Apr 14,2020 | 17 min read

Shareholders Derivative Actions in Arbitrations

Author - Vivek Tanwar

What is a derivative claim?

When a shareholder  is outvoted by a majority which is acting against the interest of the company or when a director or group of shareholders , are acting for their own benefit or being partial to the  interests of a selected third party or parties. In cases of this kind minority shareholders can issue either a derivative claim or a claim for unfair prejudice.

In some legal systems, a shareholder is permitted to act on behalf of the company. In such cases doubts can be raised s to whether the shareholder may invoke an arbitration clause in the contract and is he/she bound by it.  It is interesting to note that the arbitrability of derivative shareholders’ actions is largely unclear in comparative legal entities. The approach to arbitrability may vary from country to country. For rg In Russia, a shareholder may sue a company for rescission of a contract concluded between the company and a third part

The protection of minority shareholders is gaining importance in corporate governance. Private enforcement by shareholders is being used as a vital catalyst in improving the accountability of the board. For shareholders to use arbitration to resolve disputes with a company, has been allowed by English law. But the shareholders of listed companies do not generally use this mechanism for resolving disputes. Though the US has made use of this in some cases. In the UK and other common law jurisdictions there is currently no research on the use of arbitration to promote corporate governance and deliver risk management .The Commercial Court of England and Wales has introduced the Financial List to provide a range of  dispute resolution services for the market. 

Mobility v. Concepcion 

On April 27, 2011, the Court ruled, by a 5–4 margin, held that a California state law restricting the ability of corporations to use mandatory arbitration agreements for resolving consumer and employment contract disputes was preempted by the Federal Arbitration Act (FAA) of 1925.

 In AT&T, plaintiff-consumers argued that the contracts they entered into for cellular phone services, which contained a clause requiring arbitration of all customer class-action disputes, violated a California state rule barring all class-action waivers in adhesion contracts. 

The Supreme Court disagreed, and declared the California law invalid under the FAA. Stressing that "the principal purpose of the FAA is to ensure that private arbitration agreements are enforced according to their terms," the Court's decision heightened the importance of the FAA within the context of corporate contracts.

Russian courts believe otherwise they take a view that a shareholder is not bound by an arbitration clause included in a contract. Therefore, a party to the contract containing an arbitration clause may start  an arbitral proceeding, as a rule in a foreign arbitral institution, while a shareholder may bring an action to a Russian state court for the termination of the underlying contract (the parties to the contract are co-defendants). Whereas  the arbitral tribunals have agreed that the contract is valid, Russian courts have constantly opposed this and have held that the contract was not acceptable.

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Vivek Tanwar

Graduated from MDU, Rohtak, Haryana in B.A.LLB. (Hons). Started legal practice in 2000. Have been appointed as the SPECIAL PUBLIC PROSECUTOR by the Government of Haryana, having an excellent record in conducting heinous criminal cases. Dignified member of prestigious institutions Nani Palkhivala Arbitration Centre & Indian Commercial and Arbitration Bar Association. A qualified professional with in-depth knowledge of the ADR conducting Arbitration for various Banking and Non Banking entities.