Corporate Litigation As A Method To Protect Shareholders Rights (LL.M Dissertation)

SCHOOL OF LAW
ERASMUS UNIVERSITY ROTTERDAM
LL.M PROGRAMME
Business, Corporate, And Maritime Law
Corporate Law Specialization
Dissertation
CORPORATE LITIGATION AS A METHOD TO PROTECT

SHAREHOLDERS RIGHTS
(A Comparative Study between Indonesia and The United States)
Alwin Redfordi
Student Number: 316631
Supervisor:
Prof. Dr. F. J. M. De Ly
Rotterdam, June 2008
The Netherlands
1
ACKNOWLEDGEMENTS
1. Prof. Dr. F. J. M. De Ly, for guiding me throughout the preparation of my thesis.

2. Prof. Paul Storm, for giving me the inspiration to write this thesis during the course
commencement of the International Corporate Law programme.
3. My Parents, for providing me the opportunity to pursue higher education.
4. Tika, for your support and patience.
5. My Sister and My Brother in Law for your support.
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TABLE OF CONTENTS
INTRODUCTION ........................................................................................................................... 1
GENERAL CONCEPT OF SHAREHOLDING AND DIRECTORS LIABILITIES ................... 4
2.1. Shareholders and Types of Rights Attributed to Shareholding ................................................. 4
2.2. Separation of Ownership and Control ...................................................................................... 5
2.3. Duties and Liabilities of Directors in Company Law ............................................................... 9
2.3.1. Directors Fiduciary Duties In The United States ............................................................... 9
2.3.1.1. The Fiduciary Duty of Care .................................................................................... 10
2.3.1.2. The Fiduciary Duty of Loyalty ................................................................................ 13
2.3.2. Directors Fiduciary Duties Under Indonesian Regulatory Framework ............................. 16
2.3.2.1. The Indonesian Fiduciary Duty of Care and Loyalty of Directors ............................ 17
2.3.2.2. The Indonesian Fiduciary Duty of Care and Loyalty of Commisioners .................... 19
SHAREHOLDER/CORPORATE LITIGATION UNDER DELAWARE LAW ........................ 21
3.1. The Derivative Action ........................................................................................................... 21
3.1.1. The Proper Plaintiff Principle ......................................................................................... 23
3.1.2. The Demand Requirement .............................................................................................. 24
3.2. The Direct Action ................................................................................................................ 27
SHAREHOLDER/CORPORATE LITIGATION UNDER INDONESIAN REGULATORY
FRAMEWORK ............................................................................................................................. 29
4.1. The Derivative Action as an Ex-Post Strategy for Minority Shareholders .............................. 30
4.2. The Direct Action in Indonesian Company Law .................................................................... 34
4.2.1. Rights attaching to Shares a Legal Basis of the Claim ..................................................... 35
4.2.2. Direct Actions Submitted as Class of Shares Claims ....................................................... 39
A COMPARATIVE ANALYSIS BETWEEN THE INDONESIAN STATUTORIAL AND
AMERICAN CORPORATE COMMON LAW LITIGATION................................................... 42
5.1. Matters Concerning Direct Shareholder Litigation ................................................................ 42
5.1.1. Requirements for Direct Shareholder Litigation .............................................................. 42
5.1.2. Remedies Awarded in a Direct Shareholder Claim ......................................................... 45
5.2. Prerequisites to The Derivative Action .................................................................................. 46
5.3. Class Action Litigation Under the Indonesian and the American System ............................... 47
CONCLUSION.............................................................................................................................. 49
BIBLIOGRAPHY ......................................................................................................................... 51
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CHAPTER I
INTRODUCTION
Behind every successful company underlies a good relationship between the elements that
together forms the company. Corporate law and corporate governance has been aimed to
create ways to govern and regulate relationships between these elements of the company,
whether it is between the company and the shareholders, the management and the
shareholders and between minority shareholders with controlling shareholders.
Conflicts between these elements of the company1 are known as agency problems, namely
the problems that arise as a result from a principal and fiduciary relationship. As Henry
Hansmann and Reinier Kraakman describes the jargon of agency problem: “an ‘agency
problem’---in the most general sense of the term---arises whenever the welfare of one party,
termed the ‘principal,’ depends upon actions taken by another party, termed the ‘agent.’”2.
The problem lies in how to make sure that the agents conforms to the visions of the principal.
While corporate law through statute and case law (mostly Common Law jurisdiction) have
provided the guidelines and standards of conduct for the agents, often comes cases where the
agent acts opportunistically on the expense of the principal. Other times we often see cases
how the directors of the company are engaged in self dealing transactions therefore incurred
damages to the company and its shareholders. Other problems may arise when the company
infringed the rights of the shareholders. Solutions to these problems have been provided by
corporate law which also function as a negative reward for the violating party and to create a
better relationship between the principals and the agents in the future. Through corporate
litigation the shareholders can enforce their rights either against the company and/or its
directors, to increase its shareholders value, maintain the quality of the management and
increase management accountability
1
In this thesis the terminology of “corporation” and “company” are used interchangeably, everytime they
come up in a sentence, one should bear in mind the same idea, which is the limited liability company.
2
Hansmann, Henry and Kraakman, Reinier H., "Agency Problems and Legal Strategies" . THE ANATOMY OF
CORPORATE LAW: A COMPARATIVE AND FUNCTIONAL APPROACH, R. Kraakman, P. Davies, H. Hansmann, G.
Hertig, K. Hopt, H. Kanda, and E. Rock, Oxford University Press, p.21
4
An empirical study by Robert B. Thompson and Randall S. Thomas3 “Shareholder Litigation:
Reexamining The Balance Between Litigation Agency Costs And Management Agency
Costs” on the subject of shareholder litigation shows that most of the shareholder litigation
cases submitted In the United States specifically to the Delaware Court involves class action.
However corporate litigation is not only limited to such class actions suit, often the
shareholder pursues the claim in the name and on behalf of the company for its lack of action,
claiming that a director of the company and/or third parties committed actions which is
contrary to the interests of the company and subsequently resulted in damage/loss to the
company and/or it’s shareholders. Such term can be identified as a derivative action, it is a
method where the shareholder derives any rights supposedly belong to the company to sue
and for the company’s refusal to act or react. The third type of corporate litigation comes in
the form of direct actions or direct suits where the shareholder suffers a distinct injury
different from other shareholders of the same class in a company.
This thesis will mainly discuss about the problems regarding the relationship between the
company, its management and the shareholders in the United States and Indonesia and mainly
how corporate litigation will provide the shareholders with methods to ensure and maintain
accountability of the management and to how methods of corporate litigation an be used as an
ex ante solution to the agency problem. The discussion of direct, derivative and class action
litigation in this thesis will only be done in the context of the public company in general, thus
the discussion of direct and derivative litigation in closely held companies (such conflicts
between the minority and majority shareholder of the company) will not be included
For the purpose of this thesis, Chapter I will provide an introduction to the field of corporate
litigaiton, Chapter II will explain the general shareholders rights and the rights attaching to
share ownership, how the share ownership contributes to the legal standing of the
shareholder, how such rights shall be used as the legal basis for shareholder suits, what is the
obligation and liabilities of the company’s directors in connection with the subject of
shareholder litigation in this discussion Chapter III will provide an insight into the American
corporate law system specifically into the Delaware General Corporate Law and case law of
the state court of Delaware, corporate litigation method available for protection of
3
Robert B. Thompson and Randall S. Thomas., ‘Shareholder Litigation: Reexamining The
Balance Between Litigation Agency Costs And Management Agency Costs’. Vanderbilt University Law School
Law & economics Working Paper Number 02-10, http://ssrn.com/abstract_id=336162, p. 17
5
shareholders rights, also procedures to be followed and satisfiesd governed by the Federal
Rules Of Civil Procedure, Chapter IV will provide an insight into the Indonesian corporate
law regime and the method of shareholder protection available through corporate litigation,
Chapter V summarizes and compares the two corporate law system namely The US and
Indonesia, Chapter VI will be the final chapter which consists of the conclusions of this
thesis.
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CHAPTER II
GENERAL CONCEPT OF SHAREHOLDING AND DIRECTORS LIABILITIES
2.1. Shareholders and Types of Rights Attributed to Shareholding
Attracting capital through equity have been done by companies since the creation of the
company concept in the roman times, but the modern idea of formally tradable shares did not
arise in England until the formation of the merchant companies in the Elizabethan era4, while
some companies financed their business by using debt capital through bonds or other
commercial notes, some prefer selling their shares to private placements, venture capitals or
the public with what we know as an Initial Public Offering or IPO’s, where the company is
offering to sell their company’s shares to the public for the first time with the help of
investment banks as underwriters.
Investing money in company’s shares are risky, therefore as rational beings, investors as
economic maximizers must have something back in return for the capital or equity they
invested in the company, a tradeoff between the value they invested in with the benefits they
are receiving, thus this return can take the form of rights attaching to their ownership of
shares, which rights can be enforced against the company or any other person considering the
alienability rights attaching to the shares, this paragraph further explains the definition of
property rights and alienability:
“A property right is a legally enforced right to select the uses of an economic good. A
Property right is private when it is assigned to a specific person. Private property
rights are alienable in that they can be transferred (sold or given to another
individual)” 5.
The paragraph provided above gives us a definition about property right and the alienability
rights, in this case the discussion of rights attaching to shares come into play, shares carried
and owned by a shareholder fulfils these two definitions (i) that the share is an economic
good, having tradability characteristics and an economic value (ii) that it is assigned to a
4
Keith Pillbeam, Finance and Financial Markets, 2Rev Ed ed., Palgrave/Macmillan, 1998, p. 447.
5
James A. Brickley, Clifford W. Smith,Jr., Jerold L. Zimmerman, Managerial economics and organizational
architecture, 4th ed. (Boston: McGraw-Hill/Irwin, 2007) p.57.
7
specific investor, evident by the existence of the share certificate. Where the company have
allotted and sold shares to investors or now we can say the shareholders of the company
means that the shareholder owns part of the company through his ownership of the company’s
shares, therefore the shares he own is alienable where he can transfer the ownership of those
shares to other (future) investors, this is characteristic of an alienability right.
Shares represent the interest of the members in the company6. Shares in a company gives the
holder of the shares a number of rights as is usually stipulated in the articles of association,
we identify these rights as basic shareholders rights, although these rights basically depends
on the type of shares they are holding but commonly the rights attaching to the common
shares are as follows:
1. The rights to a dividend (a portion of the company’s profit, calculated on the basis of the
number of shares owned by the shareholder also the statutory dividend stipulated in the
articles of association)
2. The rights to be invited and to attend a general meeting of shareholders, and if the shares
entitles the holder to vote, a right to vote in the general meeting of shareholders
3. The right to convene a general meeting of shareholder and put items on the general
meeting of shareholders agenda.
4. The residual claim of the company’s assets in the case of liquidation, after all the
creditors’ claims have been satisfied.
Violation of these rights attaching to shares gives shareholders the rationale to enforce them
against the company and/or the company’s directors, further in this thesis we will discuss in
more depth concerning the usage of these rights as the basis for shareholder litigation claims
against the company or the company director.
2.2. Separation of Ownership and Control
Modern corporate law doctrine has created the concept of separation between ownership of
the company and day to day management of the company, such doctrine clearly draws the line
between management and ownership. The separation of ownership and control gives the
directors/management of the company more freedom in conducting their duty of company
6
Helen Gubby, English Legal Terminology, Den Haag, Boom Juridische uitgevers, 2004, p. 230.
8
management, while shareholders of the company being excluded from the daily or day to day
management of the company and will have their say in the important decisions to be taken of
such as decisions concerning mergers, takeovers and the likes. This creates a principal-agent
relationship between shareholders as the owners of the company and directors as a decision
making and management organ of the company, exerting its authority over daily company and
business activities. Shareholders having its position in the relationship as principals in the
principal-agent relationship by having given their authorization to the company directors to
manage the company and its assets. Here we can conclude that the managers is agents to the
shareholders and the company in that they were positioned as trustees over the company’s
assets, to manage them and make the best out of its potentials.
Differentiation or classification shall be made first between two types of companies which is
the private company or closely held company and the publicly traded company. The problem
often arises in the context of the publicly traded company where the company is owned by a
large number of shareholders where considering the large number of shareholders, arises the
need for governance concepts which will allow the management and directors to be more
independent and focused on the day to day management of the company. The dispersion of
share ownership is not often the problem happening in the private owned or closely held
companies where the shareholders are often the directors of the company itself thus the
separation of ownership and control of the company does not appear and function in the same
way as in a publicly traded company and in fact not needed to be done by the fact that the
directors and the owners are the same person running the company.
The concept of separation between ownership and control gives solution the abovementioned
problem, the creation of this concept makes perfect sense that the directors and management
will not effectively run their duties if the large number of shareholders having different
objectives, personality and will, are able and allowed to interfere with the day to day
management of the company. However notwithstanding such concept of separation of
ownership and control it is to be bear in mind that ‘the purpose of corporate governance is
also to persuade, induce, compel, and otherwise motivate corporate managers to keep the
promises they make to investors’7.
7
Jonathan R. Macey, ‘The Promise of Corporate Governance’, Paper presented at Law and Economics seminar,
Stanford Law School, Thursday November 15 2007, p. iii.
9
The problem with separation of ownership and management in the publicly traded company
creates another problem that is that the managers might act a contrario to shareholders
interest which translates into an “agency problem”. Therefore the implication of such
problem is there must exist a mechanism which functions to monitor effectively or to correct
the directors in managing the company where the function of monitoring concerns the way in
which the system attempts to allow the managers to operate the business effectively while
limiting their ability to take advantage of their power and harm the shareholders8. The
following paragraph connects how the separation of ownership (characteristic to shareholders
as residual claimants) and control (as in control over the company assets and management,
characteristic to a manager):
Control of agency problems in the decision process is important when the decision
managers who initiate and implement important decisions are not residual
claimants and therefore do not bear a major share of the wealth effects of their
decisions. Without effective control procedures, such decision managers are more
likely to take actions that deviate from the interests of residual claimants9.
Some Principals, although they are legally empowered to exercise control are in fact unable to
exercise meaningful control over their agents because of a lack of knowledge or skill10. The
previous statement shows how separation of ownership and control can cause certain
problems concerning how shareholders cannot perfectly exert its ex ante right to oversight of
the company because the lack of special knowledge (the knowledge of management).
Nonetheless indeed separation of ownership and control is important to fulfill the company
objectives, directors as management who have been dealing with the company for a certain
period of time by running its day to day management must have special knowledge and skill
not owned by the shareholders themselves.
As a solution to the problem of limitations of ex ante control oversight ever company

