FINANCE International Corporate Finance

MULTIPLE DERIVATIVE ACTIONS 1

Shareholder in a Parent Company May Bring a Derivative Action On Behalf Of a Subsidiary

Company within the Group

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MULTIPLE DERIVATIVE ACTIONS 2

Introduction

The corporate world is characterized by the shareholders being the owners delegating the

management of a business/company through the agent-principal relationship. The directors as the

leaders in charge of management functions and strategic decision making are expected to

undertake their duties to the best interest of the shareholders who are not directly involved in key

decision making. The failure to observe corporate governance and the abuse of power can lead to

loss of value to the shareholders’ value and wealth in the investment. Consequently, the

shareholders are given the opportunity to undertake derivative actions to restrain the corporate

system or conducts associated with abuse of power among the directors

. The shareholders may

bring an action to pursue a company to pursue an action the directors have failed or not willing to

prosecute

. Such actions could be against the particular directors, in persons as a result of self-

dealings or against the third parties.

The pursuance of the derivative action becomes a complicated undertaking when

involving a group of companies. The fundamental question is whether the shareholders of the

holding company can bring a derivative action on behalf the shareholders of the subsidiaries. The

doctrine is regarded as a multiple or double derivative actions as it involves an indirect action by

the majority interest in the subsidiary

. In establishing whether the shareholders from the parent

company can undertake the double derivative action this paper discusses a wide range of aspects

including the background of the legal concept, the multiple derivative actions under the English

Keay, Andrew. "Assessing and rethinking the statutory scheme for derivative actions under the

Companies Act 2006 (2016) 16 Journal of Corporate Law Studies 39.

Boyle, Anthony John. Minority shareholders' remedies (Vol. 2. Cambridge University Press,

2002).

Ferrara, Ralph C., Kevin T. Abikoff, and Laura Leedy Gansler. Shareholder derivative

litigation: besieging the Board (Law Journal Press, 2013).

MULTIPLE DERIVATIVE ACTIONS 3

law, the case law and the comparative analysis of the multiple

. The fundamental aspects

discussed in the background include to whom can be claimed against, what can cause an action

to be undertaken, and the requirements for permission to pursue the actions.

Derivative Action: Background under the common law and Companies Act 2006

The common law has been applied in providing general prohibition on claims concerning

reflective losses, but allows shareholders to pursue derivative claims on their behalf as well as

their companies

. However, under the common law, shareholders are allowed to take derivative

actions on two fundamental requirements. First, the alleged wrong was by a director, and the

majority of the members/shareholders may not be in a position to ratify the appropriate action.

For instance, a shareholder can bring forth an action against a director accused of deliberately

misappropriating firm’s assets bona fide misuse of one’s office and power

. The second

situation under which the common law advocated for derivative action is when the alleged

wrongdoers continue to be in control of the company and that the same company cannot

undertake proper claimant against the ones in control

The Companies Act 2006 set the new basis for derivative claims

. Section 260(1) of the

Act defines a derivative claim as the one brought by a member or members of a company with

the objective of seeking relied on behalf of the company

. In this case, a member regard to a

Choper, Jesse, James Cox, and Melvin Eisenberg. Gilbert Law Summaries, Corporations (West

Academic, 2015).

Sheikh, Saleem. A guide to the Companies Act 2006 (Routledge, 2013).

Joffe, Victor, Minority Shareholders: Law, Practice and Procedure (Oxford: Oxford University

Press, 2011).

Courteau, Lucie, Roberto Di Pietra, Paolo Giudici, and Andrea Melis. "The role and effect of

controlling shareholders in corporate governance (2017) Journal of Management & Governance

Paolini, Adolfo. Research Handbook on Directors' Duties (Cheltenham: Edward Elgar, 2014).

