1
Introduction
The purpose of this essay is to provide an analysis on both common law and statutory
positions of derivative claims in order to reach a conclusion on whether the statutory
position is capable of emulating the common law positon in terms of protecting the
rights of minority shareholders.
In this essay, the importance of derivative claims will first be provided. Secondly,
one will provide for the procedures and requirements of derivative claims under both
common law and statutory positions. Thirdly an analysis on the two positions will be
provided for the purpose of reaching a conclusion as mentioned above. The conclusion
of this essay is expected to answer the question in a negative, the reasons for this
conclusion will be provided in the latter parts of this essay.
Importance of derivative claim
Derivative claim refers to a representative claim taken by a shareholder on behalf of all
members and the company against the wrongdoers. 1 Such a claim is derivative as the
entitlement to sue is not vested in the shareholder who is bringing the claim but it
derives from the right of the company of bringing an action with its own name. 2
Derivative claim is defined under Section 260(1) of the Companies Act 2006 as
proceedings brought by a member of a company in respect of a cause of action vested
in the company and seeking relief on behalf of the company. 3
The purpose of such an action is threefold:
1
A. Dignam, J. Lowry, Company Law (10th edn 2018 OUP) 184
2
Ibid
3
Companies Act 2006, s 260(1)
, 2
1) Firstly it is to ensure that the directors are held accountable for wrongs they do in
their position;4
2) Secondly, it is to act as a tool to check on the directors in order to prevent them
from undertaking actions which might potentially harm the company. As the
shareholders can take a derivative action if they detect such acts; 5 and
3) Lastly, if the claim is successful, compensation to the company for wrongs
committed is ensured.6
However, a derivative claim is subjected to restrictions and requirements under both
common law and statutory positions which the shareholder bringing a claim must
satisfy. And such restrictions and requirements will be explained in full in next part of
this essay.
The position in Foss v Harbottle7
In the case of Foss v Harbottle,8 where the two shareholders brought an action against
the company’s directors on the basis that they had mis-applied the assets of the
company and mortgaged its property in an improper manner. 9 The court held that they
were not able to proceed with their procedure as they were not proper plaintiffs of the
current case.10 Furthermore, two main principles were established from the doctrine of
separate legal entity from the case of Salomon v Salomon.11 The two principles were
explained in the case of Edwards v Halliwell by Jenkins LJ:
4
Keay, AR (2016) Assessing and rethinking the statutory scheme for derivative actions under the Companies Act
2006. Journal of Corporate Law Studies, 16 (1). pp 39-68, at pp 44
5
Ibid
6
Ibid
7
Foss v Harbottle (1843) 67 ER 189
8
Ibid
9
Ibid
10
Ibid
11
Salomon v Salomon UKHL 1, AC 22
Introduction
The purpose of this essay is to provide an analysis on both common law and statutory
positions of derivative claims in order to reach a conclusion on whether the statutory
position is capable of emulating the common law positon in terms of protecting the
rights of minority shareholders.
In this essay, the importance of derivative claims will first be provided. Secondly,
one will provide for the procedures and requirements of derivative claims under both
common law and statutory positions. Thirdly an analysis on the two positions will be
provided for the purpose of reaching a conclusion as mentioned above. The conclusion
of this essay is expected to answer the question in a negative, the reasons for this
conclusion will be provided in the latter parts of this essay.
Importance of derivative claim
Derivative claim refers to a representative claim taken by a shareholder on behalf of all
members and the company against the wrongdoers. 1 Such a claim is derivative as the
entitlement to sue is not vested in the shareholder who is bringing the claim but it
derives from the right of the company of bringing an action with its own name. 2
Derivative claim is defined under Section 260(1) of the Companies Act 2006 as
proceedings brought by a member of a company in respect of a cause of action vested
in the company and seeking relief on behalf of the company. 3
The purpose of such an action is threefold:
1
A. Dignam, J. Lowry, Company Law (10th edn 2018 OUP) 184
2
Ibid
3
Companies Act 2006, s 260(1)
, 2
1) Firstly it is to ensure that the directors are held accountable for wrongs they do in
their position;4
2) Secondly, it is to act as a tool to check on the directors in order to prevent them
from undertaking actions which might potentially harm the company. As the
shareholders can take a derivative action if they detect such acts; 5 and
3) Lastly, if the claim is successful, compensation to the company for wrongs
committed is ensured.6
However, a derivative claim is subjected to restrictions and requirements under both
common law and statutory positions which the shareholder bringing a claim must
satisfy. And such restrictions and requirements will be explained in full in next part of
this essay.
The position in Foss v Harbottle7
In the case of Foss v Harbottle,8 where the two shareholders brought an action against
the company’s directors on the basis that they had mis-applied the assets of the
company and mortgaged its property in an improper manner. 9 The court held that they
were not able to proceed with their procedure as they were not proper plaintiffs of the
current case.10 Furthermore, two main principles were established from the doctrine of
separate legal entity from the case of Salomon v Salomon.11 The two principles were
explained in the case of Edwards v Halliwell by Jenkins LJ:
4
Keay, AR (2016) Assessing and rethinking the statutory scheme for derivative actions under the Companies Act
2006. Journal of Corporate Law Studies, 16 (1). pp 39-68, at pp 44
5
Ibid
6
Ibid
7
Foss v Harbottle (1843) 67 ER 189
8
Ibid
9
Ibid
10
Ibid
11
Salomon v Salomon UKHL 1, AC 22