management, corporate law gives shareholders an ex post method through corporate
litigation, which will be discussed further in this thesis. Under the ex post corporate law
8
Arthur R Pinto,’The United States’, in Arthur R Pinto and Gustavo Visentini, The Legal Basis of Corporate
Governance in Publicly Held Corporations A Comparative Approach, The Hague, Kluwer Law international, 1998
p. 265.
9
Eugene F. Fama & Michael C. Jensen, ‘Separation of Ownership and Control’, Journal of Law and Economics,
Vol XXVI, June 1983, p.5
10
Paula J. Daley, ‘Shareholder (and Director) Fiduciary Duties and Shareholder Activism’, 2006 at:
http://law.bepress.com/expresso/eps/1746, at p. 5.
10
method of corporate litigation, the board of management is actually answerable and
accountable to the shareholders for their actions and decisions taken in the course of running
the company as agents or fiduciaries of the shareholders. Corporate litigation creates a
deterrent effect upon a wrongdoer, as well as providing corporal punishment and a method
for correcting the act taken by the management. A fiduciary is described by the Black’s Law
dictionary as ‘a person holding the character of a trustee, or a character analogous to that of a
trustee, in respect to the trust and confidence involved in it and the scrupulous good faith and
candor which it requires11’. The directors acts as a fiduciary not just to the company itself but
also to the shareholders of the company, they can be held liable for their negligence or the
breach of their fiduciary duties, although the standard of directors duties differ somehow in
each country.
According to the agency theory an agency problem does not always come up between the
shareholders and the directors or management, but also between the controlling shareholders
and the minority shareholders12, and also between the firm itself (including particularly, its
owners) and the other parties with whom the firm contracts13. Daley provided that a fiduciary
is a person which is given the power to manage others, as we can see from the following
statement: “However, it is generally accepted that what makes a fiduciary a fiduciary is her
power to make decisions with regard to another person’s property or person”14. The paragraph
implies that controlling shareholders are not categorized as a member of the fiduciary group
debtors, where in this case it simply points that fiduciary duty applies to directors owing
fiduciary duties to the shareholders on general, over “their power to make decisions with
regard to another person’s property or person”. And “a power creates a fiduciary duty if it
enables the fiduciary to make decisions that are legally enforceable and can result in liability
for the beneficiary”15. Thus the management or the directors of the company given the
authority and power to make decisions upon the company’s property or asset in whole can
clearly be categorized into the definition of a fiduciary with shareholders as the beneficiaries
11
Henry Campbell Black, Black's Law Dictionary, Reprinted Second Edition (St. Paul, MN : West Group, 1995),
p.496.
12
Hansmann, Henry and Kraakman, Reinier H., "Agency Problems and Legal Strategies" . The Anatomy Of
Corporate Law: A Comparative And Functional Approach, R. Kraakman, P. Davies, H. Hansmann, G. Hertig, K.
Hopt, H. Kanda, and E. Rock, Oxford University Press, p.22.
13
Ibid.
14
Paula J. Daley, Shareholder (and Director) Fiduciary Duties and Shareholder Activism, 2006 at:
http://law.bepress.com/expresso/eps/1746, p.4.
15
Ibid.
11
of the duties. Therefore for the purpose of this thesis agency problems will only be discussed
in the context of the problems arising in shareholder-management relationship.
Further we will go into more depth on the means of protecting the shareholders rights whether
it is direct through the existence of a distinct injury suffered by individual shareholders or a
group of shareholders or through derivative action where injury is suffered by the company
and how the methods of corporate litigation and corporate class litigation under Indonesian
Delaware law is conducted and regulated.
2.3. Duties and Liabilities of Directors in Company Law
Although different in depth but most company laws provided a description of the duties and
the obligations owed by the directors to the company and its shareholders or what we know
as fiduciary duties of directors. In this respect we will review the concept of the liabilities of
the directors and commissioners as agents and fiduciary of the company and how their action
or non action can be used as the basis of a shareholder suit.
2.3.1. Directors Fiduciary Duties In the United States
In the United States directors have more power in running the management of the company,
under the traditional corporate structure, control of a corporation is vested in the board of
directors elected by the shareholders and these directors chose managers to run the business16.
This is particularly true in Delaware where “A cardinal precept of the General Corporation
Law of the State of Delaware is that directors, rather than shareholders, manage the business
and affairs of the corporation17”. In addition, according to the MBCA the board of directors
are given statutory authority to exercise corporate powers including managing the business
and affairs of the company, but nonetheless it is still subject to the limitations (if it is
provided for) in the articles of association18.
United States law acknowledges the two fiduciary duties of the director which is fiduciary
duties for the benefit of the corporation and fiduciary duties for the benefit of the
shareholders. These fiduciary duties owed by the managers of the company to the company
16
Arthur R Pinto,’The United States’, in Arthur R Pinto and Gustavo Visentini, The Legal Basis of Corporate
Governance in Publicly Held Corporations A Comparative Approach, The Hague, Kluwer Law international,
1998, p.253.
17
Case Aronson v. Lewis 473 A.2d 805 Supreme Court of Delaware, 1984.
18
Model Business Corporation Act, Section 8.01 (b).
12
and it’s shareholders can be described as the directors duty of care and the directors duty of
loyalty.
This duty owed by the director to the company and the shareholders, can be described as a
quasi fiduciary relationship where it is one that has several but not all of the elements of an
actual fiduciary relationship19 in that the entire management of corporate affairs is often
entrusted to the directors of the corporation, who are responsible for acting in the best interest
of the corporation and the shareholders20. An explanation of this duty owed by directors is
that the directors are under strict obligation to act for the benefit of the company and the
shareholders, a company director is considered to be in breach of a fiduciary duty if he
benefits from profits or gain at the expense of the company or its shareholders.
2.3.1.1. The Fiduciary Duty of Care
The directors duty of care in the United States particularly in the state of Delaware has
mainly been developed through case law, the statutes has also shown that “Delaware does not
have a statutory standard for the duty of care.21”. For a model and definition of the fiduciary
duty of care we will look into the Model Business Corporation Act (hereinafter will be
“MBCA”) § 8.30. (b) under the title of Standards of Conduct for Directors, as follows:
(b) The members of the board of directors or a committee of the board, when
becoming informed in connection with their decision-making function or devoting
attention to their oversight function, shall discharge their duties with the care that
a person in a like position would reasonably believe appropriate under similar
circumstances.22
This provision from the MBCA provided a model of the standard of conduct for directors,
this article § 8.30. (b) particularly gave a definition of the directors’ an obligation to comply
with the duty of care principle, which is in fact places and lays a burden to each member of
the board to act “with the care that a person in a like position would reasonably taken under
similar circumstances". The director sued on the basis of the duty of care principle are also
19
Angela Schneeman, The Law of Corporations, and Other Business Organisations (third edition, (Albany,
NY, West/Thomson Learning, 2002, at p. 247.
20
Ibid.
21
Pinto, A.R and M. Branson, Douglas, Understanding Corporate Law (Second Edition), Lexis Nexis, 2004, text
accompanying note 29, p.205.
22
Model Business Corporation Act § 8.30. (b).
13
given a mechanism to protect their business decisions, this rule in the American system is
termed “the business judgment rule”. The operation of a business judgment rule protects a
decision if it is made by an independent, informed board acting in what it believes in good
faith to be the best interest of the corporation23. The following paragraph describes how the
operation of the business judgment rule protects business judgments taken by directors:
According to Dean Clark, “[t]he rule is simply that business judgment of . . .

