Private Enforcement of Directors’ Duties: Derivative Actions as a Global Phenomenon

Abstract:     
When directors are in breach of their duties, it seems natural to give shareholders a claim for compensation. However, directors’ duties are owed to the company, not shareholders individually. This raises the question of whether individual shareholders can sue for compensation on behalf of the company. In some legal systems such derivative actions have been in place for a long time, but, recently, many other legal systems have also introduced or facilitated them. Still, there is considerable diversity around the world. In this paper I explore how the availability of derivative actions is related to other differences between countries, for instance, the common law/civil law divide, the ownership structure of firms, and other questions of shareholder protection and civil procedure. The main result is that today the common law/civil divide does not account for the differences and similarities in the law of derivative actions across countries. However, a quantitative analysis of 25 legal systems still confirmed a legal family effect in 1995 which could also be linked to differences in the ownership structure of firms. Other explanatory hypotheses could not be confirmed: cultural characteristics have not stopped countries such as Japan or China from incorporating rules on derivative actions into their company laws. It was also not found that legal systems use derivative actions as an ex-post substitute for other forms of shareholder protection; rather, different forms of shareholder protection can be regarded as complements.

Number of Pages in PDF File: 23

Keywords: derivative actions, derivative suits, derivative claims, comparative corporate governance, leximetrics, legal families, legal origins, dispersed shareholder ownership

JEL Classification: C80, G34, K22, K40, N20, N40, P50

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