A derivative action is one where a shareholder takes legal action on behalf of the company. This goes against the general rule that the affairs of the company are managed by the directors. The reason for this remedy to is to provide a mechanism for redress where, for example, directors refuse to act (particularly where they are the wrongdoers).
The Companies Act 2006 introduced a new procedure for derivative actions which includes a two stage process for permission. So far the courts appear to have been cautious about allowing shareholders to exercise the remedy but the recent case of Stainer -v- Lee and others may indicate a slightly more relaxed approach.
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If you are involved in a shareholders dispute there can be a temptation to do nothing and hope that it all blows over. Sometimes this is just what happens and it is the right thing to do. However, a failure to grasp the nettle can also have unfortunate consequences. You might find that your shareholders rights have been significantly diminished by a delay in taking action.
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As yet another shareholders meeting registers disapproval of executive pay, this time at easyJet, the question arises as to whether now is the time to hand some greater control over directors remuneration to shareholders.
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Lawyers involved in fighting for shareholders rights are not normally thought to be in a dangerous profession. That is unless you are a lawyer in Russia.
The death has been announced (see Daily Telegraph article) of Sergei Magnitsky, 37 year old father of two and a lawyer in the firm of Firestone Duncan in Moscow who were representing Hermitage Capital Management.
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The EU Shareholder Rights Directive is a grand title but on close analysis it does not add much to the armoury of a UK shareholder aggrieved with the company in which they hold shares.
Consequently it has been implemented in the UK (via the Companies (Shareholders’ Rights) Regulations 2009 with relatively little fanfare. The main reason for the lack of excitement is that the regulations generally only apply to “traded companies” and they only marginally increase shareholders rights or powers overall.
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A rare example of shareholders anger over excessive remuneration bearing fruit has been seen with the giant oil company Shell.
Bonuses awarded to Shell executives this year were widely considered to be excessive and the remuneration committee came in for intense criticism. The committee felt it proper to award significant bonuses even though performance targets had not been met.
The usual symbolic exercise of shareholder rights took place (see previous posts on this subject) and the pay settlement was voted down at general meeting. Now it is reported in The Times that two members of the remuneration committee, including the chairman Sir Peter Job, will step down. It looks like the shareholders did get their scalps after all.
One other interesting thing about the reporting of this event is that Shell itself seems to have come to the view that after 9 years as a non-executive director (NED) Sir Peter could no longer be considered to be truly independent. This reflects other discussions currently being had about the role of NEDs and suggests that the days of a NED having a long term sinecure are now well and truly gone.
A noteworthy addendum to Sir David Walker’s review of corporate governance is the open letter from the FSA to the Chairman of the ISC dated 19 August 2009.
This letter flags up the FSA’s support for more active shareholder engagement in disputes with boardrooms, with a view to promoting good corporate governance. This encouragement of shareholder activism at this level may be an important development.
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Marks & Spencer, which has suffered a spate of boardroom battles over the years, continues to provide examples of institutional shareholders attempting to exert control.
The latest shareholder intervention occurred at the recent AGM of the company when a group of institutional shareholders lead by local government pension funds sought to bring forward the appointment of an independent chairman. Currently Sir Stuart Rose occupies both the roles of chief executive and chairman which on the face of it is a deviation from the corporate governance code promulgated by the Financial Reporting Council.
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Boardroom Dispute Resolution, shareholders rights | Ed Weeks | 
July 5, 2010 5:42 pm | 
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