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Derivative suit

A derivative suit, also known as a shareholder derivative action, is a type of lawsuit brought by one or more shareholders on behalf of a corporation to enforce a corporate right or remedy a wrong suffered by the corporation itself, typically against its directors, officers, or third parties for breaches of fiduciary duty.^[1]^[2] This mechanism addresses situations where the corporation's board of directors fails or refuses to pursue legal action due to conflicts of interest or inaction, allowing shareholders to step in as nominal plaintiffs while any recovery benefits the corporation rather than the individuals filing the suit.^[1]^[2] Originating in the equity courts of England and recognized in American jurisprudence since at least 1855, derivative suits have historically served as a key tool for regulating corporate management by enabling shareholders to hold insiders accountable for misconduct that harms the company's value.^[3] In the United States, these actions are governed by state corporate laws, such as Delaware's, and federal rules like Federal Rule of Civil Procedure 23.1, which impose procedural safeguards to prevent abuse.^[4]^[2] To initiate a derivative suit, a plaintiff shareholder must generally meet strict standing requirements, including contemporaneous ownership of shares at the time of the alleged wrong and continuous holdings through the litigation, and first make a pre-suit demand on the board to address the issue unless such demand is excused as futile—often due to the directors' involvement in the wrongdoing or gross negligence.^[4]^[2] This demand requirement reflects the principle that decisions about corporate litigation belong to the board under the business judgment rule, but courts may intervene if the board's refusal lacks a rational basis.^[1]^[2] Derivative suits differ fundamentally from direct shareholder actions, which seek redress for personal harms to individual investors, such as dilution of shares; instead, they focus on corporate-level injuries that indirectly affect all shareholders through diminished company assets or value.^[1]^[2] Over time, these suits have faced challenges, including legislative efforts in the mid-20th century to curb perceived "strike suits" via security-for-expenses statutes and judicial developments like the 1979 Supreme Court decision in Burks v. Lasker, which allowed special litigation committees to dismiss claims, yet they remain a vital enforcement mechanism in modern corporate governance.^[3]

Fundamentals

Definition and Scope

A derivative suit, also known as a shareholder derivative action, is a legal proceeding initiated by one or more shareholders on behalf of the corporation against its directors, officers, or third parties for harms inflicted upon the corporation itself.^[5] These suits typically address wrongs such as breaches of fiduciary duty, self-dealing transactions, or mismanagement that diminish corporate value. In such actions, the shareholders act as nominal plaintiffs, stepping into the corporation's role to seek remedies like monetary damages or injunctive relief when the corporation's management declines to pursue the claim.^[1] The scope of derivative suits extends to both public and private corporations, particularly in scenarios where individual shareholders lack direct standing because the injury is to the entity rather than to their personal interests.^[6] Common claims within this scope include waste of corporate assets, where directors authorize expenditures that provide no commensurate benefit to the company; ultra vires acts, involving actions beyond the corporation's authorized powers; and violations of the corporate opportunity doctrine, where fiduciaries usurp business opportunities belonging to the corporation. These suits enforce accountability in corporate governance by allowing shareholders to vindicate the corporation's rights in cases of internal misconduct.^[5] Central to derivative suits is the principle that the corporation remains the real party in interest, with any recovery—such as restitution or damages—accruing to the company to benefit all shareholders proportionally, rather than providing direct compensation to the plaintiff shareholders.^[1] This structure ensures that the suit addresses collective harm, often resulting in indirect gains for shareholders through enhanced corporate value, such as increased share prices or dividends.^[5] Rooted in equity jurisprudence, derivative suits originated as a mechanism to enforce corporate rights when the board of directors fails or refuses to act against wrongdoing.^[7]

Distinction from Direct Suits

A derivative suit differs fundamentally from a direct suit in that the former seeks redress for injuries sustained by the corporation itself, whereas the latter addresses harms inflicted directly upon individual shareholders. In a derivative action, shareholders act as proxies for the corporation to recover damages that would replenish corporate assets, thereby indirectly benefiting all shareholders proportionally through enhanced corporate value. For instance, claims involving director misconduct that dilutes the corporation's overall worth, such as self-dealing transactions, typically fall under derivative suits. In contrast, direct suits involve personal losses to shareholders, such as the wrongful denial of dividends or violations of voting rights, where recovery is sought for the individual plaintiff's specific detriment rather than the company's. Jurisdictions employ various legal tests to delineate these claims and prevent misclassification. The "special injury" doctrine, historically rooted in common law, requires that direct suits demonstrate a harm distinct from that suffered by the corporation or other shareholders, ensuring that only uniquely personal injuries qualify. Similarly, the "incidental benefit" rule examines whether the relief primarily aids the corporation or merely incidentally advantages shareholders. A prominent modern framework is the Tooley test adopted by the Delaware Supreme Court, which poses two inquiries: first, to whom is the harm directed— the corporation or the individual shareholder?—and second, who would receive the benefit of the recovery—the corporation or the plaintiff personally? This test has been influential in clarifying boundaries, particularly in closely held corporations where overlaps are common. Misclassification poses significant risks, as courts may dismiss improperly pled claims, leading to procedural inefficiencies or loss of remedies. Hybrid claims, which blend elements of corporate and personal injury—such as breaches of fiduciary duty in squeeze-out mergers—affecting both the entity and specific shareholders, often require careful allocation to determine the appropriate suit type. Plaintiffs must analyze the gravamen of the complaint to avoid refiling delays or adverse precedents. Practically, derivative suits demand that plaintiffs serve as representatives for the corporation, subjecting them to heightened procedural safeguards like demand requirements on the board, whereas direct suits permit straightforward personal litigation and direct recovery of damages or injunctive relief for the aggrieved shareholder. This distinction underscores the representative nature of derivative actions, aimed at corporate governance, versus the individualistic focus of direct claims.

Historical Background

Origins in Equity Jurisdictions

The derivative suit originated in the English Court of Chancery during the 18th and 19th centuries as an equitable remedy, enabling shareholders to pursue corporate claims when directors refused to act, thereby addressing gaps in common law protections for corporate interests. This mechanism drew on trust principles, treating shareholders as cestui que trust—beneficiaries of corporate property held in trust by directors—and allowing suits for breaches of fiduciary duty, as exemplified in early cases like Chancey v. May (1722), where proprietors sued on behalf of all shareholders for mismanagement. Courts developed exceptions to the strict "necessary parties" rule, which typically required all affected shareholders to join a suit, permitting representative actions when the number of shareholders made joinder impracticable, such as in Adair v. New River Co. (1805). These equitable innovations balanced corporate autonomy with shareholder accountability, evolving through Chancery's flexible jurisdiction to enforce remedies like injunctions against director misconduct.^[8] A pivotal milestone came with Foss v. Harbottle (1843), which formalized the "proper plaintiff" rule by holding that the corporation itself must sue for wrongs against it, thereby generally barring individual shareholder actions to uphold majority rule and internal corporate resolution. However, the decision carved out key exceptions for derivative actions, allowing minority shareholders to sue on the company's behalf in cases of ultra vires acts, fraud on the minority by those controlling the company, or breaches of duty that directors refused to litigate due to self-interest. This framework, rooted in equity, preserved the suit as a safeguard against director inaction while limiting its scope to prevent frivolous claims, influencing subsequent Chancery rulings like Wallworth v. Holt (1841) that further refined representative standing.^[9] The principles from English equity spread to British Commonwealth jurisdictions by the late 19th century, adapting Chancery remedies to emerging statutory corporate forms in colonial contexts. In India, as a British colony, Foss v. Harbottle was directly incorporated into local jurisprudence, establishing derivative suits under its exceptions for illegality or fraud, though this often restricted their use due to procedural hurdles. Similarly, in New Zealand, the case's rule shaped common law derivative actions from the late 1800s, emphasizing majority ratification while permitting equitable exceptions for minority protection, until later statutory codification. This dissemination reflected equity's role in harmonizing shareholder remedies across the Commonwealth amid the rise of joint-stock companies.^[10]^[11] In contrast, Continental Europe saw limited early adoption of derivative suits due to civil law traditions prioritizing codified corporate governance over equitable discretion. In France, pre-20th-century mechanisms included the 1867 Loi sur les Sociétés, which introduced the "action sociale ut singuli" allowing individual shareholders to sue on behalf of the company for director liability, subject to thresholds such as 0.5% ownership for joint actions under modern interpretations. Equity-like protections emerged through the abuse of rights doctrine, particularly abus de majorité, enabling challenges to majority shareholder self-dealing via rescission suits, though these remained narrower than English derivatives and focused on collective rather than representative enforcement. Such approaches underscored civil law's emphasis on statutory director accountability over shareholder-initiated equity suits.^[12]

Development in the United States

The derivative suit was adopted into American jurisprudence in the early nineteenth century, drawing from English equity principles but diverging by granting broader access to minority shareholders who could challenge corporate mismanagement without the strict majority rule limitations prevalent in England.^[8] Early state court cases in the 1820s and 1830s recognized shareholders' ability to sue on behalf of the corporation for wrongs like director self-dealing, emphasizing the equitable remedy's role in protecting diffuse ownership interests. The U.S. Supreme Court provided its first notable endorsement in Dodge v. Woolsey, 59 U.S. (18 How.) 331 (1855), affirming a shareholder's standing to enforce corporate rights against state overreach, thereby solidifying the mechanism's federal viability. The 1930s marked a surge in derivative suits amid the Great Depression and high-profile corporate scandals, such as those involving fraudulent financial reporting and insider abuses at companies like Kreuger & Toll, which eroded investor confidence and prompted shareholders to pursue accountability for fiduciary breaches.^[13] This litigation boom, with filings rising dramatically in federal courts due to diversity jurisdiction, led to the codification of procedural standards in Federal Rule of Civil Procedure 23.1, effective in 1938, which required plaintiffs to verify their shareholder status, allege pre-suit demands on directors, and affirm non-collusion to curb perceived abuses while preserving access.^[4] In response to ongoing concerns over strike suits, several states enacted security-for-expenses statutes in the 1940s, beginning with New York's Section 61-b in 1944, mandating plaintiffs to post bonds for defendants' costs unless holding significant shares (e.g., 5% or $50,000 value), aiming to deter frivolous actions without wholly barring meritorious claims.^[13] In the mid-twentieth century, the Supreme Court reinforced federal oversight of derivative actions, as seen in J.I. Case Co. v. Borak, 377 U.S. 426 (1964), which implied a private right of action under SEC proxy rules, enabling shareholders to challenge deceptive corporate disclosures in derivative contexts and affirming broad federal jurisdiction.^[14] By the 1980s, the Delaware Court of Chancery emerged as the preeminent forum for corporate litigation, including derivative suits, due to the state's business-friendly statutes and specialized expertise, handling a disproportionate share of cases involving demand futility and fiduciary duties under influential precedents like Aronson v. Lewis, 473 A.2d 805 (Del. 1984).^[15] Recent reforms have addressed governance lapses exposed by scandals like Enron, with the Sarbanes-Oxley Act of 2002 enhancing derivative suit viability through mandates for independent audit committees, CEO/CFO certifications, and whistleblower protections, which facilitated claims alleging breaches in internal controls and financial oversight. In the 2020s, derivative litigation has trended toward environmental, social, and governance (ESG) issues, with suits targeting inadequate climate risk disclosures and board failures in diversity oversight, exemplified by cases like In re Exxon Mobil Corp. Derivative Litigation (N.D. Tex. 2019).^[16] Delaware courts have refined demand futility standards, notably in the 2023 In re Meta Platforms, Inc. Stockholder Derivative Litigation, where the Chancery Court and Supreme Court applied a unified test assessing board independence and particularized allegations of disinterest, raising the bar for plaintiffs while emphasizing director accountability in conflicted scenarios; the case settled in July 2025 for an undisclosed amount.^[17]^[18]

