Derivative Actions - the Court loosens its apron strings
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.
In this case the court gave permission for the shareholder, Mr Stainer, to pursue a derivative claim on behalf of a company, Kerrington Limited, against two directors of Kerrington and a third party company. The essence of the complaint was that the directors had made certain improper loans to the third party company.
What is of interest is that Mr Stainer only had a very small interest in the company (0.08%) and it was by no means certain that the actions of the directors, even if wrongful, had or would cause the company a significant loss.
In relation to the first of these factors, the size of shareholding should not really matter as the action is for the benefit of the company and hence all shareholders. However, this does indicate the possibility of an activist shareholder acquiring a nominal shareholding in a company with a view to bringing just such an action.
With regard to the second factor, this was dealt with by making the permission limited. The claimant was given permission to proceed up to and including the disclosure stage in the process, at which point the facts and matters in dispute should be more clear and the court would look again at whether to allow it to proceed.
Derivative proceedings ought to be a powerful weapon in a shareholders arsenal but historically the remedy has been relatively rarely used. It is possible that things may be changing.
Tags: derivative actions, Shareholders disputes, shareholders rights
Boardroom Dispute Resolution, shareholders rights | Ed Weeks | 
July 5, 2010 5:42 pm
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