Shareholder Derivative Actions - Update

Background

A derivative action is an action brought by a shareholder on behalf of the company. Owing to the complexity of the previous law, very few derivative actions succeeded. When the Companies Act 2006 (2006 Act) came into force, it introduced a wider range of circumstances in which such actions could be brought. A derivative action is now expressly available for a breach of duty by a director, even if the director has not benefited personally from the breach. Furthermore, it is no longer necessary for the shareholder to show that the director(s) who carried out the wrongdoing control the majority of the company's shares.

Initially, some legal commentators were concerned that activist shareholders would bring such actions simply to disrupt the affairs of the company or make life difficult for its directors. I initially considered some of the early cases on this new derivative action in January 2010 and concluded that any concerns that activist shareholders would be allowed to use the action frivolously seemed to be unfounded. This was due to the strict application by the courts of the tests set out in the 2006 Act which need to be satisfied before permission to continue a derivative action will be granted.

Since January 2010, permission to continue a derivative claim has been granted in Kiani v Cooper [2010] B.C.C. 463.

Facts of the case

A shareholder (X) sought permission to continue a derivative claim against another director and shareholder (Y) for breach of fiduciary duty. The court considered various tests as set out in the relevant part of the 2006 Act and decided that, in the circumstances, X was acting in good faith in bringing the...

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