An Exception

Generally, if a company has a grievance against another party, any cause of action should be pursued by the company and not by its shareholders. What to do then, when it’s the directors who are behaving improperly and therefore won’t allow the company to sue them?

A derivative action offers an exception to the rule. It is intended to deal with just such circumstances – when a company is unwilling to bring an action against a transgressor.

In limited circumstances the court will give permission for a shareholder to bring a claim on behalf of the company against one or more of its directors (either as an unfair prejudice claim or under the Companies Act 2006 and the Civil Procedure Rules).

The procedure only applies to claims involving negligence, default, breach of duty or breach of trust by a company director, former director or shadow director and the court’s permission is not automatic. The court must be satisfied that there is a manifest claim against the director and refuse permission if the conduct has been authorised or subsequently approved by the company.

When considering whether to grant permission the court will hear evidence from the shareholder bringing the claim, the company and the directors who are to be sued. It will pay particular regard to evidence from members of the company with no personal interest in the matter.

The Companies Act 2006 sets out the factors that the court must consider:

  1. Whether the shareholder is acting in good faith in seeking to continue the claim.
  2. The importance that a person acting in accordance with their duty to promote the success of the company would attach to continuing it.
  3. Where the cause of action results from an actual omission that is yet to occur, whether the act or omission could be, and in the circumstances would be, likely to be authorised by the company before it occurs or ratified by the company after it occurs.
  4. Where the cause of action arises from an act or omission that has already occurred, whether the act or omission could be, and in the circumstances would be likely to be ratified by the company.
  5. Where the company has decided not to pursue the claim.
  6. Where the act or omission gives rise to a cause of action that the shareholder could pursue in his own right rather than on behalf of the company.

If permission is granted, the court can require the company to indemnify the shareholder for the costs of bringing the claim.