the agency costsof the firm gets reduced which benefits the firm as a whole, thereby resulting in the efficientmanagement of the firm. Furthermore, the protection of the minority shareholders helps in thecross listing which is listing stock with the foreign stock exchange and also trading in the verynation where the company is incorporated.2The OECD set principlesfor countries to develop corporate governance for achieving minimum standards for the protections and Fairness, Responsibility, Transparency, Accountability are the major pillars of corporate governance. To achieve the standard of fairness,the shareholder’s rights must be safeguarded by the laws and the regulations. In order to incorporate responsibility, compliance to the operating laws is essential and transparency is achieved providing the accurate information relating to the performance of the company to its shareholders. Lastly, the accountability is achieved by focused responsibility which the directors owe to their shareholders. 1A Birds & J Boyle,Company Lawat 381 (6 ed. 2007)2D French & S Mayson et. al,Company law at 515(24 ed. 2013).1
Thus, for the protection of the minority shareholders, derivative suits are considered to bethe best approach for maintaining the corporate governance to get relief or remedy against anycompany’s directors or officers on whom the benefit of the company is vested to assert theirrights3. But, for the minority shareholders, the derivative suits are allowed only if it is approvedby the General Assembly of the company.4Therefore, this paper explore derivative suits lawsand regulations in developed countries. The derivative action by the minority shareholder, dates back to Anglo-Saxon legalsystem, where lawsuit is brought into action by the shareholder on company’s behalf, due to thedamages so borne by the actions of directors or any other people within the company or outsideit.5The derivative suit challenges those damages and seeks judicial reparation.5 Therefore,derivative suit can be defined as a requested by one or more shareholder to compel the companyto file a suit against board of directors or its executive offices, and the right of shareholders toinitiate the suit on behalf of the company upon a refusal of its general assembly.6However, it isimportant to differentiate derivative suit with shareholder class action which can be defined as alawsuit files by a shareholder on behalf of all shareholders against the company and its directors.7The most critical difference between those two lawsuit is that derivative suit is files on behalf ofthe company which makes the big differences in proving the damages. 3A Reisberg,Derivative actions and corporate governance: theory and operation at 76 (2007).4 Saudi Company Law, Article 81. 5Harald Baum & Dan W. Puchniak,The derivative action, 7The Derivative Action in Asia1–8 (2012), http://assets.cambridge.org/97811070/12271/excerpt/9781107012271_excerpt.pdf.6 Aronson, S., & Mercer, K. Shareholder Derivative Actions: From Cradle to Grave, 1 (2009)7Thai Lang, Shareholder Class Actions: A Critical Analysis of the Procedure under Part IVA of the Federal Court ofAustralia Act, UW Austl. L. Rev.40 138-162, 138 (2015)2
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