Derivative lawsuit in Ukraine: the issue of improving legal regulation

When the legal entity's transaction is challenged, the point at issue is not only internal relations between the corporation, its members, and officials authorised to manage the corporation - invalidation of the corporation's transaction directly affects the rights and interests of third parties (contracting parties). Thus, it is necessary to maintain stable civil turnover as well as the adequacy of the legal consequences of the selected remedy. The property qualification, along with the obligation to file a demand for the corporation to act (challenge the transaction), will prevent abuse of derivative action (as well as any of the other types of derivative actions), but rights of a third party that did not know and could not have known about the limited authority of the sole or collective executive body must not be violated. Under these circumstances, Clause 2 of Part 3 of Art. 92 of the Civil Code of Ukraine must be used. Civil Code of Ukraine (n 23). According to it, in relations with third parties, the restriction on the powers of representation of a legal entity has no legal force, except when the legal entity proves that the third party knew or in all circumstances could not have been unaware of such restrictions. The reasoning for the legislator's decision is that mere failure to adhere to the approval procedure does not have to result in such harsh implications as invalidation of the transaction. The plaintiff must only prove the circumstances in connection with which the transaction may be invalidated or an action for applying the consequences of invalidity is brought: 1) it is a major (interested party) transaction; 2) the transaction has not been approved or has been approved in breach of the established procedure.

As for the burden of proof that the third party was aware of the executive body's (director's) limited authority, it should be noted how the awareness and the person's ability to find out about the director's limited power are established. In its Resolution dated 20 July 2021 in case No. 911/1605/20, the Supreme Court reiterated that the contracting parties' examination of the scope of authority of the legal entity pursuant to the articles of association is within ordinary care during the conclusion of a contract. Limitation of the authority to act on behalf of a legal entity enters into force for a third party in case it has acted in bad faith and unreasonably - in particular, knew for sure that the company's executive body did not have the necessary scope of authority or must have known that if it had exercised at least reasonable care. 75 Resolution of the Supreme Court in case 911/1605/20 of 20 July 2021 <https://reyestr.court.gov.ua/ Review/98523674> accessed 8 August 2021. In other words, if the third party did not exercise due care by requesting a copy of articles of association, for instance, when data in the Unified State Register is incomplete or missing, the transaction concluded with such party in excess of the director's authority (ultra vires) may be invalidated on the claim of the legal entity or based on the derivative action of its member. Due care should also be exercised when a contract is signed: if it contains the clause where it is stipulated that the contract is signed by the person acting under the articles of association, the court will rely upon the fact that the signatory's contracting party has been informed of the identity and authority of the signatory. Such stance was expressed by the Supreme Court in its Resolution dated 9 June 2021 in case No. 911/3039/19. Resolution of the Supreme Court in case 911/3039/19 of 09 June 2021 <https://reyestr.court.gov.ua/ Review/97926318> accessed 8 August 2021.

4. Defendants in a derivative lawsuit

After it is determined who can bring a derivative action for and on behalf of the legal entity, the defendant's identity must also be established. According to Art. 54 of the CPC of Ukraine, a defendant is the official of a legal entity. 77 Commercial Procedure Code of Ukraine (n 7). However, this clause does not offer a unified definition of an `official'. The problem is that a group of people covered by the notion of an `official' differs depending on the type of the business company (the legal entity in itself). According to Part 2 of Art. 23 of the Act of Ukraine `On Business Partnerships', officials include: the chairman and members of the executive body, the audit committee, the auditor of the company, as well as the chairman and members of another body of the company who are authorised to manage the company if such body is established in accordance with the company's statutory documents (constitutional documents). 78 Act of Ukraine `On Business Partnerships' of 19 September 1991 (as amended of 3 July 2020) <https://zakon.rada.gov.ua/laws/show/1576-12#Text> accessed 08 August 2021. According to Part 1 of Art. 42 of the Law of Ukraine `On LLCs', officials of the limited liability or additional liability company are members of the executive body and the supervisory board, as well as other persons under the company's charter. 79 Act of Ukraine `On Limited Liability and Additional Liability Companies' (n 61). According to Clause 27 of Art. 2 of the Draft Law of Ukraine `On JSCs', 80 Act of Ukraine `On Joint-Stock Companies' (n 29). the status of an official may be prescribed in the charter the same way as provided for by the Law of Ukraine `On LLCs'. Also, officials include a corporate secretary and members of the liquidation committee.

