Abstract: The Israeli derivative action is a descendant of the common law derivative action. Over the years, Israeli courts have generally shown a willingness to grant a shareholder standing where justice requires it, but unlike English courts, they have also shown an inclination to effectively 'brush aside' the procedural barriers of Foss v Harbottle where they stand in the way of justice being served. This attitude has continued in recent cases, with the most obvious point of contrast lying in the courts' willingness to embrace the 'interests of justice' as an exception to Foss v Harbottle in its own right. This tendency culminated recently with the replacement of the existing derivative action procedure with a new one on a statutory footing as part of the third chapter of the new Israeli Companies Act, 1999, that came into effect on February 2000. Under the new Companies Act, 1999 derivative action is defined as 'an action brought by a plaintiff on behalf of a company for a wrong done to the company'. There are no express provisions under the Act as to the causes of action for which the derivative action is to be available. At the same time, a prospective plaintiff has to seek leave to bring the action beyond the preliminary stages and the statute sets out the conditions which the court must find to have been satisfied before leave can be given. Two fundamental policies seem to underline the majority of provisions in the new statutory derivative action. First, most of the new provisions share the objective of encouraging or promoting the use of derivative actions. The new provisions include several features which illustrate the legislator's will to turn the derivative action into a beneficial tool in enforcing corporate accountability. The derivative action is made more widely accessible for prospective plaintiffs by variety of ways of mitigating the effect of distorted litigation incentives. The second point to note regarding the new statutory derivative action is that it is subject to tight judicial control. A shareholder needs to obtain leave to proceed beyond the preliminary stages, and the court is provided with wide ranging powers and case management tools. The paper sketches the outlines of the new arrangement of derivative action under the new Israeli Companies Act, 1999. At the same time, it considers the above two major themes, looking in particular at the implications that the new the statutory derivative action may entail on the use of derivative actions. The question is whether placing the derivative action on a statutory footing will lead prospective plaintiff to make more use of it? The paper concludes that the Companies Act, 1999 goes some way to mitigate the deterrent effect of litigation by altering plaintiff's incentives directly, i.e. by providing the court with discretion to reward successful plaintiffs part of the proceeds of successful action beyond their indirect recovery so that the plaintiff can benefit directly in monetary terms. This may increase the accessibility of the remedy in the eyes of prospective plaintiffs. Furthermore, it is clear that the legislator has been enthusiastic in encouraging the use of derivative action and many of the Act's components can be explained in light of this. With respect to the centre stage the court takes in the new arrangement, particularly with its wide discretion with issues relating to fees and costs, the question is how the judges will exercise their new-found discretion and interpret the new legislation. On the one hand, Israeli courts have a good record of developing the discretion conferred upon them and they have generally shown a willingness to grant a shareholder standing where justice requires. On the other hand, concern has been expressed at the court taking on such a gatekeeper role. Finally, the paper concludes that the legislation is far from perfect, and there remain unresolved issues. For example, the arrangement does not address the obstacle of access to information held by the company. One of the most difficult things to achieve in any litigation is to gather the facts. This can be critical in a derivative action as the relevant information is probably in the hands of the controllers of the company. These are the persons who would normally be the focus of the litigation. It may well be that the member needs to get access to the company's records in order to determine whether or not an action should be instituted, but this is inaccessible to him. Rights of discovery prior to the initiation of litigation are therefore very important. Any amendments to the Act should therefore introduce measures to remedy this disadvantage.
Publication Year: 2004
Publication Date: 2004-02-17
Language: en
Type: article
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Cited By Count: 1
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