Theoretical Reflections on Derivative Actions : The Representative Problem

Minority shareholders face particular difficulties where they seek redress against wrongdoing directors. This state of affairs seems to reflect an implicit acceptance both by the judiciary and the English Law Commission that is somehow undesirable that companies should be exposed to civil litigation by minority shareholders (i.e., derivative actions). This type of thinking is rarely (if ever) made explicit; nonetheless, it is likely to continue being the primary policy impediment to enhancing the potential utility of derivative actions. The purpose of this article is primarily to inquire into these restrictive standing rules and subsequently to examine two policy responses to the problem that the company lacks an authentic decision-making body to determine whether or not a derivative action is in the best interests of the company as a whole.The article is organized as follows. Section B discusses the problems with conferring rights on minority shareholders to litigate in respect of wrongs to the company. Subsequently, two policy responses are analyzed. First, Section C examines and assesses the competence of three bodies which may assess the merits of a derivative action: a committee of independent directors; an 'independent organ' of the company; and the courts. It concludes that courts should discharge the task of deciding this critical question. Section D explains that once a gate-keeper is put in place, the focus should be on establishing an expeditious means for screening and dismissing non-meritorious cases. It evaluates how well (or rather, badly) current legal screens work. Section E draws some conclusions