What is a derivative action?
A derivative action is a legal action that allows shareholders of a corporation to initiate a lawsuit on behalf of the company. This type of lawsuit is typically brought against executives or directors of the company for wrongdoing or breaches of fiduciary duty that have harmed the corporation.
Company directors are legally bound under Part 10, Chapter 2 of the Companies Act 2006 to ensure they carry out certain directors’ duties and promote the success of a company. If they fail to act in the best interests of the company or if there are allegations of fraud or misconduct, a shareholder can launch a derivative claim under section 260 of the Act to uphold the company’s rights.
Bringing a derivative claim aims to hold the directors accountable for the harm the company has suffered due to their actions or unfair prejudice, and to recover any losses the company has suffered as a result.
Derivative action claims can be complex and require the expertise of a legal professional experienced in corporate law and shareholder litigation.
South Bank Legal have an experienced team of commercial and corporate law solicitors who possess extensive knowledge of derivative action claims. If you would like more information on our services or wish to speak to one of our experts, please get in touch with us today.
Causes of derivative action
Derivative actions can be initiated for a variety of reasons, typically revolving around breaches of duties, breaches of trust or other wrongful acts by directors that harm the company. Some common causes include:
- Breach of Fiduciary Duty: This is the most common cause and results from actions in which directors or officers put their personal interests above those of the corporation. This includes self-dealing, insider trading, or taking corporate opportunities for personal gain.
- Fraud: Fraudulent activities by directors or officers that result in harm to the corporation, such as falsifying financial statements, embezzlement, or engaging in fraudulent transactions.
- Mismanagement: Gross mismanagement or incompetence by corporate executives that leads to significant financial losses or damages the corporation’s reputation.
- Unlawful or Unauthorised Acts: Engaging in activities that are illegal or beyond the authority granted to the corporate insiders, which can expose the corporation to legal liabilities or financial penalties.
- Conflicts of Interest: Decisions or actions where corporate insiders have conflicting interests that need to be adequately disclosed or managed, leading to decisions that are not in the best interest of the corporation.
Derivative actions are typically a last resort but serve as a vital tool for shareholders to hold the board of directors accountable and ensure that the company’s interests are protected.
How to bring a derivative action claim
If you wish to bring derivative action on behalf of a company, the first step is to seek permission from the courts. The courts will only grant the permission order upon being satisfied that the shareholder making the claim has a prima facie case, meaning that there is sufficient evidence to back up the claim from the outset.
A shareholder making a derivative action claim will be responsible for managing the case and paying the legal fees that come with taking legal action. Additionally, the claim will be made in the name of the company rather than in the name of the shareholder. If the case is successful, then any damages awarded will go straight to the company, not to the shareholder. The shareholder may be able to claim back their legal expenses if they are successful in making a derivative action claim.
Shareholder derivative actions serve as a critical mechanism for safeguarding corporate governance. They enable individual shareholders to hold corporate insiders accountable for breaches of fiduciary duty, thereby promoting responsible management practices that ultimately benefit all shareholders of a company.
How can South Bank Legal assist?
South Bank Legal are a team of commercial solicitors in England and Wales. Our legal professionals are highly experienced and can provide advice and assistance with derivative action claims.
Our commercial solicitors provide legal services on a wide range of commercial disputes issues. These include intellectual property disputes, multi-million-pound shareholder disputes, drafting contracts and property disputes.
If you would like more legal advice on derivative action claims or wish to discuss any of our services, you can contact us using the form below or telephone 02035765179 for a confidential discussion with one of our solicitors.
Michael Czechyra is a senior commercial solicitor and the founder and Managing Director of South Bank Legal, a commercial law firm in Central London.
Michael primarily acts for business clients in corporate and commercial transactions and disputes, focussing on fintech startups, mergers and acquisitions, commercial contract drafting, as well as assisting with insolvency matters on behalf of technology companies and service providers, intellectual property issues, and complex business disputes.
Michael is known for his practical approach, his accessibility and his ability to meet his client’s timelines. His clients have included global corporations, private equity investors, financial institutions and trading firms, political parties and a national competition and consumer law regulator.
Michael has practised as a commercial solicitor since 1998. Prior to founding South Bank Legal, Michael held various senior and board positions at City of London law firms for several years.
