Faculty of law blogs / UNIVERSITY OF OXFORD

Corporate Governance and Statutory Derivative Actions: Comparative Approach to Shareholder Litigation


Lang Thai
Senior Lecturer in Law at the University of Lincoln Law School


Time to read

3 Minutes

In my book, Corporate Governance and Statutory Derivative Actions: Comparative Approach to Shareholder Litigation, I present an argument as to why and how the statutory derivative action procedure is in need of law reform to promote directors’ accountability and good corporate governance.  Statutory derivative action is a court action brought by a shareholder or an officer on behalf of a company to remedy a wrong done to the company where the company is unwilling or unable to bring an action.  This book is the first comprehensive study of the statutory derivative action in Australia, using the Australian model as a reference point and comparing it with the UK, Canada, Singapore, New Zealand, Hong Kong and US counterparts. 

The book’s main contention is that the Australian statutory derivative action is not an effective tool for shareholder protection.  The procedure is rarely utilised in Australia due to the difficulty in obtaining permission from the court to bring the action and due to the uncertainty in the recovery of costs.

My argument is based on the outcome of an empirical study over a 20-year period, coupled with extensive case law analysis, comparative analysis with other jurisdictions, and comparative analysis between the repealed common law derivative action and the statutory derivative action  to understand which areas have and have not been addressed properly.  The common law derivative action has been abolished through legislation since March 2000, replacing it with the statutory framework which has been in use since.  Through these methods of investigation, I contend that the courts’ strict interpretations of the statutory derivative action provisions have not greatly improved the shareholders’ position in the company or corporate governance overall, and that reform to the statutory derivative action is necessary to provide shareholders with greater protection against corporate wrongdoing.  The outcomes from the empirical study are not only relevant in the Australian context, but also useful by way of comparison for other countries that have similarly adopted the statutory derivative action.

Both empirical and qualitative analyses have identified the requirements of ‘good faith’ and ‘in the best interests of the company’ as the two most difficult criteria for shareholder applicants to satisfy when applying to the court for leave to bring a derivative action.  Judicial approaches to these criteria have been wide and varied, lacking clarity, and at times yielding inconsistent outcomes.  An applicant for leave must demonstrate with absolute certainty that the proposed action is in the best interests of the company, a test that is most difficult to establish satisfactorily in practice.  A further impediment is the difficulty in obtaining a costs order in favour of the shareholder applicant under the Corporations Act 2001 (C’th).  Current practice is that permission may be granted if an applicant is willing to pay the costs of the application and the substantive proceedings and that no company funds are to be used to finance the action.  I argue that this strict approach has detrimental implications for bona fide shareholders who cannot afford to bring a derivative action. 

My book also provides some suggestions for law reform.  I argue that the ‘good faith’ requirement is unnecessary and should be removed, using examples from New Zealand and Hong Kong, where the statutory derivative action in those countries seems to be working well without such a requirement.  Other suggestions include the amendment to the ‘best interests of the company’ requirement and amendment to the costs provision to enable a successful applicant to recover some costs.  One preferred option could be to adopt the US’ common fund approach, which enables the attorneys’ fees to be paid ahead of the shareholder claimants based on the agreed sum or percentage in a successful derivative action that generates a monetary compensation or benefit to the company.  Another option could be to adopt the Canadian or New Zealand provision by granting the applicant an indemnity order based on just and equitable grounds, with  the amount to be released to the derivative applicant not as a lump sum payment but in stages in the court proceedings to ensure that the applicant uses the approved derivative action for the purposes properly intended.

This book is useful both for jurisdictions that already have the statutory derivative action but are considering revising their existing provisions and for jurisdictions that propose on introducing the statutory derivative action. 

Dr Lang Thai is Senior Lecturer in Law at the University of Lincoln Law School.  She was an Australian law academic previously.

The book can be consulted here.


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