Research On Double Derivative Actions

The protection of minority shareholders is one of the key features of an effectivecorporate governance regime. Generally speaking, shareholders’ remedies aredominated by the rule in Foss v Harbottle, and as widely accepted, the rule in Foss vHarbottle has certain practical advantages. However, difficulties arise where amajority of the directors are themselves the wrongdoers, because the board controlledby them, is unlikely to initiate proceedings against those wrongdoers. Suchcircumstance is the rational behind the derivative actions, where a wrong done to thecompany amounts to fraud on the minority and the wrongdoers are themselves incontrol of the company and shareholders may bring a derivative action in the name ofthe company to seek redress for the company. It is obvious that the corporatestructures are very different from the days in which derivative actions were firstdevised. It is modern tendency for the companies to have subsidiaries and associatedundertakings. Large companies particular public companies often choose to conducttheir affairs through a multiplicity of subsidiaries. In such corporate groups, if therequisite elements to establish a derivative action are satisfied, a holding company asa direct shareholder of the wronged company is entitled to bring a derivative action.However, if the holding company is also controlled by the same wrongdoers as thesubsidiary, it would preclude both the holding company and the wronged companyfrom taking actions against the wrongdoers. This gives rise to the controversialquestion of whether a shareholder in a shareholding company can bring a derivative action when a wrong has been done to a subsidiary of associated company within thegroup. This article examines whether a double derivative actions should be permittedand also gives a detail discussion regarding its fundamental theory and proceedings infour chapters.Chapter I: Overview of double derivative actions, including its definition,historic development and characters. Double Derivative Actions refer to a shareholderin a shareholding company brings a derivative actions when a wrong has been done toa subsidiary of the shareholding company. Chapter I give a brief introduction ofdouble derivative actions’ historic development. By comparison with shareholderdirect suit and single derivative action, several key features of double derivativeactions have been summarized. Subject to the background of rapid development ofM&A transaction and reorganization transaction, it may needed to establish doublederivative actions in China and a reasonable way is by judicial interpretation.Chapter II: Analysis of the theory foundation of double derivative actions.Currently, different parties yield different opinions regarding the permissibility ofdouble derivative actions. Chapter II examines several dissenting opinions (i.e.alternatives to double derivative actions exist, surpass the principle ofcontemporaneous ownership requirements, or surpass the principle of independentlegal entity) and several supporting opinions (i.e. the fiduciary theory, disregard of thecorporate entity, common control theory). Finally, the author draws the conclusionthat the multiple proxy theory may be the best appropriate theory.Chapter III: Parties in the double derivative actions. By comparing with singlederivative actions, Chapter III provides a detail discussion on the subject of doublederivative actions, including the requirements of the plaintiff and scope of thedefendant. Furthermore, the author argues that relevant conditions should be satisfiedby the plaintiff before a double derivative action would be raised. On the other hand,subject to the double model of a double derivative action, the scope of the defendantshall be expanded.Chapter IV: Prerequisite proceedings security of litigation fee system in thedouble derivative actions. In order to avoid the abuse use of a double derivative action, relevant mechanism of restrictive proceedings shall be established, they areprerequisite proceedings and security of litigation fee system. As to the prerequisiteproceedings in double derivative actions, a double derivative action is permitted onlyafter the shareholder has asked the board of both the shareholding company and thesubsidiary. In addition, before initiate a double derivative action, subject to thedecision of the court, the plaintiff may need to provide security of certain amount ofmoney to guarantee that the defendant can obtain compensation.