A derivative claim is a claim brought against a company's
directors by a shareholder in the name of, and for the benefit of,
the company.
In tough economic times like these, shareholders of many
privately-owned companies are considering whether the directors of
their company are accountable for their actions and whether the
company is performing as well as it should be.. Shareholder
activism is being encouraged and new legislation providing further
rights for shareholders is promised but for the meantime the
remedies available are in the majority through the Companies Act
2006.
On what basis can a
shareholder bring a derivative claim?
Shareholders often seek redress from directors in circumstances
where:
- The performance of the company has led to reduced returns for
investors;
- The company has failed significantly to achieve the objectives
it set out to, whether annually or within such other timescale as
had been agreed;
- The negligent acts or omissions are attributable to the company
directors ;
- Directors' remuneration is greater than the performance
achieved by the company;
- The company is faced with significant negative publicity;
- The company is dealing with issues that have an actual or
perceived negative effect on employees, the environment or the
wider community. The trials and tribulations of BP in the Gulf of
Mexico are a prime example of this type of circumstance.
How can directors
defend themselves?
Derivate claims are by no means an open season opportunity for
shareholders to attack the directors the minute times get tough and
are strictly a remedy of last resort. Directors have a number of
options available to them to reduce the possibility of facing such
a claim. These include:
- Ensuring that board minutes address the directors'
decision-making in depth. Detailed and accurate minutes should
assist in defending a derivative claim (particularly at the
permission stage) since, if the minutes are authenticated by the
chairman, they will be prima facie evidence of the proceedings at
the meeting. However, minutes should not just rehearse the
directors' duties without conveying the substance of how they
complied with them;
- Seeking shareholder approval for actions that might be
contentious;
- Amending articles of association, to bring them in line with
the new conflict of interest legislation
- Ensuring that appropriate procedures are in place to facilitate
directors creating a paper trail to show that they have complied
with their duties;
- Monitoring shareholder activity, that is, looking at the
acquisition of shares by potential activists and also at whether
existing shareholders are establishing action groups;
- Considering whether directors should receive refresher training
on a regular basis in order to ensure that they are aware of
what constitutes a potential conflict of interest and also so
that they know how to comply with their duties in current economic
conditions.