Juridical Review of Derivative Suits Against Board of Directors to Enforce The Company’s Rights

DOI

10.2991/978-2-38476-352-8_22How to use a DOI?

Keywords

Derivative Action; Directors; Limited Liability Company

Abstract

Limited Liability Company is a corporate structure to conduct business with its capital divided into the number of shares, and the ownership will be determined by the contribution of shareholders. A consequence of a share-based ownership structure is the establishment of majority and minority shareholders. The board of directors plays a crucial role in determining the ratio of majority to minority shareholders. A company’s directors, by virtue of their position of power, can act as its representatives and pursue legal action against wrongdoers. The firm may not have the legal standing to sue its directors if the board of directors themselves make a mistake that costs the business money and the majority of shareholders approve of their behavior. If the company’s rights are violated, especially by the board of directors, a minority shareholder may be able to restore them through extraordinary legal measures according to “Article 97, paragraph (6) of Law Number 40 of 2007 concerning Limited Liability Companies. When directors or commissioners commit misbehavior that causes financial loss to the firm, minority shareholders have the right to initiate legal procedures against them as representatives of the company”. This is called derivative action. So, in essence, derivative action aims to protect the interests of the company, and indirectly protect the interests of minority shareholders. Minority shareholders can take extraordinary action through the court so that the company’s rights are not harmed, for example the directors use company funds for personal interests. A derivative lawsuit is an abnormal lawsuit because in most cases, it is the directors who act as representatives of the company and not the shareholders. However, even though this derivative lawsuit is filed by a minority shareholder, the compensation will be given to the Company. This is because the minority shareholder acts as a representative of the Company. Therefore, derivative lawsuits provide practical benefits and purposes both for managerial accountability, as well as a means of compensation for the company and resolution of internal corporate conflicts. The concept of derivative action is a significant advancement in corporate law, designed to curtail the misuse of authority by directors or commissioners, often controlled by majority shareholders. This study employs normative legal research methodology, which involves collection of data through literature studies, such as scholarly books, legislation, and relevant data accessed through the internet pertinent to this inquiry. This study’s findings show that when directors fail to fulfill their duties, shareholders, particularly minority shareholders, can protect the company’s interests through derivative action. Given that directors represent the firm on a daily basis, it is improbable that they would initiate actions against other directors who engage in misconduct. In this context, the notion of derivative action gives minority owners the authority to initiate exceptional legal proceedings to restore or safeguard the company’s rights.

Copyright

© 2025 The Author(s)

Open Access

Open Access This chapter is licensed under the terms of the Creative Commons Attribution-NonCommercial 4.0 International License (http://creativecommons.org/licenses/by-nc/4.0/), which permits any noncommercial use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons license and indicate if changes were made.

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TY  - CONF
AU  - Marlina Elisabeth Pakpahan
AU  - Teguh Prasetyo
AU  - Elvira Fitriyani Pakpahan
AU  - Willy Tanjaya
PY  - 2025
DA  - 2025/01/21
TI  - Juridical Review of Derivative Suits Against Board of Directors to Enforce The Company’s Rights
BT  - Proceedings of the 5th International Conference on Humanities and Social Science (ICHSS 2024)
PB  - Atlantis Press
SP  - 260
EP  - 270
SN  - 2352-5398
UR  - https://doi.org/10.2991/978-2-38476-352-8_22
DO  - 10.2991/978-2-38476-352-8_22
ID  - Pakpahan2025
ER  -