Company Act 2006

MULTIPLE DERIVATIVE ACTIONS 4

trustee in bankruptcy as by well as those who have been transferred shares by the operations of

the law. Furthermore, the article state that there is no minimum shareholding required for an

individual to qualify as a claimant. However, a shareholder who acquired shares after the

conduct complained about occurred, the claimant may be dismissed for the lack of good faith.

The other reasons for the disqualification are when the shareholder is guilty as a wrongdoer.

Therefore, a shareholder who participated in the wrong he/she complains should disqualify

himself. A claimant can be dismissed for acting for an ulterior purpose and not for the purpose

of helping the company against the wrongs. In fact, the ulterior motive can be deduced by the

fact that a claimant has another has another adequate remedy available to address the issue other

than through the court

. Furthermore, a derivate claim is not acceptable if the claimant

shareholder pursues it for his/her benefits rather for the collective good of the company.

Subsection 260(3) of the Company Act 2006, defines who a derivative action can be

taken against

1112

. The subsection states that a derivative can only the brought against the actions

arising from the actual or proposed act or its omission involving negligence, default, breach of

duty by the director(s) of the given company. The director(s) regards to the current or former

director(s) whose acts led to the issue being prosecuted

. The former directors have pursued the

things done or omitted in his/her watch before ceasing to be in office. Apart from the directors,

an action can be taken against third parties. These are the individuals whose actions are

Wrbka, Stefan, Steven Van Uytsel, Mathias M. Siems, and Stefan Wrbka. Collective Actions:

Enhancing Access to Justice and Reconciling Multilayer Interests? (Cambridge University Press,

2012).

Company Act 2006

Degenhardt, Klaus. Companies Act 2006 (Bremen: Europ. Hochsch.-Verl, 2010).

Geis, George S. Shareholder Derivative Litigation and the Preclusion Problem (2014) 100

Virginia Law Review 261.

MULTIPLE DERIVATIVE ACTIONS 5

connected to the acts of the directors pursued; the third parties can be prosecuted separately or

jointly with the directors

. Nevertheless, a derivative action cannot be taken against the third-

party if the director did not commit the wrongdoing and that the party assisted the director is the

so doing. Lastly, an action can also be taken against a shadow director. The action, in this case,

can be based on the grounds of default. For instance, an individual who owes the company

fiduciary duties by failing to company under the Company Act Pt 10, Chapter 4, can be pursued

in the same manner as a fully approved director

. Unlike a third party, a shadow director has

access to information and assets of the organization putting him/her as subject to the statutory

duties and responsibilities under the Companies Act.

Under Companies Act 2006, Part II, shareholders are given the right to sue the directors

on behalf of the company for a range of claims including company negligence, default in

upholding statutory obligations, and breach of duty

1617

. Consequently, a shareholder can bring

the derivative action even at the times when it is clear that the director sued did not benefit from

the action

. However, mere commercial misjudgements are not treated as negligence conducts;

hence not actionable. Breaches of company constitution are the other set of actions pursued

through derivative claims. Companies Act (CA) 2006, s 33 states that the company’s constitution

Bourne, Nicholas. Bourne on company law (Routledge, 2016).

Kahan, Marcel, and Edward Rock. "When the Government Is the Controlling Shareholder:

Implications for Delaware (2010) 35 Del. J. Corp. L. 409.

Degenhardt, Klaus. Companies Act 2006 (Bremen: Europ. Hochsch.-Verl, 2010).

Barker, Roger. "The Duties and Liabilities of Directors—Getting the Balance Right (2016) The

Handbook of Board Governance: A Comprehensive Guide for Public, Private, and Not-for-

Profit Board Members 249.

Barker, Roger. "The Duties and Liabilities of Directors—Getting the Balance Right." The

Handbook of Board Governance: A Comprehensive Guide for Public, Private, and Not-for-

Profit Board Members (2016): 249.

MULTIPLE DERIVATIVE ACTIONS 6

is a covenant that each member of the entity is expected to observe

. The constitution is a

complement to the common and statutory laws and hence it breach is actionable. A parson in the

position of a director is expected to collectively observe both the provisions of the enacted law

and the company constitution to avoid wrongdoing and negligence.