However, the definition of an official given in the Law of Ukraine `On LLCs' and the Draft Law of Ukraine `On JSCs' should be interpreted in such a manner that discretion as to the establishment of the group of officials in the articles of association is not and may not be unlimited. Thus, according to the Letter of the Ministry of Justice of Ukraine dated 22 February 2013 No. 1332-0-26-13/11, an official should be the person that holds the office associated with the discharge of organisational, executive, administrative, and economic functions. 81 The Letter of the Ministry of Justice of Ukraine No 1332-0-26-13/11 of 22 February 2013 <https:// zakon.rada.gov.ua/laws/show/v13_1323-13#Text> accessed 8 August 2021. If the person's duties do not include the above-mentioned functions, or he or she does not act on behalf of the legal entity, he or she is not and shall not be treated as an official.

However, when considering a defendant in the derivative action, the focus should also be placed on some inaccuracy of Art. 54 of the CPC of Ukraine. Although the effective version of Art. 54 of the CPC of Ukraine refers to a claim for compensation for damages against the official, lack of detail creates a formal legal opportunity for such person to avoid liability if he or she no longer has the status of an official as of the date of the action. 82 Commercial Procedure Code of Ukraine (n 7). Thus, according to Part 3 of Art. 372 of Czech Business Corporations 83 Czech Business Corporations Act (n 43). an official, against whom a derivative action can be brought, means without limitation the person who had that status as of the date of the damages inflicted upon the legal entity. Similarly, Sub-clause a) of Clause 5 of § 260 of the UK Companies Act defines the director as a former director as well. 84 UK Companies Act 2006 (n 13).

Therefore, Part 1 of Art. 54 of the CPC of Ukraine should be amended and supplemented with para. 3 as follows:

for the purposes of this article, “officials” include members of the executive body, supervisory board, audit committee, chairperson and members of another governing body, or persons with the status of officials pursuant to the statutory document, by virtue of their administrative, economic, organisational, and executive functions, including the ones who had the status as of the date of the damages inflicted upon the legal entity.

Losses are sometimes inflicted upon the legal entity by its majority members and shareholders rather than its official. The need to expand the circle of persons against whom a derivative action can be brought by including the company's members has already been emphasised by Yu. K. Chelebiy-Kravchenko. 85 YuK Chelebiy-Kravchenko, `General overview of participants of a legal proceeding brought by a derivative claim' (2018) 2 Entrepreneurship, Economy and Law 87-88. However, a legal entity's losses may also be inflicted upon it by third parties as to which governing bodies do not make a decision to bring an action. Losses can also be inflicted by full members of unlimited and limited partnerships with no governing bodies, so the concept of a derivative action in the existing form will be `dead' in their respect. A suggestion to expand the circle of defendants under a derivative lawsuit by including third parties has already been expressed by O. V. Bihniak. 86 OV Bihniak, `Derivative action and corporate contract as means of corporate rights protection: experience of Ukraine' (n 3). Cattano v Bragg, 727 S.E.2d 625 (Va. 2012). The opportunity to bring a derivative action against other members of the legal entity was recognized by the Supreme Court of Virginia in the case of Cattano v. Bragg⁸ In another case, James Talcott, Inc. v McDowell, the court of appeal reiterated that the member/shareholder could bring a derivative action for compensation for the losses inflicted upon the company by a third party. James Talcott, Inc v McDowell, 148 So.2d 36, 37 (Fla. App. Dist. 3 1962). Each member's opportunity to bring a derivative action for compensation for the losses inflicted by another member is provided for by Art. 108 of Czech Business Corporations Act Czech Business Corporations Act (n 43).

Thus, to our mind, the circle of persons against whom a derivative action may be brought must be expanded: there must be an opportunity to bringthis action against officials, members (shareholders) and third parties (provided that the legal entity is unable to protect its rights on its own).