directors will not be challenged or overturned by courts or shareholders, and the
directors will not be held liable for the consequences of their exercise of business
judgment—even for judgments that appear to have been clear mistakes—unless
certain exceptions apply.”24
The business judgment rule puts the burden of proof on “the party challenging the decision to
establish facts rebutting the presumption.25”, while the court will only review the decisions
made by the company on the basis of the procedures taken by the directors and not on the
actual material or business decision when it was made, the court upholds this view since the
court consider that it is not in their position to second guess26 business decisions taken by
directors which is not in their expertise to do. The business judgment rule are also provided so
that the directors can freely (nonetheless with certain limitations, that it must be taken in the
presence of good faith) take business decisions, decisions with risks in which it is their job to
do with a view of gaining a profit for the company27, provided that decisions they make are
without conflict of interest characters and not completely irrational. According to Prof
Bernard Black it is actually the duty of the directors of the company to take risks that “if the
directors risk being found personally liable for bad outcomes, they will be reluctant to take
risks, and we will get fewer really good decisions also28”.
The Supreme Court of Delaware in Smith v Van Gorkom upholds that the existence of gross
negligence on the part of directors of the company is sufficient as to determine that the
business judgment rule is not applicable, the following is cited from the decision: ‘We think
23
Case Aronson v. Lewis, 473 A.2d 805, 812 (Del.1984)
24
Prima Fontana, ‘CERCLA Derivative Suits’, published in the Boston College Environmental Affairs Law Review,
http://bc.edu/bc_org/avp/law/lwsch/journals/bcealr/27_4/04_FMS.htm, accessed 4 March 2008.
25
Case Aronson v. Lewis, 473 A.2d 805 [Del.1984]
26
Professor Bernard S. Black, ‘The Principal Fiduciary Duties of Boards of Directors’, presentation at Third Asian
Roundtable on Corporate Governance, Singapore, 4 April 2001. p.6
27
Ibid.
28
Ibid.
14
the concept of gross negligence is also the proper standard for determining whether a
business judgment reached by a board of directors was an informed one’29. Accordingly, The
Supreme Court in this case maintains the opinion that the business judgment rule can be
rebutted on the basis that the directors have been found to be grossly negligent, recent cases
such as in the Walt Disney, Mcmullin v. Beran and Zahn v. Transmerica Corp shows that “In
Delaware, a breach of duty of care generally involves a failure to become reasonably
informed or gross negligence generally30.
In Smith v Van Gorkom the board took decisions on the approval of an acquisition bid
without actually being informed by an investment banker whether the price offered in the bid
were fair or not, another bid which could have a higher offer would be possible, and the fact
that the board of directors have taken the decision to approve the sale of the company without
informed prior notice of the offer itself, considered sufficient for the Delaware Supreme
Court to not apply the business judgment rule. Had the board of directors in this case been
fully informed on the actual information from an investment banker regarding the bid at the
time the decision making was taking place, the outcome of the decision would somehow
differ.
For the matters of defining whether a the decision taken is an informed one or not the
Supreme Court of Delaware in Smith v. Van Gorkom provided a standard that “The
determination of whether a business judgment is an informed one turns on whether the
directors have informed themselves “prior to making a business decision, of all material
information reasonably available to them.31”
Upon proving the failure to act in good faith on the part of the alleged wrongdoer, the
business judgment rule can be rebutted. The Supreme Court of Delaware in its Post-trial Op
In re Walt Disney Company Derivative litigation, upholds three actions which constitutes as
the failure to act in good faith:
“...where the fiduciary intentionally act with the purpose other than that of
advancing the best interests of the corporation, where the fiduciary acts with the
intent to violate applicable positive law, or where the fiduciary intentionally fails
29
Case Smith v. Van Gorkom, 488 A.2d 858 [Del.1985]
30
Paula J. Daley, ‘Shareholder (and Director) Fiduciary Duties and Shareholder Activism’, 2006 at:
31
Case Smith v. Van Gorkom, 488 A.2d 858 [Del.1985].
15
to act in the face of a known duty to act, demonstrating a concious disregard of his
duties.32”
Rebuttal of the business judgment rule can also be done by proving a waste of corporate
assets; Arthur M Pinto elaborates the waste standard terminology: “The waste standard
generally means that what the corporation received in a transaction was so inadequate in
value that no person of ordinary sound business judgment would deem it worth what the
corporation paid33”.
in cases which the plaintiff can prove that there is a conflict of interest involved in making
the decisions, the burden of proof shifts to the defendant, thus the court may not only shift the
burden of proof to the directors to show fairness but will inquire as to both the process and
substance of the decision (i.e., entire fairness)34.
Finally few other factors can also be employed by the plaintiff shareholder to expose the
alleged directors breaching their fiduciary duties from the protection of the business judgment
rule namely that the plaintiff has to prove that the directors failed to monitor the company,
transactions made which is not beneficial to the company, actions of the directors which is
outside of its authority or ultra vires and illegal decisions taken not on good faith and fraud35.
The level of scrutiny in a duty of care case to impose liability upon directors will also differ
on the basis of whether (1) the director were a inside or (2) outside director and (3) whether
the directors have been placed in their current position for the expertise in a particular field36.
2.3.1.2. The Fiduciary Duty of Loyalty
The second fiduciary duty to be complied by the directors is the duty of loyalty, the duty of
loyalty requires “Each member of the board of directors, when discharging the duties of a
director, shall act: in good faith, and in a manner the director reasonably believes to be in the
best interests of the corporation37”, where interest “is usually defined as a financial interest
32
Case In re The Walt Disney Company Derivative Litigation, note 110, p.71
33
Pinto, A.R and M. Branson, Douglas, Understanding Corporate Law (Second Edition), Lexis Nexis, 2004, P.200.
34
Ibid, p. 201.
35
Ibid, p. 211
36
Ibid, p. 267.
37
Model Business Corporation Act § 8.30. (a).
16
not shared by other shareholders38”. In a possible conflict of interest situation under the duty
of loyalty the director must set aside his private interest for the company’s interest.
Different with the duty of care principle, in the case the shareholder plaintiff allege a duty of
loyalty violation, the director will not be given and afforded the protection of the business
judgment rule. Usually claims concerning breach of duty of loyalty by a director involve self
dealing by the director where he receives personal benefits in the company’s expense. One
example of the fiduciary duty of loyalty case described by Pinto & Branson, involving a
director of a company who is in a conflict of interest situation39:
The classic duty of loyalty defendant is a fiduciary (a director or officer or in

some cases controlling shareholders) who contracts or transacts unfairly with her
own corporation, receiving a benefit that is not equally shared with the other
shareholders and thereby creating a conflict of interest.
Another example will involve an interested director which is when an interested director
enters into a transaction with another company in which he has a stake or an interest.
However under title 8 article § 144 (a) (2) of the Delaware General Corporation Law the
interested directors transaction can be regarded as valid, where the alleged directors are
relieved from its allegation of a duty of loyalty breach and a conflift of interest situation,
hereunder the article from DGCL containing such provision:
(a) No contract or transaction between a corporation and 1 or more of its directors

or officers, or between a corporation and any other corporation, partnership,
association, or other organization in which 1 or more of its directors or officers,
are directors or officers, or have a financial interest, shall be void or voidable
solely for this reason, or solely because the director or officer is present at or
participates in the meeting of the board or committee which authorizes the
contract or transaction, or solely because any such director's or officer's votes are
counted for such purpose, if:
(2) The material facts as to the director's or officer's relationship or interest and as
to the contract or transaction are disclosed or are known to the shareholders
38
Paula J. Daley, Shareholder (and Director) Fiduciary Duties and Shareholder Activism, 2006 at:
39
Pinto, A.R and M. Branson, Douglas, Understanding Corporate Law (Second Edition), Lexis Nexis, 2004, p.223.
17
entitled to vote thereon, and the contract or transaction is specifically approved in
good faith by vote of the shareholders; or40
These two provisions clearly states that in order to be regarded as valid otherwise not void or
voidable, an interested director transaction must be disclosed to the shareholders which vote
are to be gathered for the purpose of validating the interested director transaction. In this case
not all the shareholders have the right to vote, whereas only those shares with voting rights are
to be regarded valid to vote, this is apparent with the usage of the wording of “the
shareholders entitled to vote thereon” from the prevailing article of DGCL. However it must
be bear in mind that, in most cases courts in the United States will be very cautious about
giving effect as void ab initio to a long term contract or agreement bearing the a conflict of
interest characteristic where there is a risk that harm will be done to third party who has acted
in good faith, remedy in this case are often in the form of damages rather than giving effect
void ab initio to a contract41.
An issue that could come up is regarding “organizational opportunities”, where allegedly the
opportunities which supposedly belongs to the company were taken by interested directors to
the interested transaction. in the United States the doctrine of organizational opportunities can
be found in agency law, partnership law, and, in its most developed form, corporate law42. In
the words of Professor Bainbridge from the UCLA School of law:
The doctrine generically known as “organizational opportunities” deals with

situations in which an agent usurps a business opportunity that rightfully belongs
to the principal. In doing so, the agent has violated his fiduciary duty to the
principal by usurping this opportunity for his own gain43.
The subject of executive compensation can also become a possible conflict of interest
situation and duty of loyalty breach, while it does not depend in how big were the amount of
the compensation fee paid to the executive, rather the conflict of interest and duty of loyalty
breach lies in fact in the possibility where “compensation can also be a form of self dealing
40
Delaware General Corporation Law § 144 (a) (2).
41
Professor Bernard S. Black, ‘The Principal Fiduciary Duties of Boards of Directors’, presentation at Third Asian
Roundtable on Corporate Governance, Singapore, 4 April 2001. p.3. “The courts are very cautious about
unwinding a long completed transaction, and will almost never do so if there is a risk of harm ro a third party
who has acted in good faith.”.
42
Stephen M. Bainbridge, ‘Rethinking Corporate Opportunities: Part I’, November 20 2007,
http://www.businessassociationsblog.com
43
Ibid.
18
where those who manage reward each other excessively, at the expense and exclusion of the
shareholders44”.
2.3.2. Directors Fiduciary Duty Under Indonesian Regulatory Framework
As a colony of the Kingdom of the Netherlands, the Netherlands Indies legal system in civil
matters follows closely the rules and legal texts of the “motherland”. This is due to the so
called “principle of concordance’ (asas konkordansi) concordantiebeginsel.45 Although
Independent since more than half a century, the present civil law system in Indonesia is still
much influenced by the Dutch legal system. Accordingly the matters of company law in
Indonesia was largely based upon 21 article found in the Indonesian Commercial Code
(Wetboek van Koophandel, Kitab Undang-Undang Hukum Dagang or KUHD), and
Regulation No.1 year 1995 concerning the Limited Liability Company46As the need for a
more up to date company law provision replacing the 150 year old company law provisions of
the KUHD arises, thus the Indonesian regulators established in the year 1995 Regulation No.
1 year 1995 concerning Limited Liability Companies. Currently the matters of company law
in Indonesia has its basis in the new Company Law Regulation No. 40 year 2007 (hereinafter
will be “the New Company Law”) concerning Limited Liability Companies.
Therefore any matters concerning Company Law in Indonesia will thereafter refer to this new
regulation containing of 161 articles regulating matters of the Indonesian limited liability
company. Fiduciary duties to company directors in Indonesia through the New Company Law
do also exist although not extensively developed as in the case of the American fiduciary
duties, Munir Fuady confirmed the Indonesian fiduciary duty of company director’s existence
in his book:
Principally the doctrine of fiduciary duty for a company’s director, used to be

non-existent in Indonesian Law (on the basis of the Commercial Code). However
with the existence of Regulation Number 1 Year 1995 concerning Limited
Liability Company, the doctrine of fiduciary duty, particularly for company
44
Pinto, A.R and M. Branso, Douglas, Understanding Corporate Law (Second Edition), Lexis Nexis, 2004, p.235
45
Prof. Mr. Dr. Sudargo Gautama, The Commercial Laws of Indonesia, Bandung, PT. Citra Aditya Bhakti, 1998.
p.1.
46
Benny S. Tabalujan, Indonesian Company Law A Translation and Commentary, Singapore, Sweet & Maxwell
Asia, 1997 p.7.
19
directors, is beginning to be acknowledged and developed in the Indonesian
system of law and corporate practices in Indonesia.
Although the opinion provided above is taken on the basis of Regulation Number 1 Year
1995, nonetheless the basic article used for interpretation of the fiduciary duties of directors
on the paragraph above still has the same wording as the articles in the New Company Law
whereas the difference only comes in the numbering of the articles with the existence of new
articles in the the New Company Law.
The existence of fiduciary duty care and loyalty in Indonesian law is still underdeveloped, but
I contend that the provisions stipulated in article 92 (1) , 97 (2), 97 (3), and 97 (5) b of the
New Company Law for directors and article 114 (2) (3) for the board of commisioners and its
every member, do show its traits and elements of directors fiduciary duty. We will begin this
analysis for the fiduciary duty of care and loyalty in Regulation No. 40 Year 2007 applied to
the company director.
2.3.2.1. The Indonesian Fiduciary Duty of Care and Loyalty of Directors
Article 92 (2) provides that”Management, in accordance with the provision referred to in

article (1), must be performed by every member of the [Board of] directors with good faith
and full responsibility47”. Even though general in its formulation this article clearly states that
the duty of care for directors in Indonesian law do exist, we shall compare this article with the
general description of fiduciary duty under the common law which is “basically a duty not to
act negligently in managing the company48”. From what we can infer, basically the article and
wording contained in article 92 (2) clearly bears the same formulation as in the general
description of fiduciary duty provided above, whereas in article 92 that every member of the
board of directors are obliged to carry on their duties with full responsibility. The elucidation
of article 92 (2) gives an explanation that “what is meant by “full responsibility” has its
meaning as giving notice to the company with dilligence and due care49”.
This means by taking a postion as a director in a company by virtue of article 92 (2) the
director is subject to liabilites for the full responsibility he have taken for his task of managing
the company. Subject to the full responsibility, in managing the company the director
47
Regulation No. 40 Year 2007 concerning Limited Liability Company, article 97 (2) – authors free translation.
48
Helen Gubby, English Legal Terminology, Den Haag, Boom Juridische uitgevers, 2004, p. 227.
49
Elucidation of Regulation No. 40 Year 2007, article 92 (2) - authors free translation.
20
obviously have to be cautious, not negligent, and perform his duty of managing the company
with due care and dilligence.
The following provision 97 (3) confirmed that “every member of the board of director is fully
liable for the damages incurred to the company, if the incumbent were found guilty or
negligent in performing his duties in accordance with the provision of article 97 (2)50”. This
article further strengthen the proposition of the duty of care principle imposed by the New
Company Law by imposing a penalty of liability on the director in case of negligence in
performing the duties which is obligatory under Article 97 (2).
Concerning the discussion for the second fiduciary duty of the director we can relate the
existence of article 92 (1) with the duty of loyalty to be obeyed by the company director under
the New Company Law which stipulates that “The [Board] of directors performs the
management of the company for the interest of the the company and in accordance with the
purpose and aim of the company51”. This provision supported the proposition of a duty of
loyalty to be obeyed by the company’ directors, together with the obligation to perform the
management of the company in good faith as stipulated in article 92 (2).
Below is a paragraph taken from a book by Rachmadi Usman concerning an interpretation of