Purpose and Challenges

Rationale for Derivative Suits

Derivative suits serve as a critical mechanism to address agency problems inherent in corporate structures, where shareholders act as principals and directors as agents potentially motivated by self-interest. By permitting shareholders to enforce directors' fiduciary duties on behalf of the corporation when the board is conflicted or unwilling to act, these suits mitigate conflicts that could lead to managerial opportunism, such as self-dealing or neglect of corporate interests.^[19] This enforcement aligns managerial behavior more closely with shareholder value maximization, reducing the divergence between agent actions and principal expectations as outlined in agency theory.^[20] In protecting shareholders, particularly minorities, derivative suits enable action against board inaction or majority indifference that harms the company, thereby safeguarding collective interests when internal governance fails. They promote deterrence of corporate misconduct, including insider trading and excessive executive compensation, by imposing accountability that discourages violations of fiduciary duties and fosters ethical decision-making.^[21] For instance, derivative suits have led to board reforms and recoveries that signal to executives the risks of non-compliance.^[22] The corporate benefit rationale underscores that recoveries from derivative suits replenish the company's treasury rather than providing personal gains to suing shareholders, ensuring that remedies directly enhance firm value and sustainability. This approach aligns with stewardship theory in corporate governance, which views directors as responsible stewards of the corporation, with derivative suits reinforcing their duty to prioritize organizational welfare over individual agendas.^[23] Economically, derivative suits justify their role by lowering monitoring costs for dispersed shareholders who lack the resources or coordination to oversee management individually, allowing collective enforcement without prohibitive individual expenses. Analyses of federal derivative litigation show modest but positive impacts on corporate practices post-settlement, including increased board independence and reduced agency costs.^[24] For example, research on suits filed in the early 2010s found that they prompted governance enhancements in affected firms, contributing to long-term value protection without excessive litigation burdens.^[24] As of August 2025, recent data on parallel derivative actions associated with securities class actions (2019–2024) indicate that while monetary settlements occur in about 26% of resolved cases, the majority result in non-monetary governance changes, underscoring their ongoing role in improving corporate practices.^[25]

Barriers to Bringing Suits

One significant barrier to initiating derivative suits is the demand futility doctrine, which requires shareholders to demonstrate that a pre-suit demand on the board of directors would be futile before proceeding with the action.^[26] Under this doctrine, futility is established only if there is a reasonable doubt that the board could exercise independent and disinterested business judgment, such as when a majority of directors face a substantial likelihood of personal liability, received a material benefit from the alleged misconduct, or lack independence from interested parties.^[26] This evidentiary burden is particularly high, as plaintiffs must plead specific facts supporting these elements at the complaint stage, often leading to early dismissals on motions to dismiss.^[27] For instance, in the Delaware Supreme Court's 2021 decision in United Food & Commercial Workers Union v. Zuckerberg, the court adopted a unified three-part test for demand futility and dismissed the suit for failing to meet it, underscoring how the doctrine frequently halts cases before discovery.^[26] Derivative suits also face substantial financial and risk-related obstacles that deter plaintiffs. In jurisdictions following the "loser pays" rule, such as the United Kingdom, unsuccessful plaintiffs may be liable for the defendants' legal costs, amplifying the financial exposure beyond the American rule's each-party-pays model prevalent in the U.S.^[28] Additionally, many U.S. states impose security-for-expenses requirements, mandating that plaintiffs post a bond to cover potential defendants' costs if the suit fails, which can chill meritorious claims by imposing upfront burdens on shareholders with limited resources.^[9] Attorney fees are typically contingent, but the low success rate exacerbates risks; empirical studies indicate that only about 8-30% of derivative suits yield any relief to the corporation or shareholders, with many dismissed early.^[29] For example, a 2023 analysis of parallel derivative actions following securities class actions found that while settlements occur, the overall survival rate past motions to dismiss remains low, reflecting the procedural hurdles in the 2020s.^[30] Standing requirements further complicate bringing derivative suits through the continuous ownership rule, which mandates that a plaintiff maintain share ownership from the time of the alleged corporate injury through to the judgment.^[31] This rule prevents "strike" plaintiffs from buying shares solely to litigate past harms and ensures alignment of interests, but it creates practical hurdles, as shareholders who sell or lose shares mid-litigation forfeit standing and must dismiss the suit.^[32] Some states, including Delaware and California, also enforce a contemporaneous ownership rule, requiring ownership at the time of the injury itself, which bars suits by those acquiring shares post-harm.^[33] These combined rules can lead to involuntary dismissals if ownership changes occur due to market forces or personal circumstances, undermining otherwise viable claims.^[34] Criticisms of derivative suits highlight their potential for abuse and limited efficacy, often portraying them as tools for managerial entrenchment or frivolous litigation. A persistent concern is the risk of "strike suits," where plaintiffs file hastily to extract quick settlements from risk-averse corporations, regardless of merit, leading to collusive outcomes that benefit attorneys more than the company.^[9] Empirical evidence supports low overall impact: studies show that only 2-6% of suits result in court-approved settlements or judgments, with many others dismissed or resolved through nonmonetary governance changes that favor incumbent directors.^[29] This board-friendly pattern, evidenced in analyses of post-2010 cases, suggests that procedural barriers often entrench management by weeding out challenges, while rare successes fail to deter misconduct broadly.^[21]

General Procedure

Standing and Demand Requirements

In a derivative suit under United States law, standing requires that the plaintiff be a shareholder or equitable owner of the corporation at the time of the alleged injury to the corporation and maintain continuous ownership throughout the pendency of the litigation.^[4] This contemporaneous and continuous ownership rule ensures that the plaintiff has a sufficient stake in the outcome and prevents opportunistic suits by those who acquire shares solely to litigate past wrongs.^[35] To verify standing, the plaintiff must submit an affidavit or verified complaint attesting to their ownership status, including the date of acquisition and any transfers.^[36] The demand requirement mandates that, prior to filing suit, the plaintiff make a written pre-suit demand on the corporation's board of directors requesting that the board initiate the action on behalf of the corporation.^[4] This procedural hurdle respects the board's primary authority to decide whether to pursue corporate claims and is codified in Federal Rule of Civil Procedure 23.1 as well as most state corporate statutes.^[37] Demand may be excused, however, if the plaintiff adequately pleads that it would be futile, such as when a majority of the board is implicated in the wrongdoing or lacks disinterested and independent directors capable of impartially evaluating the claim.^[38] The seminal test for demand futility in cases challenging board-approved transactions is the two-pronged inquiry established in Aronson v. Lewis (1984), under which demand is excused if there is a reasonable doubt either that the board is disinterested and independent or that the transaction was a valid exercise of business judgment.^[39] For claims not involving a specific board decision, such as oversight failures or actions by officers, courts apply the test from Rales v. Blasband (1993), which focuses on whether particularized allegations raise a reasonable doubt about the board's ability to exercise independent and disinterested judgment in responding to the demand.^[40] Modern refinements to these tests, including Delaware's 2021 adoption of a unified three-part standard emphasizing board independence, disinterestedness, and capacity to act, build on Aronson and Rales to streamline futility determinations while maintaining rigor.^[26] Special rules apply to derivative suits involving public companies, where disclosures in SEC filings can sometimes demonstrate board awareness of the issues, supporting arguments for demand futility in lieu of a full pre-suit demand.^[41] For non-corporate entities like limited liability companies (LLCs) and partnerships, standing and demand requirements are governed by state analogs, such as Delaware's LLC Act § 18-1002, which permits members or partners to sue derivatively if they held an interest at the time of the wrong and either make demand on the managing body or plead futility under similar disinterestedness standards.