4.1 The issue of financial (civil) and employment (material) liability of company's officials

The grounds for holding officials liable are prescribed by Part 2 of Art. 89 of the Commercial Code of Ukraine, according to which they include inflicting losses due to actions (omission) if they are inflicted by: 1) actions taken by the official ultra vires or by abusing his or her official authority; 2) actions of the official taken in breach of the preliminary approval procedure or another decision making procedure for such actions; 3) actions taken in accordance with the approval procedure or another decision making procedure, but based on the false data furnished by the official; 4) failure to act by the official in case he or she had to take certain actions pursuant to his or her official duties; 5) other guilty actions of the official. Commercial Code of Ukraine of 16 January 2003 (as amended of 1 August 2021) <https://zakon.rada. gov.ua/laws/show/436-15#Text> accessed 8 August 2021. Based on the above-mentioned list of the grounds for the financial liability of officials, one can conclude that some of them are rather abstract and broad.

In particular, Clause 4 of Part 2 of Art. 89 of the Commercial Code of Ukraine does not specify which duties of the official are meant. Ibid. For example, officials of a corporation, namely the director or members of the executive body, can enter into employment contracts, so this is a liability for violating employment duties. Violation of employment duties entails financial liability under employment law, and such cases are heard by general courts. In turn, according to Clause 12 of Part 2 of Art. 20 of the CPC of Ukraine, the cases based on a derivative action are considered by commercial courts and entail civil (property) liability. 92 Commercial Procedure Code of Ukraine (n 7). Therefore, the question is whether a derivative action for compensation for the losses inflicted upon the legal entity by the official with the employment contract may be brought.

A. Didenko and O. Nesterova have reasonably noted that where there are no criteria to divide the civil and labour liability of officials, there will be an absurd situation when officials with the same status will bear different liability depending on the type of their contract, either an employment one or civil law one. 93 AG Didenko, EV Nesterova `Financial (civil) liability of officials of joint-stock companies' (2012) 7 Lawyer 7. O. Koltok believes that when civil financial and employment material liability is divided, one should consider which duties have been violated by the official. 94 OI Koltok `Derivative claims: innovations that are worth paying attention to' (2016) 16 Law and Business 21-28. Yu. Popov suggests that despite the existing employment relationship, the legal entity's members must have an opportunity to bring a derivative action due to the nature of relations between the legal entity and its senior executive (official). Yu Popov, `Derivative (indirect) lawsuits: foreign experience and Ukrainian prospects' (n 45).

In comparison with other employees, officials have a special legal status and concurrently have employment and civil legal relations to discharge legal entity management functions. As noted by the Supreme Court in its Resolution dated 9 December 2020 in case No. 487/2178/19, the above does not establish the priority of employment regulation over the civil one. Resolution of the Supreme Court in case 487/2178/19 of 9 December 2019 <https://reyestr.court.gov. ua/Review/93879586> accessed 8 August 2021. However, we should emphasise that since an official is a subject of civil and employment relations that exist concurrently and in parallel to each other, civil legal regulation to the extent of the losses inflicted by the employed official cannot fully displace the employment regulation. In cases where the person does not act on behalf of the legal entity and does not discharge management functions, the official acts as a subject of employment relations, so the legal labour rules on financial liability are to be applied. The point at issue is the losses sustained in connection with failure to take actions to avoid downtime, improper registration and storage of valuables, other employment duties, or damages to the property of such legal entity, etc. In cases where the opposite approach is used, the line between legal regulation of civil and employment relations is erased, and the mechanism for holding officials liable becomes unclear.

The above-mentioned stance is also confirmed by the fact that the grounds for holding officials liable under Part 2 of Art. 89 of the Commercial Code of Ukraine are associated with the losses inflicted during the management of the legal entity. Commercial Code of Ukraine (n 89). Part 4 of Art. 92 of the

Civil Code of Ukraine, Civil Code of Ukraine (n. 23). which also provides for holding officials liable for losses inflicted upon a company, is dedicated to the legal capacity of the legal entity, so it is associated with the formation and expression of its will (management thereof) and does not provide for the opportunity to bring a derivative action on the grounds other than losses resulting from a discharge of management functions.

