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Griggs, Lynden --- "A Statutory Derivative Action: Lessons That May Be Learnt From its Past" [2002] UWSLawRw 4; (2002) 6(1) University of Western Sydney Law Review 64


THE STATUTORY DERIVATIVE
ACTION: LESSONS THAT MAY BE
LEARNT FROM ITS PAST!

Lynden Griggs[*]

Part 1: Introductory Comments

1.1 The Introduction and Nature of the Derivative Suit

As of 13 March 2000, the statutory derivative action commenced operation in Australia[1] . Its introduction follows the recommendation of a large number of corporate law reform institutes that have discussed the role and extent of shareholder remedies over the past decade. The action is now contained in Part 2F.1A of the Corporations Act 2001. Section 236 of the legislation permits a member or officer to bring proceedings on behalf of a company, or intervene in any proceedings to which the company is a party, for the purpose of taking responsibility on behalf of the company for those proceedings. The criteria for the operation of this section are provided in s237; It must be probable that the company will not itself bring proceedings; the applicant must be acting in good faith; it must be in the best interests of the company that the applicant be granted leave; there must be a serious question to be tried and written notice must be provided to the company of the intent to apply. Section 239 provides that ratification of the alleged misconduct by the directors is not an automatic bar to the bringing of proceedings; court permission is required to settle or discontinue proceedings (s240); the court can appoint an independent investigator (s241) and critically, the court has a broad power to make any order as to costs (s242).

In many respects, the derivative action is unique[2] in that it allows an individual to bring an action that belongs to another[3] . Furthermore the benefit of this action will not directly advantage that member[4] but rather, will accrue to the corporation that has, for whatever reason, decided not to pursue the matter[5] . Thus, it allows the shareholder to usurp the authority that the corporate entity has vested in the board of directors[6] . Significantly it also allows the member of the corporation to act as some form of corporate watchdog, to pursue an action against a wrongdoer, when the board refuses to act[7] . At the heart of the derivative action lies a conflict between the competing interests allowing shareholders to assert the rights of the corporation when the management refuses to, against the power granted to the board to resolve internal conflicts[8] .

A derivative action raises the spectre of undue judicial interference with the business judgment of corporate management. In other words, a derivative action is a means to curb managerial misconduct, [though there is some argument as to whether its primary focus is to deter mismanagement, or whether it is to compensate the company and/or the shareholders][9] , yet it also undermines the basic principle of corporate governance that the decisions of a corporation, including the decision to initiate litigation, should be made by the board of directors[10] .

1.2: The Derivative Action and the Rule in Foss v Harbottle

Because of the uniqueness of the statutory derivative action, and the concern about the usurping of authority, the limitations on bringing a derivative suit have generally been quite stringent. For Australian corporate law, this limitation was in the nature of the rule in Foss v Harbottle. This principle, the composite of two decisions[11] : Foss v Harbottle[12] and Mozley v Alston[13] and establishes that the courts will not interfere in the internal management of companies acting within their powers, and that, where a wrong has been done to the corporation, the action to recover in respect of this wrong should be brought by the corporation itself. The judiciary endorsed the rule for many years[14] and which, arguably, was appropriate for the time in which it was decided – at the height of the railway boom and the middle of the industrial revolution[15] .

It has been said that without the rule[16] we would see vexatious litigation[17] , multiple suits[18] and futile actions by shareholders[19] . Despite the advantages of the rule, a number of exceptions to it were formulated due to the ‘catch-22’ situation that arises when the people in control commit the wrongs to the company[20] . As the directors will not propose bringing an action against themselves in these circumstances, the exceptions were introduced to ameliorate the worst effects of the rule so that shareholders would be entitled to bring an action in certain defined circumstances[21] . The circumstances can be listed as follows:

Where the act complained of was ultra vires the company[22] ;
Where the issue is such that it could only be done by a special majority of the members and not a simple majority[23] ;
Where the personal rights of the shareholder have been invaded[24] ;
Where what has been done amounts to a fraud on the minority[25] ; and
Where the wrongdoers are in control of the company[26] .

To this, it may be added that the rule would be ignored where the interests of justice require it[27] . In essence true exceptions to the rule would be recognised if it involved fraud on the minority or in the interests of justice[28] – any others being situations where the rule will not apply[29] .

1.3: The Defects of the Rule in Foss v Harbottle

The rule in Foss v Harbottle, (or perhaps more correctly, the exceptions to it) was, in a contemporary environment, seen to suffer from many defects[30] . These defects can be summarised as follows:

No clear statement could be made of what constitutes control by the alleged wrongdoers;
Fraud was difficult to define;
The importance and extent of ratification was unclear; and
The courts expressed a reluctance to get involved with the internal management of companies[31] .

By contrast to the common law, the statutory derivative action has, (potentially), the following advantages:

The prescriptive nature of the legislation would clarify the law;
The common law would be abolished;
Ratification would not automatically bar a claim;
The court would have the opportunity to obtain an independent view as to whether the action is in the company’s best interests; and
The court would have a broad discretion regarding the payment of costs[32] .

1.4: Objectives

From an examination of the derivative suit, not directly in its contemporary environment, but by way of an examination of the common law leading up to, and including the decision in Foss v Harbottle can any lessons be learnt as to the importance, or likely utilisation, of the statutory derivative action in the 21st century in Australia? A comparative element is needed, so that essential areas of tension within the Canadian statutory derivative action and the United States common law derivative suit can be considered and contrasted with the Australian model[33] . At the outset, it can be noted that the statutory derivative action (as it is called), may in one respect, be considered a misnomer. The action does not derive from the corporation as such, but is made possible by judicial fiat pursuant to the legislation[34] .

Part 2: The Introduction and History of the Derivative Suit

The origins of the derivative action can be found abuses of management occurring in associations and corporations. The courts were required to develop a process that would allow a shareholder or a member of the corporation or association to complain about malfeasance by the controllers of the entity. If the courts had not developed this process, the matter would then have gone without remedy, leaving the controllers with a free hand to divert the assets of the corporation to their own use. The following analysis illustrates the manner in which the courts prior to, and including the decision in Foss v Harbottle, resolved the tension between allowing shareholders a say in the management of the business and the freedom of entrepreneurs to control the direction of the enterprise. The decisions and development largely reflect the social context in which the matter was heard and the underlying importance of capitalist enterprise at the time of the case.

As early as 1307, Edward I required the abbot to keep the corporate seal in a particular place to prevent it being used to the detriment of members. Similarly, ordinary corporations were subject to visitation by the King, while ecclesiastical and eleemosynary corporations were subject to visitation by the bishop and founder respectively[35] . During the 16th century, the Charitable Gifts Act 43 Eliz.1, c.4, provided the Chancellor with a mandate to inquire into corporate affairs on the complaint of any party aggrieved with the differences and similarities between individuals and communities not being the object of analysis[36] – both entities were subject to the rigours of the legal process. Perhaps the starkest illustration of the acceptance of the court’s jurisdiction over commercial entities was stated by the Attorney-General (UK) in 1682. If it was impossible to proceed against corporations:

It [would] set up independent commonwealths within the kingdom and [this] ... would certainly tend to the utter overthrow of the common law, and the crown too, in which all sovereign power to do right both to itself and the subjects, is only lodged by the common law of this realm [37].

Examples of this accountability and the authority of the Chancellor to intervene are provided in Eden v Foster[38] and Charitable Corporation v Sutton[39] . In Eden v Foster the issue before the Court was whether the Crown could exercise a right as a visitor against a school founded by the King. It was held by the Court of Chancery that where the King was founder then he could exercise visitorial rights, whereas if a private person was founder, then by implication that person or someone nominated by him could be a visitor.

In Charitable Corporation v Sutton an action was brought by the corporation against committeemen (directors) for breach of trust, fraud and mismanagement. In holding the committeemen liable the Lord Chancellor stated, ‘[I] will never determine that frauds of this kind are out of the reach of courts of law or equity, for an intolerable grievance would follow from such a determination’[40] . This was a case involving a corporation seeking relief against wrongdoers; the next step was not only to extend protection to members, but to allow the members themselves to institute proceedings. This was achieved in Adley v Whitstable Company[41] .

A member of the Whitstable Company sought an account of profits denied to him by virtue of a by-law, which penalised any member who worked for a rival company. The Whitstable Company submitted that the Court of Chancery had no jurisdiction to hear the matter. To this the Court of Chancery replied that, ‘unless I can be satisfied that the party has such a remedy at law as ought to bar his application to a Court of Equity, I conceive he has a right to apply here for such relief’[42] . The importance of this decision cannot be underestimated for the first time a shareholder was permitted to litigate an intra-corporate dispute involving a challenge to a by-law that affected all the members.

The next step in the development of remedies for minority shareholders was to allow a shareholder to come to equity on behalf of themselves and all other shareholders for the redress of a wrong done to the company through the introduction of the representative derivative action. Thus the process evolved from liability being imposed upon the corporation, to successful shareholder action to a remedy by, for, and on behalf of all shareholders – where the wrong has been done to the corporation.

