An analysis of the new derivative action under Companies Act 2006
Abstract:
Introduction
The new legislation seeks to do many things, including modernizing our company law, which is effectively based on 19th-century foundations. Arguably, one of the most important aspects of the new statute 留學生dissertation網is the reform of the derivative action. This article conducts a critical analysis of the statutory of derivative action under Companies Act 2006, and then considers some debates for the reform of derivative action. The genesis of the reforms in this area can be span more than ten years. When the English Law Commission conducted an extensive inquiry into shareholder remedies. The earliest reform for this purpose can be traced back to the period between 1995 and 1997. Following the first step the reforms of derivative action have been further appraised and considered by the Company Law Review Steering Group between 1998 and 2001 . Finally, this reform approved by the Government of UK and carried out by the Companies Act 2006.
In order to improve this remedy more effective and flexible, the reforms of derivative claims to be exercised by reference to statutory criteria set out in ss. 261-263 under Companies Act 2006. The statutory derivative action has been amongst the most publicized and debated new reforms introduced by this codification. It is seemly that this innovation discarded and replaced the rule in Foss v. Harbottle, and the concepts of ‘fraud on the minority’ and ‘wrongdoer control’. A judicial discretion to grant permission is a new approach. The paper focuses on the effect of this reform, whether or not recent reforms and modernization of company law is likely to promote the goals: (1) minimum interference with management; (2) appropriate investor protection. Why we choose the two goals to judge the success of recent reforms? The reason is that Reisberg claims that any rules governing derivative action cannot avoid
‘the challenge that is to steer a middle course between excessive reliance on a litigation remedy and judicial recourse for the shareholders on the one hand, and unreasonable interference in the affairs of the company on the other hand.’
In order to improve this accessibility to protect minority shareholders, this innovation, which is largely based upon the recommendations of the Law Commission, is the simplification and modernization of the law. These reforms have been controversial, with scholars arguing fears that these provisions widen the scope of such actions and have potential to increase claims against directors. To some extent, it will face the problem that overuse this claim lead to increases the cost and resource of litigation. Although it is obviously that the availability of the derivative action is effective approach as a shareholder remedy, the weakness of this action is hard to ignore. This action to some extent cannot prevent shareholders abuse it, and then it will influent the business of their companies. On the other hand, if the continuation of past policies, then it is not easy to actually institute legal proceedings as minority shareholder. Therefore, the key question about this issue is: how well has the UK Government done in achieving this balance between managerial freedom and investor protection. #p#分頁標題#e#
In order to discuss and analysis this question about the derivative action, in this paper, there are five sections developing the main opinions in detail. Part II highlights deficiencies in the common law and the history background, which is the situation before the Companies Act 2006. The contents in this section provide an introducing background and briefly states history issues at first, then it will be introduced the approach taken to reform, and the basic principles for analyzing the problems identified. To consider the reasons of the question why derivative actions are extremely rare in practice. On the Part III, the new statutory derivative claim in the Companies Act 2006 will be discussed, especially analyzing its extension and the procedural regulation for the application. Then, this part wills analysis statutory shareholder remedies in section 994 under the Companies Act 2006 (hereafter ‘The Act’). To consider the question, which is to what extent, has s.994 replaced derivative action in practice? In the Part IV, this essay intent to critical analysis the impact of reforms in what proved to be rather contentious area of reform. Then, it is necessary to discuss the major possible obstacles of the practice of new reform. All discussions indent to provide the reader with critical thinking to assess the likely impact of the reforms of derivative action. Finally in the Part V, it will draws some conclusions about all parts of this paper and restate my view of these reforms.

An Overview of Derivative Action in UK
1. The regulation of derivative litigation
The common law derivative action has developed to provide a remedy for a company where the company had suffered a wrong but the wrongdoers were in control of the company. If the directors or a majority of them committed the wrong, they will prevent the company initiates any action against them in respect of that wrong. In this situation, the courts permitted one or more shareholders of the company to bring an action in order to enforce the company’s rights on the company’s behalf. Such actions are called ‘derivative actions’ because they enforce rights derived from the company.