Extent to which a shareholder in a parent company may bring a derivative action on behalf

of a subsidiary company within the group

Shareholders of parent companies can undertake double derivatives on behalf of the

counterparts in a subsidiary. However, the extent and allowable situations for such actions are

legally regulated and restricted. In this section, four situations or extents to which such actions

are allowed are discussed.

I. When the Wrongdoer against a Subsidiary has Control over the Subsidiary and the

Complainant is acting in Good Faith on Behalf of the Shareholder of the Subsidiary

Before the enactment of the CA 2006, double derivative actions, in the United Kingdom

(England and Wales or Northern Ireland), were provided and guided for by the common law. CA

2006 brought the ambiguity or was unclear regarding multiple derivative actions

. Questions

have been raised as to whether it led to the abolishment of the derivative actions through its

enactment and being in force. The concerns have since been addressed in the case of Universal

Project Management Services Ltd (UPMS) v Fort Gilkicker Ltd & others. The application or the

claimant was the Universal Project Management Services Ltd, which was in this case embodied

by a Dr. Frischmann. Dr. Frischmann was one of the equally participating members of limited

Company Act 2006

Khan, Imtiaz Ahmed. "The Derivative Action Remedy for Minority Shareholder Protection in

Pakistan (2016) 36 Pakistan Journals of Social Sciences (PJSS). 1

MULTIPLE DERIVATIVE ACTIONS 7

liability Partnership Company together with Mr. Pearce. UPMS owned shares in Fort Gilkicker

Ltd (FGL). Dr. Frischmann and Mr. Pearce were the only two directors of FGL which they co-

founded as a vehicle to assist them in developing a former Victorian coastal battery, Fort

Gilkicker. However, a disagreement arose upon the allegation that Mr. Pearce had

misappropriated valuable business opportunity solely for FGL. Considering that UPMS LLP was

the sole shareholder to FGL, Dr. Frischmann decided to instigate suit using UPMS LLP as the

litigant against Mr. Pearce. The decision to pursue derivative through UPMS LLP was informed

by the fact that FGL would not take such as action considering the directorship and ownership

status

The respondents, Mr. Pearce and FGL argued that under the CA 2006, the application of

double derivative under the common law was not recognized and hence the legal action was not

legally binding. They argued that the term derivative action, referred to the ordinary derivative

action and hence multiple derivative actions were not recognized in the Act

. The defendants

were also of the opinion that the common law was wholly replaced by the Section 260 of the CA

2006. The presiding judge, Justice Briggs was forced to fast deal with the issue before

proceeding into the details of the case. Justice Briggs observed that chapter 1 of Part II of the

Act provided for comprehensive codification setting the conditions under which the derivatives

claims would be accepted. The judge stated that Section 260 states that an individual who is a

member of the company can initiate a legal action seeking relief on behalf of the company.

Besides, the Act provides that the prosecution should be against unfair prejudice.

Universal Project Management Services Ltd v Fort Gilkicker Ltd and others [2013].

Lowe, Tom. Mixed and multiple derivative claims to address reflective loss problem (2014) 20

Trusts & Trustees 930.

MULTIPLE DERIVATIVE ACTIONS 8

According to Justice Briggs, the codification under the CA 2006, aimed at removing the

complications, unwieldy and obscure in the provisions of the common law. It was, therefore,

irrational to think that Parliament intended to retain the right to undertake action through

derivative claims by the members while abolishing the right of other parties intended seeking

justice on behalf of the company.

However, certain conditions have to be fulfilled under the Company Law 2006, for the

permission to pursue double deliberative action on the basis of control by the wrongdoer(s) to be

granted. First, a claimant must overcome the hurdle on the basis for refusal of a claim under CA

2006 Section 263(2) to avoid derivative claims based on unfair prejudice petition. The petition

can be refused when it is apparent to the court that the person acting as a claimant is not

interested in promoting the success of the company. The court is also likely to refuse the

permission for prosecution on an action based on an act or omission not yet to occur.