In Hichens v Con greve[43] a suit was instituted by certain shareholders in the Arigna Mining Company on behalf of themselves and all other shareholders, except the defendants, against the chair and directors of the company and other persons connected with the entity, alleging a promotional fraud. The relief sought was that the moneys misappropriated be restored to the company. The defendants filed a demurrer claiming the shareholders had no jurisdiction to come to equity, but this was overruled as all shareholders were regarded as standing in a common position and were entitled to have the property returned for the benefit of all concerned[44] .

Similarly in Wallworth v Holt[45] , shareholders of a joint stock bank brought a representative suit against the directors requesting an accounting of the assets of the bank. Demurrers for want of equity, and want of partners were overruled, as the duty of the court was to enforce rights for which there was no other remedy[46] .

Similarly in Preston v The Grand Collier Dock Company[47] the representative suit was sanctioned, as there was, ‘a plain equity for the plaintiff to be relieved’[48] . The representative suit, ‘made the action possible, it permitted the adoption of the class action where there was no other basis for jurisdiction’[49] .

Hichens v Con greve, Wallworth v Holt, Preston v Grand Collier all show that the right of shareholders to sue on behalf of themselves and all other shareholders, to redress a wrong done to the members of the company, or to the company, was recognised prior to the 1843 decision of Foss v Harbottle.[50] The courts accepted that their jurisdiction had to be exercised – otherwise there would be no recourse for shareholders aggrieved by the actions of the controllers.

2.1: The Decision of Foss v Harbottle

The decision in Foss v Harbottle represented a major statement of the law concerning minority shareholders; though it cannot be seen as a major advance for minority shareholders. The pleadings in Foss v Harbottle were as complete as those utilised in Hichens v Con greve and Preston v Grand Collier, yet the minority shareholders were denied any standing to remedy what they saw as a misapplication of the corporate funds by the directors of the company. In this sense, the decision can be seen as a restriction rather than as an expansion of the right of a shareholder to seek judicial intervention.

The decision in Foss v Harbottle is arguably representative of Clark’s first stage of capitalism – the ‘age of the entrepreneur, the fabled promoter-investor-manager who launched large scale business organizations in corporate form for the first time in history’[51] . In essence, it was a case that promoted the interests of the business person to the detriment of the minority shareholder. It correlates with the introduction, at much the same time, of statutes enabling the general incorporation of business organizations[52] . Thus, the result of the case can be understood in the context of the development of businesses in the United Kingdom throughout the latter part of the 19th century – a development reflecting the ‘expansive phase’ [53] of the British economy during this period.

2.1.1: The Facts of Foss v Harbottle

An Act of Parliament incorporated the Victorian Park Company in 1837 to develop ornamental gardens and parks. Included in its objects was the erection of housing, with the consequential opportunity to sell the property. There were eight promoters of the scheme: Harbottle, Adshead, Byron, Westhead, Bealey (directors), Denison, Bunting and Lane;. Foss, one of the shareholders, brought a derivative suit alleging that the promoters had conspired together to profit by the establishment of the company and at the expense of the company - achieved through company purchase of land belonging to the promoters at exorbitant values. The defendants demurred to the bill on the basis that the plaintiffs were not entitled to represent the Victorian Park Company and this could not be cured by adding the corporation as a defendant.

2.1.2: The Arguments by Counsel

The argument by counsel in support of the demurrers centred on the pleadings used by the plaintiff - the representative derivative action. It was argued that if the plaintiffs had any ground for impeaching the conduct of the defendants, they could have brought proceedings using the name of the corporation and in response, the defendants could have applied to the court to prevent use of the corporate name. The court would then have been in a position to determine the merits of the plaintiff's claim. Alternatively, the suit may have been brought by the Attorney General to correct an abuse of powers granted for public purposes.

The plaintiff's argument was that the corporation was not to be treated as an ordinary corporation, and that in fact it was analogous to a partnership and should be governed by the rules applicable to partnerships.

2.1.3: The Decision of the Vice Chancellor Sir James Wi gram

The Vice Chancellor held for the defendant on two grounds. The first was that the corporation, being a separate entity from the members, could sue in its own name and in its corporate character. The only question was whether the facts would suggest a departure from the general rule that the corporation should sue in its own name[54] . The second ground for the decision has become known as the ‘internal management’ aspect of the rule of Foss v Harbottle. The Act incorporating the Victorian Park Company provided that the directors were the governing body of the company, subject to the superior control of the members assembled in general meeting. Accordingly, it was only necessary to refer to the Act to show that it was not competent for the individual corporators to sue in the manner proposed.[55]

His Honour also discussed Hichens v Con greve and Preston v The Grand Collier Dock Co. Whilst expressing his cordial concurrence with Hichens, he distinguished this case by alluding to the point that the promoters’ fraud in that case gave rise to an action for misrepresentation. Similarly, Preston v The Grand Collier Dock Co is swept aside by characterising the wrong in that case as one that could not be ratified by a meeting of shareholders. ‘[W]hether these characterisations are accurate or not, one point is clear: in Foss v Harbottle the Vice-Chancellor was announcing his refusal to intervene in business affairs which could be effectively resolved by the members of the organisation in question’[56] . Interestingly, his honour indicated that it would only be for reasons of a very urgent nature that established rules would be departed from[57] . The established rules, if anything, provided that the shareholder had a right to bring an action for corporate wrongs against those allegedly guilty of mismanagement or fraud[58] . The significance of Foss v Harbottle lies in the determination of the court that the judiciary will not interfere where a majority of members may lawfully ratify the conduct in question – a determination which arguably went against the trend of earlier cases.

The rule in Foss v Harbottle in its purest form allows directors and/or majority shareholders to trample completely the interests of minority shareholders. The minority shareholder seeking to redress a wrong done to the company would be met with the defence that the company is the proper plaintiff, or alternately, that the members in a general meeting have resolved not to institute proceedings as it is a matter of internal management. To correct this imbalance in favour of the directors and/or majority shareholders, generations of judges subsequent to Sir James Wigram VC in Foss v Harbottle developed exceptions (previously noted) to the rule in Foss v Harbottle. In fact, Sir James Wigram himself provided the forerunner for the development of these exceptions, stating that, ‘the claims of justice would be found superior to any difficulties arising out of technical rules’[59] .

The approach in England, subsequently adopted in Australia, demonstrated a ‘black-letter’ technical response to the issues arising out of the cases[60] . Prior to Foss v Harbottle claims were allowed to commence and ultimately decided on their merits. The rule in Foss v Harbottle represented a major restriction on the ability of the shareholder to respond to corporate mismanagement. The decisions before Foss exemplified the intervention of the common law to resolve disputes concerning associations. By contrast, Foss illustrated the inexorable connection between the law and the economic thinking of the time. The latter part of the 19th century represented a period of economic expansion and industrial activity and the judiciary responded with decisions such as Foss v Harbottle and masking the ratio decidendi by the application of fundamental and basic tenets of jurisprudence - the basic tenet being that the only person that can complain of a wrong done, is the person that has, in fact, been wronged. This aspect, simple to state hides an issue extraordinarily difficult to resolve. How does one determine whether the impugned conduct involves a wrong done to the shareholder in her or his personal capacity, (which may allow a remedy based on ‘personal rights’)[61] , or whether that wrong is in fact harm done to the corporation?

Part 3: The Distinction between a Personal and a Corporate Wrong

It has never been clear what can be regarded as a wrong to a corporation supporting a derivative action (for which leave is now required), as against a personal wrong (which entitles the shareholder to exercise their own rights without the need to seek leave). The case law is ‘confusing and irreconcilable’[62] . Wrongs to the corporation include breaches of fiduciary duty[63] , the recovery from third parties for wrongs to the entity[64] , fraud against the corporation[65] and the failure by the corporation to pursue a legal right such as an antitrust claim[66] . Personal wrongs include the issue of shares for an improper purpose[67] , the failure to give proper notice of a meeting[68] , interference with the right to vote[69] and breach of contract with a shareholder[70] . Given that leave must be sought to bring a derivative action,[71] whereas leave is not required for a personal action or an action under the oppression section, a foundation question for any shareholder to determine is whether the action is personal or derivative. It is a critical issue in Australia[72] , England[73] , the United States of America[74] and Canada.

‘The critical threshold question in shareholder litigation... is whether the action is personal or derivative. It was the answer to this question that tripped the plaintiffs in Farnham v Fingold which was potentially the most significant corporate action ever launched in Canada, and which has bedevilled the course of action in Goldex Mines Ltd v Revill et. al.’[75] .

In Farnham v Fingold[76] the minority shareholders sought to share in the premium that the controlling shareholders received on the sale of their shares. The action was brought by a minority shareholder on behalf of himself and all other shareholders, except the defendants, alleging a breach of fiduciary duty owed by the majority to the minority. The defendants sought to strike out the action on the basis that the action was derivative and could only be brought pursuant to the legislative provision dealing with statutory derivative actions, which required leave of the court.

The Ontario Court of Appeal held that the statement of claim was concerned with damage allegedly suffered by the corporation so leave should have been requested to bring a statutory derivative action, rather than the institution of a personal action. ‘It was clear in Farnham that the plaintiffs were not themselves sure as to whether their claim was personal or derivative and they tried to have it both ways’ [77].

