- New Procedure for Derivative Actions

The new procedure for Derivative Actions

The general rule is that if a director breaches his duties, it is for the company to take action against that director. This action could include disciplinary proceedings, the termination of the director's employment (if any), or court proceedings for an appropriate remedy (such as an award of damages, an injunction, an order setting the transaction aside, an account of profits or restoration of any company property held by the director). In some cases, there may also be imprisonment or a fine.

Under common law and the Companies Act 1985 there were limited exceptions to the general rule that allowed a shareholder to initiate proceedings. These exceptions were cumbersome and costly and so were perceived to be of limited value in providing a suitable remedy for shareholders. These options are still available but are now enhanced by a new procedure for derivative action. Now, the holder of just a single share can launch an action against any director for a breach of duty. This new procedure is subject to a 3 stage court process that aims to weed out vexatious or frivolous claims but it still represents a significant lowering of the hurdles to launching an action against a director.

Directors are understandably worried about the impact of this new law and are keen to seek ways to reduce the risk of being sued. Under the Companies Act 2006 it remains unlawful to provide in the company's constitution that a director will be exempt from liability for breach of duty but a company can purchase and maintain insurance to fund any claim made against him.