Furthermore, the court can dismiss a claim when it arises from an act or omission authorised by

the company before it occurred or that it has been ratified by the company after it had occurred.

The requirement is this case is based on the argument that a director would not be liable under

the derivative action for acts or omission supported or approved by the company.

II. Inappropriate Sale of Shares or Investment of a Subsidiary

A holding company or a subsidiary can sell its shares to third parties. However, such a

sale should be done in consideration of the rights and impact of the shareholders particularly in

the given subsidiary. In such a situation, a shareholder of the parent company can take action on

behalf of the subsidiary’s shareholder. Such an action has been taken in the case Piccard v.

Sperry Corporation. Piccard sued Standard Capital Company and its directors against the sale of

a large block of stock owned by Company at Sperry Corporation. In this case, the only

MULTIPLE DERIVATIVE ACTIONS 9

connection was that the plaintiff held voting trust certificates representing the Sperry

Corporation’s Curtiss-Wright stock. The complication of the issue was that the Curtiss-Wright

stock was sold to Sperry Corporation in full ownership of Sperry Securities Corporation. The

defendants argued that the case should be dismissed since the voting certificates held the

complaint was relatively insignificant been only 110 of the total 2,015,565 issues and

outstanding certificates

. Besides, the defendants argued that the plaintiff had no direct interest

in Sperry Corporation and hence did not the right to undertake the derivative action. However,

the court sustained the suit and order for it to proceed to the next level. The judge held that that

the plaintiff had the right to apply the double derivative on his behalf as well as the other

shareholders and voting certificate holders. Irrespective of the subsequent phase and the final

judgment, the preliminary judgment affirmed that it did a member with interests in a parent

company can apply multiple derivative actions.

III. Inappropriate Payment/Misapplication of Assets or Funds of a Subsidiary

The corporate directors in both the parent and subsidiary have the duty to appropriately

manage the assets of the organization(s) on behalf of the shareholders. The directors of parent

company are also required to take action in case of mismanagement of assets in the subsidiary

company. The action in this case arose as a result of the situation where the directors of the

subsidiary are the wrongdoers or have omitted their duties as directors

. In the case, Harris v

Microfusion, Mr. Harris, a member of a limited liability partnership, Microfusion LLP pursued a

Piccard v. Sperry Corporation, 30 F. Supp. 171 (S.D.N.Y. 1939)

Bruno, Sabrina, and Eugenio Ruggiero. Public Companies and the Role of Shareholders:

National Models Towards Global Integration (Kluwer Law International, 2011)

MULTIPLE DERIVATIVE ACTIONS 10

derivative claim against two firms, collectively referred as Future Films. Future Films was a

designated member of Microfusion LLP with the intention to benefit other members of the parent

outfit (Microfusion LLP). The claimant sued the defendants on three bases. First, it was alleged

that Future Films made inappropriate payment from LLP to LMI Investments in settlement for

administrative services. Secondly, it was suspected Future Films made paid Alcon Entertainment

LLC for services in marketing without commercial reasons. Lastly, the defendants were accused

of making rebate payments on behalf of LLP to two other firms, Trademark and Etic with no real

commercial reasons

. The player by the claimant was that the court should find Future Films

guilty of the wrongdoing regarding the payments and liable for the loss incurred by Microfusion

LLP. The argument was based on the fact that Future Films had fiduciary duties and controlled

the day to day management of LLP.