Derivative action, this term was imported from the United States by the Court of Appeal in Wallersteiner v. Moir (No 2) (1975) The difference between this action and a representative action is that the benefits of derivative proceeding go to the company. In derivative actions, the company is obviously not the claimant, because the wrongdoers, who are in control, are preventing the company from suing. Therefore, it is obviously that this is the one true exception to the rule in Foss v. Harbottle (1843), because the company is being improperly prevented from suing.
Nevertheless, the circumstances in which a shareholder can sue to enforce the rights of the company are even more limited, actually derivative actions are extremely rare in practice. There are several reasons to explain this situation, in all the reasons the most important one is that ‘the derivative action being a creature of equity, its availability to a minority shareholder is a matter that is within the discretion of the court.’ In other words, the court will have regard to all situations including whether or not the claimant himself has been guilty of unconscionable conduct. However, it is difficult to understand why a member would like to bring a derivative claim. Furthermore, the problem with the common law rules is that there is a risk that the action may run the risk of being provoked not by the best interests of the company but by other motives. #p#分頁標題#e#
Secondly, The Law Commission’s Report (here after ‘Report’) concludes that the meaning of ‘wrongdoer control’ is far from clear. Actually, not only this term is confused and vague, most of the researchers spend a lot time and energy to consider the reasonable and precise explanations of all the conditions of derivative claim, in order to make this action become an effective remedy for the minority http://www.ttc-switch.com/Thesis_Writing/shareholders. Even though the basic rule of this action still being debated up to the present, in Foss v. Harblttle (1843), Wigram VC laid down the basic principle that a shareholder could not sue in respect of wrongs done to a company. This rule remains the basis of the modern law, according to logical legal thinking, the wrong has been done to the company, and therefore the proper claimant is the company, which has been approved by the Court of Appeal and the Privy Council in Burland v. Earle (1902), until Foss v. Harbottle (1843) itself, and later cases, have confirmed that there are limited exceptions to this basic principle. Most of the so-called exceptions are cases where Foss v. Harbottle (1843) does not apply. Theoretically speaking, if mismanagement falls into this situation, a minority shareholder could sue on behalf of the company. Following Edwards v Halliwell (1950), Jenkins LJ have restated the exceptions to the rule in Foss v. Harbottle (1843), he considered the circumstances in which it will not operate to prevent a shareholder from suing. Although there are rules setting situations for shareholder to initiate derivative claim, there are still have much debated about whether the really exceptions to the rule and whether exist proceeding could reasonable protect a member achieving the aim of actions in the end. Thirdly, the procedural complexities limited the effectiveness of the minority shareholder who seeks to institute a derivative action act as a major against enforcing company rights. To some extents the task of charging majority conduct in small private companies has been made somewhat easier by s.994 of the Act. The procedural complexities obviously increase the length and cost of litigation. Therefore, the effect of those complex foundations of the principle is to make individual access on behalf of the company to the courts extremely difficult and a criticism of this is that there may be less litigation than the interests of companies require. The result is that no one would like to choose this remedy to spend a lot of time and money.
Therefore, how to reform the derivative action in an age of increasing globalization of investment and growing interest in corporate governance is a hot topic. In a change to the existing law, the new reform of derivative action under the Act replaced the old processes in the common law. Nevertheless, Andrew Keay and Joan Loughrey (2008) claimed that the real ramifications of the action are unclear. They argued that ‘there is a lack of judicial precedent on how the criteria should be applied, in the first years of the Act,’ in order to ascertain how these might assist the UK courts to determine the meaning and operation of the new provisions. Following this question and ideas, the availability of the derivative action’s reform is not only renew the provisions under its statutory, but also including considered how the Court exercise their discretion under the Act. #p#分頁標題#e#
2. Definition in the common law and The approach to reform
Despite the existence of these exceptions there have been continued calls for reform of this area of law on the basis that the exceptions are too narrow and hinder shareholder litigation. Hence the reforms for derivative claim are inevitable trend. To appreciate the scope of the new statutory derivative claim, it is useful to consider the process of the reforms and the expectation of its architects. First of all, the Law Commission acknowledged that the derivative procedure should be rationalized and modernized, especially, in an age of increasing globalization of investment and growing interest in corporate governance greater transparency in the requirements for a derivative claim is highly desirable. The extensive inquiry by the English Law Commission resulted in recommendations to abolish the rule in Foss v. Harbottle and its exceptions. The Law Commission therefore recommended a new form of derivative procedure should replace more or less the existing derivative procedure ‘with more modern, flexible, and accessible criteria for determining whether a shareholder can pursue the action.’ The final expectation is finding speedy, fair, and cost-effective mechanisms for resolving disputes between minority shareholders and those running companies without breaching the balance of power between members and managers.
