The Section 245 Derivative Action Framework: Building Litigation Defenses Through Board Process Documentation

The Business Driver: Why Derivative Suits Are Increasing

Minority shareholders in Indian listed companies increasingly use Section 245 derivative actions to challenge board decisions that allegedly harmed the company particularly RPT approvals, capital allocation decisions, and governance lapses. The plaintiff bar has developed expertise in these claims, and institutional investors sometimes support derivative litigation as means of enforcing governance accountability.

For boards and management, this creates an environment where decisions made years ago become subject to hostile judicial scrutiny, with discovery revealing internal deliberations and plaintiff experts characterising reasonable business judgments as breaches of fiduciary duty. The legal defense capability required has evolved substantially.

The Legal Defense Framework: How Section 245 Actually Operates

Section 245 of the Companies Act allows members to bring suits on behalf of the company when directors breach duties owed to the company. Unlike personal shareholder claims (where plaintiffs must prove individual injury), derivative suits address harm to the company itself making them far more powerful for challenging board decisions.

The statutory elements plaintiffs must establish: Under Section 245(1), members must demonstrate that the company's affairs are being conducted in a manner prejudicial to its interests or members' interests, or that directors are acting contrary to company interests, or that a material change in management/control justifies relief. The statutory language is broad, giving courts substantial discretion in evaluating whether board conduct justifies derivative relief. In practice, courts examine whether directors breached fiduciary duties under Section 166 duty to act in good faith for company benefit, duty to exercise independent judgment, duty to avoid conflicts of interest, duty to not achieve undue gain. Courts have recognised shareholder derivative standing in India and have outlined how such claims may proceed within our framework.

The Documentation Defense: What Courts Actually Examine

When courts decide whether directors breached fiduciary duties versus exercised protected business judgment, they examine:

1) Did directors have sufficient information to make informed decisions?
The test isn't perfection, it's whether directors made reasonable inquiry into information material to the decision. A strong record shows multiple meetings, succinct valuation summaries capturing methods/assumptions/conclusions, requests for additional comparables, and legal analysis of process/approvals. Minutes that capture questions and responses not stenography, but specific prompts and answers demonstrate real inquiry. Where such a record exists, courts tend not to substitute hindsight views for board judgment.

2) Independence and Good Faith :

Derivative claims often target transactions where board composition raises independence questions, and where plaintiffs attempt to infer bad faith from communications and timing. The evidentiary hinge is again the paper trail: committee charters, advisor engagements, recusals, multi-meeting timelines, and the "why" captured in minutes. Courts examine these with a mix of fiduciary standards and judicial restraint toward board commercial decisions.

The Specific Documentation Practices That Win These Cases

• Documented questions and challenges from directors. Minutes that show probing questions, push-back, and follow-ups create powerful evidence of genuine deliberation. Capture at least 2–3 specific questions and management responses for any material decision (not verbatim, but specific).
• Multiple-meeting deliberation for material transactions. Single-meeting approvals create an impression of haste. Structure material matters across multiple sessions: preliminary presentation; interim information/advisor consults; updated analysis and final deliberation.
• Independent advisor engagement with documented reliance. When boards retain investment banks, valuation firms, legal counsel, or other experts, minutes should record that directors reviewed reports, questioned advisors, and relied on expert conclusions.
• Contemporaneous articulation of business rationale. Minutes should capture the "why": strategic, financial, operational, or competitive reasons specifically stated.

The Process Architecture That Prevents These Claims

• Board/committee meeting protocols: written materials circulated 5–7 days in advance; alternatives presented and reasons for rejection documented; questions and bases for decisions captured; material decisions spaced across meetings.
• Independent director empowerment: charters granting authority to retain advisors without management approval; direct access to internal audit/compliance/legal; duty training; compensation/nomination that avoid dependence on management.
• Legal review integration: legal memoranda on fiduciary implications and process requirements; minutes noting that the board considered legal advice.
• Advisor engagement protocols: independent third-party valuations for material transactions; fairness opinions where appropriate; executive summaries in packs with full reports available.

These practices do not just defend litigation; they shape decisions that satisfy fiduciary duty standards and attract judicial deference.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.