In most jurisdictions, a shareholder must satisfy various requirements to prove that he has a valid standing before being allowed to proceed. The law may require the shareholder to meet qualifications such as the minimum value of the shares and the duration of the holding by the shareholder; to first make a demand on the corporate board to take action; or to post bond, or other fees in the event that he does not prevail.
Derivative suits in the United States In the
United States, corporate law is based on state law. Although the laws of each state differ, the laws of the states such as
Delaware,
New York,
California, and
Nevada where corporations often incorporate, institute a number of barriers to derivative suits. Generally in these states, and under the American Bar Association
guidelines, the procedure of a derivative suit is as follows. First, eligible shareholders must file a demand on the board. The board may either reject, accept, or not act upon the demand. If after a period of time the demand has been rejected or has not been acted upon, shareholders may file suit. If the board accepts the demand, the corporation itself will file the suit. If rejected, or not acted upon, the shareholder must meet additional pleading requirements. On the requirements being met by the shareholder, the board may appoint a “special litigation committee” which may move to dismiss. This model approach is followed to a greater or lesser degree among various states. In
New York, for example, derivative suits must be brought to secure a judgment "in [the corporation's] favor."
Delaware has different rules in regards to demand and bond requirements too. The famous case of
Shaffer v. Heitner, which ultimately reached the
United States Supreme Court, originated with a shareholder derivative suit against
Greyhound Lines.
Derivative suits in the United Kingdom In the
United Kingdom, an action brought by minority shareholder(s) could only in exceptional circumstances be upheld under the doctrine of
Foss v Harbottle in 1843 as to who is the "proper claimant/plaintiff". Exceptions involve
ultra vires and, similarly, fraud on minority. According to Blair and Stout's
Team Production Theory of Corporate Law, the purpose of such permissible suits is never to protect the shareholders, but to protect the corporation itself. Thus highly irregular emoluments or share reward schemes to the board of directors themselves or their personal extrinsic interests lend themselves to such suits. Creditors may bring an action, if a corporation inextricably faces
insolvency. Sections 302 to 306 of the
Companies Act 2006 provides no new statutory class of suits but must be followed, setting out the required standard procedure. In England and Wales, this entails a
prima facie case must be shown stage. This preliminary case avoids wasted time and costs. In Scotland where there had been even less clear rules on shareholder actions on behalf of the company, particularly procedurally, alike sections assist. A confirmation of the statutory procedure being in almost all cases applicable first occurred in the leading reported case of: •
Roberts v Gill & Co Solicitors [2010] UKSC 22
Derivative suits in continental Europe Derivative shareholder suits are extremely rare in continental Europe. The reasons probably lie within laws that prevent small shareholders from bringing lawsuits in the first place. Many European countries have company acts that legally require a minimum share in order to bring a derivative suit. Larger shareholders could bring lawsuits, however, their incentives are rather to settle the claims with the management, sometimes to the detriment of the small shareholders.
Derivative suits in New Zealand In
New Zealand these can be brought under the
Companies Act 1993 section 165 only with the of the court. It must be in the best interest of the company to have this action brought so benefits to company must outweigh the costs of taking action.
Derivative suits in India In India, derivative suits are brought under the clauses of oppression and mismanagement. ==See also==