Article 85 (1) of Regulation No. 1 Year 1995, Now article 92 (1) in the New Company Law,
supporting the proposition that the director as management of the company have to act solely
for the interest of the corporation:
In other words, the director’s is limited in performing its actions, the dilligence
and capability of the director in performing the management and representation of
the company will be measured according to the standard of cautiousness and good
faith, solely for the interest and purpose of the company52
The company directors therefore has to be loyal to the company by performing its actions
solely for the interest and purpose of the company. We can conclude that this is an obligation
of the company director to be loyal to the company and indirectly to its shareholders. That, if
the member of the board of Directors in question is guilty or negligent to carry its duties in a
50
Regulation No. 40 Year 2007 concerning Limited Liability Company, article 97 (3) - authors free translation.
51
52
Rachmadi Usman, S.H., Dimensi Hukum Perusahaan Perseroan Terbatas (The Company Law Dimension of
Limited Liability Company – authors free translation), Bandung, P.T. Alumni, 2004, p.180.
21
good manner, resulting in damages incurred to the company, the director is personally fully
liable and the shareholder can submit a claim to the district court53.
2.3.2.2. The Indonesian Fiduciary Duty of Care and Loyalty of Commisioners
By the nature of its civil law system, the legacy of the Wetboek van Koophandel, and the New
Company Law, Indonesia, having a civil law tradition in company law, have a two tier
system, which consisted of the board of directors (dewan direksi) as the general management
of the company and the board of commisioners or the supervisory board (dewan komisaris) as
the supervisory function and advisory organ to the board of directors of the company.
Article 114 of the New Company Law regulated the responsibilities, duties and liabilities of
the supervisory board and each of its members, the following is article (2) of the New
Company Law:
Each member of the supervisory board shall with good faith, cautiousness, and
responsibility in performing its supervisory and advisory duty to the [board of]
directors in accordance with article 108 (1) for the company’s interest and in
accordance with the purpose and aim of the company54.
Consistent with the argument presented on the previous subchapter, here too, the supervisory
board and each of its members are under an obligation to act in the best interest and in
accordance with the purpose and aim of the company. With its liabilites stipulated in article
114 (3) as follows:
Each member of the supervisory board will be severally and personally liable for
any damages of the Company if the incumbent is found to be guilty or negligent
in performing its duties in accordance with article 114 (2)55.
Therefore this article gives us the implied conclusion that by imposing this liability upon the
supervisory board and each of its members, we can say that the New Company Law have also
implicatively placed a duty of care on the shoulders of a commisioner of the company, this
53
Abdulkadir Muhammad, Hukum Perseroan Indonesia (Indonesian Company Law – authors free translation),
Bandung, PT. Citra Aditya Bakti, 1996, p. 73.
54
55
22
proposition is supported by the usage of the wording “guilty or negligent in performing its
duties in accordance with article 114 (2)”.
In conclusion the duty of care principle and the duty of loyalty has been given place in the
New Company Law, while its interpretation and development are still to be developed by the
court and Indonesian legal scholars doctrine. Rachmadi Usman through his book has
suggested that the the drafters of the company law have deliberately put a general description
of the concept of the duty of care and the duty of loyalty to be decided later by the court
where a such case involving a breach of duty of care or loyalty might arise in the future56.
56
Rachmadi Usman, S.H., Dimensi Hukum Perusahaan Perseroan Terbatas (The Company Law Dimension of
Limited Liability Company – authors free translation), Bandung: P.T. Alumni, 2004, p. 187
23
CHAPTER III
SHAREHOLDER/CORPORATE LITIGATION UNDER DELAWARE LAW
Basically there existed two major classification of corporate litigation in United States
particularly in Delaware which is the direct and derivative action. Both of these claims differ
in substance, where we can find the main concept separating the two actions lies on the
character of the injury suffered and who will be entitled to the damages awarded by the court.
Standards for both of these claims can be found in the case law of the Court of Chancery and
Supreme Court of Delaware.
Accordingly in the United States, shareholders regard activism through litigation against
directors for breach of fiduciary duty as a legitimate and commonly used method of
penalizing allegedly non performing boards57. In the US where it has been regarded that
advance litigation culture existed, corporate litigation through fiduciary duty are utilized as
means to ensure the better performance of the board.
This chapter will discuss and describe the corporate litigation method in the Delaware state,
where first we shall proceed and begin with the derivative action.
3.1. The Derivative Action
Different from a direct action pursued by shareholders to enforce its shareholders rights by the
virtue of a special injury not suffered by other shareholders, in derivative actions the
shareholder of a company based its claims on his rights as a shareholder to redress a wrong
done by the company directors and/or third parties in the name of the company, the following
text from Pinto & Branson’s book on Corporate Law provided a definition on nature of the
derivative action:
“By contrast, if shareholders sue to vindicate the violation of a duty owed to the
corporation, either fiduciary duties owed by the corporate directors or officers, or
57
Richard Smerdon, A Practical Guide to Corporate Governance Second Edition, London, Sweet & Maxwell,
2004, p.363.
24
obligations of a third party pursuant to a contract with the corporation, the action
is derivative.”58
Thus it is clear that in a derivative action the shareholder plaintiff acts not for himself but as a
representative of the company, where he is redressing the harm done to the company where
all subsequent damages awarded as a result of litigation will flow into the company’s treasury.
This method of litigation has rapidly gain popularity in the United States obtaining its
stimulus from the American courts “lenient approach towards derivative actions59”. Following
this the following stage comes where the derivative action went through an abusive stage by
what is known by the strike suit era. Justice Hugo Black described the strike suit as a suit “by
people who might be interested in getting quick dollars by making charges without regard to
their truth or falsity so as to coerce corporate managers to settle worthless claims in order to
get rid them”60.
While it is possible to carry on with derivative actions to redress harm done to the company,
following the strike suit era “the historical development of derivative actions in the United
States has shown a tendency to place more and more restrictions on the shareholder’s right to
derivative actions61”. Aware of this problem the states accordingly have decided to impose
certain requirements before a shareholder can be allowed to institute a derivative action, the
following text from Mark J. Lowenstein a professor of law in the University of Colorado
School of Law confirmed that the trend for such requirement or prerequisite to a derivative
action is apparent and can take the form of a number of different method, such as what he has
described in the following paragraph:
“Among other things, many states statutes require shareholder plaintiff to post
security for expenses and risk liability for attorney fees if the action fails. Most
states require that the plaintiff make a demand on the board of directors before
58
Pinto, A.R and M. Branso, Douglas, Understanding Corporate Law (Second Edition), Lexis Nexis, 2004, p. 423.
59
Xiao Ning Li, A Comparative Study of Shareholder Derivative Action, Deventer, Kluwer International Law,
2007, p.93.
60
Case Surrowitz v. Hilton Hotels Corp., 383 U.S. 363,371 as summarized in Pinto, A.R and M. Branson,
Douglas, Understanding Corporate Law (Second Edition), Lexis Nexis, 2004, p.424.
61
2007, p. 89.
25
bringing the suit, and generally the board has broad discretion in with plaintiffs
demand62”
The United States through its Federal Law has also addressed on the issue of derivative action
through the existence of Rule 23.1 of The Federal Rules of Civil Procedure. An important
qualification and prerequisite for instituting a derivative action is by placing a demand on the
board of director of the company, both of these requirements will be discussed in the
following sub chapter of this chapter.
3.1.1. The Proper Plaintiff Principle
One question to arise when instituting a derivative action, is whether the shareholder
instituting the derivative action has the rights to do so, and is he allowed to be the a
shareholder plaintiff on such derivative action claim?
We first come to the provision stipulated in Rule 23.1 of the Federal Rules of Civil Procedure
(hereinafter will be “FRCP”), this provision regulated the institution of derivative action by a
shareholder, as far as concerning the proper plaintiff principle Rule 23.1 (1) FRCP required
“that the plaintiff was a shareholder or member at the time of transaction of the plaintiff
complains or that the plaintiff’s share or membership thereafter devolved on the plaintiff by
operation of law”63. This provision clearly put a threshold on share ownership in the light of
instituting a derivative claim in which (i) a shareholder must be a shareholder or have been a
shareholder at the time the claimed harm to redress has happened. This contemporaneous rule
does make sense since a shareholder who were not a shareholder at the time of the transaction
claimed, does not incur any damages since he does not suffer any indirect damages (a drop in
his value of shares as an indirect result of damages incurred to the company), the following
wording in rule 23.1 FRCP gives a shareholder a second legal standing to institute a
derivative action and an exception in the contemporaneous ownership rule which is (ii) share
ownership or membership pass or transfer to him such in the case of “bequest, intestate
succession, or by order of court in a marital dissolution”64.
62
Mark J. Loewenstein, ‘Shareholder Derivative Litigation and Corporate Governance’, August 8 1998, text
accompanying note 7 p.7.
63
United States Federal Rules of Civil Procedure Rule 23.1 (1).
64
Pinto, A.R and M. Branso, Douglas, Understanding Corporate Law (Second Edition), Lexis Nexis, 2004, p.436.
26
Further Rule 23(1) FRCP requires that “The derivative action may not be maintained if it
appears that the plaintiff does not fairly and adequately represent the interests of the
shareholders or members similarly situated in enforcing the right of the corporation or the
association.65”
We can find a similar provision of contemporaneous ownership qualification as regulated by

Rule 23.1 FRCP on the Delaware Statute stipulated under § 327 DGCL bearing the title of
Stockholder's Derivative Action; Allegation of Stock Ownership stating that:
In any derivative suit instituted by a stockholder of a corporation, it shall be

averred in the complaint that the plaintiff was a stockholder of the corporation at
the time of the transaction of which such stockholder complains or that such
stockholder's stock thereafter devolved upon such stockholder by operation of
law.66
By this point we can understand how this contemporaneous ownership of shares is an