Litigation Process and Resolution

Once a derivative suit is initiated, the plaintiff shareholder files a verified complaint in court, alleging specific harms to the corporation caused by the directors' or officers' misconduct, such as breaches of fiduciary duty.^[4] The complaint must detail with particularity the plaintiff's efforts to secure action from the board or the reasons why such a demand was excused, typically due to futility.^[4] Defendants often respond with a motion to dismiss, commonly challenging the complaint on grounds of inadequate demand allegations or failure to state a claim under standards like Federal Rule of Civil Procedure 12(b)(6).^[42] If the motion succeeds, the suit is dismissed without prejudice if curable, allowing potential refiling with amendments.^[42] Following initiation and any initial motions, the litigation enters discovery and further motion practice. The board may appoint a special litigation committee (SLC) of independent directors to investigate the claims and recommend whether to pursue, settle, or terminate the suit.^[43] Courts review SLC reports using a two-step test established in Zapata Corp. v. Maldonado: first, determining the committee's independence and good faith in conducting the investigation; second, assessing the reasonableness of its conclusions even if independent.^[43] This review balances deference to corporate decision-making with judicial oversight to prevent abuse.^[43] Discovery proceeds limitedly, focusing on books and records to support claims, though plaintiffs face hurdles in obtaining broad evidence pre-motion resolution.^[4] Trials in derivative suits are rare, with the vast majority resolving through settlement rather than full adjudication.^[29] Settlements must benefit the corporation, often through monetary recoveries into corporate funds, implementation of governance reforms like enhanced oversight policies, or both, and require court approval to ensure fairness.^[4] Upon approval, courts direct notice to other shareholders, allowing objections, and may award plaintiffs' attorneys fees from any common fund created for the corporation under the common fund doctrine.^[4]^[44] Dismissal can occur voluntarily by the plaintiff with court approval and shareholder notice, via board or SLC motion if the investigation deems the suit meritless, or by court order for lack of substantive merit after motions or trial.^[4] If dismissed on the merits or with prejudice, the ruling binds the corporation, precluding relitigation of the claims.^[42] Appeal rights exist but are limited, typically reviewing legal errors in dismissal or approval decisions under an abuse-of-discretion standard, without reweighing factual findings.^[4]

Jurisdictional Variations

United States

In the United States, derivative suits are governed by both federal and state laws, with federal rules providing a baseline for procedural requirements in cases involving publicly traded companies or federal securities claims. Federal Rule of Civil Procedure 23.1 mandates that a derivative complaint must be pled with particularity, specifying either the efforts made to obtain board action through a pre-suit demand or the reasons why such demand would be futile, such as the board's inability or unwillingness to pursue the claim due to conflicts of interest.^[4] This heightened pleading standard aims to prevent frivolous suits while preserving shareholder oversight. Derivative actions often intersect with federal securities laws, where the Private Securities Litigation Reform Act of 1995 (PSLRA) offers safe harbors for forward-looking statements, protecting corporate officers from liability in derivative claims alleging fiduciary breaches tied to misleading disclosures, provided the statements are accompanied by meaningful cautionary language.^[45] At the state level, variations exist, but Delaware plays a dominant role as the incorporation state for most large U.S. corporations, shaping derivative litigation through the Delaware General Corporation Law (DGCL) § 327, which requires plaintiffs to verify stock ownership and aver that the suit is not a collusive effort to circumvent corporate governance.^[46] Demand futility in Delaware is excused under a unified test established in recent precedents, assessing whether a majority of the board faces a substantial likelihood of personal liability for the alleged misconduct, independence from interested parties, or good faith doubts about their ability to act impartially. In the context of mergers and acquisitions, the 2015 Delaware Supreme Court decision in Corwin v. KKR Financial Holdings LLC introduced an enhanced scrutiny standard that shifts to business judgment review if the transaction receives approval from a fully informed, uncoerced majority of disinterested shareholders, often excusing demand and leading to dismissal of derivative challenges to deals.^[47] This Corwin doctrine has significantly reduced post-merger derivative litigation by empowering shareholder votes to cleanse board decisions.^[48] Key recent developments highlight evolving boundaries in derivative suits. In Salzberg v. Sciabacucchi, the Delaware Supreme Court in 2020 upheld the validity of charter provisions mandating federal courts as the exclusive forum for Securities Act claims, a ruling that has influenced derivative litigation by allowing companies to channel related fiduciary duty claims away from state courts and toward federal venues with stricter PSLRA standards.^[49] More recently, in 2025, the New York Court of Appeals in Ezrasons, Inc. v. Rudd applied the internal affairs doctrine to dismiss a derivative suit brought by a U.S. beneficial owner against Barclays PLC, ruling that standing and procedural requirements are governed by the foreign corporation's home jurisdiction (English law), not New York statutes, thereby limiting U.S. state courts' role in suits against non-U.S. entities.^[50] Current trends in U.S. derivative suits reflect growing integration with other shareholder actions and emerging risks. Approximately 52% of securities class actions filed in 2024 were accompanied by parallel derivative suits, often alleging fiduciary breaches stemming from the same underlying events, which can amplify pressure on defendants through coordinated resolutions.^[51] There has been a notable rise in derivative claims related to cyber incidents and data breaches, as shareholders increasingly challenge boards' oversight failures in high-profile hacks, such as those affecting major retailers and tech firms, leading to suits under Caremark duties for inadequate risk management. Settlement values for derivative actions in 2024 had a median of $9.2 million, with averages higher due to larger resolutions in parallel securities cases, underscoring their role in corporate accountability without typically reaching the scale of class action payouts.^[25]

