Funding Derivative Actions: A Re-Examination of Costs and Fees as Incentives to Commence Litigation

Arad Reisberg

Pembroke College, Oxford

jcls Vol 4 Issue 2 (October 2004)

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Abstract

This article is concerned with the critical role of costs and fees in initiating and maintaining derivative actions in the context of incentives to such litigation. First, it briefly explicates the economics of derivative action litigation. As part of this, the US rules on derivative action fees are examined. After rehearsing the common law recognition of the problems of the impecunious shareholder in the form of indemnity costs orders, it exposes major flaws in the operation of these costs orders. In response, three possible solutions to rectify the funding problem are considered: (i) making a mandatory requirement for the company to pay the costs of the action; (ii) rewarding the plaintiff with part of the proceeds of a successful action; and (iii) employing conditional fee agreements. These are examined and assessed.

Keywords

Derivative Action, Costs, Indemnity Costs Order, Funding, Minority Shareholders, Conditional Fee Agreements, Contingency Fees, Incentives to Litigate.