important qualification for a shareholder to commence a derivative action in the United States
particularly in the state of Delaware. Without which, a shareholder instituting a derivative
action may not be authorized to further commence to litigation.
3.1.2. The Demand Requirement
Another prerequisite and requirement before a shareholder may continue his derivative claim
is to “ask permission” from the company through its board of director regarding the derivative
claim. The shareholder has to first institute a demand on the board to commence litigation to
redress the wrong done to the company. The following is an excerpt from Rule 23 (1) FRCP
that requires the shareholder plaintiff to include in his complaints in the event of his failure to
place a demand on the board of directors regarding the derivative claims submitted to the
court:
(b) The complaint shall also allege with particularity the effort, if any, made by
the plaintiff to obtain the action the plaintiff desires from the directors or
comparable authority and, if necessary, from the shareholders or members, and
65
United States Federal Rules of Civil Procedure Rule 23.1 (1).
66
Delaware General Corporation Law, Title 8 § 327.
27
the reasons for the plaintiff’s failure to obtain the action or for not making an
effort.67
One reason for the placing of such provision would be that generally the shareholder does not
have the better knowledge of the company such as the board of the company68. The case law
has developed a concept of demand futility, by which a demand placement on the board is
considered unecessary. However concerning the demand requirement to the board, In
Aronson v. Lewis the Supreme Court of Delaware upholds a two prong test to determine
whether a demand is futile and therefore excused, citing from the decision of Supreme Court
of Delaware:
In our view is that in determining demand futility the Court of Chancery in the
proper exercise of its discretion must decide whether, under the particularized
facts alleged, a reasonable doubt is created that: (1) the directors are disinterested
and independent and (2) the challenged transaction was otherwise the product of a
valid exercise of business judgment.69
Thus in order to to be excused a demand on the board of the company by the shareolder
plaintiff has to meet this two prong test, where the success of proving these two prong of tests
will cause the shareholder plaintiff not only relieved from the obligation to exhaust intra
corporate remedies such as a demand requirement, but also continue to insitute the derivative
claim pursued. On the contrary if demand has been refused by the board of director and the
court consider that the two prong test were not met, the shareholder plaintiff must discontinue
its derivative action.
Such provision of demand placement on the board of directors can also be found in the
MBCA § 7.42, that it regulates how a shareholder plaintiff may continue to commence a
derivative action:
No shareholder may commence a derivative proceeding until:
67
United States Federal Law of Civil Procedure Rule 23 (1).
68
2007 p.1, “Third it is submitted that it should be up to the company, through appropriate bodies such as the
board of directors, rather than individual shareholder to decide whether an action is in the best interest of the
company because these bodies have greater knowledge of the company’s management and are themselves
more professional”.
69
Case Aronson V. Lewis 473 A.2d at 814 (1985).
28
(1) a written demand has been made upon the corporation to take suitable action,
and
(2) 90 days have expired from the date the demand was made unless the
shareholder has earlier been notified that the demand has been rejected by the
corporation or unless irreparable injury to the corporation or unless the
shareholder has earlier been notified that the demand has been rejected by the
corporation or unless irreparable injury to the corporation would result by
waiting for the expiration of the 90-day period70.
Accordingly, relying on MBCA § 7.42 (2) a shareholder plaintiff can also argue that in the
case when he or she has not received any notification whatsoever from the board of directors
after placing a demand for the board to act in the face of an allegation of breach after the 90
days time frame as stipulated has passed, that he may continue to commence a derivative
action absent a demand on the board.
However the board may have its last resort to bar the shareholder plaintiff to continue its
actions, namely through appointing a special litigation committee. The following paragraph
from a paper by Williams & Williford elaborates how this special litigation comittee can be
used by the board of director upon the existence of a request by the plaintiff to court for a
demand futility arguing that demand on the board is not necessary because it meets the two
prong test:
When a shareholder files a complaint alleging demand futility, the board will in
some instances opt to appoint a special litigation committee to investigate the
shareholder's allegations, to determine whether the litigation is in the best interests
of the corporation and, if appropriate, to seek the termination of the derivative
suit.71
The existence of this special litigation commitee is to further ensure that frivolous suits or the
suits similar to what has been described above as the suits in the strike suit era will decrease,
as the threshold to institute a derivative action is higher, plaintiffs and their lawyers will
refrain on submitting frivolous suits.
70
Model Business Corporation Act § 7.42.
71
Gregory P. Williams, Evan O. Williford, ‘Derivative Litigation’, http://www.abanet.org, p. 39.
29
3.2. The Direct Action
A direct action can be brought either when there is a special duty, such as contractual duty,
between the wrongdoer and the shareholder, or when the shareholders suffers injury separate
and distinct from that suffered by other shareholders.72 Denial of a contractual right of a
shareholder, such as contractual rights obtained by virtue of the shareholder contract and
articles of association can also be categorized as a direct action. Concerning this direct claim
The Court of Chancery of Delaware upholds in Moran v. Household Int’l a threshold that a
shareholder must cross to continue pursuing the claim or allegation against the company
directors:
To set out an individual action, the plaintiff must allege either “an injury which is
separate and distinct from that suffered by other shareholders”... or a wrong
involving a contractual right of a shareholder, such as the right to vote, or to assert
majority control, which exists independently of any right of the corporation.73
Different from the derivative action, there is no restrictions imposed on shareholder plaintiff
suing in the direct action, only the distinction were to be made whether the injury suffered are
the shareholder alone or to the contrary in fact the shareholders only suffers an indirect injury
as a result of the direct injury of the corporation which makes a claim derivative in nature.
A direct action can also be maintained as representative actions, this representative action is
typically brought by a shareholder and his or her entire class of shareholders against the
corporation. In this representative action a shareholder is still claiming under as result of a
distinct injury only the distinct injury claimed is suffered by the members of his class of
shares. We shall bear in mind that according to such definition a member of a different class
of shares cannot join their claim together due to the differences of the “distinct injury they
suffered”. Nonetheless often ‘the term representative action is sometimes used
interchangeably with the term direct action.’74 Due to its representative nature procedural
matters to institute a representative action shall comply to the provisions stipulated in the
FRCP 23 regulating Class Action.
72
Pinto, A.R and M. Branso, Douglas, Understanding Corporate Law (Second Edition), Lexis Nexis, 2004, p. 427.
73
Moran v. Household Int’l, as summarized in Pinto, A.R and M. Branson, Douglas, Understanding Corporate
Law (Second Edition), Lexis Nexis, 2004, p.429.
74
Angela Schneeman, The Law of Corporations and Other Business Organisations, Albany, NY West/Thomson
Learning, 2002, p. 291.
30
FRCP 23 provides several prerequisite before a shareholder can continue and institute a class
action claim, the characteristics mentioned hereunder must be met in order to institute a class
action by a shareholder plaintiff representative75:
1) The class is so numerous that joinder of all members is impracticable,
2) There are questions of law or fact common to the class,
3) The claims or defenses of the class, and
4) The representative parties will fairly and adequately protect the interests of the class
A class action litigation must initially be certified by court by virtue of a court order76,
subsequently the court must also as soon as a class has been certified to appoint a class
counsel. Where there is more that one applicant for an appointment of class counsel, the court
must appoint the applicant that best able to represent the interest of the class and also being
adequate as class counsel under Rule 23 (g) (1) (B)77.
75
Federal Rules of Civil Procedure Rule 23. Class Actions (a).
76
Federal Rules of Civil Procedure Rule 23. Class Actions (c) (1) (a).
77
Federal Rules of Civil Procedure Rule 23. Class Actions (e) (2) (B).
31
CHAPTER IV
SHAREHOLDER/CORPORATE LITIGATION UNDER INDONESIAN

REGULATORY FRAMEWORK
It is acknowledged that in Indonesian Company Law, under its statute regulating limited
liability companies which is Regulation No. 40 Year 2007 as a sucessor of the old company
law and the 150 year old provisions stipulated in the KUHD, corporate litigation as a method
of stengthening the shareholders position and to correct wrongdoing also imposing liability
upon the company directors and the company itself are rarely used.
But in regard of the important use and pragmatic solution provided by the derivative action as
one of the important method of corporate governance, Indonesian legislators has also inserted
provisions regulating the institution of the derivative action. While this being of corporate
litigation have been given life through the New Company Law provision, but other corporate
litigation method such we will find in the United States namely through class action, is still
not clearly regulated under Indonesian Law, in other words there is no prohibition of pursuing
director or company liability through class action existed in Indonesian legislation nor there is
an explicit provision regulating in detail such litigation method. Hereafter in a paragraph
extracted from a book by Munir Fuady, in which he expresses his concerns regarding the need
for a stronger basis for other corporate litigation proceedings outside of the derivative action
method:
In a company, the derivative action model should have the same (legal) standing
with other company litigation methods, such as the shareholders direct suit or the
class action suit which is also instituted by the shareholders. Only that, in
Indonesian Company Law led by Regulation No, 1 Year 1995, those corporate
litigation method have not yet been fully accomodated.78
This by no means have rejected the concept of the class action and direct action in Indonesian
Law, but merely stating that its application is still rare and therefore in need of a stronger
legal basis for its application for vindication of liability.
78
Munir Fuady, SH, LL.M, Doktrin-Doktrin Modern Dalam Corporate Law & Eksistensinya Dalam Hukum
Indonesia (Modern Doctrines in Corporate Law & Its Existence in Indonesian Law – authors free translation),
Bandung, PT. Citra Aditya Bakti, 2002, p. 73.
32
4.1. The Derivative Action as an Ex-Post Strategy for Minority Shareholders
The New Company Law as also its predecessor Regulation No.1 year 1995 included
provisions regulating the institution of the derivative action against director(s) and
commisioners or the supervising board of the company.
While it has not been regulated in detail such what has been found in the procedural and
substantive law of corporate litigation in the United States, nonetheless the provisions
stipulated in The New Company Law is sufficiently regarded to be a legal basis in pursuing
company commisioners and directors liability through derivative litigation.
Preceeding regimes of Regulation No.1 Year 1995 and The New Company Law such as the
KUHD basically does not acknowledge the principles of minority shareholder protection
against wrongdoing by company organs through litigation as have been provided by the
former. This condition is in line with the principles of the Persona Standi in Judicio of the old
company law (and also in the New Company Law), that the rights to act as representative of
the company, can only be done through the company’s organs. The minority shareholders is
not allowed to pursue a derivative action79. The legal standing or Persona Standi in Judicio of
directors to act as representative of the company is stipulated in article 98 of the New
Company Law where it is stated that Director(s) represent the Company either inside or
outside of court80, but the number of directors authorized to represent the company somehow
vary from company to company on the basis of each specific company bylaws.
In light of these condition and circumstances of barriers to representation of the company by

minority shareholders, legislators has created a concept of what is known as a derivative right
formed in article 97 (6) and 115 (6) in the New Company Law which is according to
Chatamarrasjid Ais in his book, that a derivative right according to Indonesian law is a right
given or owned by minority shareholders so that he can take specific actions in safeguarding
79
Felix O. Soebagjo. 1995. ‘Merjer, Akuisisi dan Konsolidasi Ditinjau Dari Sudut Undang-undang Nomor 1 tahun
1995 dan Peraturan Perundang-undangan di Bidang Pasar Modal’ (‘Merger, Acquisition and Consolidation
Examined Under the View of Law Number 1 Year 1995 and Regulations in the Financial Market Sector’ –
authors free translation). This paper is presented on the Menyongsong Berlakunya Undang-Undang Nomor 1
Tahun 1995 Tentang Perseroan Terbatas Dan Implikasinya Terhadap Perkembangan Dunia Usaha Di Indonesia
Seminar (The Seminar on Welcoming the Enactment of Regulation Number 1 Year 1995 Concerning Limited
Liability Companies and It’s Implication to The Development of the Business World in Indonesia – authors free
translation). Yogyakarta: Universitas Gadjah Mada.
80
33
or to represent the company against actions taken by other organs of the company if the
company incurs damages.”81
Thus we have come to the conclusion that through corporate litigation particularly derivative
action, Indonesian company law gives minority shareholders a vehicle to act as a
representative of the company which can be viewed as an abnormality, where this duty or
obligation is normally to be bored by the company’s director by virtue of article 98 of the
New Company Law and subject to the articles of incorporation also bylaws of the company.
“Why is this derivative action more characteristic to minority shareholders and not majority
shareholders?” one might ask, because as for the the majority shareholders their
representation on the company’s board and by virtue of their majority ownership of the
company’s shares which will result to a (more than) fair representation of their voice at the
general meeting of shareholders, it is viewed that their (majority shareholder) protection has
been sufficiently given. While this is not the case with minority shareholders, where often
they (minority shareholders) do not have much say in the general meeting shareholders (due
to the small voting rights) which can lead to abuse of their rights. Chatarrasmajid confirms
this view by stating that minority shareholders in general is not able to use the General
Meeting of shareholder mechanism in defending his rights.82
As also can be found in other systems applying the derivative litigation, this method of
litigation is not without limitations, inline with the principle of the proper plaintiff, in
insituting a derivative action the New Company Law does also require a certain threshold to
be made, by which a minority shareholder can be regarded the proper plaintiff and therefore
allowed to continue pursuing the derivative action against the company directors and/or a
member of the board of commisioner liable for wrongdoing. The article containing provisions
as the basis for minority shareholder to institute a derivative action is as the following:
(6) Acting on behalf of the of the company, a shareholder representing at least

