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Rotem: The Law Applicable to a Derivative Action on Behalf of a Foreign Corporation

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Yaad Rotem (Ramat Gan Law School – College of Law and Business) has posted “The Law Applicable to a Derivative Action on Behalf of a Foreign Corporation — Corporate Law in Conflict”, 46:2 Cornell International Law Journal (2013).

The abstract is as follows:

In corporate law, the derivative action mechanism allows minority shareholders and, in certain jurisdictions, single directors or even creditors to file and litigate on behalf of the corporation a lawsuit against an insider or a third party whose action has allegedly injured the corporation. The derivative action is a mechanism that corporate law furnishes to tackle agency problems because the corporate insiders who should initiate such claims occasionally become caught in a conflict of interests. Obviously, each jurisdiction decides whether to employ a derivative action mechanism and on what terms. However, in a globalized world that offers many attractive places in which investors can incorporate their businesses, corporate law regulation has become increasingly affected by surrounding regulatory environments. In many respects, conflict-of-laws rules manage the interaction between local and foreign regulatory rules. The purpose of this Article is to discuss the regulation of derivative actions when this mechanism is evoked in the context of a foreign corporation. This rather common scenario creates a choice-of-law question: should the terms and conditions for filing a derivative action on behalf of a foreign corporation (as opposed to the cause-of-action itself) be regulated by the law of the forum or by the law of the place of incorporation? For example, should the forum court enable plaintiffs to rely on the forum’s local derivative action mechanism when the foreign law of the place of incorporation rules out completely the possibility of derivative actions being filed? This Article analyzes the doctrinal contexts that may serve as a legal platform for resolving this question, as well as the relevant considerations to be taken into account. The Article subsequently argues that, in contrast to a prevailing perception, the law of incorporation should not always be applied. It is further argued that the public policy doctrine, rather than any other doctrinal context, is best suited to serve as a platform for adjudicating the choice-of-law question and that forum shopping concerns should be excluded from this question and confined to the context of jurisdiction ascertainment.

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