Derivative Claims

The law on derivative claims is complex. A company has a legal personality of its own, which means only it can bring proceedings against its directors for a breach of a duty. Normally, directors bring proceedings on behalf of the company to recover a loss, by obtaining shareholder approval. The issue is where the directors have caused the loss and use their control of the company to prevent the company from suing them.

Derivative claims exist in order for minority shareholders to bring a claim against the directors in the company’s name. They circumvent the issue explained above. They are used to claim against any directors who have breached statutory and/or common law duties.

Derivative claims are rare and should not be a first port of call for disgruntled shareholders. This rarity means that it is important to find a solicitor who has experience of conducting derivative claims.

There are two types of derivative claim:

  1. Statutory derivative claims under the Companies Act 2006; and
  2. Common law derivative claims.

The statutory derivative claim process

Under the statutory process for bringing a derivative claim, there are two strict hurdles for any potential claimant. The first involves obtaining permission from the court immediately after serving a claim form. Without such permission, the derivative claim is struck out. All a claimant must demonstrate is that there is a prima facie case, meaning that there could be a genuine case and it is not just a frivolous claim. This permission can be dealt with at an oral hearing, if the claimant requests.

If the court grants permission to continue the derivative claim, the second hurdle is a further need to obtain permission from the court at a hearing. This is a full permission hearing. Discretion will be exercised by the court to decide whether the claimant should be granted permission to continue the derivative claim. Firstly, at the hearing, the court must refuse permission if any of the following apply:

  1. That a person acting in accordance with their duty to promote the success of the company would not seek to continue the claim. This is a commercial decision as to whether bringing a claim against the directors is in the company’s best interests;
  2. The action involves a future action or omission that has been authorised by the company;
  3. The action involves a past action or omission that has either been authorised or ratified retrospectively by the company.

If the court has still not refused permission, they must then finally decide whether to grant permission. Although statute prescribes a number of factors that the court should take into account, they are not exhaustive. The central issue for the court at this stage is whether to interfere in the company’s management by overriding the decisions of those who actually run the company.

The common law derivative claim process

Although codified by statute, common law derivative claims still exist. They are known as ‘double derivative’ claims. These are claims commenced by a member of a company against directors for breach of duty in respect of the company’s subsidiary. A double derivative claim cannot be brought under statute.

As with statute claims, a claimant must demonstrate a prima facie case and be granted permission from the court to pursue a derivative claim. The court will use its discretion in determining whether to grant permission, and can apply the same factors used to determine whether to grant permission for statutory derivative claims.