A derivative action seeks to enforce a right of the company when the authorized bodies within it do not do so.
Derivative action: in the name of the company, against its directors
When the harm is to the company and it does not enforce its rights, a shareholder or director may seek approval for a derivative action on its behalf, subject to the conditions of the Companies Law. As a rule, a prior approach to the company is required, subject to exceptions. A creditor may proceed through this route only in cases the law permits, including an unlawful distribution; not every creditor has a general right to sue on behalf of the company. The court examines, among other things, the company's best interests and the applicant's good faith. It is possible to request disclosure of documents for the purpose of examining the application, subject to the evidentiary foundation and the conditions of the law, and not as an automatic right to sweeping inspection.
The difference between harm to the company and personal harm
Money withdrawn unlawfully from the company's coffers, a business opportunity taken from it, or a transaction that harmed it may give rise to a cause of action belonging to the company. A decline in the value of the shares following that same harm does not necessarily turn the cause of action into a personal claim of every shareholder. It is necessary to identify to whom the right belongs and what the remedy is: in a derivative action, the remedy is generally intended for the company, and not for direct distribution of its money to the applicant.
Preparing the approach and the evidence
The foundation begins with protocols, agreements, reports, and financial movements that can be obtained lawfully. The approach to the company must explain the alleged act and the reason for enforcing the right. It is necessary to examine whether an exception to the prior-demand requirement applies, how the company responded, and whether an officeholder was appointed for it in liquidation or insolvency proceedings. A disclosure request is not a fishing expedition for suspicion: a suitable factual basis and relevant documents must be identified.
The defense against these proceedings
Businesses, corporations, and officeholders that receive a motion to certify a class action or a derivative action require a swift strategic response: attacking the cause of action and the class, withdrawal and settlement arrangements at the right stages, and management of insurance and communications exposure. An application that is handled properly at the certification stage is stopped before it turns into an avalanche.
A decision to approve a derivative action makes it possible to litigate the company's claim; it does not prove that the defendants are liable. Settlement, withdrawal, and costs are also examined under the supervision prescribed by law. It is important to distinguish between the personal interest in a shareholders' dispute and the benefit to the company, and to consider whether another route, such as an oppression claim, is suited to the argument.
Representation in class and derivative proceedings
Israel Arama represents representative plaintiffs and shareholders in class and derivative proceedings, as well as companies and officeholders in defending against them. Contact us for an initial consultation without obligation.
Derivative action: in the name of the company, against its directors — what is important to know?
When the harm is to the company and it does not enforce its rights, a shareholder or director may seek approval for a derivative action on its behalf, subject to the conditions of the Companies Law. As a rule, a prior approach to the company is required, subject to exceptions. A creditor may proceed through this route only in cases the law permits, including an unlawful distribution; not every creditor has a general right to sue on behalf of the company. The court examines, among other things, the company's best interests and the applicant's good faith. It is possible to request disclosure of documents for the purpose of examining the application, subject to the evidentiary foundation and the conditions of the law, and not as an automatic right to sweeping inspection.
The difference between harm to the company and personal harm — what is important to know?
Money withdrawn unlawfully from the company's coffers, a business opportunity taken from it, or a transaction that harmed it may give rise to a cause of action belonging to the company. A decline in the value of the shares following that same harm does not necessarily turn the cause of action into a personal claim of every shareholder. It is necessary to identify to whom the right belongs and what the remedy is: in a derivative action, the remedy is generally intended for the company, and not for direct distribution of its money to the applicant.
Preparing the approach and the evidence — what is important to know?
The foundation begins with protocols, agreements, reports, and financial movements that can be obtained lawfully. The approach to the company must explain the alleged act and the reason for enforcing the right. It is necessary to examine whether an exception to the prior-demand requirement applies, how the company responded, and whether an officeholder was appointed for it in liquidation or insolvency proceedings. A disclosure request is not a fishing expedition for suspicion: a suitable factual basis and relevant documents must be identified.
The defense against these proceedings — what is important to know?
Businesses, corporations, and officeholders that receive a motion to certify a class action or a derivative action require a swift strategic response: attacking the cause of action and the class, withdrawal and settlement arrangements at the right stages, and management of insurance and communications exposure. An application that is handled properly at the certification stage is stopped before it turns into an avalanche. A decision to approve a derivative action makes it possible to litigate the company's claim; it does not prove that the defendants are liable. Settlement, withdrawal, and costs are also examined under the supervision prescribed by law. It is important to distinguish between the personal interest in a shareholders' dispute and the benefit to the company, and to consider whether another route, such as an oppression claim, is suited to the argument.
This information is for initial orientation about the service and contact process. It is not individual legal advice.
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