In recent years the use of the instrument of the derivatives suit has increased mainly among public companies in Israel. In the 1980s only a few derivative suits were filed while in the 1990s dozens were filed. By 2000 alone dozens of derivative suits were filed and in the current decade over 100 derivative suits have already been filed. There has also been a consistent rise in the tendency of courts to approve the filing of derivative suits.
There are many similarities between derivative suits and class action suits. The plaintiff in the derivative suit is also entitled to special recompense, which will be paid by the company (in addition to the compensations that will be awarded in favor of the company). The lawyer representing the plaintiff is also entitled to a fee that will be set (among other things) taking into account the sum that will be awarded in favor of the company. Nevertheless, the amounts of the recompense and the fee paid in derivative suits, whether by the court's decision or in a compromise, are similar in substance to the amounts paid in class action suits. The conduct of the derivative suit also requires filing for approval to conduct the case. The derivative suit also does not require payment of a fee ahead of time. The derivative suit can also receive funding from the Israel Securities Authority and is permitted to request disclosure of documents before approval to conduct the suit is given, and sometimes even before filing the request to give approval.
However, there is an important advantage that a derivatives suit has over a class action suit against company executives. Generally, it can be said that the chances of success in a derivatives suit are higher than the chances in a class action suit. Class action suits with public companies fail in no small number of cases on the grounds that the prosecuting shareholder does not have a personal cause of action against the executive. This is due to the rule that executives owe obligations of trust and caution solely to the company and not to shareholders (except in exceptional cases). This obstacle does not stand in the way of plaintiffs in derivative suits. Shareholders file suits in the name of the company, and not in the name of shareholders. Therefore, derivative suits are no less dangerous (perhaps more) to executive officers at public companies compared with class action suits.
In addition, courts have been more lenient in recent years with derivative suits and removed obstacles that previously barred the way. For example, courts are inclined to be more lenient with a plaintiff who purchased his shares in order to file the derivative suit. In the past, courts dismissed derivative suits just for this reason. Today the courts make do with the statement that this matter is taken into account as part of the examination in good faith of the derivative claim that has been filed. Courts tend to place an emphasis on examining the existence of grounds for the suit by the company against the executives and less on the question of the fitness of the shareholder to conduct the suit.
Therefore, the derivative suit is slowly replacing the class action suit against directors and managers of public companies. It is acceptable to see class actions suits as a threat that might be strategic for the company. The derivate suit too may also be a strategic threat, especially for executive officers of the company. It is important to recognize the instrument of the derivative suit and the ways that exist to defend against it.