1/10 (one tenth) of the whole amount of shares with voting rights can submit to
81
Prof. Dr. Chatamarrasjid Ais, S.H., M.H., Penerobosan Cadar Perseroan dan Soal-Soal Aktual Hukum.
Perusahaan (Piercing The Corporate Veil and Actual Company Law Issues – authors free translation), Bandung,
PT. Citra Aditya Bakti, 2004. p.31.
82
Ibid, p. 21.
34
sue through the district court against the company director in which because
wrongdoing or negligence incurred damages to the company.83
However this derivative action threshold requirement poses another a problem, that actually,
rather than providing protection it constitutes barriers for the minority shareholders, that is in
this provision the wording refers to a single substantial substantial shareholder who is able to
exercise at least 10% of the issued shares with valid voting rights84. Thus a pooling of
shareholder stakes to reach the 1/10 ownership threshold is not an available choice, this will
especially cause barriers for the minority shareholders in a public company eager to use the
derivative vehicle, where a dispersion of share ownership is so apparent that it is impossible
for a minority to sue by the fact that the minority shareholder is not legible to sue using the
derivatie vehicle because his ownership does not cross the 1/10 threshold.
Further, similar comparable wording in other articles were brought in comparison further
analyze the relevancy of the argument that it is not possible to aggregate votes from more than
one shareholder in order to reach the 1/10 threshold. Benny S. Tabalujan compares this article
concerning derivative litigation with two provisions of Regulation No.1 year 1995 which is
Article 66 (2) (now article 79 (2) (a) in the New Company Law) and article 117 (1) (b) (this
article or a similar provision is now non existent in the New Company Law, where Regulation
No.1 year 1995 stipulated that a shareholder could and should submit a request to the district
court for the dissolving of a company, where in the New Company Law this request for
dissolvant of the company can be made through the general meeting of shareholders.)
hereunder is his statement:
(if it is intended that this right be extended to one or more shareholders who,
together in aggregate, exercise at least 10% of the issued shares with valid voting
rights, then a different wording – similar to that used in Arts 66 (2) or 117 (1)(b)
UUPT – would have been used instead.)85
To clarify the statement above, the articles mentioned (art 79 (2) (a)) used as a comparison to
the derivative action provision uses the wording “1 (one) or more shareholder which together
83
84
Benny S. Tabalujan, Indonesian Company Law A Translation and Commentary, (Singapore: Sweet & Maxwell
Asia, 1997), p. 193.
85
Ibid.
35
represent 1/10 (one tenth) or more than the whole amount of shares with voting rights86”, so
this means that the legislator of the New Company Law as also in Regulation No.1 year 1995
clearly intended that pooling of shareholders to reach the threshold is not possible, thus using
class action in combination with derivative litigation according to the New Company Law is
not applicable.
As a way out from the limitations in the derivative clauses, we can also find that The New
Company law does also give another solution in such case when it is apparent that all the
directors and commisioner of the company were interested to the transaction subject to the
claim. The New Company Law states that the representative function to act in court in such
case can be given to a shareholder of the company given mandate by the General Meeting of
Shareholders to represent the company in court.87
Similar provision regarding derivative litigation which applies mutatis mutandis with the
provision in article 97 (6) of the New Company Law can also be enforced against individual
members of the board of commisioners liable for wrongdoing or negligence causing damages
to the company. This in its substance is contradictive with the provisions stipulated in article
108 (3) regulating the actions taken by the Board of Commisioner, there it is specified that the
Board of Commisioner which consisted of more than 1 (one) more member is a council and a
single member of the Board of Commisioner can not act on its own, whereas it has to act
based on the decision of the Board of Commisioner as a whole. 88 Thereby in this sense it is
more appropriate that the derivative claims under article 97 (6) of the New Company Law
were to be enforced against the board of commisioners as a whole not against individual
member of the board, because by virtue of article 108 (3) it implies that each member of the
board is jointly and severally liable for the the wrongdoing and negligence done by each of its
member as it is obligated to always act as a whole board and not as individual commisioners
Nonetheless directors and commisioners challenged in court in the face of a derivative action
insituted by shareholder(s) still have a number of arguments in which the
86
Regulation No. 40 Year 2007 concerning Limited Liability Company, article 79 (2) a – authors free translation.
87
88
36
directors/commisioners can use as a defence in front of the court adjudicating the case, such
as89:
1. The reason of the time for submittance of claim has already passed and
expired.
2. Specifically for transactions which have a “voidable” nature (vertietigebaar),

thus not “void by virtue of the law” (nietig), also provided a defence
argument to the defendant that the transaction has been ratified by the
(uniterested) director or shareholder.
4.2. The Direct Action in Indonesian Company Law
Every direct action directed against the company or one of the company’s organs by its
shareholders is instituted on the basis of individual rights owned by the shareholders, both
majority and minority. Every agreement in principle gave birth to the existence of individiual
rights either only for one party in an unilateral agreement or each of the party(s) in a
reciprocal agreement. All the same can be said about a company, which the essence and
raison d’etre of originated from an agreement, an agreement by the founders of the company.
The Indonesian company according to the New Company Law is a legal entity established
based upon contract which is a an alliance of capital, undertaking business activity with an
authorised capital which is entirely divided into shares, and fulfills the conditions which are
stipulated in this Law and its implementing regulation90. So it is clear that the company is a
legal entity born from a contract entered into and between investors which will, as soon as
after the company is fully established become the shareholders of the company. Another
characteristic that further strengthen this concept is that the new Company Law also requires
that (1) the Company should at least be established by 2 (two) or more persons with a notarial
deed which is drafted in bahasa Indonesia 91; and (2) that in the case of the shareholder of the
company decreases to one shareholder only, and the 6 month time limit given for the
shareholder to transfer a portion of his shares to another shareholder has passed92, the sole
89
Munir Fuady, SH, LL.M, Doktrin-Doktrin Modern Dalam Corporate Law & Eksistensinya Dalam Hukum
Indonesia (Modern Doctrines in Corporate Law & Its Existence in Indonesian Law – authors free translation),
Bandung, PT. Citra Aditya Bakti, 2002.), p. 95.
90
Regulation No. 40 Year 2007 concerning Limited Liability Company, article 1 – authors free translation.
91
92
37
remaining shareholder is personally liable for all the agreements or losses of the company
and, at the request of an interested party, a state court may dissolve that company93.
So on the basis of that agreement a shareholder has undertaken obligations (to contribute his
portion of the company’s capital to the company) and subject to receive shareholder rights as
a quid pro quo for the capital they contributed to the Company. Thus, the relationship
between the shareholder and the company are based more on a contractual relationship which
emanates from the provisions stipulated in the company law statutes and as what has been
written in the company bylaws94.
4.2.1 Rights attaching to Shares a Legal Basis of the Claim
As what has been discussed in the first chapter of this thesis concerning ownership rights and
the alienability of shares, ownership of shares gives the holder certain rights which this too
has been acknowledged by the New Company Law. Through article 60, the New Company
Law explicitly states that the share of a company is a movable good95, that means having the
movable good title, the property rights of the shareholders of the shares is legitimate. About
this character of company shares the Indonesian Civil Code also stipulates in article 511 (4)
where it is stated that the evidence of share or share of a company is to be considered a
movable good, however, this shall apply to the respective shareholders only to the extent of
the duration of the association96; Therefore the shares only loses its characteristic as a
movable good and thus also property rights attaching to it once the company or undertaking
ceases to exist such as through liquidation and dissolution of the company, thus by the
happening of liquidation and dissolution itself then the shareholder loses its rights to sue the
company either through direct action or derivative action. The following wording of Article
60 gives a reference to Article 52 of the New Company Law referring to the rights attaching
to the shares owned by a shareholder, in which those rights granted to the shareholder by
virtue of his share ownership stipulated in article 52 were: (a) to attend and vote in the general
meeting shareholders; (b) to receive dividend payments and residual claim on the asset of the
company in the case of liquidation; (c) to enforce any other rights given by virtue the
93
94
Prof. Dr. Chatamarrasjid Ais, S.H., M.H., Penerobosan Cadar Perseroan dan Soal-Soal Aktual Hukum
PT. Citra Aditya Bakti, 2004), p. 28.
95
96
Kitab Undang-Undang Hukum Perdata (Indonesian Civil Code) Article 511 (4) – authors free translation.
38
Indonesian company law statutes97 (d) a right to object to a decision of the general meeting of
shareholders98. Shares are also viewed as a legitimation device99 as a personal evidence and
identification of the person which name is written in the share certificate or the person holding
the share certificate, to obtain its rights of dividend and/or other rights conferred by the
articles of association.
These rights mentioned in the preceeding paragraph is to be used by the shareholder as a basis
for pursuing a direct action against the company. One example of a clearly regulated “direct
action” is laid down in article 61 (1) where every shareholder have the right to submit a claim
against the company through the district court if (he) incurred damages because of the actions
taken by company which is considered to be unfair and without reasonable reason as a result
of the GMOS, Director’s, and/or Board of Commisioners decision100. Different with the
derivative provisions, this article does not provide for a threshold in instituting the direct
claim, and also by interpretation of the elucidation of article 61 (1) of the New Company Law,
there is no damages will be awarded to the shareholder, rather that the decisions awarded by
the court will be to give an order to the company that the company shall take actions to
discontinue the damaging act and to take necessary steps, as to mitigate the result which has
already risen and also to prevent the same happening in the future101.
While it is possible to sue the company on the basis of article 61 (1) to vindicate justice and to
enforce the rights of the shareholders, the decision awarded wil only go as far as correcting
mistakes done by the company, mitigation of the damage against the plaintiff shareholder(s),
and also to the extent of giving a court order of provisional measures by the court to the
company to take necessary actions to to discontinue the damaging act. Then another question
arises, will this not be unjust for the shareholders? What shall become with damages suffered
by the shareholders, irreparable damages that can only be mitigated through financial ways. A
solution and answer to that question should be to sue for material damages where the claim
will be brought under a second proceeding, claiming damages on the basis of the Indonesian
Civil Code, either under the articles regulating wanprestatie or onderechtmatige daad.
97
98
Prof. Mr. Dr. Sudargo Gautama, Indonesian Business Law (Bandung: PT. Citra Aditya Bakti, 1995), p. 297.
99
Agus Budiarto S.H, M.Hum, Kedudukan Hukum dan Tanggung Jawab Pendiri Perseroan Terbatas(The Legal
Standing and Liability of the Company’s Promoter – authors free translation), Jakarta, Ghalia indonesia, 2002,
p.54 .
100
101
Elucidations of Regulations No.40 year 2007, article 61 (1) – authors free translation.
39
If the claim arises from a breach of contractual rights, the articles on the Civil Code
provisions concerning wanprestatie (breach of contract) are to be summoned and applied,
where as what happens in a case involving wanprestatie that the damages granted by court
will be to the party incurring damages which is the shareholder itself and not the company
while in the derivative action the damages will flow into the company treasury.
In correcting wrong company and/or management behaviour through a direct action the
shareholder plaintiff can also employ the law of tort (perbuatan melawan
hukum/onrechtmatige daad) such we can see in the case regulated under article 61 (1) of the
New Company Law where the shareholder has been treated unfairly as a result of a
discriminating decision by the GMOS, directors, and/or the commisioners of the company.
The matters concerning tort are regulated under Article 1365,1366 and 1367 of the Indonesian
civil code, article 1365 of the Indonesian Civil Code specifically provides that “A party who
commits an illegal act which causes damage to another party shall be obliged to compensate
therefor”. The shareholder plaintiff thus can allege that the company through the decisions of
its GMOS, directors and/or board of commisioner has violated article 61 of the New
Company Law, and as a result the shareholder plaintiff incurred damages and therefore he/she
is entitled to remedies under the law of tort.
In this case there has been discussions whether a company can be sued for tort by the idea that
it does not have its own mind and organs, that the actions undertaken by the company always
have to be done by natural persons such as its directors. Chatarrasmajid formulates that the
tort and negligent manners by the company is derivative in nature and by this nature so does
also provide implication that the company can be held liable for the actions of the natural
persons acting on behalf of it, that the Company has to take liability for the individual actions
taken by natural persons, because there is a certain relationship between the company and the
actor.102 This vicarious liability of the company for the actions taken by its employees is done
on the basis of Article 1367 which reads as follows:
An individual shall be responsible for the damage which he has caused by his own
act, as well as for that which was caused by the acts of the individuals for whom
102
Prof. Dr. Chatamarrasjid Ais, S.H., M.H., Penerobosan Cadar Perseroan dan Soal-Soal Aktual Hukum
PT. Citra Aditya Bakti, 2004, p. 181.
40
he is responsible, or caused by matters which are under his supervision. (S.27-31
jis. 390, 421)
Employers and those who have been assigned to manage affairs of other
individuals shall be responsible for the damage caused by their servants and
subordinates in the course of duties assigned to them.103
Consequently every directors action done in the course of its duties and inside the scope of
authority given to him by virtue of the law and/or the company bylaws is under the
companies responsibility inline with the vicarious liability concept carried by article 1367 of
the Civil Code. As a result every tort commited by the directors to the extent it fulfills the
abovementioned aspects is to be shifted to the company, therefore tort claims for the cases as
such should be finally directed to the company, and concerning any remedies will be paid
directly from the company treasury.
Chairuddin Ismail describes that torts committed by the company can crystallize in two
possible cases such as104:
1. Dividends which has been unclaimed for five years were not entered into the reserves,
therefore causing the rightful shareholders difficulties in taking out his share.
2. The company sold its shares for the purpose of increasing its capital directly to third
parties without giving a preemptive right to current shareholders or the employees of
the company.
Nonetheless suing under a direct action claiming that the directors have acted against the law
(onderechtmatige daad), therefore violating the law and consequently causing loss to the
shareholder is possible, three material aspects must be taken into account so that the claim
can turn out to be sucessfull shareholder plaintiff can be awarded monetarial damages namely
that, (i) there should be an act done willfully against the law, fault (schuld) by the actor, (ii)
103
Kitab Undang-Undang Hukum Perdata (Indonesian Civil Code), article 1367 (1) and (3) – authors free
translation.
104
Drs. Chairruddin Ismail, SH., MH., Direksi dan Komisaris dalam Perbuatan Melawan Hukum oleh Perseroan
Terbatas, Konstruksi Hukum, Tanggung Jawab dan Perlindungan Hukum Pihak Ketiga (Director and
Commisioners in Tort by Limited Companies, Legal Construction, Liability and Protection of Third Parties –
authors free translation, Jakarta, Merlyn Lestari, 2005, p.122.
41
there is loss (schade) incurred as a result of the claimed act, and (iii) there is a causal
relationship (oorzakelijk verband) between the act and the damages incurred105.
There are certain standards to be fulfilled by directors and/or other organs of the company to
be exempted from liabilities arising as a result of the actions they have taken, therefore
transfer those liabilities to the company, that (i) actions done by the company directors is still
inside the scope of duties or instructions given to them; (ii) the actions taken were not a fraud
commited against the company, (iii) it is intended to generate or bear the fruit of profit for the
corporation. In other words if either one of these standards were not fulfilled, only then the
(liability of) wrongdoing or negligence will not be bourne by the company, but will solely be
the liability the company organ doing such action.106
Thus following the material aspects of the tort the main separating point on the burden of
liability of an act of tort commited by a director, is whether the directors have acted inside or
outside the authority which were given to them either by law or by the articles of association.
As for the purpose of court proceedings, where direct actions was to be pursued as claims on
the basis of wanprestatie or onderechtmatige daad, the claims must be separately submitted
and pursued as two separate proceedings and therefore cannot be joined together as one claim
in front of the court, as the jurisprudence of the Supreme Court of Indonesia has uphold this
view in its decision No. 1875 K/Pdt/1984 that “the joining of tort and breach of contract
(claims) can not be justified in the order of the proceedings and shall also be settled
individually”107.
4.2.2. Direct Actions Submitted as Class of Shares Claims
It is possible that direct action(s) were to be instituted by a group of shareholders, by which a