United Kingdom

In the United Kingdom, derivative claims are governed by Part 11 of the Companies Act 2006, which codified and replaced the previous common law procedure derived from cases such as Foss v Harbottle (1843). Sections 260 to 264 of the Act permit a member of a company to bring proceedings on its behalf in respect of causes of action arising from an actual or proposed act or omission involving negligence, default, breach of duty, or breach of trust by a director (including shadow or former directors). This statutory framework applies to all companies incorporated under the Act, encompassing both public and private entities, thereby expanding accessibility beyond the more restrictive equitable exceptions to the rule in Foss v Harbottle.^[52]^[53] The procedure for initiating a derivative claim requires the claimant to apply to the court for permission under section 261, establishing a two-stage review process. In the first stage, the court summarily assesses whether the claim discloses a prima facie case; if it does, the application advances to a substantive hearing under section 263, where the court evaluates specific criteria for granting permission. These include whether the member is acting in good faith in seeking relief, the importance of the claim to the company's success, and whether pursuing it would be in the company's best interests (aligned with the directors' duty under section 172 to promote the company's success). Permission must be refused if the act or omission has been authorized or is likely to be ratified by the company, or if an independent panel of members would likely refuse authorization. The court also considers the company's stance, the views of disinterested members, and any personal interest the claimant may have in the outcome. Under the no reflective loss principle, shareholders are barred from pursuing personal claims for losses that merely mirror those suffered by the company, reinforcing the derivative mechanism's focus on company-level remedies.^[54]^[55]^[56] Since the regime's implementation on 1 October 2007, derivative claims have seen rare usage, with empirical analyses indicating only a limited number of applications—fewer than 50 reported cases through 2024—due to the onerous permission threshold and the preference for alternative remedies like unfair prejudice petitions under section 994. Initial applications often fail at the prima facie stage, and successful claims have predominantly involved public companies in governance or ESG-related disputes, such as ClientEarth v Shell plc (2023), where permission was granted to pursue directors for alleged failures in managing climate risks. Trends show a shift toward non-monetary outcomes, with derivative actions frequently complementing or leading to director disqualification proceedings under the Company Directors Disqualification Act 1986 rather than emphasizing financial recovery for the company, reflecting the regime's emphasis on accountability over compensation.^[57]^[58]^[59]

Continental Europe

In Continental Europe, civil law jurisdictions lack a uniform derivative suit mechanism akin to common law systems, relying instead on national statutory analogs that enable shareholders to enforce corporate claims against directors or managers for breaches of duty. These mechanisms are shaped by the EU's Shareholder Rights Directive II (Directive (EU) 2017/828), which, while not mandating derivative actions, promotes member state provisions for shareholder engagement and accountability, including voting on remuneration policies and related-party transactions to indirectly bolster oversight of management.^[60] This directive encourages harmonization but leaves implementation to national laws, resulting in varied approaches emphasizing preventive or inquisitorial processes over adversarial litigation.^[61] In Germany, the primary analog is the actio pro socio under the Limited Liability Companies Act (GmbHG § 46a), allowing minority shareholders—typically holding at least 10% or representing a specific interest—to sue on behalf of the company for directors' fiduciary breaches, such as self-dealing or negligence, provided the company has not already pursued the claim. This action is subsidiary and limited to enforcing corporate rights arising from membership relations, reflecting a board-centric governance model that prioritizes internal resolution. Courts, including the Federal Court of Justice (BGH), have upheld its use in cases of mismanagement, but it requires demonstrating subsidiarity to avoid redundancy with corporate actions.^[62]^[63] France provides the action en représentation under the Commercial Code (Articles L. 225-251 and L. 223-22), permitting shareholders to initiate suits on the company's behalf against managers for faults causing harm, often after a failed demand on the board, though no formal demand futility test exists. This mechanism is rarely invoked due to procedural hurdles, including court authorization and alignment with company interests, and is more common in simplified joint-stock companies (SAS) than public firms. It focuses on directorial liability for breaches like abuse of corporate assets, but usage remains low amid preferences for associative actions by minority groups.^[12] The Netherlands employs inquiry proceedings before the Enterprise Chamber of the Amsterdam Court of Appeal (under Book 2 of the Dutch Civil Code, Articles 2:345–2:354), where shareholders holding at least 10% of capital or representing €2 million in shares can request an investigation into alleged mismanagement. If wrongdoing is found, the Chamber may appoint provisional directors, order asset freezes, or facilitate settlements, serving as a preventive tool rather than a direct damages claim. This inquisitorial approach contrasts with litigious suits, emphasizing expert probes over courtroom battles, and has gained traction post-2008 financial crisis for resolving shareholder disputes in family-controlled firms.^[64]^[61] In Italy, derivative actions are narrowly available under the Civil Code (Article 2393-bis), allowing shareholders with at least 5% (or 2.5% in larger companies) to sue directors for liability after board inaction, but only if approved by a shareholders' meeting or court. This provision targets breaches like conflicts of interest, yet it is constrained by requirements for majority consent in practice, limiting its role to exceptional cases of severe misconduct. Italian law prioritizes company-initiated claims, with derivative suits often overshadowed by direct shareholder actions for personal harm.^[12] These mechanisms face significant challenges, including cultural emphasis on supervisory board oversight and concentrated ownership structures—prevalent in family or blockholder-dominated firms across the region—where controlling shareholders may collude with management, deterring minority suits. Usage remains infrequent, with empirical studies showing fewer than 1% of corporate disputes escalating to derivative-like actions annually, compared to higher rates in dispersed-ownership systems. Higher shareholding thresholds (e.g., 10% in Germany and the Netherlands) and costs further restrict access, though post-2008 reforms in some states have pushed for enhanced minority protections to align with EU harmonization goals. Unlike common law models, Continental approaches favor inquiries and statutory barriers to frivolous claims, promoting stability over shareholder activism.^[63]^[12]^[61]

