Historical Context
A derivative claim is a legal action initiated by a shareholder on behalf of a corporation to address a wrong done to the company. The concept emerged in the 19th century in England, reflecting the need to protect minority shareholders from the abuses of those in control of the company. The landmark case of Foss v Harbottle (1843) established that only the company could sue for wrongs done to it. However, exceptions were made when wrongdoers controlled the company, allowing shareholders to bring derivative actions.
Types and Categories
Derivative claims can be categorized based on the nature of the wrong:
- Fraud on the Minority: Wrongdoers within the company commit fraud affecting minority shareholders.
- Negligence by Directors: When directors fail to fulfill their fiduciary duties, resulting in harm to the company.
- Breach of Duty: Involves breaches of statutory or common law duties by directors or majority shareholders.
Key Events
- 1843: Foss v Harbottle case established the foundation for derivative claims.
- 2006: The UK Companies Act 2006 reformed the law on derivative claims, making it more accessible for shareholders.
- 2009: Significant case law developments, including Mission Capital v Sinclair, further clarified procedural aspects of derivative claims.
Detailed Explanation
A derivative claim allows a shareholder to sue on behalf of the company when those in control are unwilling or unable to do so. This action is critical in maintaining corporate governance and holding directors accountable. The company is usually named as a defendant in these actions, ensuring it benefits from any remedy.
Criteria for Derivative Claims
- Standing: The claimant must be a current shareholder.
- Wrongdoers’ Control: Those committing the wrong should control the company, preventing it from taking action.
- Demand Futility: It must be shown that requesting the company’s directors to sue would be futile.
Procedural Steps
- Filing the Claim: Shareholder files the derivative claim with supporting evidence.
- Court Approval: The court must approve the claim before it proceeds.
- Litigation: The case proceeds with the shareholder acting in place of the company.
Importance and Applicability
Derivative claims are essential for:
- Protecting Minority Shareholders: Ensuring their interests are protected against abuses by majority shareholders.
- Corporate Governance: Promoting accountability and ethical management practices.
- Redressing Wrongs: Providing a mechanism to address wrongs that the company itself is unable to rectify.
Examples
- Case Study: Smith v Croft (1988) - Shareholders successfully brought a derivative action for misappropriation of assets by directors.
- Hypothetical: A shareholder of XYZ Corp files a derivative claim against the board for misappropriating company funds.
Considerations
- Legal Costs: High litigation costs may deter shareholders from filing derivative claims.
- Approval Hurdles: Obtaining court approval can be challenging, requiring strong evidence.
- Benefit to Company: Any remedy or damages awarded benefit the company, not the individual shareholder directly.
Related Terms
- Fiduciary Duty: The legal duty of directors to act in the best interest of the company.
- Minority Shareholder: A shareholder holding less than 50% of a company’s shares.
- Corporate Governance: Systems and processes to direct and control corporations.
Comparisons
- Direct vs. Derivative Claim: Direct claims are filed by shareholders for personal losses, while derivative claims are on behalf of the company.
- Class Action vs. Derivative Claim: Class actions involve multiple plaintiffs with common claims, whereas derivative claims are filed by individual shareholders for wrongs to the company.
Interesting Facts
- Derivative claims were rare historically but have gained prominence with modern reforms.
- Courts closely scrutinize the merit of derivative claims to prevent abuse.
Inspirational Stories
Ralph Nader’s Advocacy: Consumer advocate Ralph Nader has highlighted the importance of derivative claims in holding corporate boards accountable.
Famous Quotes
Justice Cockburn in Foss v Harbottle: “The company itself is the proper claimant to redress wrongs done to it.”
Proverbs and Clichés
- “The squeaky wheel gets the grease” – highlighting the importance of speaking up against corporate wrongs.
Expressions, Jargon, and Slang
- [“Piercing the corporate veil”](https://financedictionarypro.com/definitions/p/piercing-the-corporate-veil/ ““Piercing the corporate veil””): Overcoming legal barriers to hold individuals accountable for corporate actions.
- “Corporate watchdog”: A term for vigilant shareholders who monitor and act against corporate misdeeds.
FAQs
Q: Can a former shareholder bring a derivative claim? A: Generally, only current shareholders have standing to bring derivative claims.
Q: What if the court denies permission for the claim? A: The shareholder can appeal the decision or may consider direct claims if personal losses are involved.
References
- Foss v Harbottle (1843), seminal case establishing the basis for derivative claims.
- UK Companies Act 2006, legislation detailing modern derivative claims.
- Mission Capital v Sinclair (2009), case elucidating procedural aspects of derivative claims.
Summary
A derivative claim is a critical legal tool that empowers shareholders to act on behalf of a company to address wrongs committed by those in control. Its historical roots, procedural requirements, and role in corporate governance underscore its importance in the legal landscape. Understanding derivative claims helps shareholders protect their investments and promote ethical corporate practices.
