Legal Updates

In certain cases a shareholder or a director may file a claim on behalf of the company

February 12, 2019

One of the founders and a minority shareholder in a company sought to file on its behalf a claim against the control holders contending that they took from the company a novel idea for the development of a digital loudspeaker and transferred it to a company newly incorporated by them – Audio Pixels Ltd. – which in the meanwhile was registered for trade (by a mother company wholly owning it) on the Australian Stock Exchange (ASX).

The Supreme Court rejected the motion to approve the derivative claim.  A derivative claim is a tool meant to prevent a situation under which due to a corporate governance failure, a proper right of claim of the company is not consummated, and this is by way of a right given by the Court to a shareholder or a director to act on behalf of the company.  One need to ensure that the claim and its management are for the benefit of the company and the movant does not act in bad faith.  For this, the Court checks at the early stage already whether it is worthwhile to file the claim, checking the chances, risk, and costs, and that the movant is the correct entity to manage the proceedings on behalf of the company.  Here it is undoubtful that the claim is against the control holders and thus there is a corporate governance failure that justifies the derivative claim, but it seems that the chances of the claim are slim and thus, under the chances vs. risks test, managing the proceedings is not for the benefit of the company because the costs weigh against the benefits from the proceedings.