The Essence of a Derivative Action
A derivative action is defined in the Entrepreneurship Code: one or several shareholders have the right to bring an action in their own name and for the benefit of the joint stock company in order to enforce a claim belonging to the company, including against the officials of the company — with a demand for compensation of damage caused to the company by their non-performance of duties, for the transfer of profit received in return for the caused damage, or for the renunciation of the right to receive such profit. The derivative character lies precisely in this: the action is brought by the shareholder, but the claim belongs to the company and is enforced for its benefit. An analogous route is provided for limited liability companies as well: under the relevant article, where a partner brings an action for the benefit of the company, the rules of the derivative action apply. In this way the law protects the interests of the enterprise where the organs of the company themselves avoided or were unable to initiate a dispute against its officials.
The Appointment of a Special Auditor
An important instrument for preparing a derivative action is the special audit. Under the respective article, a joint stock company is obliged, upon the application of shareholders holding at least 5 percent of the shares and by a decision of the general meeting, to carry out a special audit of the economic activity of the company or of its annual financial statements, where it is not subject to a mandatory audit, and for this purpose appoints a special auditor. A shareholder whose interests the audit concerns has no voting right on that matter. Where the general meeting refuses to appoint an auditor for an activity after which no more than 5 years have passed, the court appoints the special auditor upon the application of shareholders holding at least 5 percent of the shares, if a substantiated suspicion of a gross violation of the law or the charter exists. The replacement of an auditor appointed by the meeting is also possible: an application to the court must be filed within 14 days from the date of the meeting where the auditor lacks qualification or doubt exists as to his or her impartiality. Where the court appoints the auditor, the company bears the court costs and the court-determined remuneration; the governing organ and the supervisory council must cooperate with the auditor, grant access to documentation, funds and inventories and provide all necessary information; the conclusions are drawn up in writing and published. Where the appointment rested on incorrect information deliberately or grossly negligently supplied by the applicants, they reimburse the company's costs.
The Initiation of Liability by the Organs
A separate article regulates the organs' own initiative: the general meeting, the supervisory council and the governing organ of the company have the right, within their own competence, to demand from the members of these organs the compensation of damage caused to the company. By a decision of the general meeting the supervisory council or the governing organ may be charged to demand from the officials the compensation of damage caused by their non-performance of duties. A decision of the general meeting on demanding the compensation of damage must be executed within 6 months of its adoption, and the general meeting may appoint a special representative for this purpose. This norm complements the purely shareholder route: where the organs are active, the company restores justice by its own forces, and the shareholder's action remains for the case where that does not happen.
The Shareholder's Action and Proper Standing
Before filing, the shareholder demands in writing that the company bring the action. A shareholder is considered a proper plaintiff if 90 days have passed from the written application to the company, except where the company refuses to bring the action before the expiry of this period or observance of the period may cause irreparable damage to the company; in addition, the court must establish that the satisfaction of the shareholder's demand does not contradict the predominant interest of the company. The company may, with the consent of the shareholder, intervene in his or her place at any time. Where the shareholder is recognized as a proper plaintiff, the company is obliged to reimburse his or her costs connected with the action to a reasonable extent, unless it proves that the satisfaction of the action turned out to be harmful to the company; where standing is found improper, the shareholder reimburses the company's reasonable costs.
Frequently Asked Questions
For whose benefit is a derivative action brought?
For the benefit of the joint stock company: the shareholder brings the action in his or her own name, but the claim and its result belong to the company.
How many shareholders must apply for a special audit?
Shareholders holding at least 5 percent of the shares; where the general meeting refuses, the court appoints the special auditor on the application of the same quota if no more than 5 years have passed and a substantiated suspicion of a gross violation exists.
Within what period must the general meeting's decision on a damages claim be executed?
Within 6 months of its adoption, and for this purpose the general meeting may also appoint a special representative.
When may a shareholder bring the action?
After 90 days have passed from the written application to the company, unless a refusal follows earlier or a risk of irreparable damage exists; the court also assesses whether the demand contradicts the predominant interest of the company.
How We Help on Legal.ge
A derivative action is a complex instrument where the management of deadlines and evidence is decisive. Our team will assess the prospects of your case, prepare the application and the statement of claim, help organize the special audit and represent you in court. Contact Legal.ge and we will defend your interests and those of the company.