From a procedural standpoint, a derivative action enables a shareholder to assume the legal position of the company and initiate a legal action against its directors for any misconduct perpetrated against the company. In this article, Derivative Action By Shareholders, we take a look at the process involved and the options available to you.
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What are the different types of derivative claim?
There are two types of derivative claim:
- Statutory derivative claims under the Companies Act 2006; and
- Common law derivative claims.
Under the statutory procedure for initiating a derivative claim, any potential claimant must overcome two stringent obstacles. The first involves obtaining court permission promptly following service of a claim form. Without this permission, the derivative claim is dismissed. A claimant need only demonstrate that there is a prima facie case, which means that there is a possibility of a genuine case and that the claim is not frivolous. If the claimant so requests, this permission can be addressed during a hearing.
If the court grants permission to proceed with the derivative claim, the second obstacle is obtaining court permission at a hearing. This is a hearing for complete permission. The court will use its discretion to determine whether the claimant should be granted permission to pursue the derivative claim. First, the court must deny permission at the hearing if any of the following conditions are met:
- That a person acting in accordance with their duty to advance the success of the business would not pursue the claim. This is a business decision regarding whether or not pursuing a claim against the directors is in the best interests of the company.
- The action entails a company-approved future action or omission.
- The action entails a prior action or omission that has been retroactively sanctioned or ratified by the company.
If the court has not yet denied permission, it must now decide whether or not to grant permission. Although the statute specifies a number of considerations for the court, they are not exhaustive. At this juncture, the central question for the court is whether to intervene in the company’s management by overriding the decisions of those who actually run the business.
Although codified by statute, derivative claims under common law still exist. They are referred to as “double derivative” claims. These are claims commenced by a member of a company against directors for breach of duty in respect of the company’s subsidiary. Statutorily, a double derivative claim cannot be launched.
As with statute claims, a claimant must establish a prima facie case and obtain court approval before pursuing a derivative claim. In determining whether to grant permission, the court will exercise its discretion and may consider the same factors used to determine whether to grant permission for statutory derivative claims.
What differentiates a derivative claim from a claim for unjust prejudice?
When initiating an unfair prejudice petition, a shareholder aims to safeguard their own rights as a shareholder inside the company. Conversely, in a derivative claim, a minority shareholder endeavours to safeguard the rights and interests of the company, prioritising them over their own individual interests as a shareholder.
Moreover, it is important to note that a derivative claim is typically limited to minority shareholders, whereas an unfair prejudice claim is accessible to all members of a firm, even majority owners.
What types of remedies are available in a derivative action?
The remedies available to a company through a derivative claim are equivalent to those available through a typical civil action and include:
- An injunction issued by a court to prevent future or additional violations;
- Setting aside a particular transaction;
- A directive for repayment or the imposition of an obligation on the director to account for any accumulated profits;
- The return of company property held by the director
- Damages for any losses incurred by the company.
In accordance with the Company Directors Disqualification Act of 1986, failure to perform one’s duties may also result in disqualification as a director and possible imprisonment.
Is a director invariably subject to personal liability for a breach of duty?
In certain instances, a director who has violated one of the company’s obligations may be exempt from liability through means such as ratification or court-granted relief.
In order for shareholders of a corporation to ratify a director’s behaviour involving negligence, default, breach of duty, or breach of trust, at least fifty per cent of the members must vote in favour of such ratification. This functions to rectify the improper conduct of a director, thereby eliminating any future grounds for initiating a derivative action.
In an alternative scenario, if a director is aware of a potential claim being lodged against them due to a breach of their fiduciary duties, they have the option to seek redress through the legal system by submitting an application for relief. The court has the authority to exonerate a director from liability if it determines that the director in question acted with candour, reasonableness, and consideration of all pertinent facts, thereby justifying a justification.
Determining whether a director has violated any of the obligations enumerated in the Companies Act of 2006 can be a difficult endeavour, as is initiating or defending a derivative action on behalf of the business.
How we can help
We have a proven track record of helping clients deal with the process involved in derivative actions by shareholders. We will guide you diligently and ensure all checks are carried out swiftly and efficiently. We firmly believe that with the right solicitors by your side, the entire process will seem more manageable and far less daunting. You can read more about the range of corporate services we offer by clicking here: https://blackstonesolicitorsltd.co.uk/corporate-legal-services/
How to contact our Corporate solicitors
It is important for you to be well informed about the issues and possible implications of a derivative action. However, expert legal support is crucial in terms of ensuring a positive outcome to your case.
To speak to our Corporate solicitors today, simply call us on 0345 901 0445, or click here to make a free enquiry. We are well known across the country and can assist wherever you are based. We also have offices based in Cheshire and London.
Disclaimer: This article provides general information only and does not constitute legal advice on any individual circumstances.
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