The high court Judge, Justice Pelling upheld the derivative action on the first two issues

but denied permission regarding the third. Mr. Harris appealed against the dismissal on the third

issue, while the defendant, Future Film appealed against the approval of the first two issues. The

Court of Appeal, under the Lord Justice McCombe as the lead judge and Justice Christopher

Clarke as a member of the bench, dismissed Mr. Harrison were the appeal and upheld Future

Films' appeal. The implication of the judgment was that all the three claims could not be

sustained. The argument by the judges was that there was no prove that the payments involved

actual fraud leading to a loss to the company for the benefit of the wrongdoers. Furthermore,

Harris v Microfusion 2003-2 LLP & Ors, Court of Appeal - Civil Division, [2016] EWCA Civ

1212

MULTIPLE DERIVATIVE ACTIONS 11

the judges eluded that the claimant had a narrow argument to demonstrate that he was acting in

seek of justice to the minority shareholders

On the same extent, a shareholder in a parent company can bring a derivative action on

the basis of mismanagement of accounting profit. In the case Hirshhorn v. Mine Safety

Appliances Co., the plaintiff was a shareholder in Carbon Monoxide Eliminator Corporation

brought the action on own behalf and other stakeholders of Carbon Monoxide Eliminator

Corporation. The plaintiff was concerned that accounting profits from the company and its

subsidiary Catalyst Research Corporation was diverted to another firm the Mine Safety

Appliances Company. The defendants wanted the court to dismiss the case on the basis that the

shareholder had no sufficient interest in the subsidiary company, Catalyst Research Corporation.

The motion to dismiss the suit was denied. The trial judge, Judge Schoonmaker stated that the

case of double derivative action would be maintained because it concerned the affairs of the

parent-subsidiary characterised with an interwoven corporate veil

. The judge made it clear that

the primary premises for double derivative are the element of control and the intention of the

claimant. It is therefore clear that the judge upheld the right of a shareholder /member of a

corporation can undertake double action on own behalf and for the stockholders of the

subsidiary. However, the court did not grant the relief to the plaintiff starting that the directors

did not benefit and acquire profit from the transactions.

The opportunity for undertaking double derivative on the basis of misapplication of assets

is affirmed in the case General Rubber Co. v. Benedict. General Rubber Co., a company based in

Barker, Roger, and Iris H-Y. Chiu. "Protecting minority shareholders in blockholder-controlled

companies: evaluating the UK’s enhanced listing regime in comparison with investor protection

regimes in New York and Hong Kong (2014) 10 Capital Markets Law Journal 98.

Hirshhorn v. Mine Safety Appliances Co., 101 F. Supp. 549 (W.D. Pa. 1951)

MULTIPLE DERIVATIVE ACTIONS 12

New Jersey owned almost all the shares of General Rubber Brazil. Benedict was the director of

the holding company but had no control or statutory duty over the subsidiary. The shareholder

of the parent company sued the director on the basis that the employees at the subsidiary were

misapplying the firm’s funds. The request by the plaintiff was for damages equal to the mount in

loss of value of the shares of the subsidiary as a result of the defalcation. A 3-2 decision

sustained the complaints, and the plaintiff appealed. The court of appeal sustained the charges by

a 4-2 decision

. The majority judges argued that the shareholder had right to sue to indirect

damages considering that the damages on the value of shares were as a result of the breach of

duty by the directors.

The decision by the court to sustain the claims on the basis of misapplication of assets is

in line with the CA 2006. However, the judgment allowing for the remedy for indirect

compensation to the complaint seems to have contraindicated the hurdles required under CA

2006 Section 263(3)

. First and foremost, the Section requires that the court should consider

whether the individual/claimant acts in good faith in seeking the relief. Secondly, the court

considers whether the persons are acting on the duty to promote the stability and success of the

company. The possibility that an individual is taking action to pursue own benefits rather than on

behalf of the company leads to dismissal of the claim.

