A Comparative Approach

This thesis also employs a comparative approach177 for which the jurisdiction of the UK has been chosen as analysis sample. This is because the UK is the most advanced commercial law jurisdiction and it holds a significance influence over legal frameworks of common law countries. Being a common law country, the company law of Pakistan

176 _{Robert E Stake, Multiple Case Study Analysis(The Guilford Press, New York 2006)24}

177 _{For explanation of comparative research approach , see generally , John C Reitz, ‘How to Do}

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is a remnant of colonial legal legacy and stands largely in its original form.178 Furthermore, Pakistan and Britain share a common heritage of history extending over a period of more than one hundred year. Therefore, a comparative reflection on Pakistan’s legal framework cannot avoid analysis of relevant laws in its birthplace. A significant argument this thesis makes relates to inadequacies of law which facilitate pyramiding arrangements and lead to the expropriation of minority interests by controlling managers in Pakistan. This thesis contributes to the literature by putting forward future legal reform proposals regarding statutory derivative action system in Pakistan. Consequently, the selection of the UK for comparative analysis becomes important as the UK is the originator of the derivative action system which is expected to bring a good reference for Pakistan.

However, it might be argued that the US is also an advanced jurisdiction and has a long history of derivative action system. As such, the courts are not as much willing in the UK as the US courts are, in accepting the application of derivative claims. To that, it is submitted that the main focus is on the UK derivative action system while reference would also be made to other jurisdictions where necessary so as to learn from their experiences.

In fact, the derivative action system is not the only way of disciplining errant management and protecting minorities. There are other mechanisms such as the capital markets, the market for corporate control, the product markets, shareholder voting and the framework of independent directors that may function to discipline errant management. The role of the derivative actions depend not only on its own legal rules but also on other intuitional factors and managerial disciplinary mechanisms. This is

178 _{Shaukat Muhmood and Nadeem Shaukat, The company Law( Legal Research Centre Vol-1 ,}

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because corporate governance is a system that sets out the internal relations between various constituencies of a company. Therefore, it is right to say that the role of derivative actions is inversely proportional to the effectiveness of other managerial disciplinary mechanisms. The more effective other mechanisms are, the less the role of derivative actions is.

It is, therefore, not apt to say that one jurisdiction has a better derivative action system than the other. As such, one cannot say that the US derivative action system is better than the UK’s where courts hold relatively more conservative attitude towards derivative claims. This is mainly due to the reason that unfair prejudice remedy is readily available to disgruntled shareholders in the UK and hence, derivative actions are not that much important. Thus, borrowing rules from other jurisdictions does not depend on whether those rules are good or bad but it depends on the suitability of those rules in the receiving jurisdictions.

The purpose of using a comparative approach is to analyse where Pakistan can draw lesson from the UK so as to devise its statutory derivative action system.179 However, it is debateable whether borrowing from other jurisdictions is useful for improving legal frameworks. The debate over borrowing from other jurisdictions has been carried out in this part bearing in mind whether borrowing from the UK is possible for Pakistan. Alan Watson defines legal transplant, ‘as moving laws from one jurisdiction to another jurisdiction’.180

He is of the view that legal transplant is very useful for a legal change in a jurisdiction. Therefore, he recommends that understanding of legal developments in other jurisdictions is useful for lawmakers to have new insights into how to reform

179 _{Helen Xanthaki, ‘Legal Transplants in Legislation: Defusing the Trap’ (2008) 57 (3) International &} Comparative Law Quarterly 659-673, 660.

180 _{Alan Watson, Legal Transplant: An Approach to Comparative Law (2}nd _{edn, University of Georgia}

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their particular laws.181 Watson also opines that the ‘voluntary legal transplant’ can be a good source for developing laws in receiving jurisdictions. Given the importance of voluntary legal transplant, he attempts to establish his view that relationship between law and society is a misconceived notion. His believes that the legal origin in a society does not develop usually by virtue of a logical outgrowth of the society’s own experience.182

However, contextualist and culturalist schools have criticised Watson’s view on legal change. The contextualist school levels charges against his ‘legal transplant’ thesis by stating that he ignores social structural factors and undermines the rationale for developing a theory of law and society.183 Moreover, Watson’s thesis on legal transplant did not remain unchallenged by the culturalist school. For example, they hold that a particular culture determine the development of law in a jurisdiction. They reject Watson’s ‘legal transplant’ thesis by claiming that law evolves historically and Watson overlooks a specific culture inherent in every legal system.184

Given the concerns raised by the contextualist and culturalist schools, two important questions needs to be answered so as to justify the adoption of a comparative approach for this thesis. First question relates to the prospects of legal transplant in the context of Pakistan. Second question that requires answering relates to the efficacy of legal transplant in Pakistan. The first question is answered on the basis of following reasons.

181

Alan Watson, ‘Aspects of Reception of Law’ (1996)44 American Journal of Comparative Law 335- 351,335

182 _{Ibid (n 180) 16-19.} 183

Otto Kahn-Freund, ‘ On Uses and Misuses of Comparative Law’(1974)37(1) Modern Law Review 1- 27

184 _{Pierre Legrand, ‘What’ Legal Transplants’ in David Nelken and Johennes Feest (eds), Adopting Legal}

Cultures(Oxford , Hart Publishing 2001)55-68; Anne W. Seidman & R.B.Seidman, State and Law in the

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First, Pakistan is a member of World Trade Organisation (WTO) that requires national laws to be more liberal and to be in congruence with international standards.185 To that end, legal transplant becomes necessary and inevitable for Pakistan. Second, cultural and political conditions that may resist legal transplant are inherent in the public laws such as criminal and constitutional laws. However, commercial laws are not that much closely linked to cultural and political conditions as they function according to their own ground rules and they work relatively in an autonomous system of law. The cultural differences, though important, are not fatal to the comparison in the area of commercial laws. Therefore, legal transplant is possible in the area of commercial laws and the one model governance thesis at least confirms the veracity of this statement.186 Whilst legal transplant is possible, it does not mean copying laws from one jurisdiction to another one. The potential benefits of borrowing from other jurisdiction can only be achieved if it considers the legal culture and other extra-legal conditions.187 Though the legal transplant does not face as resistance in commercial laws as it may in the public laws-closely linked to local conditions; therefore it is important to pay heeds towards local conditions as each and every single rule may not function in a receiving jurisdiction as effectively as it does in its birthplace. Thus, when this thesis uses a comparative approach, it means comparative approach based on the UK’s experience provides guideline where relevant, in order to establish an effective derivative action system in Pakistan based on both doctrinal and empirical grounds.

185 _{‘Pakistan Ratifies WTO deals’ Daily Dawn newspaper <www.dawn.com/news/1215829> accessed}

27 February 2016.

186 _{See generally ,Arthur R. Pinto, Globalisation and The Study of Comparative Corporate}

Governance’(2005)23 Wisconsin International Law Journal 477

187 _{Daniel Berkowitz, Katharina Pistor and Jean-Francois Richard, ‘The Transplant Effect’(2003)51(1)} American Society of Comparative Law 163-203; Ibid (n183).

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