J Poole and P Roberts did recognize that there is evident show that the Law Commission was intent to satisfy the need to achieve a balance between the ability of the company to function effectively on a day-to-day basis, without the unreasonable interference of challenges from members in one hand, and the other hand is the requirement to protect minority shareholders and enhance shareholder confidence by providing shareholders effective remedies to against wrongdoer.
In terms of procedure, the rules of the court still govern the new derivation claim. It is obviously that the basis of the claim would be spelt out in a new statutory provision in the Act. Nevertheless, ‘The Report opposed any definitive criteria for granting leave on the basis that there is a danger that they would be incomplete and would not fit the situations of each case.’ Actually, the court should take into account all the relevant circumstances without limit. It is unsurprisingly that this approach could easily be seen as maintaining a policy of not favoring derivative claims. If the rules would like to cover any single case, this approach will become a signal of an over-restrictive approach to shareholders.
Then the Company Law Review Steering Group (CLRSG), established to manage the DTI’s review, agreed the recommendations of the law Commission . At the same time, it agreed that the derivative claim should be put on a statutory basis, restricted to breaches of director’s duties, including the duty of care and skill. The CLRSG endorsed that the law on ratification should be modernized and simplified. It was proposed that the new companies’ legislation will extent the scope and practicability of the new derivation claim after the reforms. Where a wrong had not been lawfully ratified, the court still has discretion to consider all the circumstances in determining whether a derivative claim should proceed.#p#分頁標題#e#

About the reforms of derivative action, White Paper, Modernizing Company Law was somewhat equivocal on this area of law in 2002.
The Company Law Reform Bill (CLRB) also proposed extending the scope of claims that could lead to derivative actions. It provides that a director’s negligence should be capable of challenge by this means. Furthermore, The CLRB also sets out a two-limb process for consideration by the court of whether or not to permit a claim of derivative action.
The Derivative claim under the Companies Act 2006
1. Introduction
As we have seen, the new Companies Act 2006 would contain a reform of derivative claims. Part 11of the Act 2006 came into force on 1 October 2007. Broadly speaking, ‘Part 11 procedures broadens the circumstances in which derivative actions may be brought, extending to actions in respect of any actual or proposed act or omission involving negligence, default, breach of duty or breach of trust by a director of the company.’ In particular, the new procedure will apply to derivative actions for alleged breaches of any of the new statutory duties of directors in Chapter 2 of Part 10 of the Act. Which include the duty of reasonable care, skill and diligence.
Although Part 11procedure follows the recommendations discussed above in the rough, there are avoidless points different from presuppose in style and content. There are several respects different from the common law in the new procedure. Firstly, the Government would like to abolish the requirement that the claimant have to prove ‘wrongdoer control’, because this requirement prevent a derivative claim to be brought successfully by a member of a widely held company. Secondly, the Government suggests that this action should be bring a claim in cases of negligence, even if it is hard to shown that the directors have profited from the negligence. However, despite this general expansion of the circumstances in which derivative actions may be brought, and the new statutory take place the common law principles, there are still have some complicated procedure cannot be avoid. The motive is safeguards against unwarranted shareholder activism have been admitted. First, the Part 11 procedure does not change the current rule that it is only allow the company become a proper claimant. Second, the procedure still contains a requirement that a shareholder should be requiring the court’s consent to sue.