Goldex Mines v Revill[78] involved a fight for control of Probes Mines Ltd. At issue was alleged misconduct by the directors and defendant shareholders, including misleading proxy solicitation. However, it was not clearly stated whether the claim was personal or derivative and leave to bring an action had not been sought. This was the central issue - was leave required?

The Ontario Court of Appeal ultimately concluded that the endorsement was deficient as it failed to differentiate between personal claims and derivative claims. The case is authority for the proposition, that while derivative and personal actions may be joined in the one writ, it is necessary to distinguish each cause of action in the statement of claim.

These two Canadian cases established that if a minority shareholder wants to seek redress for misconduct, it will be vitally important to determine whether the cause of action is personal or derivative and to endorse the statement of claim accordingly. Arguably, the introduction in Australia of the statutory derivative action, sitting alongside the oppression remedy (for which leave is not required), the same problem may occur here[79] . However, it is submitted that the solution to this conundrum may lie in questioning the validity of the distinction, rather than in seeking to maintain it: ‘For some time now, the boundaries separating actions shareholders can bring on behalf of the company (derivative actions) and personal actions which shareholders can bring in their own right have been in a state of flux, and may be intertwined in practice... In short, the... [answer may be] to downgrade rather than deconstruct the traditional dichotomy between derivative and personal actions’[80] .

As an alternative to downgrading the distinction between personal and derivative actions, a framework[81] could be developed whereby two questions are posed: Who has suffered the harm and where is the duty owed that has been breached? Thus, the shareholder will have a personal action if he or she can point to damage separate and distinct from the damage that flows to the company. This category of damage to the company indirectly harms the shareholder by, most likely, affecting the market value of the capital of the company. In addition, an individual cause of action for the member will lie if the wrongdoers are abusing a duty that is owed to the minority shareholders. If there are circumstances that cannot be answered by this framework, leave to bring the action should be sought.

Part 4: A Comparative Study of Jurisdictions

4.1: Canada

The tendency in Canada for the past thirty years has been a move away from majority rule to the protection of minority rights. A balance has been sought between the majority and minority – the standards applicable to the majority increased, the options to the minority made greater[82] .

Canada has differed from England, the United States and Australia by its enactment of a virtual ‘bill of remedies’[83] . The result is that remedies for Canadian minority shareholders are more expansive than in Australia and include the statutory derivative action, oppression remedy, various restraining orders, an appraisal remedy and a remedy allowing for a just and equitable winding up. The role of the Lawrence and Dickerson Law Reform Committees has been critical in this development.

4.1.1: Lawrence Committee - Canada[84]

After analysing the rule in Foss v Harbottle and the oppression remedy utilised in the United Kingdom, their considered view was that the oppression section was a ‘complete dereliction of the established principle of judicial non-interference in the management of companies’ and that it had an air of ‘reservation and defeatism’ about it[85] . The Lawrence Committee then considered the alternatives to an oppression section and concluded that the statutory derivative action would be the most appropriate means of achieving relief[86] .

4.1.2: Dickerson Committee - Canada

The Dickerson Committee[87] , when considering a corporations law for Canada, adopted the premise that ‘a corporations Act should be largely self-enforcing by civil action initiated by the aggrieved party not by severe penal sanctions or sweeping investigatory powers’[88] .

On the basis of this premise, the Dickerson Committee submitted that not only should a minority shareholder have the right to bring a statutory derivative action but an oppression section should also be introduced, thereby disagreeing with the criticisms of this remedy by the Lawrence Committee. They saw great promise in the statutory derivative action – it would relegate the rule in Foss v Harbottle to ‘legal limbo without compunction, convinced that the alternative system recommended is preferable to the uncertainties - and obvious injustices - engendered by that infamous doctrine’[89] . The Committee also made a number of critical comments concerning the interaction between the derivative action and the oppression remedy. The object of the statutory derivative action was to remedy a wrong done to the company, whereas the oppression section would normally be invoked in a close corporation since its usual object will be to remedy any wrong done to the minority shareholder in a personal capacity[90] . The Committee also recognised that in many instances a wrong to the minority shareholder will also be a wrong to the corporation. In those instances, the minority shareholder would have the option of selecting the remedy that, in their opinion, would best resolve the problem[91] .

The legislation that resulted from the recommendations of these committees had its supporters and detractors: ‘[T]he statutory derivative action] should ultimately prove to be the most important and most enduring of the corporate law reforms of the 1970s and the 1980s... [It] is the minority shareholder’s sword to the majority’s twin shields of corporate personality and majority rule’[92] . Similar comments were made by Conard: ‘Shareholder derivative suits [are] a vital support to...free enterprise economy...derivative suits are the major policemen of managerial integrity’[93] . On the other side of the equation, many suggested that the oppression section was the preferred choice, given that under this provision, leave of the court was not required and any successful remedy would result in the benefit flowing directly to the shareholder[94] .

4.2: United States of America

‘United States Corporate Law has no acquaintance with the Foss v Harbottle doctrine. Since the middle of last century it has accepted that shareholders may sue derivatively on their corporation’s behalf in appropriate circumstances’[95] . Corporate accountability and proper financial management was to be accorded higher priority than discouragement of litigation[96] .

Evidence of this is demonstrated by the decision of the New York Supreme Court in Robinson v Smith.[97] Three shareholders, holding a small amount of stock in a coal company brought an action charging the directors with fraudulent misapplication of funds. These funds were invested in banking corporations, the share price of those entities having declined significantly since the initial investment. ‘In 1832 it must have appeared, as it does today, that the individual stockholder was in need of a means of invoking judicial power to curb managerial abuse’[98] . The court resolved this dilemma by perceiving the relationship between the director and stockholder as being analogous to a trust – thus, a recognised and established doctrine was used to invoke the jurisdiction of the court[99] .

Other United States decisions of the same era to support the establishment of the trust analogy were Taylor v Miami Exporting Co.[100] , Ogden v Kip[101] , Verplanck v Mercantile Ins. Co.[102] and Dodge v Woolsey[103] . The result of these cases was that ‘the concept of the corporation as a separate right-holding entity had to be integrated with the idea that the shareholder had a right to judicial protection of his interests when jeopardized by a defaulting management. Viewing the shareholder’s right as secondary, representative or derivative, provided this integration’[104] .

The United States equivalent to Foss v Harbottle[105] is Hawes v City of Oakland.[106] The two decisions provide a contrast of the judiciary’s approach to derivative suits by shareholders. While the rule in Foss v Harbottle denies an action by a minority shareholder unless it comes within strict guidelines, - the American decision established the procedural requirements for the bringing of a shareholder suit, which were:

Before instituting the action, the complainant shareholders were required to make a demand on all the shareholders requesting that they resolve the matter.
The complainant shareholders were also required to make a demand on the directors, requesting that the grievance be pursued. This requirement was excused if the demand would be futile.
The complainant then had to specify with particularity the facts justifying the complaint and they also had to allege that there was no collusion between the parties so as to create federal rather than state jurisdiction.
The plaintiff was also required to own shares at the time of the alleged wrongdoing.

The decision of Hawes v City of Oakland[107] led to the enactment of Equity Rule 94 in 1881, which is reproduced today in Rule 23.1 of Federal Rules of Civil Procedure[108] .

23.1. In a derivative action brought by one or more shareholders to enforce a right of a corporation, the corporation having failed to enforce a right which may properly be asserted by it, the complaint shall be verified and shall allege (1) that the plaintiff was a shareholder at the time of the transaction of which he complains or that his share devolved upon him thereafter by operation of law; (2) that the action is not a collusive one to confer jurisdiction on a court of the United States which it would not otherwise have. The complaint shall also allege with particularity the efforts, if any, made by the plaintiff to obtain the action he desires from the directors, and, if necessary, from the shareholders, and the reasons for his failure to obtain the action or for not making the effort. The derivative action may not be maintained if it appears that the plaintiff does not fairly and adequately represent the interests of the shareholders similarly situated in enforcing the right of the corporation. The action shall not be dismissed or compromised without the approval of the court, and notice of the proposed dismissal or compromise shall be given to shareholders in such manner as the court directs.

This rule was designed to provide guidelines for the institution of derivative actions and to prevent the unrestrained use of the suit by minority shareholders[109] and created a procedural threshold which shareholders must pass[110] . It must be noted that these procedural obstacles can represent the same barriers to litigation as do substantive legal restrictions. Hanrahan notes: ‘In jurisdictions where a statutory derivative action is available, including the United States and Canada, it is frequently the case that a plaintiff shareholder will seek to establish that its action is personal rather than derivative, in order to avoid the procedural obstacles created by the statute’[111] .

4.2.1: Special Litigation Committees[112]

The major issue in the United States has been the use of litigation committees to resolve whether or not a matter should proceed. These committees were introduced in the 1970’s[113] whereby the board of directors delegated the decision of whether or not to sue on a corporate wrong to an allegedly independent sub-committee of directors. A variety of approaches have been identified to determine the utility of this committee. One approach suggests that the court will not intervene provided the special litigation committee acts in good faith and the committee is independent[114] . The essence is one of procedural fairness. By contrast, a second avenue considers that not only must the committee be independent and act in good faith but the court is required to exercise its own business judgement in reaching its conclusions[115] . Consideration is given to the substantive merits.

A third approach is the most critical of the special litigation committee and considers that if the board of directors is not independent, then by definition, its decision to have a special litigation committee must also be tainted[116] . The defence created by appointing a special litigation committee to consider the matter has now been codified by a number of jurisdictions[117] .

The first approach was demonstrated in Auerbach v Bennett.[118] where the New York Court of Appeals held that the board had the authority to appoint a committee of disinterested directors to determine if maintenance of the derivative suit was justified. Under this authority, if the elected committee ‘utilise adequate and appropriate investigative procedures, and pursue the investigation in good faith, the committee's determination is shielded from judicial scrutiny’[119] . In effect, the court adopted the business judgment rule to the appointment of a litigation committee. This rule provided that, if commercial decisions are made in good faith and in a reasonable manner, the court will not interfere. The test was essentially procedural in nature. The importance of this approach is its implicit acceptance that directors will act in the corporation’s interest and that they can rely on their business judgement.

This case can be contrasted with the decision of the Delaware Supreme Court in Zapata Corp. v Maldonado[120] . The court accepted the major elements of Auerbach with two amendments: First, the burden of proof was shifted to the corporate defendant, and second, the courts were required to exercise their own business judgment in determining whether the derivative suit should continue. This took the test from that of being procedural to a substantive examination of the merits of the claim.

Typically under the Zapata test, the special litigation committee (often comprised of the disinterested directors) will present evidence to the court (pursuant to a motion to dismiss) that after thorough investigation, the decision was made that the litigation should not proceed. The complainant-shareholder will respond by seeking discovery of how the special litigation committee reached its conclusion. The court will then engage in a limited presentation of the evidence –amounting to an abridged trial[121] : ‘[T]he court's response to the use of litigation committees is grounded in practical reality: Zapata Corp. articulates the fear that committee members will so empathise with the plight of their fellow directors - the defendants - that they will be unable fairly to assess the merits of the suit’[122] .

A third response to litigation committees was adopted by the Supreme Court of Iowa in Miller v Register and Tribune Syndicate, Inc.[123] . The court adopted what has become known as the ‘structural bias’ theory[124] which suggests that if directors are not in a position to control litigation in the first place because of some conflict of interest, those same directors are disqualified from participating in the selection of the litigation committee[125] . Obviously this approach is the ‘most critical of the motives and abilities of special litigation committees’[126] .

Empirical evidence suggests that special litigation committees will routinely decide that action is not in the corporation’s best interests - a conclusion supported by the courts[127] . Demott noted: ‘Surely in eight years some claims worth pursuing were raised derivatively. Indeed, in some reported cases, the committee's recommendation appears to have been at odds with the advice as to the merits of claims received from its counsel’[128] .

Australia has opted for a model whereby the court has discretion to authorise an independent organ[129] to investigate the claim and report as to whether the matter should proceed. Given the criticism levelled at American special litigation committees, criticism can also be levelled in Australia that the statute allows this device under a different moniker. The attitude of the Australian courts will obviously be critical in determining the utility of the independent organ provision – they must be alert to the dangers of delegating or eschewing their function to some other entity[130] . Furthermore, what will be the result if the board of directors appoints a special litigation committee to examine the matter? Ultimately, this may lead to the court having to consider the view of opposing counsel, the considerations of a court appointed investigator and the deliberations of a special litigation committee.

4.3: Comparisons between the jurisdictions

The approach in Australia differs significantly from that taken in the United States of America and Canada. At least since Foss v Harbottle, Anglo-Australian common law has emphasised that the proper plaintiff is the corporation and that the minority shareholder will only have an action as an exception to this dominant principle. Historically, this was not always the case. Before 1843 the right of the minority shareholder to proceed for and on behalf of the corporation was well established and Foss v Harbottle represented a significant restriction on this right. In comparison the emphasis in the United States was on the procedural hurdles that needed to be overcome to allow the minority shareholder the right to bring an action.[131] By contrast, Canada has been historically far more proactive in its development of a ‘bill of remedies’ for the minority shareholder and has sought different ways to resolve the problems faced by this category of member. Australia has sought to follow this direction.

Given the background that Canada and the United States have had in the availability of the derivative action, and the historical basis for its introduction, what we can say is its likely utility in Australia[132] ?

4.4: Evidence as to the utilisation of the derivative action

The available evidence is that the statutory derivative action has been little used in Canada[133] for a variety of reasons. First, derivative litigation by its nature is altruistic – the benefit of any remedy goes to the company. Generally, the shareholder will only benefit indirectly – by the recovery made to the corporate entity. In addition to this, the shareholder will only benefit pro-rata, all other shareholders that are not undertaking the risk of the plaintiff-shareholder get a free ride on the actions of the plaintiff[134] . Having said this, one point of contrast must be noted between the jurisdictions.

In Canada, by legislative direction, an order can be made directing that any amount adjudged payable by a defendant in an action shall be paid, in whole or in part, directly to former and present security holders of the corporation or its subsidiary instead of to the corporation or its subsidiary[135] .A similar provision exists in New Zealand[136] . In the United States of America, this remedy of a payment of damages in favour of present or past shareholders has been described as ‘judicially fashioned’[137] . No express provision exists in Australia for this type of order, though the courts are empowered to make any order that they consider appropriate[138] .

The argument that this type of order may be appropriate in certain circumstances can be drawn from the dissenting judgment of McDermid J. in Abbey Glen Property v Stumborg[139] . In this case the Stumborgs were the directors of a company involved in land speculation in Canada. This company, Terra, subsequently merged with other entities and became known as Abbey Glen Property. They were also associated with a number of other companies, some of which were similarly involved in land dealings. A third party, not interested in transacting with Terra but keen to transact with the Stumborgs, queried their interest in a real estate development. . The Stumborgs went ahead with the transaction and Abbey Glen sought to make them accountable for the profit that they had received. The argument was made that Abbey Glen would receive a windfall if it was successful, having agreed to pay a certain price for the shares that were, at one point, in Terra. This argument was accepted by McDermid J. as there would have been an unjust enrichment if the company was permitted to profit, given that previous shareholders had suffered from the breach of the fiduciary duty. Accordingly, ‘...it is no proper function of a Court of Equity to unjustly enrich a litigant unless there be some public purpose served in so doing’[140] .

The majority judges, (Haddad, Clement JJA) agreed that there was an unexpected windfall but the principle that a person not profit from a fiduciary position was not of such vital importance so the consequences were immaterial[141] . Though a company undertook this action, the issue can be easily stated in the context of the statutory derivative action. If former members of Terra had brought this action, then surely any remedy should flow through to these shareholders – otherwise what incentives have they to bring an action? They will not benefit from any remedy flowing through to the company – they are no longer shareholders. Similarly, the ability to provide a remedy direct to shareholders will not assist where the company has been dissolved.

The decision of Abbey Glen - echoes that of Regal Hastings v Gulliver[142] . In that well known decision, the former directors of Regal Hastings were held liable to account for the profit they had received on the sale of shares in a company which had exploited an opportunity which Regal Hastings was unable to take advantage. Again, if a former shareholder of Regal Hastings had brought the action, should the benefit of any remedy extend to the corporation?

Abbey Glen and Regal Hastings can be compared with the American decision of Home Fire Insurance v Barber[143] where it was held that a corporation could not sue to recover from former controllers for misconduct where the shares had been acquired by new controllers at fair value[144] . A plaintiff must recover on the strength of their own case, not on the weakness of the defendants’[145] . The plaintiff cannot be unjustly enriched.

Transposing these principles back to the Australian conditions, the omission to detail a personal remedy for shareholders should be corrected. As noted by Poole and Roberts in the English context: ‘Although the Law Commission does acknowledge that ‘to maintain a distinction in available relief based solely on the cause of action pleaded may perpetuate the current problems facing litigants in deciding whether to bring a personal or derivative action’, it seems prepared to allow these problems to continue by refusing personal relief in a statutory derivative action’[146] .

Other reasons why the statutory derivative action has been little used in Canada is the availability of the oppression remedy (for which leave is not required) and establishing unfair prejudice may be easier than proving a breach of a corporate right[147] . Having said this, it may be the case that many actions are commenced but few proceed to trial as either the view of management prevails (that the matter should not be litigated) and judicial permission to proceed is denied, or management’s decision not to proceed is overruled. If this latter option occurs, a settlement outside of court is likely, as neither party would want an internal struggle between the majority and minority being aired in public[148] .

Similarly, there is little evidence of the derivative action making a significant impact in the United States despite the availability of contingency fees and the rules governing costs which provide that each side bears their own expenses[149] . It has been suggested[150] that the result of the special litigation process is that most corporate litigation is decided in the pre-trial phase. The special litigation committee, which will most likely consist of the disinterested directors, will pursue a motion to dismiss and if the court agrees, the litigation will be at an end. If however, the court rejects the determination of the special litigation committee, the directors will typically settle the matter. Indeed, it has been suggested that the derivative suit in the United States has been producing only trivial benefits to shareholders[151] and that it is time to administer the last rites to it[152] .

