The Ministry of Justice has released draft regulations for derivative claims in response to a dramatic increase in the number of claims filed in the past decade. The regulations aim to streamline legal procedures and are based on regulations for class actions. The draft regulations were compiled by the economic department in consultation and legislation, led by attorney Meir Levin. The regulations are now open for public comment before they can be approved by Justice Minister Yariv Levin.
Derivative claims are filed by shareholders on behalf of a company against its managers when the company’s management fails to take legal action. The new regulations establish rules regarding deadlines for submitting court documents, fees and compensation for the plaintiff, and the establishment of a register of derivative claims. The regulations also introduce a mechanism for preliminary discussion of threshold claims, in an effort to dispose easily of claims that have no justification to pursue.
One key focus of the regulations is the establishment of independent committees. These committees are appointed by companies after a derivative claim is filed against them, and they recommend whether or not the company should sue its officers. The regulations aim to provide the court with tools to supervise the committees’ work, ensuring their independence and impartiality. The court will now consider several factors before deciding whether to delay a lawsuit due to the convening of an independent committee. The regulations also require the full committee report, even in cases of a compromise settlement, to be submitted to the court.
The Ministry of Justice aims to return the focus to the court and decrease the power of independent committees. The regulations state that granting “status to the company in the derivative procedure…should be given sparingly and only if there are circumstances that justify it”. The ministry argues that relying on committees for investigation rather than the court may not lead to the best result for the company and its shareholders.
In addition, the regulations address the issue of a race between derivative claims. According to the current rule, priority is given to the first claim filed in the same matter. The regulations allow the court to add or delete a derivative claim filed later if it is justified to manage the lawsuit in the best and most efficient way. The court will also have the power to appoint an objective expert to assist in the process.
The draft regulations aim to provide sufficient supervision of derivative claim procedures, dismiss unfounded claims, and ensure a fair and efficient process for all parties involved. The Ministry of Justice invites the public to provide their feedback on the regulations before they are brought to the approval of the Justice Minister.