Derivative actions and the funding problem: the way forward

It is widely acknowledged that the issue of cost is a major obstacle in the path of a minority shareholder bringing a derivative action on behalf of the company. This remains a burning issue. The purpose of this article is to examine possible solutions to the funding problem in which the risk of litigation is shifted on to the plaintiff's attorney. The article is organized as follows. The first section briefly explains why opting for the contingency fees agreement more acceptable cousin, namely, the conditional fees agreement is unlikely to resolve the funding problem in derivative action litigation. The second section then puts forward six arguments in favour of allowing contingency fees agreements for derivative actions in the UK. It explains why the time is now ripe for such a move and how in derivative action litigation this may be beneficial. There is no doubt that to permit a solicitor to conduct a derivative action on the basis of a contingency fee should be subject to proper safeguards. The final Section considers how these safeguards could be structured. The article concludes that, in the long run, unless a US type of contingency fee agreements together with supporting mechanisms is adopted to the English system accompanied by proper safeguards as proposed in the paper, it is unlikely that any reform will make the remedy more accessible. This will make litigation far more likely because it means that no individual shareholder need invest the emotional resources or time usually needed to pursue litigation, let alone the financial resources. This is clearly also warranted by an understating that contingency fee agreements are more compatible with derivative actions as well as more advantageous than indemnity orders or conditional fees agreements. Instead of re-inventing the wheel, the article proposes to adopt the US model for the derivative action and see whether over a ten-year period (litigation is a lengthy process) the benefits are clearly outweighed by any evils that may be perceived in that time.