Translated to Australian conditions, the evidence shows that shareholder litigation is rare. A survey completed of the period from September 1983 to March 1994 indicated that there were only 93 reported judgments in which litigation had been commenced by a shareholder and of these, 25 were under the oppression section. By way of comparison, for the year ending 30 June 1994, the regulator had commenced 107 criminal prosecutions for breaches of directors’ duties, 184 other criminal prosecutions and 79 civil matters[153] . This empirical evidence and the North American experience indicate that the statutory derivative action may have little practical utility.

Part 5: The Future for the Statutory Derivative Action

All the available evidence suggests that the statutory derivative action will have little impact on shareholder litigation in Australia. Indeed, the other jurisdictions have demonstrated that despite almost universal support amongst law reform bodies, its practical role has been negligible. Perhaps the problem lies in the failure to see that (arguably) the process that should have been undertaken in reform was an examination of the fundamental tenets of corporate law. Presently there exists conflict[154] between the objective of additional monitoring of managerial conduct as against ensuring that directors are accorded greater autonomy in their decision-making processes[155] .

On one hand, this conflict has been expressed in terms of a corporate law model based on minimum standards for shareholders, detailing a number of significant procedures that are designed to protect shareholders. It has been described in the following terms:

[S]ubstantive regulation may be the best means to restore integrity to and belief in the investment process. Statutory do’s and don’ts directed against real, as opposed to hypothetical, abuse may best curb conduct by corporate managers or owners that has inimical effects on shareholders’ and investors’ perceptions... Flexibility for corporate managers may be entirely appropriate in some, but not across all, areas of corporation law[156] .

On the other hand, there is the corporate law model which at its foundation is said to provide the directors a reasonably free hand in the management of the business:

As a general rule [corporations law] should not preclude private parties from structuring their affairs in whatever manner they choose any more than the government should interfere with other types of contractual arrangements. Enabling statutes such as Delaware’s corporation law, as interpreted by judicial decisions that give management maximum flexibility in running the corporation’s affairs are based on precisely this principle of freedom to contract[157] .

In Australia, it could be argued that the law reform bodies have never sought to articulate and justify the particular corporate law model[158] that is being used. Instead, we have seen a political compromise – a balance based on pragmatism, rather than principle. Historically, this debate is not as apparent – either the shareholder was given a remedy (Hichens v Congreve, Adley v Whitstable, Preston v Grand Colliery, Hawes v City of Oakland) or the directors were had the independence to make business decisions unimpeded by threat of curial second-guessing (Foss v Harbottle, Mozley v Alston). If the need is to achieve greater accountability of directors, and the statutory derivative action is part of this armoury, how does this fit with the insulation of liability given to the managers by the introduction (at the same time as the statutory derivative action) of the business judgement rule[159] ?

This tension needs to be reflected upon and examined in the context of some of the fundamental precepts within corporate law – these including:

Separate legal entity status[160] ;
Majority rule[161] ;
Directors having fiduciary duties to the corporate entity and not to shareholders[162] ;
Courts reluctant to involve themselves in the decision making processes of companies[163] ;
The special nature of the s140 contract[164] ; and
That corporate management resides with the board[165] .

If these precepts are examined, and we were to say, for example, that the directors owed a duty to shareholders[166] or that majority shareholders owed a duty to the minority[167] , then the need for legislative responses such as the statutory derivative action would arguably not exist. Similarly, in an historical context, the role of the regulator was not applicable whereas today that role is critical. Given the importance of the Australian Securities and Investment Commission and the lack of apparent contemporary incentive for shareholder activism, is there a different solution than the statutory derivative action?

Perhaps the underlying legacy of an historical examination of the rule in Foss v Harbottle is that it leads to a questioning of the new basis of corporations law. As explained by Sugarman: ‘So the problem for company lawyers is to how to create a new synthesis, possibly drawing upon the best of the classical model, the modern model (regulatory, state-centred) and the late modern model (hybrid, fragmented, de-centred, contractual, equitable) of corporate law, while also fashioning a more appropriate conceptual framework for the 21st century’.[168]

The need for this new synthesis is borne out by the historical examination of the rule in Foss v Harbottle. English and American jurisdictions both saw a need to respond to managerial abuses. The response in the United States of America was to set the pre-conditions that allowed minority shareholders to bring an action. In England, and subsequently Australia, it was to start from the premise of majority rule and then to prescribe restrictive exceptions to the principle. The marked difference between Australia and the United States lies in the fact that Australia began from the principle of excluding claims whereas the United States set down the criteria for eligibility[169] . In both cases the judiciary responded to the need facing that particular society –the manner in which the corporation was perceived.

The criticism that can be made of the introduction of the statutory derivative action in Australia in 2002 is the lack of evidence demonstrating any real need for it. As indicated, shareholder litigation is rare in Australia as the presence of a strong regulator provides the main form of protection against corporate abuses. Given this, have we seen statutory amendment to fix a problem that in practice did not exist? The critical issue for the future is how to measure the utility of the statutory derivative action and in answering this, the criticism could be made that a solution has been found to a problem for which there is arguably, little, if any demonstrated evidence. Many of the solutions are simply a political response to a perceived problem, rather than an informed reply to a problem that is present[170] .

If there is a lack of litigated decisions utilising the statutory derivative action does this lead to the conclusion that it has been statutory amendment for amendments sake? Alternatively, can we say that the introduction of the remedy will have an important deterrent irrespective of the level of actual utilisation by the minority shareholder? The rule in Foss v Harbottle was introduced in a time when the law strongly saw the corporation as a creature of private law – that incorporation was a right, rather than a privilege[171] and that judicial supervision of corporations was not to be permitted[172] . This view has obviously changed and there is now the important role of the state regulator to be acknowledged (thus bringing in aspects of public law), legitimate expectations are relevant considerations in a court’s decision making process[173] and the proprietary interests of shareholders are still fundamental[174] . Given this change in recognition of the corporate form[175] we need to consider to whom directors owe their duties[176] , whether the separate legal entity concept can be sustained[177] and what is meant by the corporation and its best interests[178] .

Furthermore, what does the derivative action accomplish – is it to deter corporate malfeasance or to provide some form of compensation[179] ? Upon answering these questions and others, we will be in a position to determine whether the statutory derivative action will serve the contemporary needs of the Australian shareholder[180] . History shows us that these arguments were not previously apparent but today, perhaps sadly, the complexity of modern social conditions dictates that these arguments need to be at the forefront of any reform.


[*] Senior Lecturer in Law, University of Tasmania. Lynden.Griggs@utas.edu.au. My appreciation for the comments of an anonymous referee.

[1] Likewise, Canada, New Zealand, South Africa and Japan have introduced statutory models. See B. Cheffins, ‘ Reforming the Derivative Action: The Canadian Experience and British Prospects’ , Cambridge Conference on Shareholders Rights and Remedies (April 1997) at 7-8; M. Berkahn, ‘ The Derivative Action in Australia and New Zealand: Will the Statutory Provisions improve Shareholders’ Enforcement Rights’ [1998] BondLawRw 5; (1998) 10 Bond LR 74; MD West, ‘ The Pricing of Shareholder Derivative Actions in Japan and the United States’ (1994) 88 North Western University Law Review 1436; H. Oda, ‘ Derivative Actions in Japan’ (1995) 48 Current Legal Problems 161.

[2] M. Mathews, ‘The Shareholder Derivative Suit in Arkansas’, (1999) 52 Arkansas Law Review 353 at 353.

[3] Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204 at 210.

[4] D. R. Fischel & M. Bradley, ‘The Role of Liability Rules and the Derivative Suit in Corporate Law: A Theoretical and Empirical Analysis’ (1986) 71 Cornell L. Rev 261; R. Romano, ‘The Shareholder Suit: Litigation without Foundation’, (1991) 7 JL Econ & Org 55. Contrast an earlier study: TM Jones, ‘An Empirical Examination of the Resolution of Shareholder derivative and Class Action Lawsuits’ (1980) 60 BUL Rev 542.

[5] Ross v Bernhard, [1970] USSC 26; 396 US 531 at 538 (1970).

[6] Mathews, n 2 at 353. ‘The derivative action impinges on the managerial freedom of directors’, Pogostin v Rice Del. Supr., 480 A.2d 619 at 624 (1984).

[7] Mathews, n 2 at 354:

[8] Supreme Court of Wisconsin in Einhorn v Culea & Ors [2000] WI 65 at para. 17.

[9] J. C. Coffee and D. R. Schwartz, ‘The Survival of the Derivative Suit: An Evaluation and a Proposal for Legislative Reform’, (1981) 81 Columbia Law Review 261 at 302.

[10] Renfro v FDIC, 773 F.2d 657 (1985), at 658; Einhorn v Culea & Ors [2000] WI 65 at para. 17.

[11] K. Wedderburn, ‘Shareholder Rights and the Rule in Foss v Harbottle’, [1957] CLJ 194; [1958] CLJ 93; [1957] at 195.

[12] [1843] EngR 478; (1843) 2 Ha 461; 67 ER 189.

