Derivative claims

What is a Derivative Claim?

A derivative claim is a legal action brought by a shareholder on behalf of the company to challenge wrongful conduct by directors or others in control. These claims typically involve breaches of duty, misuse of company assets, or serious mismanagement.

They arise where those responsible for the company’s governance refuse to act against misconduct, often because they are implicated themselves. In such cases, the law allows a shareholder to pursue the claim in the company’s name to recover losses suffered by the company.

Derivative claims are governed by Part 11 of the Companies Act 2006 and are subject to strict court oversight.

Who might start a derivative claim?

Derivative claims are usually brought by:

• minority shareholders concerned about mismanagement or misuse of power;

• shareholders in family-run or closely held companies where relationships have broken down;

• joint venture partners who are being excluded from oversight.

They are often one element of a wider corporate or shareholder dispute.

Who Can Bring a Derivative Claim?

Any shareholder can bring a derivative claim, regardless of the size of their shareholding, provided they:

• are a current member of the company; and

• were a member at the time of the alleged wrongdoing, or acquired their shares through inheritance or similar means.

There is no minimum shareholding requirement. However, the right to bring a claim is not automatic and is subject to a mandatory court permission process.

Legal grounds for a derivative claim

Derivative claims can be brought where there has been a breach of directors’ duties (statutory or fiduciary), negligence or breach of trust. The most common breaches involve the section 172 duty to promote company success, conflicts of interest, or decisions benefiting directors personally. The requirement extends to former directors and shadow directors. Common examples include:

• unlawful payments or loans;

• misuse of company funds;

• diversion of business opportunities for personal gain;

• excessive or unauthorised remuneration.

Evidence required

To succeed, the shareholder must present clear evidence that:

• The company has suffered harm as a result of the alleged wrongdoing;

• There is a factual and legal basis for the claim.

Supporting documents may include board minutes, financial records, correspondence, audit findings, and legal or tax advice.

Court permission needed to proceed with claim

To proceed with a derivative claim, the shareholder must first obtain permission from the court. The court will consider:

• Whether there is a prima facie case of wrongdoing;

• Whether the claim is being pursued in good faith;

• Whether a reasonable, independent director would seek to bring the claim;

• Whether alternative remedies would be more appropriate.

The process involves two stages:

1. An initial paper-based assessment where the claim may be dismissed outright if it appears unmeritorious;

2. A full permission hearing, if the claim passes the first stage.

Risks and challenges

• Costs can be significant and may not be recoverable;

• The permission process is stringent and can block weak claims;

• The benefit of any success accrues to the company, not the individual claimant;

• Claimants may be required to indemnify the company for legal costs;

• The process can be time-consuming and complex.

What might happen in court?

If permission is granted, possible outcomes include:

• Financial recovery for the company;

• Resignation or removal of directors;

• Reversal of improper transactions;

• A negotiated settlement.

Many claims settle before trial, particularly where strong evidence is presented and the threat of litigation encourages early resolution.

Negotiating positions and settlement

Derivative claims often form part of wider shareholder disputes and may lead to:

• buyouts of the minority shareholder’s stake;

• settlement payments to the company;

• governance changes or director resignations.

The strength of the case and the willingness of parties to resolve matters pragmatically are key drivers of settlement.

Are derivative claims common?

Derivative claims are relatively rare in the UK. Unfair prejudice petitions are more common as they protect personal shareholder rights, don't require court permission, and offer direct compensation. However, they're not viable where the company has suffered loss but shareholders cannot demonstrate personal prejudice, making derivative claims the only available remedy despite their complexity.

Derivative claims are not common because they :-

• are complex and costly to bring;

• require permission from the court before they can proceed;

• if successful will benefit the company rather than the shareholder personally;

How we can help

We act for shareholders, directors and companies in all types of corporate disputes, including derivative claims.

Our expertise includes:

• advising on whether a derivative claim is viable or advisable;

• reviewing the strength of the claim and available evidence;

• preparing and managing court applications, including permission hearings;

• exploring alternative remedies and settlement options;

• managing litigation strategy and risk.

Whether you're a shareholder seeking redress, or a director facing allegations of wrongdoing, we provide strategic, commercial advice tailored to your situation.