De Jure Convergence, De Facto Divergence: A Comparison of Factual Implementation of Shareholder Derivative Suit Enforcement in the United States and the United Kingdom

Abstract

Many legal systems have been converging toward a US shareholder-centric model of corporate law and governance. This includes de jure rules relating to derivative enforcement. Despite convergence of the UK system towards the US model, each system continues to diverge as regards levels of shareholder enforcement. This article suggests that this divergence can be explained by the way the courts implement the derivative procedure de facto. A comparative assessment of de facto implementation in the US and the UK reveals that while courts in both systems are reluctant to interfere with the business judgment of the board, the US courts are willing to analyse whether board decisions were substantively reached, contributing to the levels of enforcement based on the way costs are allocated. Conversely, ingrained traditions of the UK courts place a high evidentiary burden on the shareholder, which they are unlikely to meet. Since costs are allocated to the loser in the UK, the factual implementation continues to serve as a strong disincentive for private shareholder enforcement and good governance. Derivative claims, enforcement, costs, civil procedure, judiciary, directors, shareholders, company law, corporate governance, convergence

The adoption of shareholder activism by minority investors in Mauritius and a comparative analysis with the UK laws

“…In 2006, the UK Companies Act provided for a derivative action mechanism so as to allow the court to intervene more actively. Nevertheless, despite this formal enactment, the UK did not experience a surge in derivative enforcement mainly because courts have been reluctant to depart from the ingrained tradition that enforcement of corporate rights is generally a matter for the board, except when there is a claim with: sufficient legal merit; and the claimant is the proper person (Gindis and Gibbs, 2019).…”