Derivative Claims ' A Means For Minority Shareholders To Fight Back

• Published date: 05 February 2024
• Subject Matter: Corporate/Commercial Law, Corporate and Company Law, Directors and Officers, Shareholders
• Law Firm: Herrington Carmichael
• Author: James Musallam and Stephen Taylor

Are the directors of the company you invested in failing to act in that company's best interests? You may be able to protect that company's best interests by bringing a derivative claim against them on behalf of that company, no matter how small your shareholding is in it.

The laws of England & Wales consider private limited companies (Ltds) to have their own legal personality separate from that of their shareholders and directors. The significance of this is that Ltds can enter into legal agreements, sue, and be sued in their own name without personal liability falling on the shareholders and directors of the company.

The upshot of this is that if the directors commit a wrongdoing against the company, the proper claimant in respect of this action is the company itself, which will not sue the director if all other directors and/or a majority of shareholders do not compel it to do so (which they may not be inclined to do, especially if they are complicit in the wrongdoing).

This potentially leaves minority shareholders without protection against the misdeeds of directors, which may prejudice the profits and other benefits realised by the shareholders from the company they invested in. However, in certain circumstances the law allows derivative claims to mitigate these risks and protect minority shareholders and the Ltds themselves from rogue or misguided directors who deliberately disregard the company's best interests or their statutory duties under the Companies Act 2006.

Derivative Claims

A derivative claim is a claim brought by the shareholders in their own name, but on behalf of the company to seek remedy against the director(s) for wrongdoing committed against the company.

This provides shareholders with a means of holding director(s) to account for their wrongdoings against the company, even if the company cannot be compelled to sue those director(s) directly through the inaction of directors or other shareholders.

Who can bring them?

The right to bring a derivative claim is generally confined to the shareholders of the company against which the wrong has been committed, but it also includes a person to whom shares:

1. have been transferred but not yet formally registered as a shareholder of that company; or
2. transmitted by operation of law (e.g. to a trustee in bankruptcy or the personal representatives of the deceased shareholder).

Grounds for bringing derivative claims

The Companies Act 2006 provides that a shareholder may bring a statutory...