Derivative Action

INTRODUCTION

Derivative action served a main purpose that is to provide protection to the company against managerial misconduct. As Arad Reisberg mentioned, ‘The derivative action is the route by which shareholders, usually minority shareholders, are able to enforce the company’s rights where directors have breached their duties’[1]. There are 2 types of derivative actions, common law derivative action (CDA) and statutory derivative action (SDA).

CDA based on the rule in Foss v. Harbottle (1843) 67 ER 189. Litigation will be allowed when exceptions to the rule in Foss v. Harbottle occurs, as quoted from Gearóid Carey, “(1) Ultra vires and illegality, (2) Actions requiring a special majority, (3) Invasion of individual rights, and (4) "Frauds on the minority” ” [2]. Individual member may bring an action if they could show a “fraud on minority” exception to the rule.

SDA, quoted from the Hong Kong Common Law, “allows a member of a specified corporation (i.e. a Hong Kong or a non-Hong Kong company) to intervene into an action on behalf of the company in respect of “misfeasance” ” [3].

SDA has replaced CDA in some countries, UK, Australia, Canada and New Zeland. However, the co-existence of SDA and CDA happens in Hong Kong and Singapore. It preserves the ability of foreign companies’ members to bring a CDA.

To be precise, the following discussion will concentrate on the effectiveness of the protection to and governance of the company, and how it is not effective enough.

DISCUSSION

The basic protection to the company brought by derivative action is that it brings equitable remedies to managerial misconduct. In Barrett v Duckett[4], the court considered the conduct and motives of the plaintiffs, and the availability of other remedies. Most of the cases, requirements of the plaintiffs who won the suit will get satisfied and the legal cost is going to be paid by the corporation.

The derivative action is expected to act as a powerful mechanism in...