Corporate Governance, Shareholder Litigation and the Prospects for a Statutory Derivative Action

Shareholder statutory derivative actions have been introduced into the laws of an increasing number of countries. Derivative actions are where shareholders bring litigation on behalf of the company; for example, to enforce breaches of directors duties. This article considers three key issues relevant to derivative actions. First, the role of shareholder litigation in corporate governance is evaluated. Second, the article considers possible solutions to the collective action problem evident in shareholder litigation including a mandatory requirement for the company to pay the costs of the derivative action once the court allows the action to proceed and also shifting the risk of litigation to the plaintiff shareholder's attorney by the use of contingency fees. Third, an evaluation is undertaken of the competence of various bodies (the plaintiff shareholder, the other shareholders of the company, independent directors and the courts) to determine whether a derivative action is in the interests of the company.