The second consideration that must be taken into account stems from the problem of a representative, which stems from the fact that there are cases in which the entities authorized to make decisions on behalf of the corporation are in a state of conflict of interest, and therefore they are not able, as a matter of structure, to make the best decisions for the corporation. In the context of a derivative claim, a conflict of interest problem will usually arise when it comes to a claim against the corporation's organs themselves or against the controlling shareholder who appointed them (see, for example, Civil Appeal 52/79 Suleimani v. Brauner, IsrSC 35(3) 617, 628 (Justice M. Alon) (1980); Derivative Claim (Tel Aviv District) 15442-11-09 Bertie China Betty v. Leviev, [published in Nevo] at para. 65 of my judgment (April 28, 2012)).
Even when the decision makers are not in a situation where their personal interest is in direct contrast to that of the corporation, there may be situations in which there is concern regarding the "cleanliness" of their judgment, as a result of a structural bias (see in this context: Assaf Hamdani and Ruth Ronen, "Who controls the derivative claim?" Sefer Yoram Danziger 211, 221-227 (Limor Zer-Gutman and Ido Baum eds., 2019) (hereinafter: "Greedy and Ronen")).
The derivative action proceeding therefore constitutes an exception to the principle of non-intervention, and it grants a shareholder or director (and in some cases also a creditor) the right to sue on behalf of the corporation, thereby "circumventing" the authority of the authorized organs to decide on filing a lawsuit, when they refrain from making a decision in favor of the corporation. The derivative claim is filed on behalf of the corporation, and it is intended to serve its interests. The remedy provided in the framework of it is intended to enrich the corporation's coffers, and not the private pocket of the person filing the claim (Irit Habib-Segal, Corporate Law, Vol. 1, 686 (2007)).
- Another consideration that the court must take into account is the concern of the possible conflict of interest of the derivative plaintiff. Thus, even the derivative plaintiff will not always and necessarily act only for the benefit of the corporation. First, the derivative plaintiff may act for extortionate reasons and not in order to promote the best interests of the corporation. Moreover, even in a case where the derivative plaintiff's motives in filing the application are "valid", he is liable to focus his attention on the success of the derivative claim proceeding – a proceeding that, if successful, will entitle him to remuneration, and his attorneys to fees – and this, at times, is "at the expense" of the corporation's best interests. The derivative plaintiff may therefore ignore various "prices" that the derivative claim proceeding may impose on the corporation. In addition, the derivative plaintiff may have other private interests as a result of which he seeks to advance the conduct of the proceeding, which are not necessarily in the best interest of the corporation (see Greedy and Ronen, at p. 220).
- The preliminary mechanism of the procedure for approving the claim derived by the court is therefore intended to strike a balance between the desire to protect the corporation from its managers, and the desire to protect it from undesirable lawsuits and possible "extortion" by one of the shareholders. This is the reason why the court must conduct an in-depth preliminary examination before approving a derivative claim, and the applicant must lay a preliminary evidentiary foundation that will indicate a prima facie chance of success of the claim (see Civil Appeal 7735/14 Vardnikov v. Elovitch, [Published in Nevo] In paragraph 17 of the judgment of Judge Y. Amit (December 28, 2016) (hereinafter: "The Verdnikov Matter"); Civil Appeal Authority 4024/14 Africa Israel Investments in Tax Appeal v. Cohen, [Published in Nevo] in paragraph 16 of the judgment of Judge Y. Amit (April 26, 2015)).
- One of the means that corporations use to regain control of the derivative lawsuit process, even in those cases where the decision makers in relation to the lawsuit are in a situation of conflict of interest or structural bias, is the means of appointing an independent committee. Such an appointment is intended to "uproot" the fear of biased decisions that do not necessarily stem from the best interests of the corporation, but rather from the best interests of the decision makers or those close to them. The more the court can rely on the committee's independence, its professionalism and the way it works in preparation for making the decision, the more it will be inclined to respect the decision it made, and vice versa.
The Court's position with regard to the decisions of independent committees gives expression to a dilemma similar to that described above: on the one hand, an independent committee is a desirable means of restoring control over decision-making to the corporation, and this time – through a body established for the purpose of making a certain decision, while paying attention to the question of the conflict of interest and the structural bias of its members, and an attempt to prevent them. On the other hand, granting too broad a possibility to officers of corporations to appoint independent committees, and giving too much "respect" to their decisions (i.e., applying a standard of judicial review facilitates these decisions, from the point of view of the officers), may lead to the abuse of this instrument, which will harm not only a particular corporation whose case is being discussed in the proceeding, but also the institution of derivative claims as a whole.
- It should be remembered that the institution of derivative claims is intended for an important purpose, of providing the possibility of suing on behalf of corporations, even when the officers in charge of it tend not to do so. Knowing the existence of the possibility of filing such a lawsuit, especially when it is used frequently (and this is the situation in recent years in Israel), is useful both for corporations in which the duties of officers towards the corporation have been breached, and in relation to officers of other corporations – the fear of a derivative lawsuit is intended to incentivize them to act lawfully for the benefit of the corporation and for this purpose only.
Therefore, damage to the institution of the derivative claim may be detrimental to the corporations and the incentive system of their officers. The more they believe that they will be able to "evade" a lawsuit by establishing a claims committee whose conclusions the court will respect, the less their incentive to act lawfully in favor of the corporation in accordance with the duties of trust and care imposed on them. This is assumed that if damage is caused to the corporation and a request is filed to certify a derivative claim, it will be possible to repel it by establishing such a committee.