IV. Pursuance of Longstanding Doctrine of Equity Jurisprudence

The Doctrine of Equity Jurisprudence upholds fairness and natural justice including to

right to take action as a common shareholder against directors or company in which one has

invested/interests. In the case, Brown v Tenney, the plaintiff, Melvin Brown filed a case against

General Rubber Co. v. Benedict, 215 N.Y. 18, 109 N.E. 96 (1915)

Company Act 2006

MULTIPLE DERIVATIVE ACTIONS 13

Richard Tenney and others including Agri-Econ, Inc., Pioneer Commodities, Inc., and T/B

Holding Company. The claimant was acting on behalf of himself and T/B Holding Company. In

this case, Richard Tenney and William Jell were the directors of Pioneer Corporation, a

subsidiary of T/B Holding Company. The plaintiff was the shareholder of T/B Holding Company

and was therefore indirectly interested in Pioneer Corporation. The fundamental count in the case

was that Richard Tenney and William Jell as the directors breached fiduciary duties of loyalty by

converting funds from Pioneer to Ag-Econ, Inc., without repayments

. As a result, the

complainant sought injunctive and other reliefs from the wasting and damaging of the assets

which would affect the stability and success of both Pioneer and T/B Holding. The defendants

wanted the court to dismiss the suit on the basis that plaintiff could not act on behalf of Pioneer

in which he was not a shareholder. The court, however, held that the claimant had the right to

act through the double derivative as a longstanding doctrine of equity jurisprudence.

Besides, in the case Universal Project Management Services Ltd (UPMS) v Fort

Gilkicker Ltd & others, the court pronounced that the parliament would not have repealed the

double derivative claims to create a convenient procedural device for the wrongdoers who are in

absolute control of the company concerned

. Justice Briggs stated that a holding company could

be wrongdoer against a subsidiary he/she/it is in control, and hence the abolition of double

derivative would imply that a shareholder in the holding company may be denied the opportunity

take the derivative claim on behalf of the subsidiary company. Therefore denying a shareholder

Brown v. Tenney, 508 N.E.2d 347 (Ill. App. Ct. 1987)

Huang, Robin Hui, and Nicholas Calcina Howson, eds. Enforcement of Corporate and

Securities Law (Cambridge University Press, 2017).

MULTIPLE DERIVATIVE ACTIONS 14

in a parent company to undertake double derivative would be an act against Doctrine of Equity

Jurisprudence.

The Comparison between UK, USA, and South Korea

The application of the double or multiple derivative actions is considerably a highly

contested issue due to its complexity as well as lack of knowledge among the stakeholders

including the shareholders, company directors, and the attorneys. The fundamental reasons for

the complication are that single or simple derivative actions have been in practice of the years

and supported through provisions such as company acts and common law, but multiple

derivatives have been recognized recently through the case law. For the better understanding, it

is imperative to undertake a comparative analysis of the application of multiple derivatives in

three countries including UK, USA, and South Korea. The reason for the selection of UK and

USA is that the countries subscribe to the common law and that their judicial system gives the

claimants to pursue their concern. South Korea is involved because it is an example of a country

where the legal concept has not been accepted

3233

. In other words, the three countries give the

opportunity for an international comparative analysis of the application of double derivative

actions.

In the United Kingdom, derivative actions were primarily based on the common law,

until the enactment of the Company Act 2006. Company Act 2006 did not talk about the double

derivate or differentiated it from single or simple derivative. Instead, it coded the basis as to how,

Baum, Harald, Dan W. Puchniak, and Michael Ewing-Chow, The Derivative Action in Asia: A

Comparative and Functional Approach (Cambridge [etc.]: Cambridge University Press, 2012).

Puchniak, D, W, Harald B, and Ewing-Chow, M The Derivative Action in Asia: A

Comparative and Functional Approach (Cambridge: Cambridge University Press, 2012).

MULTIPLE DERIVATIVE ACTIONS 15

who qualifies the issues to be addressed and who can be sued through the derivative actions.

However, the act is applied complementary to the common law under which the double or

multiple derivatives are provided for an aggrieved member of a company. As discussed in the

case, Universal Project Management Services Ltd (UPMS) v Fort Gilkicker Ltd & others, the

Company Act 2006 did not abolish double/multiple derivatives but attempted to minimize the

complexity based on the common law to assist in its administration.

