“Derivative claim” Question

Q4) Discuss whether the statutory procedure securing a process for a “Derivative claim” provides sufficient minority protection. Please support your answer with reference to relevant case law.

A derivative claim is a claim made by a nominate shareholder on behalf of the company. It is a claim made for the wrongs done to the company by a director. Prior to the introduction of part 11 of the Companies Act 2006, only under common law could a derivative action be raised. One of the disputable areas in the Companies Act 2006 (‘CA 2006′) is the provisions of derivative claim. It is believed a successful derivative claim regime should strike the right balance between ensuring effective remedies available to minority shareholders while not allowing troublesome directors impeding the carrying on of the proper business of the company. However, it seems the pendulum of the new statutory provision swings in favour of the managerial freedom. Whether it could be served as a tool to ensure directors being held accountable for their breach of duties is questionable.

The case of Foss v Harbottle leaves the minority in an unprotected position, exceptions have arisen and statutory provisions have come into being which provide some protection for the minority. By far and away the most important protection is the unfair prejudice action in ss. 994-6 of the Companies Act 2006 (UK). Also, there is a new statutory derivate action available under ss 260-269 of the 2006 Act.

Obviously, these old rulings do not protect minority shareholders from directors who commit fraud themselves and they have since been developed to provide four exceptions:

Where the transaction is ultra vires or illegal; where the transaction requires the sanction of a special majority; where the transaction infringes the personal rights of the shareholders; and where the transaction amounts to a fraud on the minority. (False assertion different from criminal)

The derivative claim at common law a shareholder did not have the right to bring an action for a wrong against a company under the common law has always been regarded as complicated and unsatisfactory. As a result, it was brought far less frequent than other shareholder remedies.

It has been long established in Foss v Harbottle that the proper claimant in an action in respect of a wrong done to a company is the company itself. The decision whether to sue or not is usually made by the board of directors acting within their normal management power. However, when the people causing harm to the company are its own directors, it is clearly unsafe to let the directors decide. Hence, under special circumstances when the company is not willing to pursue its own right, individual shareholders may be allowed to bring a derivative claim.

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