Shareholders may bring a derivative action when a wrong has been committed against the company but the directors are unable or unwilling to pursue it themselves. Under the Companies Act 2006, derivative actions give shareholders the power to challenge the acts or omissions of a director or third party when it involves negligence, default, breach of duty or breach of trust. This allows shareholders to “stand in the shoes” of the company.

Procedure

Derivative actions are restricted by the Companies Act 2006 to a very narrow set of circumstances, which is usually breach by a director of duties to the company.

The court acts as a gatekeeper to weed out weak or vexatious claims, therefore after the derivative action has been issued the shareholder must apply for the Court’s permission to continue with it.

The application may be automatically dismissed if the court considers that a person acting under the duty to promote the success of the company would not pursue the claim; or the act or omission complained of was authorised or ratified by the company. There are various other factors which are considered at this stage, including:

  • Whether the shareholder is acting in good faith;
    • Whether the company has decided to pursue the claim;
    • Whether the member has a cause of action that they can pursue in their own right; and
    • The views of other shareholders who have no personal interest in the application.

Multiple derivative actions

Shareholders can pursue an action against a subsidiary of the parent company if they have shares in the parent company. This also extends to pursuing a cause of action against the subsidiary of the parent company’s subsidiary. These claims are called ‘double’ and ‘triple’ derivative claims.

Multiple derivative claims do not follow the same system as other derivative claims, however, as they are still governed by common law principles and not the Companies Act 2006.

Costs

One of the main attractions of bringing a derivative action is that the company can be ordered to indemnify the shareholder for costs where:

  • the claim could have reasonably been pursued by the directors,
  • the claimant’s only interest in the outcome of the claim is as their capacity as a shareholder and
  • the benefit from the action will accrue to the company.

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