In its Resolution, the Grand Chamber of the Supreme Court reiterated that employment relations between the legal entity and its official did not influence the determination of jurisdiction of such dispute, and it had to be heard in accordance with Clause 12 of Part 1 of Art. 20, Part 1 of Art. 54 of the CPC of Ukraine. Resolution of the Supreme Court in case 910/12217/19 of 14 April 2020 <https://reyestr.court.gov.ua/ Review/88815574> accessed 8 August 2021. The cause of action was the losses resulting from illegally accrued salaries (excessive payments to the staff). At first glance, this case seems to be within the competence of general courts by virtue of the direct legal rule, and the official's liability must be financial (under employment law). Thus, the Resolution of the Grand Chamber of the Supreme Court contradicts the law. However, it is not that unambiguous. Firstly, according to the facts of the case, the director's powers to determine the labour remuneration form and system were provided for by the articles of association, so these duties arise not so much from his or her status as an employee, but from his or her managerial position. Secondly, the powers to accrue salaries are rather of administrative nature since they provide for the disposal of the legal entity's funds (property). Under such circumstances, the official (director) acts as a competent governing authority of the legal entity in the first place rather than an employee.

The approach we have presented is used as a basis for the regulation of derivative actions in the legislations of other countries. For example, according to Arts. 147 and 148 of the German Joint-stock Companies Act, shareholders may bring a derivative action only for compensation for the losses inflicted `during the management of the company's affairs'. Act of Germany `On Joint-Stock Companies' (n 16). Similarly, it is stipulated in Arts. 236 and 239 of the Spanish Business Corporations Act that the cause of a derivative action is losses resulting from actions (omission) of the director(s) in breach of the law, statutory documents, or official duties. Corporate Enterprises Act of Spain of 2010 (as amended July 2015) <https://www.spenceclarke.com/ wp-content/uploads/Tax%20treaties%20etc/Company-law.pdf> accessed 8 August. Moreover, Part 2 of Art. 239 of the Law that governs the procedure for several members or shareholders to bring a derivative action uses the concept of `corporate interest', Ibid. which can only be breached when losses are inflicted upon the legal entity by the official as a subject of administrative powers rather than an employee.

Therefore, a derivative action against the official with the employment contract, given the specific legal status and in accordance with the effective law, does not depend on the existence of employment relations themselves and depends on how such an official acted, as a subject of employment or civil (managerial) relations, when he or she inflicted losses upon the legal entity. If losses result from a violation of the duties associated with management of the legal entity (management decisions taken, transactions conducted on behalf of the legal entity, etc.), a derivative action may be brought. If losses result from the official's actions (omission) as an employee (are not associated with management of the legal entity), the liability of such officials is financial, and a derivative action cannot be brought.

As for conditions for officials' liability, the following should be noted. In its Resolution in case No. 904/982/19 dated 24 February 2021, the Supreme Court reiterated that a person might be held liable in a derivative action only when four elements of the civil offence are proven, which include: 1) unlawful conduct; 2) losses; 3) cause-and-effect relationship between the unlawful conduct and losses incurred; 4) guilt. Resolution of the Supreme Court in case 904/982/19 of 24 February 2021 <https://reyestr.court.gov.ua/ Review/95240657> accessed 8 August 2021. The burden of proof is borne by the plaintiff, and if one of the elements of the offence is missing, the official cannot be held liable. We would like to avail of an opportunity and draw attention to Part 4 of Art. 92 of the Civil Code of Ukraine in respect of the liability of officials. Civil Code of Ukraine (n 23). The point is that this rule provides for joint and several liability of officials for the losses sustained by the legal entity. However, the wording of this rule does not enable a clear understanding of whether the persons who, for instance, have not voted for the resolution that has resulted in the losses are also held liable. This issue was also raised by O. O. Kot in his study of a derivative lawsuit in Ukraine. OO Kot, `Derivative lawsuit as a remedy for protection of corporate rights' (2016) 5-6 Bulletin of Economic Justice 21-27.

According to the special rule, Part 3 of Art. 40 of the Law of Ukraine `On LLCs, an official (namely, the member of the supervisory board or executive body) is released from liability if he or she proves that he or she is not guilty of the damages; in other words, individual liability of each official is established. Act of Ukraine `On Limited Liability and Additional Liability Companies' (n. 61). This rule can be interpreted so that the officials who have not voted for the resolution that has resulted in the company's losses will not be held liable. The same individualistic approach is also demonstrated by Art. 293 (in limited liability companies) and Art. 483 (in joint-stock companies) of the Commercial Companies Code of Poland, Part 3 of Art. 187 of Commercial Code of Estonia. The Commercial Companies Code of Poland of 19 September 2000 (as amended 2014) <https://

supertrans2014.files.wordpress.com/2014/06/the-commercial-companies-code.pdf> accessed 8

August 2021; the Commercial Code of Estonia of 01.09.1995 (as amended 4 April 2014) <https://www. riigiteataja.ee/en/eli/504042014002/consolide> accessed 8 August 2021. The effective Law of Ukraine `On JSCs' does not contain an equivalent rule, Act of Ukraine `On Joint-Stock Companies' (n. 32). but it is stipulated in Part 2 of Art. 86 of the Draft Law of Ukraine `On JSCs' that only the officials who have voted for the resolution in the collegiate bodies of the joint-stock company are held liable for the losses inflicted upon by the body's resolution. Draft Law of Ukraine `On Joint-Stock Companies' (n.8).