[13] (1847) 1 Ph. 790.

[14] Wedderburn, n 11 at 195

[15] M. A. Maloney, ‘Whither the Statutory Derivative Action’, [1986] 64 The Canadian Bar Review 308 at 312.

[16] Wedderburn, n 11.

[17] La Cie de Mayville v Whitley [1896] 1 Ch 788

[18] MacDougall v Gardiner (No. 2) (1875) 1 Ch D 13.

[19] Bagshaw v E. Union Ry. Co. [1849] EngR 430; (1849) 7 Hare 114.

[20] Maloney, n 15 at 310-11.

[21] Edwards v Halliwell [1950] 2 All ER 1064.

[22] Edwards v Halliwell [1950] 2 All ER 1064; Australian Agricultural Co v Oatmont Pty Ltd (1992) 8 ACSR 255; 106 FLR 314.

[23] Baillie v Oriental Telephone and Electric Co Ltd [1915] 1 Ch 503.

[24] Residues Treatment & Trading Co Ltd v Southern Resources Ltd (1988) 6 ACLC 1160.

[25] Ngurli v McCann [1953] HCA 39; (1953) 90 CLR 425 at 447.

[26] n21 at 1067.

[27] See Aloridge Pty Ltd (prov liq apptd) v West Australian Gem Explorers Pty Ltd (prov liq apptd) [1995] FCA 1033; (1995) 15 ACSR 645; Mesenberg v Cord Industrial Recruiters Pty Ltd (1996) 19 ACSR 483 at 487

[28] Controversy still exists as to whether this was an actual exception or just the theoretical basis for the other exceptions: Biala Pty Ltd v Mallina Holdings Ltd (No 2) [1993] FCA 455; (1993) 11 ACSR 785; 11 ACLC 1,082; Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204; Eromanga Hydrocarbons NL v Australia Mining NL (1988) 14 ACLR 486; Scarel Pty Ltd v City Loan & Credit Corp Pty Ltd (1988) 17 FCR 344; 79 ALR 483.

[29] Maloney, n 15 at 311.

[30] K. Vere-Stevens, ‘Should We Toss Foss: Toward an Australian Statutory Derivative Action’ , (1997) 25 ABLR 127; I. Ramsay, ‘ Corporate Governance, Shareholder Litigation and the Prospects for a Statutory Derivative Action’ [1992] UNSWLawJl 7; , (1992) 15 UNSWLJ 149; R. Baxt, ‘ The Rule in Foss v Harbottle Rears its Ugly Head: The Case for a Statutory Derivative Action Gathers Strength’ , (1996) 14 Companies and Securities Law Journal 174; J. Kluver, ‘ Derivative Actions and the Rule in Foss v Harbottle: Do We Need a Statutory Remedy?’ , (1993) 11 Companies and Securities Law Journal 7.

[31] On defects generally see R. Reed, ‘Derivative Claims: The Application for Permission to Continue’, (2000) 21 The Company Lawyer 156; A. Arora, ‘A Review of Minority Shareholder Protection’, (2000) 21 The Company Lawyer 37 at 37.

[32] P. von Nessen, ‘The Americanization of Australian Corporate Law’, (1999) 26 Syracuse Journal of International Law and Commerce 239 at 262.

[33] It can be noted that the statutory derivative action is largely replicated throughout the corporate laws of Canada (for example, Canadian Business Corporations Act 1975), New Zealand (Companies Act 1993, ss165-168), Japan (Articles 267-8 of the Commercial Code of Japan) and South Africa (Companies Act 1973, ss266-8)

[34] B. Welling, Corporate Law in Canada – The Governing Principles, 2nd edition, Butterworths, Toronto, 1991 at 544-546.

[35] W.S. Holdsworth, A History of English Law, Volume IX, Sweet and Maxwell, 1926 at p.58-59.

[36] Holdsworth, n35, Volume II at 401.

[37] Holdsworth, n36, Vol IX at 46.

[38] [1725] EngR 27; (1725) 2 P.Wms 325; 24 E.R. 750.

[39] [1742] EngR 111; (1742) 2 Atk 400; 26 E.R. 642.

[40] [1742] EngR 111; 26 E.R. 642 at 645.

[41] [1810] EngR 515; (1810) 17 Ves Jun 315, 34 E.R. 122.

[42] [1810] EngR 515; 34 E.R. 122 at 126.

[43] (1828) 4 Russ & M. 562, 38 E.R. 917.

[44] 38 E.R. at 922.

[45] (1841) 4 My & Cr. 619, 41 E.R. 238.

[46] 41 E.R. at 244.

[47] [1840] EngR 1063; (1840) 11 Sim 327, 59 E.R. 900.

[48] 59 E.R. at 907.

[49] B.S. Prunty, ‘The Shareholders' Derivative Suit: Notes on its Derivation’ (1957) 32 New York University Law Review 980 at 983.

[50] n12.

[51] R. C. Clark, ‘The Four Stages of Capitalism: Reflections on Investment Management Treatises’, (1981) 94 Harvard Law Review 561 at 561.

[52] For example the Joint Stock Companies Registration and Regulation Act 1844 (UK); Limited Liability Act 1855 (UK); Joint Stock Companies Act 1856 (UK), Companies Act 1862 (UK).

[53] S. P. Ville, ‘ The Salomon Judgment and the Development of British Business in the Nineteenth Century’ , Conference paper delivered at 100 years of Salomon – A Reassessment, Australian National University, 26 September, 1997.

[54] (1843) 67 E.R. at 203.

[55] n56.

[56] Prunty, n49 at 983.

[57] [1843] EngR 478; (1843) 2 Ha 461 at 492.

[58] Prunty, n49 at 983.

[59] [1843] EngR 478; (1843) 2 Ha 461; 67 E.R. 189 at 202.

[60] D. A. Demott, ‘ Shareholder Litigation in Australia and the United States: Common Problems, Uncommon Solutions’ [1987] SydLawRw 5; , (1987) 11 Sydney Law Review 259 at 260

[61] P. Hanrahan, ‘Distinguishing Corporate and Personal Claims in Australian Company Litigation’, (1997) 15 CSLJ 21 where the author considers that an expansive view has been taken of the types of wrongs that can create a personal right of action in shareholders.

[62] P. Lipton and A. Herzberg, Understanding Company Law, 8th edition, LBC Information Services, Sydney, 1998 at 416; J. Poole and P. Roberts, ‘ Shareholder Remedies – Corporate Wrongs and the Derivative Action’ , [1999] JBL 99 at 113. The American courts have also had similar concerns. See for example In re Rexene Corp Shareholders Litig, 17 Del J. Corp L.342 at 348 (1991); Abelow v Symonds, 38 Del Ch 572 (1959).

[63] Phoenix Airline Services Inc v Metro Airlines Inc, 397 SE 2d 699 (1990); Kramer v Western Pacific Industries, 546 A.2d 348 (1988); Biala Pty Ltd v Mallina Holdings Ltd (No 2) (1993) 11 ACLC 1082.

[64] Adair v Wozniak, 492 NE 2d 426 (1986); Wallensteiner v Moir [1975] QB 373.

[65] Bagdon v Bridgestone Firestone Inc, [1990] USCA7 1017; 916 F.2d 379 at 383 (1990).

[66] Peck v General Motors Corp, 894 f.2d 844 at 847 (1990).

[67] Residues Treatment & Trading Co Ltd v Southern Resources Ltd (1988) 6 ACLC 1160.

[68] Efstathis v Greek Orthodox Community of St. George (1988) 6 ACLC 706.

[69] Reifsnyder v Pittsburgh Outdoor Advertising Co, 173 A.2d 319 (1961); Lipton v News Int’l Plc, 514 A.2d 1075 at 1078-79 (1986).

[70] TGX Corp. v Simmons No. 87-5398, 1989 US Dist Lexis 7291.

[71] Section 236 Corporations Act 2001 (Cth).

[72] Residues Treatment and Trading Co Ltd v Southern Resources Ltd (1988) 51 SASR 177.

[73] Poole & Roberts, n62 at 111-112.

[74] Hanrahan, n61 at 42.

[75] S. M. Beck, ‘The Shareholder's Derivative Action’ (1974) 52 Can. B.R. 159 at 169.

[76] [1972] 3 O.R. 688; 33 D.L.R. (3d) 156 (Ont. C.A.).

[77] Beck, n75 at 181.

[78] (1973) 32 DLR (3d) 129 (Ont HC); leave to appeal granted (1973) 34 DLR (3d) 13; affd (1975) 54 DLR (3d) 672 (Ont CA); D. Prentice, ‘Goldex Mines v Revill: Some Reflections on the Statutory Derivative Action’, (1976) 15 UWOL Rev 225.

[79] In Canada the right to bring a common law derivative action has been excluded by the legislation introducing the statutory derivative action: Shield Development Company Limited v Snyder [1976] 3 W.W.R. 44 (B.C.S.C) The distinction between personal and derivative actions also arises with the oppression remedy: J.G. MacIntosh, ‘The Oppression Remedy: Personal or Derivative?’ (1991) 70 Can B.R. 29. In the Australian context: D. McDonough, ‘Proposed New Statutory Derivative Action – Does it go far enough?’ [1996] BondLawRw 3; (1996) 8 Bond LR 47 at 61:

[80] D. Sugarman, ‘Reconceptualising Company Law: Reflections on the Law Commission’s Consultation Paper on Shareholder Remedies’, (1997) 18 The Company Lawyer 274 at 275-6.

