Minority Shareholder Protection Through Derivative Suits

This literature review examines the protection of minority shareholders, focusing on the role of derivative suits within the context of corporate governance, particularly in Saudi Arabia. The review begins by defining minority shareholding and emphasizes the importance of safeguarding their rights, contrasting them with the influence of majority shareholders. It analyzes the Saudi Arabian legal system's approach to shareholder complaints and the limitations faced by minority shareholders, especially concerning pre-emptive actions and the influence of the courts. The review then incorporates OECD principles of corporate governance to assess Saudi Arabia's compliance. It also compares practices in the UK and US, highlighting the potential of proxy voting and the impact of shareholder participation. The analysis extends to derivative actions, addressing associated cost ambiguities and the relevance of cases like Smith v Croft. The conclusion underscores the necessity of protecting minority investor interests, emphasizing their importance to the overall health of the company and advocating for their active participation in corporate governance and decision-making. The literature review references various regulations, books, and articles to support its arguments.

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Literature Rivew
Literature Rivew
MINORITY SHAREHOLDERS PROTECTION THROUGH DERIVATIVE
SUIT

Introduction
The rights belonging to shareholders varies from country to country and is dependent solely on
some factors which includes political and economic structures of the company. It is important to
protect the rights of the shareholders, by the using the regulations or by the use of the judicial
process or by the maintenance of the corporate governance within the company itself, since this
practice of corporate governance ensure the foreign investments where the directors are under
obligation to consider the rights of the investors with other clients and employees and obviously
the minority shareholders.
Minority Shareholding
It is crucial to have the definition of the minority shareholding before actually deciding what it is
in Saudi Arabia. It is obvious that the minority do not possess the control over the firm’s
operational activities when it is done through voting. But, when a shareholder has the majority
share then they enjoy their influence in operation including decision making. But, to ensure the
effectivity of the good corporate governance, it is essential to protect the rights of the minority
shareholders.
The Saudi legal system
The legal system in Saudi Arabia, gives the option to the shareholder in minority to place against
the majority shareholder, the complaint. But, the complaint so made cannot be to the Board of
directors based on the fact of assumption about the future occurrence of any unethical or illegal
behavior which is likely to happen. So, it is clear that minority shareholder can only complain
after the occurrence and not in suspicion of it. The minority shareholder is also restricted to seek

review after the completions of the actions which is on the contrary with the majority
shareholder. When there is the situation which report for the abuse of power, then also majority
shareholder is in the forefront and they have the right to held the directors liable or accountable
for any misconduct on their part. In general circumstances, the Court often take the side of the
majority shareholder, so that they do not have to intervene in the internal affairs of the company.
Even the majority shareholders incorporate their own terms and conditions in the shareholder
agreement, subject to the fulfillment of conditions that the terms and conditions so included is
not in conflict with the company’s original vision. So, it is apparently obvious that the legal
system in Saudi Arabia do not actually take the side and in so doing do not provide adequate
protection in securing the rights and the interests of the minority shareholders.
Again, the company law in Saudi Arabia, do not provide the definition of the word share, but the
Saudi Arabia Capital Market provides a definition for it and held share to be an investment
indicating ownership in the company. The UK Companies Act 2006, also do not provide the
definition of share but, precedence as observed in Borland's Trustee v Steel Brothers & Co Ltd is
used, where share was defined as the liability and 2ndly the interests and also includes mutual
covenants.
OECD Principles of Corporate Governance
The OECD set principles for countries to develop corporate governance for achieving minimum
standards. 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.
Saudi Arabia in compliance with and in detriment to the OECD Principles
Saudi Arabia on basic shareholder rights has complied with the set standards to certain extent as
laid down by the OECD. The Securities Depository Center does the registration of shareholders
and the company information are made available to the shareholders. The Corporate Governance
Regulations 2006 (CGR) of Saudi Arabia for related party transactions is an omission since,
the insiders of the company misuse their positions and involves themselves
in inappropriate activities. So, the Capital Market Authority (CMA) ensured insider trading as
forbidden.
Practice in US and UK
In the UK, the right to shareholders are not formulated by the legislations, so that they can be in
a position to decide on the company’ goals and objectives. But, the Shareholders Voting
Guidelines 1994 specifically provides, the information relating to important decisions of the
company must be passed on to the shareholders so that they can exercise their legal right when it
comes to voting. The companies Act also allows proxy voting to the shareholders and the
electronic form of appointing proxy by the shareholders are also granted by the legislation. These
concepts of proxy voting are a tool which can be used by Saudi Arabia for the protection of the
minority shareholders’ rights.
In the US, which is quite contrary to UK, the shareholders are allowed by legislation to annually
participate in discussion regarding company’ agenda if the shareholder holds a minimum of 1%

of the total number of shares. The listed companies in US have the option of cumulative voting
and is compulsory for some States, while it is only an option for the others.
Derivative action
The Company Law do not address the problem which arises with the costs when it is actually
connected with derivative actions. So, to determine the costs of the lawsuit and which party will
be responsible for the payment is ambiguous. The case of Smith v Croft is followed by the
Courts in Saudi Arabia when it comes to indemnity. But, it is also true that minority
shareholders will not lay their claim and will never risk when it comes to an uncertain outcome.
So, it is important to include wider approach when it comes to minority shareholders, since their
action can be a boon for the company in related ways.
Saudi company law provides adequate protections for shareholders and they have the statutory
right if they sought legal remedy against directors. Company law specifically emphasizes on the
fact that, if the directors’ handling results in abuse or any kind of misconduct, they will be jointly
or severely liable for compensating the company as a whole or it shareholders, as the case may
be. So, to bring an action for the liability against the directors, the company itself or any
shareholder on its behalf can lodge an action, subject to the fact that the directors’ action of
misconduct harmed all the shareholders and also the company. Each and every shareholder can
also bring a liability action against the director’ action or misconduct if such actions relates to
specific damage for individual shareholders, but this action can only have brought if the
company still possess the right of litigation.

Conclusion
Hence, the privileges of the minority investors must not be lessened or ignored despite the fact
that the majority investors have most offers in the organization. The interests of the minority
investors are no less profitable than those of the lion's share. Consequently, the larger part
investors should give due thought to the premiums of other investor gatherings, regardless of
how little. So, when they practice their entitlement to take part in corporate administration and
basic leadership exercises, dominant part of the majority investors ought not concentrate without
anyone else premiums but rather on those of the organization as it is a business operation whose
reason for existing is to produce monetary returns for the investors. Furthermore, majority
investors ought to not the slightest bit exploit their status to control or direct authoritative choices
to serve their interests, particularly when such choices are troublesome to the premiums and
rights of the minority investors as well as of the organization overall.

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