Asia-Pacific and Other Regions

In India, derivative suits are facilitated through class action provisions under Section 245 of the Companies Act, 2013, which permit shareholders holding at least five percent of the issued share capital or at least 100 members—whichever is less—to initiate proceedings against the company for acts of mismanagement or oppression, with reliefs including injunctions against ultra vires actions or director removal.^[65] These suits are overseen by the National Company Law Tribunal (NCLT), which evaluates the prima facie case and potential benefit to the company before granting leave, ensuring that proceedings address wrongs primarily to the company rather than individual shareholders.^[66] The mechanism gained prominence following the 2009 Satyam scandal, where accounting fraud by the company's founder exposed governance lapses, prompting legislative reforms to empower minority shareholders and enhance accountability in listed entities.^[67] New Zealand's framework for derivative actions is outlined in Section 165 of the Companies Act 1993, allowing shareholders or directors to seek court leave to bring or intervene in proceedings on behalf of the company for breaches of director duties or other harms, mirroring the UK's emphasis on judicial discretion.^[68] Courts assess applications based on the applicant's good faith, the seriousness of the alleged wrong, and whether the action is in the company's best interests, often requiring prior notice to the company and consideration of alternative remedies like regulatory intervention by the Financial Markets Authority.^[69] Case volume remains low, attributed to robust enforcement by regulators and the availability of other shareholder protections, which reduce the need for litigation.^[70] Australia's statutory derivative regime under Part 2F.1A of the Corporations Act 2001 enables eligible persons, such as shareholders or officers, to apply to the court for leave to commence actions in the company's name against directors for breaches like improper use of position or failure to act in good faith.^[71] The process requires demonstrating that the applicant is acting in good faith, that the claim is prima facie viable, and that it is in the company's best interests, with the Australian Securities and Investments Commission (ASIC) empowered to intervene, provide consent for proceedings, or seek dismissal if contrary to public interest. This framework balances shareholder access with safeguards against frivolous suits, though empirical data indicates modest usage, primarily in cases involving director misconduct in closely held companies. In China, the 2023 amendments to the Company Law have expanded shareholder remedies by explicitly permitting suits against directors, supervisors, or senior managers for breaches of fiduciary duties, particularly in state-owned enterprises where the state holds controlling interests.^[72] Article 189 allows shareholders of wholly state-owned companies to directly institute civil actions for compensation if directors cause losses through violations, with courts able to order liability sharing among wrongdoers and recovery of illicit gains.^[73] These provisions aim to strengthen governance in state-dominated sectors by lowering barriers to enforcement, though applications often require alignment with state regulatory priorities enforced by bodies like the State-owned Assets Supervision and Administration Commission. Across the Asia-Pacific, derivative suits are seeing growing adoption amid broader corporate governance reforms, such as the 2024 ASEAN Corporate Governance Scorecard, which promotes enhanced shareholder rights and board accountability in member states to attract investment.^[74] However, enforcement challenges persist in developing markets, including judicial delays, limited legal expertise, and cultural preferences for mediation over litigation, which can undermine the mechanism's effectiveness despite formal statutory adoption.^[75]