company comprised of several classes of shareholders with different rights and classification
are sued on the basis of a separate and distinct injury done to a specific class of shareholders
in the company. This is to be regarded as a direct action, that ultimately the damages awarded
to the plaintiff will be distributed pro rata between the members of the class.
105
Ibid, p.46.
106
Prof. Dr. Bismar Nasution, SH, MH, ‘Kejahatan Korporasi Dan Pertanggungjawabannya’ (‘Corporation Crimes
and it’s Liabilities’ – authors free translation), this paper is presented on the the lecture given to jajaran
Kepolisian Daerah Sumatera Utara taking place in Tanjung Morawa Medan, on 27th of April 2006, at p.10.
107
Mahkamah Agung RI No. 1875 K/Pdt/1984, “penggabungan gugatan perbuatan melawan hukum dengan
perbuatan ingkar janji tidak dapat dibenarkan dalam tertib beracara dan harus diselesaikan secara tersendiri
pula.”
42
On the basis of the New Company Law, every shareholder is allowed to institute a claim
against the company, but with this also arises problems, with every shareholder holding the
right to sue, there will be a possibility of a multiplicity of claim, each of the claim will bear
the possibility of contradicting and differing judgments, so the solution should be that for the
purpose of avoiding multiple suits, claims instituted as to vindicate rights distinct to a class of
shareholder should be done on the basis of class action.
The context of class action in Indonesian law is regulated under Peraturan Mahkamah Agung
No.1 Tahun 2002, where it describes a class action as a procedure for instituting a claim,
where one or more person which represent a group submits a claim for himself and also for
the purpose of representing a group of persons multiple in numbers, which also has similar
facts or legal basis similarities between the representative and the member of the group.108
This regulation is enacted and aimed to provide for an orderly civil procedure of class action
litigation, a procedure which previously under Het Herziene Indonesisch Reglement (HIR)
and Reglement op de Burgerlijk Rechtsvordering (RBg) (the procedural laws governing civil
litigation in Indonesian law) were not known.
So an action on the basis of a distinct and injury suffered by the members of a class of
shareholder in a company can be clearly categorized into this definition of a class action,
where (1) the members of the class has a distinct and separate injury not suffered by other
class of shareholder, (2) the members has the same legal standing, as shareholders of the
company, and holding rights to insitute a direct claim against the company.
As for representative issues of the head plaintiff of the class, that to represent the legal stakes
of the members of the class, a representative of the class is not required to obtain a special
letter of attorney from the members of the class (article 4 PERMA No.1 year 2002)109, as
what has been stipulated in the HIR a plaintiff suing in court is not required to proceed with
an attorney but it does have the choice to do so, by common practice a plaintiff nowadays
always uses an attorney to act on behalf of him. According to article 123 (1) HIR Parties can,
if they choose to do so, have themselves assisted or represented by assignees, who for that
purpose have been provided with a special written authorization, wherever the authorizing
108
Peraturan Mahkamah Agung No.1 year 2002, Article 1 a. – authors free translation.
109
Emerson Yuntho, S.H., ‘Class Action Sebuah Pengantar’ (‘Class Action – A Guide’ – authors free translation),
2005, at P.23.
43
party may personally be present110. Thus in the case of an attorney acting on behalf of the
plaintiff, a special power of attorney must be provided, given and signed by the representative
of the group, exceptions of this power of attorney from the representative of the class
includes that no such other power of attorney from the member of the class is required.
110
Het Herzienne Indonesisch Reglement art 123 (1) – authors free translation.
44
CHAPTER V
A COMPARATIVE ANALYSIS BETWEEN THE INDONESIAN STATUTORIAL

AND AMERICAN CORPORATE COMMON LAW LITIGATION
To provide a better picture of the shareholder litigation under both system, this chapter will
try to analyze and compare the procedural matters and remedies provided under the
Indonesian and American corporate common law system.
Further during the course of the comparative process of the two systems, the writer will also
attempt to provide conclusions and on the basis of the analysis, give comments on the
positive and negative sides on each aspect of the shareholder litigation, which method and
technique will better provide an effective solution to the problem of management conformity
which is the central purpose of this comparative study.
Because of the lack of data of actions against directors and commisioners in breach of
fiduciary duties in Indonesia111, therefore for the purpose of this thesis the analysis and
discussion in light of these Indonesian circumstances will take form in a theoretical rather
than a case approach analysis.
5.1. Matters Concerning Direct Shareholder Litigation
The Indonesian and American system in this respect does have not a large amount of
differences. A direct action pursued by one or more shareholders under both systems
resembles civil litigation method pursued by an individual to enforce its rights outside the
field of corporation law. Accordingly discussions on direct shareholder litigation will also
take into account aspects of general civil litigation.
5.1.1. Requirements for Direct Shareholder Litigation
In the context of enforcing one or more shareholder(s) right(s), direct shareholder action is to
be interpreted as the common civil action pursued to enforce civil rights. Direct action by a
shareholder to vindicate the shareholders rights in all aspects do bear the same characteristic
111
Arumugram Rajenthran, ‘Indonesia An Overview of the Legal Framework for foreign direct investment’,
ECONOMICS AND FINANCE NO. 4(2002) October 2002, p.21 http://www.iseas.edu.sg/pub.html
45
as what we can find in actions (outside the field of corporate law) taken by legal persons to
enforce their right against others, whether based on contractual or non contractual right.
The procedural laws for these civil actions under indonesian law is governed by the two
procedural law inherited from the pre Indonesian independent Netherlands Indies government
which is HIR and Rbg, and to a certain extent does also take into account the relevant
provisions of the Reglement op de Burgerlijke Rechtsvordering (Rv) for aspects not regulated
by the two former procedural law. Therefore to pursue a direct action against the company
and or the company directors and the board of commisioners, before submitting the claim, a
shareholder plaintiff must fulfill the procedural requirements as laid down in the two
procedural law (and to certain extent the Rv).
The utmost importance is for a shareholder plaintiff to establish his position as a valid
plaintiff vis a vis the law. The absence of, under a disqualificatoir exception in which the
defendant submits a request to the judge presiding over the civil case to rule that “the plaintiff
does not have the legal standing and qualification to sue as a plaintiff112”, which if it is
successfully argued and accepted then the court (favoring the defendant) will declare that the
claim as unnacceptable (NO/niet ontvankelijkverklaard). Therefore to be established as a
valid shareholder of the company, a shareholder plaintiff has to show that he has a valid
ownership/stake in the company having the form of share certificates bearing his name on
the relevant certificate, or in the case of bearer shares, proof of ownership can be provided in
the form of a share purchase agreement of the relevant shares.
In the American system, courts will ultimately look into the substance of the claim as well
also considering the identity of the plaintiff as in the Indonesian procedural law discussion
above. In determining whether an action should be direct or derivative, American courts are
not bound by the label applied by the plaintiff in their argument, instead they will look to the
body of the complaint and apply certain criteria to decide the nature of the action.113 The
complaint is to be tested if it meets several characteristic of a direct claim that whether the
alleged wrongdoing were unique, or where other shareholders were not victims of the same.
112
Wiratmanto, ‘Eksepsi Selain Tidak Berkuasanya Hakim Dalam Perkara Perdata’ (‘Other Exceptions other
Than Exceptions in Which The Judge Does Not Have the Authority to Rule Over a Civil Case’ – authors free
translation), Universitas Muhammadiyah Yogyakarta, p.5.
http://www.umy.ac.id/hukum/download/Eksepsi.PDF
113
Rubinstein v. Skyteller, Inc., 48 F.Supp.2d 315, 323 (S.D.N.Y. 1999); Ferrara et al. (2005), Section 1.02, text
accompanying footnotes 13-18. In Xiao Ning Li, A Comparative Study of Shareholder Derivative Action,
(Deventer: Kluwer International Law, 2007) p. 125.
46
A number of standard or characteristic to be applied by the court in concluding such nature of
the action is first that the alleged breach of duties by the directors were duties owed to the
corporation not the shareholders114, second the harm is done directly to the company and
indirectly to the shareholder115, third concerning a dilution of shares of minority interest,
“where a significant shareholder’s interest is increased at the sole expense of the minority
shareholder”116, therefore a dilution conferring benefits to a third party is not a direct
claim117. Problem encountered in these kind of direct action characterization is claims that is
originally submitted as a direct claim, because of an unfullfilment of the characteristics and
example mentioned above were dismissed by court due to the absence of a demand placed on
the board which is a prerequisite to a derivative claim in the American system.
To the contrary the New Company Law does not give a detailed description on how the court
will differentiate between the direct action and derivative action as what we can find in the
United States. However learning from the American experience an Indonesian shareholder
plaintiff prior to insituting a direct action must also consider and put paramount attention to
the legal basis of its claim, even if the danger of a failure in placing a demand requirement to
the board of directors is not known under Indonesian law, nonetheless if the judge presiding
over the case finds that a shareholder plaintiff is pursuing a direct action which in the original
nature should be derivative, then the claim might be declared unnacceptable (NO/niet
ontvankelijkverklaard) by the reason that it is unclear (obscuur libel) where the shareholder
plaintiff:
1) fails to create a clear connection between the fundamentum petendi (the grounds of the
claim) and the petitum (the requested decision)118 which in this case happens when the
plaintiff’s fundamentum petendi clearly shows that the nature of the claim should be
derivative but to the contrary the shareholder plaintiff is requesting for a direct petitum,
therefore the petitum should be that of a derivative petitum which requests that the
damages awarded shall be finally go to the company treasury.
114
Pinto, A.R and M. Branson, Douglas, Understanding Corporate Law (Second Edition), Lexis Nexis, 2004, p.
427.
115
2007, p. 428.
116
Ibid.
117
Ibid.
118
Reglement op de Burgerlijke Rechtsvordering Article 8 – authors free translation.
47
2) joined in one claim, claims on the basis of a contractual right and tort119, which is
prohibited under Indonesian civil procedural law.
5.1.2. Remedies Awarded in a Direct Shareholder Claim
From the previous sub chapter we have discussed the the similar character of a direct
shareholder litigation to that of a common civil action instituted by the public in general.
Here also as with a civil action insituted by the public, remedies for the claim goes straight to
the shareholder.
The Indonesian and Delaware corporate law has its difference in the award or damages given
to the shareholder plaintiff. In the United States, clearly that the common law does not
differentiate damages awarded either for contractual based claim or a tort based claim.Thus
the judge presiding over the case (on whatever basis the plaintiff pleads its case) is permitted
to award monetary damages as a compensation for losses incurred by the shareholder
plaintiff. Whereas the New Company Law does not provide such award of monetarial
damage for tort related claim120. The New Company Law, specifies that an award given for a
direct claim on the basis of article 61 (1) will only be in the form of an injunction or an order
for the company or director to correct such wrongdoing, or injustice done to the shareholder
plaintiff.
Therefore to obtain monetarial compensatory for tort claims (claims that directors has
breached its fiduciary duty, by acting negligently outside the authority conferred to him by
the law), a shareholder plaintiff must pursue a subsequent proceeding by making use of the
provisions in the Civil Code.
Comparing the two it seems fair to conclude that Delaware law, gives a better and practical
method concerning the award of remedies in a direct action, that the burden to institute two
different proceedings such in the case of the the Indonesian direct shareholder litigation on
the basis of torts (under article 61 (1)), where the first proceeding is aimed to (1) obtain an
injuction to stop the damaging act, compel the company to mitigate the effects and the second
is to (2) obtain compensatorial tort damages is in the writers view is considered
impracticable.
119
See discussion at p. 32, concerning the joining of wanprestatie and tort claims.
120
Regulation No.40 year 2007 concerning Limited Liability Companies, Article 61 – authors free translation.
48
5.2. Prerequisites to the Derivative Action
The United States is really well known for its litigation culture, the same can be said
regarding the development of the corporate control in the United States system, particularly
in the context of this thesis Delaware Law. The United States has developed a complicated
subset of standard and prerequisites before a shareholder plaintiff can sue the directors or the
management of the company using a derivative action claim.
It seemed to be well established, although in practice minor addition and developments

