Preliminary Procedures in Shareholder Derivative Litigation: A Beneficial Legal Transplant?

37 Pages Posted: 11 Feb 2022 Last revised: 25 Feb 2022

See all articles by Martin Gelter

Martin Gelter

Fordham University School of Law; European Corporate Governance Institute (ECGI)

Date Written: February 9, 2022

Abstract

Jurisdictions around the world have developed different mechanisms to balance the necessity of enforcement with the problem of non-meritorious shareholder derivative litigation. One instrument to channel shareholder litigation is preliminary procedures, which typically constitute a screening stage before fact-finding. These have been adopted in several jurisdictions in recent years. This article argues that in jurisdictions applying the “loser pays” rule, preliminary procedures can serve as cutoff points for potential plaintiffs’ litigation cost risk, which often blunts incentives to litigate. To make preliminary procedures an effective instrument, the law must find workable solutions for two questions of institutional design. First, the risk of paying litigation costs should initially be limited to the preliminary procedure. Second, at the preliminary stage, shareholders should not be required to provide evidence about the merits of the suit or whether the company would benefit from it. Instead, as in the US, the emphasis of the preliminary stage should be on conflicts of interest of directors that make it unlikely that they bring such a suit themselves. Such a system would permit courts to screen out abusive lawsuits at an early stage while at the same time reducing incentive problems that have long plagued shareholder litigation.

Keywords: derivative suits, shareholder litigation, corporate governance, comparative corporate law, discovery, pre-trial procedures, litigation cost, legal transplants *

JEL Classification: K22, K41

Suggested Citation

Gelter, Martin, Preliminary Procedures in Shareholder Derivative Litigation: A Beneficial Legal Transplant? (February 9, 2022). Forthcoming in European Company and Financial Law Review (2022), Fordham Law Legal Studies Research Paper No. 4030969, European Corporate Governance Institute - Law Working Paper No. 625/2022, Available at SSRN: https://ssrn.com/abstract=4030969 or http://dx.doi.org/10.2139/ssrn.4030969

Martin Gelter (Contact Author)

Fordham University School of Law ( email )

150 West 62nd Street
New York, NY 10023
United States
646-312-8752 (Phone)

HOME PAGE: http://www.fordham.edu/info/23135/martin_gelter

European Corporate Governance Institute (ECGI)

HOME PAGE: http://ecgi.global/users/martin-gelter

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