In our opinion, such an approach is ambiguous. It is absolutely wrong to hold the official who has voted against the respective resolution liable for the losses sustained by the company. However, there is still an open question of how to qualify actions of the official in the collective body who has not voted against and has abstained from voting: as passive approval of the unlawful resolution of the governing body or as a ground for being released from liability? On the one hand, such an official does not vote for the unlawful resolution. On the other hand, such conduct may be treated as a violation of the officials fiduciary duties by omitting to take the actions that would prevent the adoption of a resolution that will inflict damages upon the corporation. Moreover, such person's attendance can, for instance, procure quorum at the general meeting in a joint-stock company and their power to adopt a resolution.

In our opinion, this is the very reason why only those officials who have directly disagreed with the resolution and voted against it should be released from liability. This approach is implemented in the laws of a number of foreign jurisdictions. For example, according to Clause d) of Art. 316 of the Corporations Code of California, abstaining from voting is considered to be a passive approval of the respective resolution, so a director is jointly and severally liable together with the other members of the executive body. Corporations Code of California of 1947 (as amended 1 January 2021) <https://leginfo.legislature.ca.gov/ faces/codes_displayText.xhtml?lawCode=CORP&division=1.&title=1.&part=&chapter=3.&article=> accessed 8 August 2021. According to

Clause 2 of Part 6 of Art. 63 of the Act of Kazakhstan `On Joint-stock Companies', abstaining from voting is treated as `unlawful omission' that has resulted in losses. Act of Kazakhstan `On Joint-Stock Companies' (n 68). According to §123 of the Canada Business Corporations Act, a director who is present at a meeting of the executive body is deemed to have consented to any resolution passed unless he or she directly expresses his or her dissent. Business Corporations Act of Canada (n 14) L McMillan, `The Business Judgment Rule as an Immunity Doctrine' (2013) 4 (2) Wm. & Mary Bus. L. Rev. 567.

5. Business judgement rule

However, it should be noted that the circumstances under which a resolution (action or omission) is adopted by officials are usually unclear, the scope of information is insignificant, and the time is limited. Therefore, it is extremely difficult to foresee consequences in advance, so there is quite a high probability of the resolution or transaction that will not only fail to meet the expectations but also will do damages, despite good-faith estimates of its performance and economic feasibility. The above constitutes risk as an integral attribute of any economic operations in which it is necessary to promptly respond to internal and external factors, which will not be ensured if officials keep doubting their decisions all the time for fear of liability for their bona fide actions - in the end, it is the corporation that will suffer.¹¹³¹¹⁴ Judges and participants of litigation are often unable to tell apart negligence as the improper discharge of the official's duties and competent management under the conditions of limited information, time, resources, etc., which, due to the risky nature thereof, entailed unfavourable results. A Ponta, RN Catana, `The business judgement rule and its reception in European countries' (2015) 4 (7) The Macrotheme Review 132, 137. There are several reasons for the above: 1) the judge does not have the sufficient level of knowledge and experience in the business sphere to assess economic aspects of the officials' resolution; 2) there is a frequent basis for the so-called hindsight bias: a tendency to perceive the facts and events that have occurred as evident and predictable ones as well as reversible ones, despite the fact that the initial information before occurrence thereof was insufficient to foresee them; in other words, a resolution of the officials that was reasonable when it was adopted might seem unreasonable in the course of time. D Despotovic `Fiduciary Duties and the Business Judgment Rule (with the Emphasis on the Citigroup Case)' (Master Thesis, University of Tilburg 2010) 12-13. Therefore, there is an actual probability that the officials' actions can be misjudged as negligence, and they can be held liable. It is necessary to create guarantees to protect the latter from liability for risky actions (non-actions), provided that their fiduciary duties are discharged.