[81] M. Baxter, ‘The Derivative Action Under the Ontario Business Corporations Act: A Review of Section 97’ (1982) 27 McGill LJ 453; J. MacIntosh, ‘The Oppression Remedy: Personal or Derivative’ (1991) 37 Canadian Bar Review 29.

[82] P. Anisman, ‘Majority-Minority Relations in Canadian Corporation Law: An Overview’ (1986-1987) 12 Can. Bus.L.J. 473 at 474.

[83] E. E. Palmer E.E. & B. L. Welling,. Canadian Company Law - Cases, Notes and Materials, 3rd. ed. 1986, Butterworths, Toronto and Vancouver at 7-42.

[84] Interim Report of the Select Committee on Company Law, Ontario, 1967 (hereafter referred to as the Lawrence Committee).

[85] n84 at 60.

[86] n84 at 62.

[87] Proposals for a New Business Corporation Law for Canada, Ottawa, 1971 (hereafter referred to as the Dickerson Committee).

[88] n87 at 161.

[89] n87 at 161.

[90] n87 at 162.

[91] n87 at 162.

[92] B. Welling, Corporate Law in Canada: The Governing Principles (2nd ed.), 1991, Butterworths at 525-526.

[93] A. F. Conard, ‘Winnowing Derivative Suits Through Attorney Fees’ (1984) 47 Law and Contemporary Problems 269 at 269.

[94] D. Peterson, Shareholder Remedies in Canada (1989), Butterworths, para. 17.1.

[95] J. Kluver, ‘Derivative Actions and the Rule in Foss v Harbottle: Do We Need a Statutory Remedy?’, (1993) Companies and Securities Law Journal 7 at 12.

[96] The Laws of Australia, ‘ Shareholders’ Actions Against Company Controllers’ , Chapter 5, Part B (The Derivative Suit), Division 6 (Other Jurisdictions) at para. 267.

[97] 3 Paige Ch. 222 (N.Y. 1832).

[98] Prunty, n49 at 986.

[99] Prunty, n49 at 987, the genesis of the idea of a trust relationship can actually be derived to an earlier decision of Attorney General v Utica Ins. Co, 2 Johns. Ch. 371 (N.Y. 1817) at 389-90: ‘ but, at the same time, I admit, that the persons who, from time to time, exercise the corporate powers, may, in their character of trustees, be accountable to this court for a fraudulent breach of trust; and to this plain and ordinary head of equity, the jurisdiction of this court over corporations ought to be confined.’

[100] 5 Ohio 162 (1831).

[101] 6 Johns. Ch. 160 (NY 1822).

[102] 2 Paige Ch. 438 (NY 1831).

[103] [1855] USSC 16; 59 US 331 (1855).

[104] Prunty, above n49 at 992.

[105] n12.

[106] [1881] USSC 79; 104 U.S. 450 (1882).

[107] Other relevant cases include Corbus v Alaska Treadwell Gold Mining Co, [1903] USSC 16; 187 US 455 (1903) and United Copper Sec. Co. v Amalgamated Copper Co, [1917] USSC 117; 244 US 261 (1917).

[108] There are some differences in the various states but there is basic similarity with the federal procedure: O. C. Shreiner, ‘The Shareholders Derivative Action: A Comparative Study of Procedures’, (1979) 96 South African Law Journal 203 at 221.

[109] Daily Income Fund Inc. v Fox, [1984] USSC 15; 464 US 523 at 530 (1984).

[110] Brown v Ferro Corp, [1985] USCA6 780; 763 F.2d 798 at 802 (1985).

[111] Hanrahan, n61 at 29.

[112] See generally on this topic the articles cited in n 118 as well as the following: G. Varallo, W. M. McErlean & R. C. Silberglied, ‘ From Kahn to Carlton: Recent Developments in Special Committee Practice’ , (1998) 53 Business Lawyer 397 C. W. Murdock, ‘ Corporate Governance – The Role of Special Litigation Committees’ , (1993) 68 Wash. L. Rev 79; M. Shevach, ‘ Comment, Deciding Who Should Decide to Dismiss Derivative Suits’ , (1990) 39 Emory L.J. 937 ; J. S. Solovy, B. Levenstam & D. S. Goldman, ‘ The Role of the Special Litigation Committee in Shareholder Derivative Litigation’ , (1990) 25 Torts and Ins L.J. 864; D. J. Block & H. Prussin, ‘ Termination of Derivative Suits Against Directors on Business Judgement Grounds: From Zapata to Aronson (1984) 39 Business Lawyer 1503; J. Cox, ‘ Searching for the Corporations Voice in a Derivative Suit Litigation: A Critique of Zapata and the ALI Project’ , [1982] Duke LJ 959.

[113] Lewis v Anderson, [1980] USCA9 369; 615 F. 2d 778 (9th Circuit 1979).

[114] Auerbach v Bennett, 419 NYS 2d 920 (1979); 393 NE2d 994; Black v NuAire Inc, 426 NW 2d 203 (1988); Skoglund v Brady, 541 NW 2d 17 (1995).

[115] Exemplified by Zapata Corp v Maldanado, 430 A.2d 779 (1981); Joy v North, [1982] USCA2 975; 692 F.2d 880 (1982); Abella v Universal Leaf Tobacco Co, 546 F. Supp 795 (1982); Watts v Des Moines Register and Tribune, 525 F. Supp 1311 (1981); Strougo v Padegs, 1 F. Supp 2d 276 (1998); Kaplan v Wyatt, 499 A. 2d 1184 (1985); In re PSE&G Shareholder Lit., 315 NJ Super 323 (1998).

[116] Houle v Low, 556 NE 2d 51 (1990); Miller v Register and Tribune Syndicate Inc., 336 NW 2d 709 (1983); GW Dent, ‘The Power of Directors to Terminate Shareholder Litigation: The Death of the Derivative Suit?’ (1980) 75 NW UL Rev 96.

[117] Alaska Stat. Ann. 10.06.435;Ariz. Rev Stat. Ann. 10-3634; Conn. Gen. Stat. Ann. 33-724; Fla. Stat. Ann. 607.07401; Idaho Code Ann. 30-1-744; Me. Rev Stat. Ann. Tit. 13-A, 632; Minn Stat. Ann. 302A.241; Miss. Code Ann. 79-4-7.44; Mont. Code Ann. 35-1-545; Neb. Rev Stat. Ann. 21-2074; NH Stat. Ann. 293-A:&.44; NC Stat. Ann. 180.0744; Tex. Bus. Code Ann. Art 5.14; VA Code Ann. 13.1-672.4; Wis Stat. Ann. 180.0744.

[118] 419 N.Y.S. 2d 920 (1979); In Alford v Shaw N.C., 349 S.E. 2d 41 (1986) the Supreme Court of North Carolina adopted Auerbach, but said, that if the independence of the directors is established as well as the investigation being deemed to be reasonable, the director's good faith will be presumed in the absence of evidence to the contrary. The Auerbach test is probably the most widely adopted: Strougo v Padys, 27 F. Supp. 2d 442 (1998); In re Oracle Sec. Litig., 852 F. Supp. 1437 (1994); Johnson v Hui, 811 F. Supp. 479 (1991); Allied Ready Mix Company Inc. ex rel Mattingly v Allen, 994 SW 2d 4 (1998); Millsap v American Family Corporation, 208 GA. App. 230 (1993); J. L. Rudolph & G. A. del Puerto ‘ The Special Litigation Committee: Origin, Development and Adoption under Massachusetts Law’ (1998) 83 Mass. L. Rev 47; C. B. Swanson, ‘ Juggling Shareholder Rights and Strike Suits in Derivative Litigation: The ALI Drops the Ball’ (1993)77 Minn. L. Rev 1339; J. C. Coffee Jr. & D. E. Schwartz, ‘ The Survival of the Derivative Suit: An Evaluation and a Proposal for Legislative Reform’ , (1981) 81 Colum. L. Rev 261.

[119] K.S. Williams, ‘Derivative Actions’, (1987) 22 Wake Forest Law Review 127 at 132.

[120] 430 A.2d 779 (Del. 1981). The case has been much criticised: Block & Prussin, ‘The Business Judgment Rule and Shareholder Derivative Actions: Viva Zapata’ (1981) 37 Bus Law 27; cf. Duesenberg, ‘The Business Judgment Rule and Shareholder Derivative Suits: A View from the Inside’, (1982) 60 Wash USQ 311.

[121] The practical details of the process were supplied by e-mail from Professor Kellman, De Paul University, United States of America – copy held with author.

[122] D. A. Demott, ‘Shareholder Litigation in Australia and the United States: Common Problems, Uncommon Solutions’[1987] SydLawRw 5; , (1987) 11 Sydney Law Review 259 at 276.

[123] 336 N.W. 2d 709 (Iowa 1983).

