Derivative actions, and its derivatives

Today we squint through our legal binoculars and focus on the little man.  No, this is not a post on voyeur-style deviant actions but on lawyer-style derivative actions.  Same same, but different.
           A derivative claim (or derivative action if you prefer) is one of three main shareholder remedies - see if you can spot which one:

1. "unfair prejudice" remedy, in which a member seeks redress for action by the company which injures his interest as a member; 
2. derivative action, in which a member seeks to enforce a claim belonging to his company; and
3. action to enforce the companys constitution.

That wasn't very hard, but it gets harder... A derivative action is an exception to the rule in Foss and Harbottle (1843) 2 Hare 461 which prevents a shareholder from bringing an action against the company. A derivative action may be commenced by one member of a company on behalf of all the other members (other than the wrongdoer) to enforce a cause of action that belongs to the company (Re Incasep Ltd Jones v Jones and others [2002] EWCA Civ 961). 
             In a derivative action the claimant requires the permission of the court to continue the claim (CPR 19.9).  Further, the court has a discretion to order the company to indemnify the claimant against the costs incurred in the claim.  The test is whether an independent board exercising the standard of care which a prudent business man would exercise in his own affaris would have decided to bring the proceedings (Jaybird Group Ltd v Greenwood [1986] BCLC 319).
             The key case and summary of English law and procedure on the bringing of derivative actions was stated in Barrett v Duckett and Others [1995] 1 BCLC 243.  This set out the general principles governing actions in respect of wrongs done to a company or irregularities in the conduct of its affairs. 
             A derivative action may be prevented from taking place by the majority of a company ratifying the decision or having approved it before the contested decision was made.  And if the court does allow the action to proceed, the claimant will be entitled to an indemnity from the company for the costs of bringin the suit!
             Derivative Actions are supposed to be the action of last resort, a bit like judicial review for the acts or omissions of public authorities (cf Social Issues - a new duty for directors).  The courts have held derivative actions to be an alternative remedy to actions under s.459 of the Companies Act, but the availability of this alternative remedy does not necessarily preclude a derivative action from being the remedy of last resort.  This is an interesting dichotomy, and one that has required the muscle of the Company Law Reform Act to sort it out.  This is not the case with an action under s.459.
             Although there is no statutory authority in Scotland, the case of Anderson v Hogg [2000] SLT 634 makes it clear that derivative actions are available in Scotland and that their availability did not debar section 459 proceedings and vice versa, and where both were available there was no need for minority shareholders to elect for a derivative claim. 
             Getting a bit bogged down here... Time for some refreshment...
             The Company Law Reform Act looks to simplify, formalise and ease the case law conundrum in s.260-269 (of the Company Bill as at 20 July 2006).  However the Company Bill takes all the power out of the blur between s.459 and derivative actions by facing up to it and effectively saying "I'm not scared of you" (s.260):

(2) A derivative claim may only be brought—(a) under this Chapter, or (b) in pursuance of an order of the court in proceedings under section 459 of the Companies Act 1985 (c. 6) (proceedings for protection of members against unfair prejudice).

(3) A derivative claim under this Chapter may be brought only in respect of a cause of action arising from an actual or proposed act or omission involving negligence, default, breach of duty or breach of trust by a director of the company. The cause of action may be against the director or another person (or both).

(4) It is immaterial whether the cause of action arose before or after the person ,seeking to bring or continue the derivative claim became a member of the, company.

Corporate Blawg UK looks forward to seeing more derivative actions in court, as this codification of the cluttered case law should bring the remedy to the attention of more astute shareholders, and dodgy directors should tremble (accordingly).
           That is all I shall derive from this matter for now, until another day.

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