Given the above, the common law was the first to develop the refutable presumption called `business judgement rule', a refutable presumption that the officials acted in good faith, reasonably (on an informed basis), and for the benefit of the legal entity. The burden of proof is generally borne by the plaintiff, although in some jurisdictions, the defendant has to prove that the resolution, actions, or omission meet the applicable criteria (Germany, Austria, etc.). P Nimmerfall, LJ Peissl, `The Business Judgment Rule and its Impact on Austrian Law' (2015) 4 Casopis pro pravni vedu a prax 354-357. However, while assessing risk factors in good faith, they can arrive at a reasonable conclusion on the feasibility of not conducting a transaction or adopting a resolution, which can also inflict losses upon the corporation in the future (including as lost profit). The doctrine of the business judgment rule covers the above-mentioned cases. According to Part 3 of Art. 180 of the Australian Corporations Act business judgement rule applies to any decision to take or not take action in respect of a matter relevant to the business operations of the corporation. Corporations Act of Australia of 2001 (as amended 2017) <https://wwW'legislation'goV'au/Details/ C2018C00031> accessed 8 August.

According to the judgement of the Delaware Supreme Court in the case of Smith v. Van Gorkom, the duty of care should mean that the corporation's officials acted in an informed manner the same way as any reasonable person would do under the same circumstances. In its turn, an informed manner means that officials must take a decision only after they have examined all the information, both available and obtainable. Smith v Van Gorkom, 488, A.2d 858 (Del. 1985). The law enforcement practice then confirmed that the duty of care was only associated with the requirement for the procedure for decisionmaking by the informed person. In particular, an official will not be held liable for the decision that would not be made by an ordinary reasonable person, which means that the decision as an outcome is not assessed. C Hansen, `The Duty of Care, the Business Judgment Rule, and The American Law Institute Corporate Governance Project' (1993) 48 (4) The Business Lawyer 1357. However, it does not mean that the decision taken in the process is of no significance at all. If the decision taken is obviously irrational or is an abuse of discretion,

i. e., the one that cannot be taken by any other person, the official enjoys no immunity in this case. Given the above, one can conclude that the courts rather assess how unreasonable the decisions taken are. However, it does not mean that reasonableness of the decision is ignored when it is resolved whether to use the business judgment rule: when lack of reasonableness is assessed, `reasonableness' of the decision is indirectly assessed as well.

According to the judgement of Delaware Supreme Court in the case of Aronson v. Lewis, the duty of loyalty means that when a decision was made, the official acted in the best interests of the company, did not have a personal interest therein, was not a party to the transaction or did not gain indirect personal benefit from the decision made, and was independent of external influence in the decision made. Aronson v Lewis, 473 A. 2d 805 (Del. 1984). Ibid.The court defined independence as follows in its judgement:

While directors may confer, debate, and resolve their differences through compromise, the end result, nonetheless, must be that each director has brought his or her own informed business judgment to bear without regard for or succumbing to influences that convert an otherwise valid business decision into a faithless act.121

Still, it should be noted that a separate `duty to act in good faith' is fairly criticised in the USA. A. Gold argues that even when the director has misled the members (shareholders) of the corporation and has been confident that his actions will be in the interests of the corporation, ultimately, it is the duty of loyalty that is breached since deceit by the official, no matter the motives, can hardly be in the interests of the company. AS Gold, `The New Concept of Loyalty in Corporate Law' (2009) 43 UC Davis Law Review 12-15. Gold suggests that the business judgement rule must be limited to checking adherence to two duties only: duty of care and duty of loyalty, in the broad meaning of the latter. The same stance can be found in the Judgement of the Delaware Supreme Court in the case of Stone v. Ritter. Stone v Ritter, 911 A.2d 362 (Del. 2006). In civil law countries, the duty to act in good faith is generally not separated from other fiduciary duties of the officials. According to Art. 93 of the Joint-stock Companies Act of the Federal Republic of Germany, `failure to discharge their duties by members of the governing body does not take place if the latter reasonably assumed while taking a decision that they acted based on sufficient information and in the best interests of the company'. Act of Germany `On Joint-Stock Companies' (n 16). According to the laws of France, the grounds for holding officials liable are erroneous actions, violation of the law or articles of association (Art. L. 225-251 of the Commercial Code of France), and taking actions contrary to the company's interests. Commercial Code of France (n 39).

Fiduciary duties that comprise a business judgment rule as a refutable presumption are implemented in Part 3 of Art. 92 of the Civil Code of Ukraine, which prescribes the duty of the company's officials to act in good faith, reasonably, and in the company's interests. Civil Code of Ukraine (n 23). The same rules can be found in Part 1 of Art. 40 of the Law of Ukraine `On Limited Liability Companies' Act of Ukraine `On Limited Liability and Additional Liability Companies' (n 61). and Parts 1 of Art. 63 of the Law of Ukraine `On JSCs'. Act of Ukraine `On Joint-Stock Companies' (n 32). It is worth noting that the courts determine the unlawfulness of the official's conduct as a condition for holding him or her liable for the losses sustained by assessing the actions taken in pursuance of the fiduciary duties established by the above-mentioned rules. Combined with the fact that the burden of proof lies within the plaintiff, we can argue that a kind of business judgment rule is implemented in case law. For example, according to the Resolution of the Supreme Court in case No. 904/3852/18 of 26 February 2020, unlawful conduct constitutes certain improper and unscrupulous actions, without adherence to the limits of normal business risk, with personal interests or abuse of official duties on purpose (at own discretion), obviously negligent and wasteful decisions taken deliberately for the benefit of the official. Resolution of the Supreme Court in case 904/3852/18 of 26 February 2020 <https://reyestr'CourtgoV' ua/Review/87735735> accessed 8 August 2021. The equivalent extended interpretation of the concept of `unlawfulness' can be found in the Resolution of the Supreme Court in case No. 904/982/19 dated 24 February 2021. Resolution of the Supreme Court in case 904/982/19 of 24 February 2021 <https://reyestr'Court'goV'Ua/ Review/95240657 > accessed 8 August 2021.

However, it should be noted that the main shortcoming of the above legal rules is that they do not detail the content of the fiduciary duties of officials. This issue has been remedied in the Draft Law of Ukraine `On JSCs'. In particular, Art. 85 of the Draft Law establishes the extended list of the fiduciary duties imposed on the official and details their content. Draft Law of Ukraine `On Joint-Stock Companies' (n 8). At the same time, the duty to take independent decisions is not defined precisely enough. Part 4 of Art. 85 attempts to describe this duty in more detail: the duty will not be breached if the limitation of the official's discretion is stipulated in the contract between him or her and the company. Ibid. However, the question is whether an official can take a decision independently if it has consulted or actively debated with another, possibly qualified person. The legislator gives no answer to this question, but, according to the case of Aronson v. Lewis, the official's actions (omission) are independent in case he or she ultimately takes his or her own informed decision, which may be based without limitation on consulting, debating, etc. Aronson vLewis, 473 A. 2d 805 (Del. 1984). Therefore, to our mind, the equivalent definition of this duty should be introduced since the director will otherwise be considerably deprived of an opportunity to make an informed decision and discharge his or her duty to act in good faith.

We should note another shortcoming inherent both to Part 3 of Art. 92 of the Civil Code of Ukraine, Art. 40 of the Law of Ukraine `On LLCs, and Art. 86 of the Draft Law of Ukraine `On JSCs'. In all these articles, the duties to act in good faith, the duty of care and the duty of loyalty are established in respect of the officials' actions, their active conduct. Civil Code of Ukraine (n 23); Act of Ukraine `On Limited Liability and Additional Liability Companies' (n 61); Draft Law of Ukraine `On Joint-Stock Companies' (n 8). However, as we have emphasised before, adherence to the above-mentioned fiduciary duties may also occur when the officials, acting in the legal entity's interests and with due care, take a decision not to conduct a transaction or adopt a resolution. It should be noted that Part 2 of Art. 40 of the Law of Ukraine `On LLCs' Act of Ukraine `On Limited Liability and Additional Liability Companies' (n 61). and Art. 86 of the Draft Law of Ukraine `On JSCs' Draft Law of Ukraine `On Joint-Stock Companies' (n 8). provide for the officials' liability for the omission, but it is not a question of omission under the above circumstances since omission is associated with failure to discharge official duties while informed decisions not to take certain actions result from the discharge of the official's duties. Thus, we suggest supplementing Part 3 of Art. 92 of the CC of Ukraine, Part 1 of Art. 40 of the Law of Ukraine `On LLCs, and Art. 86 of the Draft Law of Ukraine `On JSCs' with para. 3 as follows: `Officials are not liable for the losses inflicted upon the legal entity if the decision to act (or not to act) has been taken in accordance with the duties of care and duty of loyalty'. We are also critical about the establishment of the officials' duty to act in good faith since this category is rather judgement-based and deprived of its own sense beyond the duty of loyalty and duty of care.