[124] Williams, n119 at p.133.

[125] Note the disagreement with this approach in the recent decision of Einhorn v Culea & Ors [2000] WI 65 at para 44: ‘A court should not presuppose that a special litigation committee is inherently biased. Although members of a special litigation committee may have experiences similar to those of the defendant directors and serve with them on the board of directors, the legislature has declared that independent members of a special litigation committee are capable of rendering an independent decision.’

[126] Williams, n119 at 133.

[127] Abramowitz v Posner, [1982] USCA2 125; 672 F2d 1025; Gaines v Haughton, [1981] USCA9 1005; 645 F2d 761; Maldonado v Flynn, 485 F Supp 274; Stein v Bailey, 531 F Supp 684; Evangelist v Fidelity Management & Research Co, 554 F Supp 87.

[128] n123 at 277.

[129] D. McDonough, ‘Proposed New Statutory Derivative Action – Does it go far enough?’ [1996] BondLawRw 3; (1996) 8 Bond LR 47 at 57. This provision bears some similarity to the position that applies in South Africa, where the court can appoint a curator ad litem.

[130] Vere Stevens, n30 at 138-9; A. J. Boyle, ‘The New Derivative Action’ (1997) 18 The Company Lawyer 256 at 258.

[131] K. Vere Stevens, n30 at 129.

[132] At the time of writing only four decisions on the new provisions have been reported: Karam v ANZ Banking Group Limited NSW Supreme Court, 28 June 2000 per Santow J. BC200003593; RTP Holdings Pty Ltd v Roberts SA Supreme Court, 8 November 2000 per Lander J. BC200007153; Keyrate Pty Ltd v Hamarc Pty Ltd NSW Supreme Court, 19 June 2001 per Santow J. BC20013159; Talisman Technologies Inc v Qld Electronic Switching PL [2001] QSC 324, 7 September 2001 per Mullins J.

[133] J. D. Wilson, ‘Attorney Fees and the Decision to Commence Litigation: Analysis, Comparison and an Application to the Shareholders’ Derivative Action’ (1985) 5 Windsor Yearbook of Access to Justice 142 at 171; M. S. Baxter, ‘The Derivative Action Under the Ontario Business Corporations Act: A Review of Section 97’, (1982) 27 McGill LJ 452 at 475.

[134] Ramsay, n30 at 163

[135] Section240(c) of the Canadian Business Corporations Act 1975.

[136] Section 167 of the Companies Act 1993 (NZ).

[137] Abbey Glen Property Corp v Stumborg (1978) 85 DLR (3d) 35 at 52 quoting from the writing of Ziegel, Studies in Canadian Company Law (1967) at 598.

[138] Section 241 of the Corporations Act 2001 (Cth.).

[139] (1978) 85 DLR (3d) 35.

[140] n141 at 54.

[141] n141 at 63.

[142] [1967] 2 AC 134.

[143] 93 NW 1024 (1903).

[144] Bangor Punta Operations Inc v Bangor & Aroostock RR, [1974] USSC 134; 417 US 703 (1974); National Union Elec Corp v Matsushita Elec Corp., 498 F. Supp (1980).

[145] (1903) 93 NW 1024 at 1035.

[146] n62 at 123.

[147] B. Cheffins and J. Dine ‘Shareholder Remedies: Lessons from Canada’ (1992) 13 Company Lawyer 89.

[148] The author contacted Professor Bruce Welling of the University of Western Ontario who provided some background information on the utilisation of the statutory derivative action in Canada. Much appreciation is expressed for this assistance.

[149] I. Ramsay, ‘Enforcement of Corporate Rights and Duties by Shareholders and the Australian Securities Commission: Evidence and Analysis’ (1995) 23 Australian Business Law Review 174; P. Fitzsimons, ‘The Companies Act 1993: a new approach to shareholder litigation in New Zealand’ (1997) 18 The Company Lawyer 306 at 306-7.

[150] E-mail correspondence with Professor Kellman, DePaul University, United States of America – copy held with author.

[151] R. Romano, ‘The Shareholder Suit: Litigation without Foundation’, (1991) 7 J.L.Econ. & Org. 55, at 84-85.

[152] M. Dooley, ‘The Role of Corporate Litigation in the Twenty-First Century’ (2000) 25 Delaware Journal of Corporate Law 131 at 142.

[153] Ramsay, n149.

[154] Maloney, n15 at 316. On the business judgment rule see A. Greenhow, ‘The Statutory Business Judgment Rule: Putting the Wind into Directors’ Sails’[1999] BondLawRw 3; , (1999) 11 Bond LR 33.

[155] Another principle evident in corporate law reform also appears to be globalisation. For example the Final Report of the Company & Securities Advisory Committee Shareholder Participation in the Modern Listed Public Company, June 2000 extensively canvasses the requirements of overseas jurisdictions in formulating its recommendations. The Committee also consulted with Professor Theodor Baums, Johann Wolfgang Goethe-Universe, Frankfurt am Main, Germany & Professor Eddy Wymeersch, Universiteit Gent, Belgium.

[156] D. Branson, ‘Countertrends in Corporation Law: Model Business Corporation Act Revision, British Company Law Reform and Principles of Corporate Governance and Structure’ (1983) 68 Minn L. Rev 53 at 115.

[157] D. Fischel, ‘The Race to the Bottom Revisited: Reflections on Recent Developments in Delaware’s Corporation Law’ (1981) 76 NW U L Rev 913 at 944.

[158] For a discussion of the two models outlined see K. G. Ottenbreit & J. E. Walker, ‘Learning from the Delaware Experience: A Comparison of the Canada Business Corporations Act and the Delaware General Corporation Law’ (1998) 29 Canadian Business Law Journal 364.

[159] Section 180(2) of the Corporations Act 2001 (Cth.); J. Bird, and J. Hill, ‘Regulatory Rooms in Australian Corporate Law’ (1999) 25 Brooklyn Journal of International Law 555 at 588.

[160] Salomon v A Salomon & Co. Ltd [1896] UKHL 1; [1897] AC 22.

[161] Mozley v Alston (1847) 1 Ph 790.

[162] Percival v Wright [1902] 2 Ch 421.

[163] Wayde v NSW Rugby League Ltd. (1984) 9 ACLR 349.

[164] Hickman v Kent or Romney Marsh Breeders’ Association [1915] 1 Ch 881.

[165] Automatic Self-Cleansing Filter Syndicate v Cuninghame [1906] 2 Ch 34

[166] Glavancics v Brunninghausen (1996) 14 ACLC 345.

[167] Donahue v Rodd Electrotype Co. of New England Inc, 367 Mass. 578, 328 N.E.2d 505 (1975); Wilkes v Springside Nursing Home Inc., 370 Mass. 842, 353 N.E.2d 657 (1976).

[168] Sugarman, n80 at 279-280.

[169] D. A. Demott, ‘Shareholder Litigation in Australia and the United States: Common Problems, Uncommon Solutions’ [1987] SydLawRw 5; (1987) 11 Sydney Law Review 259.

[170] R. McQueen, ‘Company Law as Imperialism’ (1995) 5 AJCL Lexis 8 at 76.

[171] Sugarman, n80 at 278-9.

[172] Salomon v Salomon & Co Ltd [1896] UKHL 1; [1897] AC 22.

[173] Ebrahimi v Westbourne Galleries [1973] AC 360.

[174] Gambotto v WCP Ltd [1995] HCA 12; (1995) 182 CLR 432.

[175] Arguably, this evaluation of the corporate form began with the challenge by A. A. Berle and G. C. Means, The Modern Corporation and Private Property (1932). See also A. A. Berle, ‘Modern Functions of the Corporate System’ (1962) 62 Columbia Law Review 433.

[176] The High Court has recently confirmed that directors owe no duty to creditors: Spies v The Queen [2000] HCA 43, High Court of Australia, 3 August 2000.

[177] I. Ramsay, ‘Allocating Liability in Corporate Groups: An Australian Perspective’, (1999) 13 Connecticut Journal of International Law 329.

[178] R. Langton and L. Trotman, ‘Defining ‘the Best Interests of the Corporation’: Some Australian Reform Proposals’ (1999) 3 FJLR 163.

[179] J. C. Coffee and D. E. Schwartz, ‘The Survival of the Derivative Suit: An Evaluation and a Proposal for Legislative Reform’ (1981) 81 Columbia Law Review 261 at 302.

[180] McDonough, n129 at 63: ‘ A better approach would be to enquire into and identify with some precision the limits that should be placed on the control that may be exercised by shareholders over directors and management – in other words identifying the means for monitoring the actions of management. That is the central issue.’ Contrast the comments of M. Berkahn, ‘The Derivative Action in Australia and New Zealand: Will the Statutory Provisions improve Shareholders’ Enforcement Rights?’ [1998] BondLawRw 5; (1998) 10 Bond LR 74 at 75: [T] he introduction of the statutory derivative action will probably not in itself serve to place significantly greater enforcement power in the hands of minority shareholders. What is had the potential to do, however, is add certainty to the law, in the sense that it specifies much more clearly and logically the situations in which an aggrieved shareholder may pursue a remedy for a wrong done to the company.’


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