Derivative Action Against Directors

A derivative action against directors is a legal action brought by a shareholder or group of shareholders on behalf of a company or corporation against its directors or officers for alleged misconduct or wrongs committed. This type of lawsuit is called “derivative” because it derives from the corporation’s claim against its own directors or officers. In other words, the shareholders step into the shoes of the corporation to assert a claim that the corporation itself has chosen not to pursue.

Shareholder derivative actions are common in cases involving corporate fraud, breach of duty by directors or officers, breach of trust, mismanagement, or other wrongdoing that harms the corporation. Company Directors are legally bound by law under the Companies Act 2006 to ensure they carry out certain directors’ duties and promote the success of a company. The purpose of such actions is to hold accountable those responsible for the harm caused to the corporation and to recover losses on its behalf.

Derivative actions can be complex legal proceedings, so individuals considering such actions should seek legal advise with expertise in corporate law and shareholder litigation. Expert Commercial Law have access to a panel of experienced commercial solicitors with experience in derivative action against Directors, if you would like more information or wish to speak to one of our legal experts then please get in touch today.

What causes Derivative Action?

A derivative action against directors is typically initiated when shareholders believe that the directors or officers of a corporation have engaged in wrongful conduct or breached their fiduciary duties, and the corporation itself has failed to take action to address these alleged wrongdoings including negligence, default, breach of duty and breach of trust. Directors are expected to exercise reasonable care and skill in the operation of a company, always acting in its best interests. Some common causes or reasons that may lead to derivative actions against directors include:

• Breach of Fiduciary Duty: Directors and officers owe fiduciary duties to the corporation and its shareholders. Shareholders may bring derivative actions if they believe that directors have breached these duties, such as by acting in their self-interest, engaging in conflicts of interest, or failing to exercise reasonable care and diligence in their roles.
• Corporate Mismanagement: Shareholders may initiate derivative actions when they believe that the corporation’s management, including its directors and officers, has mismanaged the company’s affairs, leading to financial losses or damage to the corporation.
• Accounting Irregularities: Allegations of financial misconduct, including accounting fraud or misrepresentation of financial statements, can lead to derivative actions against directors and officers.
• Self-Dealing: Directors or officers who engage in transactions that benefit themselves at the expense of the corporation or its shareholders may be subject to derivative actions. This can include self-dealing in contracts, excessive compensation, or the inappropriate use of corporate assets.
• Conflict of Interest: If directors or officers are involved in situations where their personal interests conflict with their duties to the corporation, shareholders may bring derivative actions to address these conflicts.
• Failure to Monitor or Supervise: Directors have a duty to oversee the corporation’s operations and to monitor potential misconduct by officers and employees. If shareholders believe that directors have failed in this oversight role, they may file derivative actions.
• Allegations of Fraud or Securities Violations: Shareholders may bring derivative actions in cases of alleged fraud, securities law violations, or other forms of financial misconduct that harm the corporation and its shareholders.
• Environmental or Regulatory Violations: Cases involving environmental violations or other regulatory breaches that lead to harm to the corporation and its shareholders can also result in derivative actions.
• Executive Compensation Issues: Excessive executive compensation or compensation packages that are not in line with industry standards or corporate performance may lead to shareholder-initiated derivative actions.
• Failure to Address Risks: Directors are expected to identify and address risks that could harm the corporation. If shareholders believe that directors have failed to adequately address significant risks, they may seek remedies through derivative actions.

It’s important to note that derivative actions are typically a last resort. Shareholders are often required to make a demand on the corporation’s board of directors to address the alleged misconduct before filing a derivative lawsuit. If the board refuses to act or if the demand is deemed futile, shareholders may then proceed with the lawsuit.

Bringing a Derivative Claim

Bringing a derivative claim means the shareholder must first obtain permission to bring the claim from the court. The court must refuse permission if it considers there is no prima facie case. The court will only grant permission if it is satisfied that the shareholder has a prima facie case, that the action is in the best interests of the corporation, and that the shareholder is acting in good faith. Additionally, the court can refuse permission if it is satisfied that a person acting in the best interests of the company would not seek to raise the claim, would be satisfied in not continuing the claim or that the act or omission at the subject of the action has been addressed or authorised.

If the court grants permission, the shareholder will then be able to proceed with the claim. The claim will be conducted in the name of the corporation, but the shareholder will be responsible for managing the case and paying the legal fees.

If the shareholder is successful in the lawsuit, the damages awarded will go to the corporation, not to the shareholder. However, the shareholder may be entitled to reimbursement of their legal fees.

Shareholder derivative actions are an important tool for protecting the interests of corporations and their shareholders. They can help to ensure that corporate insiders are held accountable for their actions and that corporations are managed in the best interests of all shareholders.

How can Expert Commercial Law assist?

Our panel of shareholder derivative action solicitors possess extensive experience and can assist parties in complex disputes using their care, skill and diligence.

Our panel firms provide guidance throughout the process and can help protect their client’s rights and interests. They can also help evaluate the strength of the case and advise on the best course of action. 

Our solicitors can also help with a number of other commercial claims, such as partnership disputes, breach of contract and CCJ removal.

Please note we are not a firm of solicitors; however, we maintain a panel of trusted and regulated legal experts. If you contact us in relation to a commercial law case, we will pass your case on to a panel firm in return for a fee from our panel firms. We will never charge you for passing on your case to a panel firm. 

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