Derivative Claims Guide For Shareholders

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Emilene LucasLegal Assessment Team Supervisor
Updated on 9th May 2024

Sometimes, the people in charge of a company do things that hurt the company or its shareholders, like making a bad decision or acting unfairly. Derivative claims give shareholders a way to step in and take legal action on behalf of the company even if the company fails to take action. 

In this article, we’ll look at what derivative claims are, who can bring these types of claims, potential pitfalls, and how to bring a derivative claim.

derivative-claims-guide

What is a derivative claim? 

A derivative claim is a legal action taken against directors of a company for something they did, proposed to do, or did not do that harmed the company or its shareholders. 

These claims can be brought against current directors, former directors, shadow directors, and third parties involved in the same wrongdoing. They usually come about because of negligence, breach of fiduciary duty, or breach of trust.

Who can bring a derivative claim? 

Derivative claims can be brought by: 

  • Majority and minority shareholders

  • Trustees 

  • Personal representatives (in the context of probate). 

Shareholders can also continue a derivative claim if the company is unable or unwilling to pursue it further, and the shareholder believes it’s in the company’s best interest to continue. 

It’s important to note that these claims are intended to protect the company, not individuals. So, the role of the person bringing a derivative claim is that of a representative of the company seeking to protect the company’s interests and hold directors accountable. 

If you believe you have grounds for a derivative claim or have questions about your eligibility to bring such a claim, contact our legal assessment team today for a free case evaluation and quote for the services of a specialist corporate lawyer. 

What grounds are required for a successful derivative claim? 

To bring a successful derivative claim, shareholders must provide evidence that the directors in question have breached any duties outlined in the Companies Act 2006. 

This includes: 

  • Making decisions that benefit themselves, not the company

  • Not exercising reasonable care, skill, and diligence in decision-making 

  • Failing to promote the success and sustainability of the company 

  • Not declaring personal interests they have in deals the company is involved in

Shareholders must provide evidence to support their claim. This can be in the form of documentation, witness testimony, financial records, or other relevant information that evidence the wrongdoing alleged in the claim. 

How to make a derivative claim

To make a derivative claim in the UK you should: 

  1. Consult with a corporate solicitor to understand the strength of your claim 

  2. Collect evidence that shows the alleged wrongdoing 

  3. Draft a claim form and particulars of claim 

  4. File the claim and particulars of claim with the appropriate court and apply for permission to continue the claim 

  5. Notify the company of the claim and permission application

  6. Attend a permission hearing before the court

  7. If permission is granted, continue with the derivative claim according to the court’s directions

During proceedings, you may choose to explore the possibility of a settlement or mediation to resolve the dispute and avoid prolonged litigation. 

What remedies are available in derivative claims? 

If a derivative claim is successful, the court may award monetary damages to compensate the company for losses suffered. Alternatively, the court may order recission (cancelling or undoing a transaction) to restore the parties to their original positions. 

If future harm is anticipated, the court may grant injunctions to prevent further misconduct or to require specific actions to be taken by the company or its directors. 

In cases where directors or officers have profited from their wrongful actions, the court may order them to account for any profits obtained to prevent them from benefiting unfairly from their misconduct at the company's expense.

If company assets have been misappropriated or misused, the court may order the return of those assets to the company. This remedy aims to ensure that the company's assets are protected and used for their intended purposes.

Specific remedies available in a derivative claim may vary depending on the circumstances of the case and the nature of the wrongdoing alleged. Additionally, the court has discretion in determining the appropriate remedies based on the facts presented and the interests of justice.

Risks and challenges of derivative claims 

Not all derivative claims are successful, and shareholders should be aware that there is a risk of failure. They can also be costly and time-consuming. 

In some cases, shareholders may be liable for the defendant's legal costs if the claim is unsuccessful. This risk, known as adverse costs orders, means that shareholders could end up paying significant sums if their claim is unsuccessful.

Despite these risks and challenges, derivative claims can be an effective means of holding company directors and officers accountable for their actions and protecting the interests of shareholders. Shareholders should carefully weigh the potential risks and rewards and seek legal advice to determine the best course of action in their particular circumstances.

What is the difference between derivative claims and unfair prejudice petitions?

In bringing a derivative claim, shareholders are looking out for the company’s interests as a whole.

While in unfair prejudice petitions, shareholders are looking out for their own interests. That is, they believe the actions of directors are harming them directly, instead of the company at large. 

How can Lawhive help? 

If you are a company shareholder with real concerns about the directors of your company, you should feel empowered to seek justice and protect the company's interests.

If you think you have a case, or you’re unsure, contact our Legal Assessment Specialists for a free case evaluation. 

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