References

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derivative action | Wex | US Law | LII / Legal Information Institute
A derivative action is a type of lawsuit in which the corporation asserts a wrong against the corporation and seeks damages.
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Foundations of Law - The Derivative Suit - Lawshelf
A derivative suit is used as a means for a shareholder or group of shareholders, acting on behalf of the corporation, to reclaim value lost to the corporation ...Missing: definition | Show results with:definition
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Long considered the "chief regulator of corporate management," and a recognized form of litigation in American courts at least since 1855, it now confronts the ...
[4]
Rule 23.1. Derivative Actions | Federal Rules of Civil Procedure
This rule applies when one or more shareholders or members of a corporation or an unincorporated association bring a derivative action to enforce a right.
[5]
shareholder derivative suit
### Summary of Shareholder Derivative Suit
[6]
[PDF] The Dynamic Shareholder Derivative Suit
Sep 18, 2013 · These derivative suits for breaches of fiduciary duty focus on whether directors provided the necessary oversight through compliance systems ...
[7]
[PDF] Right to Jury Trial in Shareholder Derivative Suits - LAW eCommons
Historically, a shareholder's derivative suit was a creation of the equity courts,27 because the common law did not provide an adequate remedy for the ...
[8]
[PDF] Shareholder Derivative Litigation's Historical and Normative ...
The Part will demonstrate that the historical and normative foundations of the U.S. shareholder derivative action differed significantly from that of England, ...
[9]
[PDF] The Survival of the Derivative Suit - Scholarship Archive
The shareholder derivative suit is often said to have originated with Foss v. Harbottle, 67. Eng. Rep. 189, 2 Hare 461 (Ch. 1843). In America, the Supreme Court ...Missing: 19th | Show results with:19th
[10]
Shareholder Derivative Action Suits in India: Avoiding the Influence ...
Aug 10, 2022 · “Derivative action suit” is usually an option for the shareholder to sue on behalf of the corporate entity when the directors or management in the company has ...
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[PDF] The Derivative Action in Australia and New Zealand
[extract] A derivative action is an action brought by a shareholder or director of a company in the name and on behalf of that company.Missing: Commonwealth India
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[PDF] Why do Shareholder Derivative Suits Remain Rare in Continental ...
Part 3 suggests that the absence of deriva- tive suits may not be as detrimental as one might think at first glance by showing that derivative litigation is not ...Missing: Commonwealth India Zealand
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[PDF] the corporate origins of shareholder derivative litigation in the united
Since at least the 1930s, corporate managers and their attorneys have denounced shareholder derivative suits.1 They have painted such.
[14]
J.I. Case Co. v. Borak | 377 U.S. 426 (1964)
U.S. Supreme Court. J. I Case Co. v. Borak, 377 U.S. 426 (1964). J. I Case Co. v. Borak. No. 402. Argued April 22-23, 1964. Decided June 8, 1964.
[15]
A Short History of the Court of Chancery
Chancery's early jurisdiction was broad and imprecise because it derived from royal prerogative. Early Chancery procedure mirrored the flexible and simple ...Missing: 19th | Show results with:19th
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Trends in Shareholder Derivative Litigation - Bloomberg Law
Second, 2020 saw a continued upswing in shareholder derivative litigation targeting companies' actions in light of their environmental, social, and governance ( ...
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[PDF] in the court of chancery of the state of delaware
Apr 5, 2024 · Accordingly, the defendants' motions to dismiss for failure to plead demand futility must be granted in full. I. BACKGROUND. The facts are drawn ...
[18]
[PDF] The Role of Liability Rules and the Derivative Suit in Corporate Law
2 Proponents claim that the derivative suit, a suit brought by a shareholder on behalf of the corporation, is essential to enforce the fiduciary duties of care ...
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[PDF] The Agent's Problem - Duke Law Scholarship Repository
Mar 25, 2021 · The agency problem, the idea that corporate directors and officers are motivated to prioritize their self-interest over the interest of their.
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[PDF] The Lost Lessons of Shareholder Derivative Suits
Corporate law has long offered shareholders a variety of litigation options to police the behavior of corporate managers.26. These lawsuits are typically ...
[21]
Derivative Lawsuits as a Corporate Governance Mechanism
Apr 6, 2009 · We find that the incidence of derivative lawsuits is higher for firms with a greater likelihood of agency conflicts. We also find that ...<|separator|>
[22]
[PDF] DIRECT SUITS AND DERIVATIVE ACTIONS: RETHINKING ...
Depending on the precise legal regime, a direct suit may be brought against the company, directors, controlling shareholders, or any other shareholder. A.<|control11|><|separator|>
[23]
https://journals.library.wustl.edu/globalstudies/article/8755/galley/25549/view/
[24]
Corporate Governance in the Courtroom: An Empirical Analysis
This article aims to fill this gap by presenting the first empirical examination of shareholder derivative suits in the federal courts.
[25]
Delaware Supreme Court Clarifies the Standards for Demand Futility
Oct 27, 2021 · The Delaware Supreme Court adopted a new three-part demand-futility test that clarifies the standard shareholders must meet to file such derivative suits.Missing: explanation | Show results with:explanation
[26]
Shareholder Derivative Actions (Part III): "Demand Futility" Doctrine
Nov 10, 2023 · The doctrine of “demand futility” governs when a demand would be clearly rejected by the board of directors or be pointless because the board is corrupt.Missing: explanation | Show results with:explanation
[27]
[PDF] Derivative claims in the US and the UK - Mayer Brown
A shareholder in the UK who decides to bring a derivative claim must not only fund the action (unless third party funding can be obtained or the court orders ...Missing: barriers | Show results with:barriers
[28]
[PDF] Empirical Research and the Shareholder Derivative Suit
The emergence of the derivative suit as a major threat to unquestioned control of the business enterprise by corporate management has not gone unchallenged. ...Missing: rationale | Show results with:rationale
[29]
[PDF] Parallel Derivative Action Settlement Outcomes: 2023 Review and ...
This study analyzes the settlement characteristics of parallel derivative lawsuits in which a shareholder derivative action features the same or similar.Missing: motion | Show results with:motion
[30]
Shareholder Derivative Lawsuits in Corporations - Justia
May 7, 2025 · This is referred to as the “continuous ownership requirement.” If the shareholder's interest in the company was lost, or devolved, because of ...
[31]
California Supreme Court Imposes A Continuous Ownership Rule ...
Feb 25, 2008 · The California Supreme Court held that California law, like Delaware law, imposes a “continuous ownership” requirement on plaintiffs in shareholder derivative ...
[32]
[PDF] the continuous ownership requirement in - My Willamette
Oct 28, 2010 · “The 'contemporaneous ownership' requirement in shareholder derivative actions was first announced in Hawes v. Oakland, 104 U.S. 450 (1882), and ...<|control11|><|separator|>
[33]
Arizona adopts the “Continuous Ownership” Rule for Derivative ...
Apr 24, 2019 · A "derivative" suit is one brought on behalf of an entity by a partner or shareholder to enforce a claim against its officers, managers, ...
[34]
[PDF] LITIGATION OF DERIVATIVE STANDING ISSUES IN SUITS IN ...
While the demand futility standard is a substantial hurdle, it is not an insurmountable barrier to standing. There are numerous decisions in federal courts ...Missing: explanation | Show results with:explanation
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Standing to Sue in a Shareholder Derivative Litigation | Practical Law
A Practice Note addressing the standing requirements for a derivative action brought by a shareholder of a corporation or a member of an alternative entity.
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Rule 23.1 - Derivative Actions | 2024 Federal Rules of Civil Procedure
Rule 23.1 requires detailed pleading for shareholder derivative suits, including efforts made to resolve the issue before suing.Missing: 1930s scandals 1938
[37]
The Demanding Demand Requirement in Shareholder Derivative ...
