Empirical analysis of the statutory derivative claim: de facto application and the sine quibus non

This article is an empirical investigation in to how the statutory derivative procedure is being applied de facto in comparison with the equitable procedure. Agency theory supposes that the corporate purpose is to maximise the value of the company. To do so, the “efficient contract” must be approximated between the shareholders and directors, which is one that maximises their aggregate welfare. Private enforcement through the derivative claim is one such way of doing so. However, an intractable tension exists between too much and too little litigation where there are inadequate private incentives relative to the corporate purpose. The equitable procedure did not incentivise litigation. The concern of the statutory reform was that it would be more accessible creating inadequate private incentives for shareholders to litigate. Comparing the de facto application of the two procedures we do not find evidence to suggest the statutory procedure is more accessible. Instead, we observed what we call the sine quibus non for permission. These essential conditions the courts require for permission are unlikely to be met by shareholders, creating little incentive to litigate. From this we infer directors will continue to be incentivised to deter even beneficial litigation.