Statutory Derivative Claim Regime: Ten Years On

The statutory derivative claim regime in the Companies Act 2006 came into force nearly ten years ago, on 1 October 2007. At the time, there was a concern that it could be used as an additional tool in the rise of shareholder activisim against quoted companies. However, the bar to bringing derivative claims is set high and they have not become commonplace.

The statutory derivative claim regime in the Companies Act 2006 (2006 Act) came into force nearly ten years ago, on 1 October 2007. At the time, there was a concern that it could be used as an additional tool in the rise of shareholder activism against quoted companies (see Opinion "Derivative claims: a step too far?").

There has not been much evidence of this, with activist shareholders choosing other channels to challenge companies on issues such as executive pay and unpopular strategic decisions (see feature article "Shareholder activism: coping with the rising tide").

Private company directors are more likely to be the subject of a derivative claim and, in order to limit their risk of this litigation, they should ensure that they have well-drafted shareholders' agreements and articles of association that set out the expected actions of those involved.

However, the bar to bringing derivative claims is set high and they have not become commonplace.

What is a derivative claim?

Derivative claims are claims brought against a company by a shareholder on behalf of the company in relation to a breach of duty by a director. The principle has its foundation in common law as a recognised exception to the rules established in Foss v Harbottle, which determined that it is for the company to bring a claim when it has suffered an alleged wrong, rather than the shareholders ((1846) 2 Hare 461).

This, together with the majority rule principle that the will of the majority of the members of the company should, in general, prevail in the running of its business, prevented minority shareholders from protecting the company's interests. The courts acknowledged the risk of abuse and established a set of exceptions to these principles, which included the right to bring a claim where there was an act which constituted a fraud on the minority.

This right was put into statute and now derivative claims may only be brought by following the procedure set out in Part 11 of the 2006 Act, or by pursuing an unfair prejudice claim under section 994 of the 2006 Act (see box "Unfair prejudice claims"). Permission to bring a claim must be sought from a court, which has to balance the still relevant law that the right of the majority must be respected with the need to improve minority shareholder protection, while preventing a rise in frivolous or spurious claims (see box "How to bring a derivative claim").

Type of derivative claims

A derivative claim may only be brought in respect of a cause of action arising from an actual or proposed act or omission involving negligence, default, breach of duty or breach of trust by a director of a company (section 260(3), 2006 Act). That cause of action must be vested in the company and the member bringing the claim must be seeking relief on behalf of the company (section 260(1), 2006 Act).

The...