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Company Law - Derivative Actions

In: Business and Management

Submitted By Kingsney8
Words 1000
Pages 4
Introduction
In general, the role and duties of corporate directors are to manage company affairs, holding the board of directors meeting, and selecting the managing director or CEO to operate the company. Yet, in real world, the directors will abuse their power to exclude minority of directors, or make selfish decision with their own sakes of interests in the expense of company interests. For example, managing directors will maximize their director fees without the paying of dividends, or excluding the minority of directors by voting. Because of that, the legal system allows shareholders to take “derivative actions” to balance the power of directors. Derivative actions are the effective tools to solve this problem. However, it is not well proven in the real world. The purpose of protection and effect on company of derivative actions in practice will be discussed.

Derivative Actions
There are two types of derivative actions, common law derivative actions and statutory ones.

For common law derivative action, it is taken based on case laws such as Foss and Harbottle case. In this case, two shareholders, Richard Foss and Edward Starkie Turton claimed the board of directors decided to misuse the land in Manchester of company which made company wasted many on the mortgage. Then, they sued the five directors because of their misbehavior, on behalf of company to claim the remedy. Finally, the case is dismissed. Thus, there are proper plaintiff rules and majority rules applied before common law derivative actions. In general, company affairs should be solved by majority general meeting rule instead of legal action, and directors have the power to decide whether or not to sue on in protection of the rights of the company. However, there is exception, if there is fraud to minority, where shareholder can bring an action only on behalf of company where wrongdoers are in…...

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