Derivative Claim – Shareholders Strike Back

By James Gould on

The situation may arise where a shareholder:

  • – believes their shareholding his been prejudiced by the actions of a director; and
  • – the company (possibly controlled by that director) refuses to take action.

 

The shareholder wants the director to be held to account – but if the company is a successful, profitable enterprise – the shareholder will not want to divest their shares or wind up the company.

What is the shareholder to do to?

The shareholder could pursue a minority shareholder’s prejudice claim under section 994-996 of the Companies Act 2006. However, these claims tend to be a blunt instrument and generally lead to the sale of the relevant shareholding, or the dissolution of the company. The answer could instead be to pursue a “derivative claim” on behalf of the company.

What is a Derivative Claim?

Section 260 of the Companies Act 2006 allows any member of a company (shareholder) to pursue a claim against any director of the same company who has breached their fiduciary duties. There are important differences between a shareholder’s prejudice claim and a derivative claim; first and foremost the derivative claim is brought on behalf of the company, not the shareholder. Consequently, if the claim succeeds the shareholder will not receive any direct compensation – this instead will be due to the company.

As you might expect, derivative claims are difficult to bring. There are strict statutory guidelines and the permission of the Court must be sought in all circumstances – the test to satisfy being that the claimant has a good prima facia case. Consequently, derivative claims are rarely brought unless the evidence against the director is overwhelming, or alternatively, following an appropriate order of the Court in a shareholders prejudice claim.  They remain however a useful tool for shareholders and a reminder to directors that they are not untouchable.

Are you a director of a limited company and would like advice on your legal obligations? Or are you a shareholder and feel that your shareholding has been prejudiced? If so our experienced commercial solicitors at Levi Solicitors in Leeds, Wakefield and Manchester can help you, call 0113 2449931.