Jul 1, 2019 · The plaintiff's complaint must allege demand or demand futility. When demand is made upon the board to initiate a lawsuit against one or more controllers,Missing: US | Show results with:US
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Aronson v. Lewis :: 1984 :: Delaware Supreme Court Decisions
As is clear from this case, and the conclusory allegations upon which the Vice Chancellor relied, demand futility becomes virtually automatic under such a test.
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Rales v. Blasband :: 1993 :: Delaware Supreme Court Decisions
The plaintiff filed a verified amended complaint, naming Easco as a nominal defendant and containing new allegations of demand futility. On March 3, 1993, the ...Missing: factors | Show results with:factors
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In the Name of the Company: When Stockholders Interfere in the ...
Jun 1, 2022 · Companies can impose some order by requiring all derivative suits to be filed in one jurisdiction and by responding uniformly to all books and ...<|control11|><|separator|>
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[PDF] Dismissing Derivative Actions in the Federal Courts for Failure to ...
Sep 18, 2014 · At this critical point, the district court will either allow the action to proceed, or dismiss it for failure to allege demand futility. If the ...
[42]
Zapata Corp. v. Maldonado :: 1981 - Justia Law
Zapata Corp. v. Maldonado - 430 A.2d 779. ... [15] The Court should apply a two-step test to the motion. First, the Court should inquire into the ...
[43]
Derivative Suits 101: Tips for Successful Settlements
Jan 17, 2020 · The unique procedural posture of shareholder derivative suits requires court approval of settlements under Rule 23.1.Missing: process | Show results with:process
[44]
Securities and Derivative Litigation: Quarterly Update - Dechert LLP
Sep 5, 2024 · This ruling was critical to the Court's decision affirming dismissal because the PSLRA's safe harbor for forward-looking statements does not ...
[45]
title 8 - Delaware Code Online
§ 327. Stockholder's derivative action; allegation of stock ownership. In any derivative suit instituted by a stockholder of a corporation, it shall be ...Missing: excusal | Show results with:excusal
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[PDF] IN THE SUPREME COURT OF THE STATE OF DELAWARE
Sep 16, 2015 · The case involves a challenge to a stock-for-stock merger between KKR & Co. LP and KKR Financial Holdings LLC, with the court affirming the ...
[47]
Don't Call It a Comeback: A Decade Later, the Corwin Doctrine Still ...
The Delaware Supreme Court's 2015 decision in Corwin v. KKR Financial Holdings LLC reshaped the landscape of merger and acquisition litigation by ...
[48]
Salzberg, et al. v. Sciabacucchi - Delaware Case Law
Mar 18, 2020 · The case concerned the validity of federal-forum provisions in Delaware corporations' charters, which the Supreme Court determined could ...Missing: 2023-2025 | Show results with:2023-2025
[49]
Ezrasons, Inc. v Rudd :: 2025 :: New York Court of Appeals Decisions
Plaintiff accordingly contends that it has standing to represent Barclays in New York because it holds a "beneficial interest in [Barclays] shares," even though ...
[50]
2024 Securities Class Action Litigation: Claims Are on the Rise Again
Jun 11, 2025 · In 2024, 52% of cases were accompanied by parallel derivative lawsuits, and the median settlement amount was $18.6 million, higher than the ...
[51]
Recent Trends in Parallel Derivative Action Settlement Outcomes
Sep 11, 2024 · A new report by Cornerstone Research, a top consulting and expert testimony firm, highlights recent trends in settlements of derivative lawsuits brought in ...Missing: motion dismiss
[52]
Companies Act 2006, Part 11 - Legislation.gov.uk
(1)A member of a company who brings a derivative claim under this Chapter must apply to the court for permission (in Northern Ireland, leave) to continue it.
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https://www.legislation.gov.uk/ukpga/2006/46/section/260
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https://www.legislation.gov.uk/ukpga/2006/46/section/261
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https://www.legislation.gov.uk/ukpga/2006/46/section/263
[56]
https://uk.practicallaw.thomsonreuters.com/8-546-6725?transitionType=Default&contextData=(sc.Default)
[57]
Statutory derivative claim regime: ten years on | Gowling WLG
Jul 3, 2017 · The statutory derivative claim regime in the Companies Act 2006 (2006 Act) came into force nearly ten years ago, on 1 October 2007.
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Shareholder Safeguards: A Practical Guide to Derivative Claims in ...
Jul 22, 2025 · A derivative claim is a type of legal action brought by a shareholder against a director(s) on behalf of a company. Governed by sections 260-264 ...
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Derivative action commenced in UK against Shell's directors for ...
Mar 9, 2023 · The derivative action claims Shell's 11 directors have breached their legal duties under the Companies Act 2006.<|separator|>
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[PDF] Directive (EU) 2017 - EUR-Lex - European Union
May 17, 2017 · Under this Directive, the personal data of shareholders should be processed to enable the company to identify its existing shareholders in order ...Missing: derivative | Show results with:derivative
[61]
[PDF] Mapping Types of Shareholder Lawsuits Across Jurisdictions - ECGI
provides that shareholders abusing their rights shall ... (2010): “The Use and Abuse of Investor Lawsuits”,. European Company and Financial Law Review, pp.Missing: early | Show results with:early
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Shareholders' Rights & Shareholder Activism 2025 - Germany
Sep 23, 2025 · Additionally, shareholders can bring derivative actions on behalf ... action on behalf of the company (actio pro socio) available to them.
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[PDF] Why Do Shareholder Derivative Suits Remain Rare in Continental ...
enforcement of corporate law and prevention of abusive lawsuits that are ... 261, 268 (1997) (reporting that abuse has become common in France and Bel-.
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Q&A: shareholder activist strategies in Netherlands - Lexology
Mar 20, 2025 · Inquiry proceedings allow shareholders (above a statutory share ownership threshold) of a Dutch company to request the Enterprise Chamber to ...
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[PDF] Class Action under Companies Act 2013 - Vinod Kothari Consultants
Section 245(1) sets out the kinds of relief that the Tribunal can grant in a Class Action: Restrain the company from committing an act, which is ultra vires ...
[66]
Class actions under the Companies Act, 2013
A class action allows a number of claimants with a common grievance against a company to file a lawsuit against it under Section 245 of the Companies Act, ...
[67]
Scandal at Satyam: Truth, Lies and Corporate Governance
Jan 9, 2009 · B. Ramalinga Raju, founder and CEO of Satyam Computers, India's fourth-largest IT services firm, announced on January 7 that his company had been falsifying ...
[68]
Companies Act 1993 - New Zealand Legislation
Derivative actions intervene in proceedings to which the company or any related company is a party for the purpose of continuing, defending, or discontinuing ...
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[PDF] THE DERIVATIVE ACTION IN THE COMPANIES ACT 1993
[56] Further, s 165(5)(b) provides that the company must inform the Court whether it intends to bring, continue, defend or discontinue the proceedings. Given ...
[70]
[PDF] New Zealand - Russell McVeagh
While derivative actions are not particularly common, section 165 of the. Companies Act gives the court the ability to grant leave to a shareholder or ...
[71]
[PDF] AN EMPIRICAL STUDY OF THE STATUTORY DERIVATIVE ACTION
Analysis of Key Issues. The Cost of Litigation. Section 242 deals with costs in relation to derivative proceedings. The section 'gives the court a broad ...
[72]
China's 2023 Company Law- A Comprehensive Overview
Article 189 of the 2023 Company Law grants a shareholder to institute a lawsuit against directors, supervisors, or senior managers of a company wholly-owned ...
[73]
Company Law of the People's Republic of China [2023 Revision]
Jan 8, 2024 · Article 25 The resolutions of the company's shareholders' meeting and board of directors are invalid if they violate laws and administrative ...<|separator|>
[74]
2024 ASEAN Corporate Governance Scorecard
Mar 19, 2024 · The ASEAN Corporate Governance Scorecard (ACGS) is an initiative by the ASEAN Capital Market Forum to improve the corporate governance standards and practices.
[75]
[PDF] The derivative action in Asia: A complex reality - InK@SMU.edu.sg
The derivative action, as a mechanism de- signed to allow minority shareholders to attack the misdeeds of such insiders, provides a powerful polit- ical tool ...