A derivative claim is legal action that is brought concerning a company director for a breach of duty, usually by shareholders. It can be brought if the director is believed to be negligent or has breached duty or trust.
Directors of a company are legally bound by statutory duties under the Companies Act 2006 (the Act). The Act codifies certain common law and equitable duties that directors must adhere to when managing a company.
The Act sets out the general duties of a director, which are:
Where certain indiscretions are committed by company directors in relation to the management of a company, and it is argued that the directors are in breach of their duties, the courts have the power to permit shareholders of a company to bring a claim against the offending directors, on behalf of the company.
The desired effect of this claim is to make the directors personally liable for any misconduct whilst compensating the company for any loss suffered. As an aside, a director may also face disqualification proceedings and a ban from being permitted to act as a director, depending on the nature and severity of the breach.
Where the actions of a director have caused the company to suffer loss, a derivative claim should be presented in court, requesting the court’s permission to bring such a claim. The right to bring a derivative claim is restricted to members of the company only.
For these purposes, a member also includes a person to whom shares have been transferred but is not yet formally registered as a member or a person to whom shares have been transmitted by operation of law (for example, a personal representative of a deceased member).
A derivative claim may be brought in certain circumstances, generally in scenarios where there has been a breach of director’s duty, although a claim can also be brought in other limited circumstances, including losses suffered by the company as a result of a director’s:
In order for the court to permit a derivative claim to be brought by a shareholder, the court must generally have regard to two factors, being:
The court must refuse any application to bring a derivative claim if either of the factors above are satisfied. If the court is persuaded that neither factor 1 nor 2 applies, the shareholder is likely to be granted permission d to bring the derivative claim on behalf of the company.
If a director’s conduct could amount to negligence, default, breach of trust or breach of duty, then the shareholders of a company can vote to ‘ratify’ the conduct. If at least 50% vote to ratify the conduct (i.e. to consent to it), then there will not be grounds to bring a derivative claim.
Furthermore, the court can also come to the aid of a director and excuse a breach of duty if it considers that the director’s conduct was in the course of the director having acted honestly and reasonably in regard to all the circumstances involved. This threshold to bring a derivative claim can therefore be difficult to reach, and these claims are not without complexity.
Nevertheless, if an application to bring a derivative claim succeeds, various remedies can benefit a company. These remedies include, but are not limited to: