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has its genesis in the rule in Foss v.Habottle3 and the exceptions to that rule.4 The basic rule states that if acompany suffers a wrong, it is the company that should seek redress for thatwrong because it is a separate legal entity from its shareholders. This rule is
based on sound corporate law principles and is capable of achieving
economically desirable results—for example—by reducing a multiplicity ofshareholder legal actions and allowing managers to have the freedom to run thecompany.5 However, it can lead to manifest injustices in some circumstances.Problems may arise when a majority of the directors are themselves engaged inconduct detrimental to the company and as such the board refuses to bring suitin the name of the company. As a consequence, a number of exceptions to therule in Foss v. Harbottle were developed to allow a shareholder to sue in orderto protect his or her ownership interest in the company.6
The common law position has been widely criticized as inadequate in
several aspects, including the prohibitive cost of litigation, the restrictive
1. Baoshu Wang & Hui Huang, China’s New Company Law and Securities Law: An overview and
assessment, 19 AUSTL. J. CORP. L. 229, 236 (2006).
2. Zhonghua Renming Gongheguo Gongsifa [Company Law of the People’s Republic of China]
(promulgated by the Standing Comm. Nat’l People’s Cong., Dec. 29, 1993, effective July, 1 1994)
(P.R.C.) (amended 1999, 2004, and 2005).
3. 67 Eng. Rep. 189 (V.C. 1843).
4. The derivative actions in the United States are based on the common law principles from a case
as early as in 1882: Hawes v. City of Oakland, 104 U.S. 450 (1882).
5. See, e.g., S. Chumir, Challenging Directors and the Rule in Foss v. Harbottle, 4 ALTA. L. REV.
96, (1965); C. Hale, What’s Right with the Rule in Foss v. Harbottle?, 2 COMPANY FIN. INSOLVENCY L.
REV. 219, 225 (1997).
6. In general, five exceptions were recognized: the illegal or ultra vires act exception, the special
majority exception, the personal rights exception, the fraud on the minority exception, and the interests
of justice exception. See, e.g., IAN M. RAMSAY & BENJAMIN B. SAUNERS, LITIGATION BY
SHAREHOLDERS AND DIRECTORS: AN EMPIRICAL STUDY OF THE STATUTORY DERIVATIVE ACTION 9-10
(Center for Corporate Law and Securities Regulation, University of Melbourne, 2006); Lang Thai, How
Popular are Statutory Derivative Actions in Australia? Comparisons with United States, Canada and
New Zealand, 30 AUSTL. BUS. L. REV. 118, 133 (2002).
HUANG V2Berkeley Business Law Journal Vol. 4.2, 2007
standing requirements, and the uncertainty of the rule and exceptions.7
Therefore, a number of common law jurisdictions have either introduced, or areconsidering the introduction, of the statutory derivative action. The Canadianstatutes on derivative actions have been around since the 1970’s.8 In 1993,Singapore and New Zealand introduced statutory derivative action to theircorporate law respectively.9 After nearly a decade of debate and consideration,Australia eventually introduced its statutory derivative action in 2000.10Recently, a statutory derivative action has also been proposed and subsequentlyadopted in the United Kingdom, birthplace of the rule in Foss v. Harbottle. 11
The statutory derivative action can also be found in the United States.12 It isbelieved that a statutory regime can overcome the common law deficiencies,making a derivative action more