through case law can still be observed on how delaware courts have carefully approached
derivative actions. One remark which is to be said to understand how the Indonesian and the
American corporation culture is different especially in how they address the problem of
agency problems is the different structure of the company board. The United States as with
many Common Law countries uses a one tier board, while Indonesia following the civil law
tradition has a two tier board.
The implication of using a one tier board is having less corporate control to the power of
directors in the United States, while we shall not also forget how American directors
particulary in Delaware has been given a substantial amount of power to manage the
company, therefore to compensate for the enormous authority given, a strict judicial scrutiny
through corporate litigation in this case a derivative action or direct action is essential. It has
been viewed that derivative actions in the United States were ‘the principal method of
disciplining corporate management’121.
On the contrary Indonesia with a two tier method has the function of the board of
commisioners to supervise the board of directors in carrying its duties, this will partly answer
the question concerning why derivative litigation is not particulary popular in Indonesia.
Some of the board of directors decision also require the ratification of the general meeting of
shareholders122, thus as we can see the Indonesian directors has fewer authority than the
american directors.
121
2007, p. 98.
122
Regulation No.40 year 2007 concerning Limited Liability Companies, Article 102 (1), which prescribes that
authorization must be obtained from the general meeting of shareholders for an act done by the director of
the company to transfer or put a lien on the assets of the company which exceeds 50% of the whole value of
the company assets. – authors free translation.
49
Prerequisites imposed by the American system compared to the Indonesian system was
exceptionally more detailed123, whereas the Indonesian system through the New Company
Law only imposed one requirement for a shareholder to sue under the derivative action which
is the 1/10 ownership rule, a contrario the American system does not have such requirement.
A demand requirement to the board of directors of the company to act is not a conditio sine
qua non to continue a derivative litigation under indonesian law. In contrast to the American
system the Indonesian system of derivative action does not recognise the method of a
representative action, under the New Company Law only one shareholder with a 1/10
ownership is allowed to institute a derivative action.
In this respect again the American law has a competitive advantage compared to the
Indonesian law, it has provided a much clearer view on the mechanism on insititution of a
derivative action due to age old of the method itself (albeit it’s complicated formal
requirements), where it has since the late 19th century been known and occasionaly used to
correct corporate wrongdoings. However because the complex prerequisites and procedures
of the derivative litigation, many times the shareholder plaintiff will try to pursue a direct
action rather than a derivative action in that they ‘can avoid the substantive and procedural
hurdles of the derivative action and benefit directly in the remedies’124. Nevertheless
Indonesian shareholders can still hope that this method will be further developed in the
future, after all it also provided a method for a better corporate governance besides other
control methods which has been provided by the New Company Law. To a greater extent the
Indonesian Law can also adapt the example of the American system, which puts a number of
prerequisites, to certify whether the shareholder is the proper plaintiff for the derivative
action. In the writers view a requirement of a 1/10 ownership of the shares is not sufficient,
provisions regulating the identification of a shareholder as the rightfull plaintiff of the claim
is necessary, with the intention to prevent vexatious litigation or abuse of the derivative
action.
5.3. Class Action Litigation Under the Indonesian and the American System
The Indonesian and American system both has the procedural requirements concerning class
actions suits. However to the extent of the knowledge of the writer class action in Indonesian
123
See the discussion concerning these prerequisites at p.20 and 21.
124
2007 p. 98.
50
corporate law has never been used, although the provisions regulating the class action
litigation has been provided by the Indonesian Supreme Court, this could probably be
because the lack of knowledge of how class action can be used as a practical vehicle to sue
the company for an alleged wrong.
Both procedures requires a class representative to be appointed ro represent the class.

Substantive difference between the two procedures is that appointment of a class
representative under the American system is strictly done by the court, whereas under the
Indonesian system, the class itself must appoint their own class representative to act as lead
class plaintiff. A prerequisite to have the same legal basis/merit for claim is also found in
both of the systems. In the writers view both type of class counsel appointment gives the best
solution to each of its legal culture. A class counsel appointment by the courts under the
American system could be done to prevent a further dispute in who is more rightful to act as
a representative of the class. Whereas in Indonesian law where the culture of “family
principle” is so apparent, that usually the class will have a consensus between them
concerning who should act as the representative of the class.
51
CHAPTER VI
CONCLUSION
Upon observing and completing a comparative study of both the shareholder litigation
methods in the United States and Indonesia, we can conclude that under both systems
derivative and direct litigation does exist, as also with fiduciary duties upon company
directors and commisioners (in the case of the Indonesian Law). The apparent gap between
the two system is mainly because of the age difference between the systems itself and how it
has developed. Corporate litigation in the United States particularly its derivative litigation
provided a fairly complex subset of requirements and also mechanism to be complied with by
a shareholder plaintiff. Whereas under the Indonesian system shareholder litigation is rarely
used, mainly by the reason that it has only been introduced to the Indonesian corporation
society for approximately 13 years since Regulation No.1 year 1995 has been first enacted,
and carried on to the regime of the New Company Law.
The rare usage and minor provisions regulating the derivative action under the New
Company Law as well as its predecessor made Indonesian shareholders approach the method
with due care, having uncertainty in the successfullness and outcome of the corporate
correction method.
However, this condition will hopefully change in the coming future, having a long road
ahead, the development in the young Indonesian Company Law statute. After all these
method of corporate litigation functions as a complementary method to other corporate
governance control mechanism already existed in Indonesian Company Law.
A suggestion can be given to Indonesian regulators that they shall polish the Company Law
statute in order to better provide a stronger mechanism and basis for direct and derivative
litigation as well as corporate representative actions, while bearing in mind that control of the
different method of shareholder litigation particularly derivative action must also be put again
by using the company law statutes, to prevent vexatious litigation or an abuse of the method
itself.
52
Further information must also be disseminated to the Indonesian business society regarding
the usage of direct, derivative as well as corporate class action litigation, so that the
awareness of these method of corporate corrction through litigation itself will increase and
hence also its usage. Thus hopefully with the correct development of such methods of
corporate litigation will increase the performance of the directors and commisioners of
Indonesian company’s and in addition also the quality of the Indonesian Corporate
Governance.
53
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57

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SCHOOL OF LAW

ERASMUS UNIVERSITY ROTTERDAM

Business, Corporate, And Maritime Law

Corporate Law Specialization

CORPORATE LITIGATION AS A METHOD TO PROTECT

(A Comparative Study between Indonesia and The United States)

Student Number: 316631

Rotterdam, June 2008

1. Prof. Dr. F. J. M. De Ly, for guiding me throughout the preparation of my thesis.

GENERAL CONCEPT OF SHAREHOLDING AND DIRECTORS LIABILITIES

2.1. Shareholders and Types of Rights Attributed to Shareholding

2.2. Separation of Ownership and Control

As a solution to the problem of limitations of ex ante control oversight ever company

2.3. Duties and Liabilities of Directors in Company Law

2.3.1. Directors Fiduciary Duties In the United States

2.3.1.1. The Fiduciary Duty of Care

According to Dean Clark, “[t]he rule is simply that business judgment of . . .

2.3.1.2. The Fiduciary Duty of Loyalty

The classic duty of loyalty defendant is a fiduciary (a director or officer or in

(a) No contract or transaction between a corporation and 1 or more of its directors

The doctrine generically known as “organizational opportunities” deals with

2.3.2. Directors Fiduciary Duty Under Indonesian Regulatory Framework

Principally the doctrine of fiduciary duty for a company’s director, used to be

2.3.2.1. The Indonesian Fiduciary Duty of Care and Loyalty of Directors

Article 92 (2) provides that”Management, in accordance with the provision referred to in

Below is a paragraph taken from a book by Rachmadi Usman concerning an interpretation of

2.3.2.2. The Indonesian Fiduciary Duty of Care and Loyalty of Commisioners

SHAREHOLDER/CORPORATE LITIGATION UNDER DELAWARE LAW

3.1. The Derivative Action

3.1.1. The Proper Plaintiff Principle

We can find a similar provision of contemporaneous ownership qualification as regulated by

In any derivative suit instituted by a stockholder of a corporation, it shall be

By this point we can understand how this contemporaneous ownership of shares is an

3.1.2. The Demand Requirement

No shareholder may commence a derivative proceeding until:

1) The class is so numerous that joinder of all members is impracticable,

2) There are questions of law or fact common to the class,

3) The claims or defenses of the class, and

SHAREHOLDER/CORPORATE LITIGATION UNDER INDONESIAN

In light of these condition and circumstances of barriers to representation of the company by

(6) Acting on behalf of the of the company, a shareholder representing at least

2. Specifically for transactions which have a “voidable” nature (vertietigebaar),

4.2. The Direct Action in Indonesian Company Law

4.2.1 Rights attaching to Shares a Legal Basis of the Claim

4.2.2. Direct Actions Submitted as Class of Shares Claims

It is possible that direct action(s) were to be instituted by a group of shareholders, by which a

A COMPARATIVE ANALYSIS BETWEEN THE INDONESIAN STATUTORIAL

5.1. Matters Concerning Direct Shareholder Litigation

5.1.1. Requirements for Direct Shareholder Litigation

5.1.2. Remedies Awarded in a Direct Shareholder Claim

It seemed to be well established, although in practice minor addition and developments

Both procedures requires a class representative to be appointed ro represent the class.

Abdulkadir Muhammad, Hukum Perseroan Indonesia (Indonesian Company Law – authors

Benny S. Tabalujan, Indonesian Company Law A Translation and Commentary, Singapore,

James A. Brickley, Clifford W. Smith,Jr., Jerold L. Zimmerman, Managerial economics and

Richard Smerdon, A Practical Guide to Corporate Governance Second Edition, London,

B. Laws and Regulations

American Model Business Corporation Act

Delaware General Corporation Law

Federal Rules of Civil Procedure Rule 23. Class Actions

United States Federal Rules of Civil Procedure Rule 23.1

Indonesian Limited Liability Company Law No.40 Year 2007

Indonesian Civil Code