In The United States, the Company Acts governing the corporate governance, the rights

and the role of the stakeholders including shareholder are enacted at the state level

. This is

unlike in the United States where the Company Act 2006 is applicable in England and Wales or

Northern Ireland. However, the application of the common law and the case law is highly

evident concerning double derivative, in the United States. The cases including Brown v. Tenney

and others; Piccard v. Sperry Corporation; Hirshhorn v. Mine Safety Appliances Co.; and

General Rubber Co. v. Benedict as discussed above are the attestation that multiple derivatives

are largely accepted in American courts

. However, due to lack of harmonized statute or an Act

at the federal level, the complexity of the actions under double derivative actions is likely to

continue unlike in the United Kingdom. The American courts irrespective of the states will

continue to play a critical role in addressing the ambiguity or confusion in the common law

Schwarcz, Steven L. Keynote Address, Regulating Corporate Governance in the Public

Interest: The Case of Systemic Risk (2016).

Welch, Edward P., Robert S. Saunders, Allison L. Land, Andrew J. Turezyn, and Jennifer C.

Voss. Folk on the Delaware General Corporation Law: Fundamentals (Wolters Kluwer Law &

Business, 2016).

Strasser, Kurt A., Nicholas L. Georgakopoulos, and Eric J. Gouvin. The Law of Corporate

Groups: Jurisdiction, Practice, and Procedure (New York, NY: Aspen Publishers, 2007).

MULTIPLE DERIVATIVE ACTIONS 16

Therefore, the United Kingdom seems to be a step ahead regarding clarity regarding the second

tier derivatives.

In South Korea, the application of double derivative actions has not been adequately

provided for in both the case law and statutes

. This implies that the common law concerning

multiple derivative actions has not been upheld. An attempt to put the practice into case law has

been interrupted by invalidation by a higher court

. One of the outstanding cases is Eun-Sup

Jung v. Pyung-Sup Jung, et al

. In this case, the complainant was a shareholder of a parent

company controlling over 80% of as subsidiary. The plaintiff owned shares at the parent

company and accused it directors of misappropriation of funds happening at the subsidiary.

Surprisingly, the Seoul High Court ruled in support of the double derivative action. The court

gave three rationales for the decision. First, the court held that the application of the multiple

derivative actions would assist in opening a new avenue of dealing with the wrongdoing of

directors of both a holding and subsidiary companies. The second reason was that in the

particular case, the damages to the parent company were detrimental to the parent and therefore

the shareholder who is the complaint was also affected. Thirdly, the court stated that the use of

other means such as direct derivative at the subsidiary level would not have worked against the

directors in the parent company due to their control.

The ruled in this case similar to other cases in the United Kingdom and the United States;

it was in line with the common law and the Company Act 2006. However, the ruling was

Jeong, Young-Cheol K. "Impending Amendments to Korean Corporate Laws in 2009: A

Mystic Mix (2009) 4 Asian Journal of Comparative Law1.

Kim, Jasper. Korean Business Law: The Legal Landscape and Beyond (Durham, N.C.:

Carolina Academic Press, 2010).

Gelter, Martin. "Mapping Types of Shareholder Lawsuits Across Jurisdictions." (2017).

MULTIPLE DERIVATIVE ACTIONS 17

overturned by the Supreme Court. The Supreme Court stated that a plaintiff could only be

allowed to pursue derivative action to a corporation where he/she is a shareholder. In 2007,

double derivative proposed in an amendment bill to the National Assembly but was delivered as

a result of pressure from the business community

. This was however despite the support from

legal experts who were in favour of the earlier ruling by the Seoul High Court.

In summary, the practice and the application of the double derivative can be considered

to be part of the phenomenon used in enhancing corporate governance in the contemporary

world. In the countries or states where it is applied, it allows shareholders or member of a parent

company to seek relief against the misconduct and wrongdoing by the directors in both the

parent and the subsidiary in the subsidiary company. The common law provides that a

shareholder can seek relief through the derivative action against the directors. In addition to the

directors, the law provides that any a plaintiff can enjoy any other party /entity working in a

collision with the directors in the wrongdoing

. The plaintiff is however required to be acting on

his/her behalf as well as other shareholders, but not for personal gains.

