Shareholders' Remedies: The Choice of Objectives and the Social Meaning of Derivative Actions
Posted: 19 May 2005
Abstract
The purpose of this article is to offer a wide ranging consideration of the policy objectives underlying the derivative action. More specifically, the article inquires into an indefinite, but fundamental, question that has received inadequate attention in the literature on corporate law theory in European or English law: what rationale or rationales justify the use of derivative actions?
Shareholder litigation is neither the initial nor the primary protection for shareholders against managerial misconduct. It cannot be viewed in isolation from a number of mechanisms which relate to corporate governance. A variety of social and market forces also operate to hold corporate officials accountable. These mechanisms and others, coupled with the regulatory authority of governmental agencies constitute protections in the absence of private litigation. To the extent that these mechanisms effectively align the interests of mangers and shareholders, there may be less need to resort to costly litigation as a means of protecting shareholder question can also be formulated in the following manner: what role should be assigned to shareholder litigation that may, in turn, enhance the capabilities of these other mechanisms of accountability?
The discussion proceeds as follows. Section II identifies the limitations of the traditional view of the derivative action. An initial analysis of the merits and demerits of the derivative action is presented in Section III. Section IV analyses the role derivative actions may assume in enforcing corporate accountability. The question addressed is whether its purpose is primarily to deter misconduct or simply to compensate the company for the wrongdoing. As part of this, the possible benefits and limitations of these rationales will be explored. Finally, Section V examines the public image, or expressive value, of the derivative action. The purpose is to determine if some of the features inherent in the derivative action procedure enhance or detract from derivative action being understood as a positive social force. The section also briefly considers strategies that can be pursued to reverse the negative effects of those forces that weaken the social meaning of derivative actions so that the action is more likely to be viewed as an instrument that affirms desirable norms in the corporate setting.
Keywords: Derivative actions, costs and benefits, corporate governance, shareholder, shareholder litigation, shareholders' remedies, deterrnece, compensation
JEL Classification: K22
Suggested Citation: Suggested Citation