SEO Tools comparison and reviews


Taking counsel: Derivative action as legal instrument for minority shareholders

  • 2007-01-24
  • By Greta Makaraityte [ Teder, Glikman & Partnerid ]
In order to compensate damages caused to a company, shareholders can undertake so-called derivative action. Derivative action, generally speaking, serves as one of minority shareholders' instruments of influence on corporate governance. Moreover, it is one of the measures being utilized to improve protection of shareholder rights, and having it established in national law statistically increases the chances to be evaluated as a highly protective country for minority shareholders.

Currently the system of corporate is designed to insulate the interests of the majority members as they usually have a right to decide. Minority shareholders' rights have come to light as those needing protection, however, since there are multiple hazards for their infringement. Moreover, the general principle of equal treatment of all company shareholders is preserved by the specific rights that are provided for minority shareholders.

Minority shareholders' power can be illustrated by the list and effectiveness of their rights in respect to the majority's decisions and management of the company in general. Usually all shareholders enjoy the same rights; however, the exercise of those rights sometimes differ due to the status of the shareholder 's i.e., a stake held in the capital.

Sometimes the minority shareholder faces an impossible task in attempting to force directors to take action against themselves. In certain circumstances the courts will allow a minority shareholder to bring a claim in the company's name.
The action known as derivative is also a minority shareholder solution, one which allows one or more shareholders to take a liability case against directors and sue them directly for damages they have caused to the company. Thus the claim is considered to be for damages that would have been paid to the company but not personally to shareholders.

Shareholders' derivative action is not a system accepted worldwide. It is found in only a few countries, most of which belong to the common law system. Derivative actions can be used as a mean of harassment or intimidation. A derivative action is involved with recovering damages, property or funds that belong to the company for wrongs done to it. In most cases, this involves a serious breach of directors' duties, but the derivative form of action is only appropriate were recovery for the company will result from a successful judgement.

Not all countries recognize the derivative action (e.g., Germany, Greece, the Netherlands), or at least they limit this right by introducing a requirement on possessing a specific amount of shares. In Lithuania, Article 16 of the Company Law, as in France, the right of derivative action is established as one of the non-property rights of the shareholders, stating that all shareholders'swithout limitation to the number of owned shares'shave a right to bring the action to court for the damages that were caused by the misconduct of the director, members of the board or not performance of their obligations established in the Company Law or other laws, the company's Articles of Association and in other cases indicated in the laws.

Unprofitable transactions that led a company to insolvency, as well as any other transaction that is not financially beneficial to the company can be considered as misconduct (mismanagement) on the part of company management.

Greta Makaraityte is an associate lawyer at Jurevicius, Balciunas & Bartkus, a member of Baltic Legal Solutions, a pan-Baltic integrated legal network of law firms including Teder, Glikman & Partnerid in Estonia and Kronbergs & Cukste in Latvia, dedicated to providing a quality "one-stop shop" approach to clients' needs in the Baltics.