Shareholders, including a minority shareholders can take action to protect themselves by bringing a derivative claim. Our team has an excellent track record in these claims.
What is a derivative claim?
Directors have many duties regarding their conduct as directors of a company. These are contained in legislation and various corporate governance codes as well as case law.
Generally, a claim for breach of directors’ duty would be bought against a director by a company. However, if for whatever reason the company does not want to bring such a claim against a director (possibly because the director is the majority shareholder and director) then it is possible for a shareholder, including a minority shareholder, to bring a claim against a director for breach of duty in place of the company. A derivative claim by a shareholder will only be allowed if the company does not take the claim itself.
Grounds for a derivative claim
A director that is subject to a claim does not necessarily have to have gained a personal benefit from the breach of duty. Such a director does not also have to be a majority shareholder, although this may be fairly common as they tend to be able to exercise a fair degree of overall control over the company.
A derivative claim can sometimes overlap with other remedies such as an unfair prejudice petition or an application for winding up on just and equitable grounds. It may be bought alongside these claims, as all of them are based on breach of directors duties.
If a director’s conduct has been ratified or authorised by the company, then a derivative claim cannot be brought by a minority shareholder. However, depending on the breach, it is unlikely that a company would necessarily ratify a breach of a significant duty.
Whilst a minority shareholder will bring a claim, the relief that is granted is bought on behalf of the company as a whole.
Examples of derivative claims:
- if a director has transferred company funds to their own personal bank account.
- if a director has stripped company’s assets.
Essentially any breach of fiduciary duty by a director which may require recompense by way of repayment to the company or a restitution claim can be made by a shareholder.
The proceedings themselves are complicated and can be particularly costly. The court requires that there be an initial stage to the proceedings for these claims, where they will assess at an early stage whether there is a strong case. If the court assesses that there is a strong case, then the proceedings may continue and a trial will take place. If not, the claim will be dismissed before a trial takes place.
A successful party will usually be awarded costs, and the unsuccessful party will have to pay such costs. The minority shareholder might seek an indemnity from the company when applying for permission to bring an application, on the basis that it is a company claim and the company should have bought the case. However, this is not necessarily going to be agreed by the company.
These types of claims can often be resolved by way of alternative disputes resolution, settlement negotiations or by mediation. This can help keep costs down, and it may also possibly allow for the continuation of a relationship between the parties. If you would like more information on these alternative dispute resolution methods used by the team at Francis Wilks & Jones, we can provide you with more detail.
Companies should make sure that their directors and officers insurance (D&O) covers derivative action as well as company claims.
Prevention is always better than cure. It is likely that if a shareholders agreement is in place that sets out clear boundaries between the parties and allows for the expectations of all parties to be met, then a minority shareholder may not feel so aggrieved that they need to bring a derivative claim, and the matter may be resolved internally without the costs and stress that a claim may bring.
At Francis Wilks & Jones we frequently act for all parties in disputes relating to company matters, including advising shareholders and directors on their rights and claims. If you find that you are in this position and would like some advice on how to take matters forward, please don’t hesitate to contact one of our senior team who will respond to you immediately.