The Key Requirements for Bringing a Derivative Claim

A derivative claim can be brought by a shareholder on behalf of a company against a director or another person (or both), usually for alleged breaches of fiduciary duty, fraud, or mismanagement. The benefit of a derivative claim goes solely to the company, not to the shareholder who initiates it. As an equitable remedy, the court, in exercising its discretion, will consider the conduct and motives of the claimant, as well as the availability of other remedies. 

This article discusses the key requirements for bringing a derivative claim. 

Grounds for Bringing a Derivative Claim 

Under Section 260 of the Companies Act 2006 (the “Act”), a derivative claim may be brought by a shareholder but only in respect of a cause of action involving an actual or proposed act or omission by a director that involves negligence, default, breach of duty, or breach of trust. A shareholder may bring a derivative claim against a director, another person, or both, and this can apply to a cause of action that arises either before or after the shareholder became a member of the company. 

Permission to Bring the Action: A Two-Stage Process 

While permission to initiate a derivative claim is not required, a shareholder must apply to the court for permission to continue the claim. At this initial stage, the court examines the evidence provided by the claimant to determine if there is a prima facie case. If the evidence does not make a prima facie case, the court must dismiss the application and may issue any order it considers appropriate. 

However, if the court considers that the application and evidence does amount to a prima facie case for granting permission to continue the claim, it may give directions as to the evidence which is required from the company and adjourn the proceedings to enable the retrieval of the evidence.  

Once this evidence is gathered, the court will proceed to hear the application. At this stage, the court may either grant permission to continue the claim on specified terms, deny permission and dismiss the claim, or adjourn the application and issue further directions. 

What Happens After Prima Facie Permission is Granted? (Stage Two) 

At the second stage, a hearing is held where the court evaluates the views of all interested parties to decide if the application should continue. The court closely scrutinises the evidence, among other factors, to determine whether the statutory criteria are met and the claim can be continued. 

The court will not grant permission if: 

1. It is satisfied that the person against whom the claim is brought was acting in accordance with their duty to promote the company’s success per Section 172 of the Act, and no director following this duty would wish to continue the claim; or 

2. The act or omission for which the shareholder seeks to bring the claim has been authorised by the shareholders or ratified by the company. 

If neither of these applies, the court will consider additional factors in deciding whether to permit the derivative claim, including: 

• whether the shareholder is acting in good faith; 

• the importance that a person acting to promote the company’s success would place on bringing the claim; and 

• whether the shareholder has an alternative remedy available to them personally. 

If permission is granted, the derivative claim proceeds to trial. If permission is denied, the claim is dismissed before trial. 

What Orders Can a Court Make? 

If a derivative claim succeeds at trial, the court has broad discretion in ordering remedies. These may include: 

• removing a director from their role; 

• ordering a director to pay damages to the company; 

• ordering an injunction against a director to prevent specific actions; and 

• awarding costs against the director. 

Contact Us: Derivative Claim Solicitors 

If you have any questions about this topic, please contact Sali Zaher, Associate Solicitor, at S.Zaher@rfblegal.co.uk or by phone on 020 7467 5766.