In the comparative analysis in regard to multiple derivative actions in UK, USA, and

South Korea, it is evident that the legal application of the concept differs from one country to

the other. The legal system in the UK and the USA allow for the double derivative actions. In the

UK the passage of the Company Act 2006 codified the provisions of the Common Law

. In the

USA, the common law and the courts play a critical role since there is no statute to complement

Puchniak, Dan W., Harald Baum, and Michael Ewing-Chow. The Derivative Action in Asia: A

Comparative and Functional Approach (Cambridge: Cambridge University Press, 2012).

Jelsma, Phillip L., and Pamela Everett Nollkamper. The Limited Liability Company

(LexisNexis, 2017).

Rose, Paul, and Bernard S. Sharfman. Shareholder Activism as a Corrective Mechanism in

Corporate Governance (2014) 5 BYU L. Rev. 1015.

MULTIPLE DERIVATIVE ACTIONS 18

the common law. Contrary, the Supreme Court in South Korea and the National Assembly, have

halted the efforts to uphold double derivative actions. Therefore, shareholders in a parent

company are not allowed to pursue derivative action on behalf of the minority shareholders in a

subsidiary company.

Conclusion

As shareholders invest their resources in an organization, they expect the directors

involved in the day to day management of the corporation to undertake their duties effectively

and efficiently. The misuse and misappropriation of company assets and the omission involving

negligence and default are the wrongdoings termed as a breach of statutory duty of a director.

One of the remedies for such wrongdoing is derivative actions by the shareholders. From the

discussion, it is evident that shareholders of a parent company can sue the directors of a

subsidiary for the wrongdoing on own behalf as well as on behalf of other shareholders.

Nevertheless, in the case General Rubber Co. v. Benedict and par the common law, the claimant

must clearly demonstrate that he/she is not seeking compensation for the loss incurred. In fact,

the intention must be to assist both the parent and the subsidiary to perform successfully in their

undertakings.

The application of double derivatives is not uniformly applied across the world. It is

mostly accepted in some, but in others, it is not legally supported. In the United Kingdom, the

Company Act 2006 codified the application of derivative actions against the wrongdoing in

support of the common law. The common law concerning double derivative actions is also

applied in the United States, and the shareholders are allowed to pursue their claims in the courts

of law. It is recommended that the states or the federal lawmakers in the United States should

affirm the phenomenon. For the countries such as South Korea and others where multiple

MULTIPLE DERIVATIVE ACTIONS 19

derivative actions have not been supported, the lawmakers and the courts should engage the

stakeholders and introduce its provisions. For instance, the Seoul High Court high court ruling in

the cases Eun-Sup Jung v. Pyung-Sup Jung, et al. give reasons for the support of double

derivative actions. Despite been overruled by the Supreme Court the reasons given are in line

with the provision of the common law. Moreover, is such countries should be considered the

fact that the business corporation and company combinations have evolved over time and so

should be the legal provisions to enhance corporate government based on the trends.

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General Rubber Co. v. Benedict, 215 N.Y. 18, 109 N.E. 96 (1915)

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1212

Hirshhorn v. Mine Safety Appliances Co., 101 F. Supp. 549 (W.D. Pa. 1951)

Piccard v. Sperry Corporation, 30 F. Supp. 171 (S.D.N.Y. 1939)

Universal Project Management Services Ltd v Fort Gilkicker Ltd and others [2013] EWHC 348

(Ch), [2013] All ER (D) 313

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Company Act 2006

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<https://scholarship.law.duke.edu/cgi/viewcontent.cgi?article=6316&context=faculty_sc

holarship> Accessed 13

December

MULTIPLE DERIVATIVE ACTIONS 23

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