To our mind, the establishment of the list of fiduciary duties will positively influence the legal regulation of the derivative action. In fact, according to Art. 86 of the Draft Law of Ukraine `On JSCs', officials shall only be liable for the actions (omission) taken contrary to the company's interests. Ibid. However, if officials have acted in the company's interests, but have taken the decision in breach of the duty to act reasonably (duty of care), i.e., have violated any of the fiduciary duties, the business judgement rule shall also not be used, and the official must be held liable. Therefore, it will be logical to amend the rule and prescribe that officials are liable for the actions (omission) taken contrary to the company's interests and in breach of the duty to act reasonably (duty of care).

Conclusions

The institute of a derivative lawsuit is a complex legal concept only recently implemented in Ukrainian legislation. Nevertheless, a derivative action is an important guarantee of protection of the rights and interests of the corporation and minority participants (minority participants) from abuse and wrongful acts by those who control the corporation. At the same time, the current model of legal regulation of the derivative lawsuit contains many shortcomings, the analysis and solution of which is carried out in this scientific work.

The formation of the will (decision-making) to exercise the procedural rights and obligations of the corporation is an incorrect and internally contradictory approach, as the latter are subject to further approval by the applicants (members of the corporation). The corporation must be allowed to acquire and exercise its procedural rights and obligations (make decisions) on its own behalf through its members, who filed a lawsuit.

The right to file a derivative lawsuit must be granted to members of all corporations - entrepreneurial and non-entrepreneurial alike. To that end, property qualification must be substituted with a representation quota for members of non-entrepreneurial corporations. Continuing the topic of persons, who can file a derivative lawsuit, such a right must be granted to holders of preferred stock since there is no reason to deprive them of such right, as it was shown in this scientific work. The right to file a derivative lawsuit must also be granted regardless of whether the cause of action arose before or after the person seeking to bring or continue the derivative claim became a member of the company.

The prevention mechanism regarding any abuse of the right to file a derivative lawsuit should amount to the extended locus standi procedure. The latter has to consist of the following requirements: 1) property qualification or representation quota; 2) mandatory application of a demand to the corporation for taking actions; 3) the legal entity, contrary to its interests, has failed to take any action to defend its rights and interests for one month or has rejected the person's demand (is unable to defend its rights and interests on its own); 4) there are no other grounds that would prevent a derivative action from being brought.

The cause for a derivative lawsuit is the inability of the legal entity to protect their rights and interests in cases where the persons controlling it do not take any measures, and the damage was caused by the majority of members or even third parties. Considering this, it is necessary to extend the circle of defendants by including members of the corporation and third parties as those against whom the lawsuit may be filed. Such a suggestion confirms with foreign practices.

It is quite common for a corporation's official to be employed. In that case, the necessity for distinguishing civil (financial) and employment (material) liability. The cause to file a derivative lawsuit and to bring officials to financial liability rises when the damages were caused by officials' acts (omission) in violation of the duties associated with management of the legal entity. Otherwise - the liability must be material. One other issue to consider is the possibility to hold liable an official who abstained from voting regarding the resolution of the governing body that caused the damage. To our mind, such conduct must be deemed a violation of the official's fiduciary duties by omitting to take the actions that would prevent the adoption of a resolution that will inflict damages upon the corporation.

To prevent any detrimental effect to the management of the corporation caused by officials' constant questioning of their decisions, the `business judgement rule' must be implemented into Ukrainian legislation. This refutable presumption must include two duties - `duty of care' (person acted reasonably and was informed) and `duty of loyalty' (person acted in the interest of the corporation). The `duty to act in good faith' is too broad in its meaning and can be effectively substituted with other duties - `duty of care' and `duty of loyalty'. For the implementation of the business judgement rule to be effective in national legislation, the latter must provide its application in cases where officials acting reasonably and in the interest of the corporation decided not to take any actions. The latter cannot be considered an omission because officials do not fail to discharge their duties.

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