2. The scope of application
2.1 The basic elements
The main aspects of a derivative claim are set out in section 260. The definition of derivative claim is in section 260(1). There are three basic elements have been mention in this section: (a) The action applies to proceedings in England and Wales or Northern Ireland; (b) the action is brought by a member of the company; (c) the cause of action is vested in the company; and (d) relief is sought on the company’s behalf. Then, 260(2) provides further that the claim may only be brought either under this Chapter or in pursuance of an order of the court in proceedings under CA 2006 s994 (formerly CA 1985 s459). It should be mention that Section 260(5) provides the real meaning of ‘director’ and ‘member’. A member in this Chapter includes a person who is not a member but to whom shares in the company have been transferred or transmitted by operation of law. For the purposes of this Chapter, a director is not includes a former director, but also contain a shadow director.#p#分頁標題#e#
2.2 A derivative claim might be brought by extending types of breaches
It is a fact that Part 11 of the Act contains a new derivative action procedure, which will effectively replace restrictions of the common law requirements under the rule in Foss. Instead, ‘there is a presumptive right to claim if the conditions of section 260 are met and the leave requirement can be satisfied,’ extending to actions in respect of any ‘actual or proposed act or omission involving negligence, default, breach of duty or breach of trust by a director of the company.’ As such, a new statutory provide that the types of breach of duty under a derivative claim may be brought. In Chapter 2 of Part 10 of the Act, it includes the duty to exercise reasonable care, skill, and diligence. Under the new procedure, the shareholders no longer need to prove that the director has benefited personally from the wrongdoing or that defaulting director control the majority of the company’s shares. It appears that a derivative claim is no longer bared by the common law requirements, therefore the circumstances in which a derivative action can be triggered have widened significantly.
Therefore, it is obviously that the new regime will potentially allow an extension range of claims to be brought more easily than the situation at common law. Such as, an employee or an environmental group holding shares could potentially bring an action under the new statutory. The new provisions declared that the directors are in breach of their duty by not taking into account their benefits as required by the new statement of directors’ duties. The extension of derivative claims, by reason of Section 260(3) might be regarded as a welcome liberalization of the rules.
However, at the same time, some worry that there is a disadvantage that the boarded range will increase the heightened fears of directors, especially non-executive directors. The gist of that argument is that directors will be more exposed to actions for breach of duty, which is likely to discourage individuals from taking up directorships, and in particular, it is more difficult for existing directors to make decisions with any reasonable risk. During the Grand Committee, Lord Hodgson stated that this new statutory as a ‘double whammy’, Which is the effect of codifying directors’ duties and at the same time creating a statutory basis for members to bring a claim against company directors. Consequently, the changes make it easier for shareholders to begin actions against directors. Therefore, The Government has introduced a number of safeguards intend to prevent abuse of the new procedure and in particular prohibit tactical or ‘fishing’ litigation. Obviously, the potential risk of directors is broadened with the change of the scope of derivative claim. Then, the question is whether the safeguards in the rest of the provisions prevent abuse. It has been further argued that this codification will have a limit positive benefit of clarifying the scope of derivative claim, which actually is a rarely used in practice. However, this codification will have the damage and significant effect of increasing shareholder litigation and reducing the number of people become a director. There are a number of points in response this question in The Attorney-General, Lord Goldsmith. The most important is that there will continue to be tight judicial control of cases brought under the new procedure, and the Act does not create any major change of principle to the law in this area. Actually, the Law Commission did not expect the significant increate the number of derivative action, because the motive of this remedy is protect minority shareholders in reasonable and beneficial degree. #p#分頁標題#e#
2.3 Derivative claims against third parties
Section 260(3) provides that the cause of action may be against the director or another person (or both). Following the Law Commission’s proposals it is not expected that derivative claims against third parties will be permitted easily and in normal situation. The reason is that ‘they have to strike a careful balance between protecting directors form vexatious and frivolous claims and protecting the rights of shareholders. It would be dangerous to move too far against either of those interests.’ Therefore, the Law Commission constantly continues to be tight judicial control of such cases.
The further question is that how to identified the certain circumstances which is desire a derivative action against third parties. Such as, Lord Goldsmith suggests that this circumstance is a breach of duty by the director, at the same time, a third party has come into possession of property of the company, which should be return to the company. Secondly, the circumstance it should be concerns is that a profitable company that is the victim of a tort by a third party. Some scholar added that it is necessary to be clear the standard for the shareholders to commence the claim. This problem would certainly meet the justice of the case and the consideration of the Court.

2.4 Can the applicant bring a derivative claim in respect of wrongs committed prior to his becoming a member (or after he leaves the company)?
Sections 260(4) provides that it is immaterial whether the cause of action arose before or after the person seeking to bring or continue the derivative claim became a member of the company. