The two principal remedies available to an aggrieved shareholder under the Companies Act 1985 and at common law are respectively unfair prejudice claims under Section 459 of the Act and derivative actions.  Alterations to both of these are likely to a greater or lesser extent as a result of the Company Law Reform Bill.

At present, shareholders have a right at common law to bring a "derivative action". This is an action brought by the shareholder on the company's behalf which seeks to remedy a wrong which has been done to the company.  Both the Law Commission and the Company Law Review have supported the introduction of a statutory derivative action which is proposed in the Company Law Reform Bill at Part 11.

Separate provisions are being proposed in respect of derivative claims in England, Wales and Northern Ireland and derivative claims in Scotland. However, the provisions are similar in that:

  • An action may be brought in respect of an act or omission involving negligence, default, breach of duty or breach of trust by a director;
  • An action may be raised against a director or another person;
  • A court must grant leave in order for a derivative action to be pursued.

The matters which a court must consider in deciding whether to permit a derivative action are the same in both jurisdictions and include:

  • Whether the member is acting in good faith or not;
  • The importance that the member would attach to the pursuit of the claim;
  • Whether the act or omission is likely to be ratified by the company or not; and
  • Whether or not the action could be brought by the company itself.

Common law actions are rarely brought and it is intended that the new statutory provision will assist shareholders by making it easier for them to take action in respect of a greater number of wrongs than under the current system.  It remains to be seen whether the new provisions will lead to a significant increase in the number of actions brought and what proportion of these actions will be considered worthy of approval by the courts. However, companies should check their directors and officers insurance policies to ensure that they remain appropriately covered following reform. It is worth noting that the reform to the provisions on director's indemnities which were implemented last year will not allow a company to indemnify a director in respect of a derivative action.

A claim under Section 459 is a personal action for unfairly prejudicial conduct brought by a shareholder on his own behalf. Reform of this law on unfair prejudice was not thought to be necessary by the Company Law Review. Accordingly, the unfair prejudice remedy is not repealed but minor amendments to it will be necessary by virtue of the Company Law Reform Bill.

It is also worth noting that the possibility of bringing a claim under Section 122 of the Insolvency Act 1986 for the winding up of a company on the grounds that it is just and equitable to do so will still remain an option.

With regard to listed companies, there is a possibility that the position may undergo further change in the future as a result of a corporate governance constitution published by the European Commission.

 

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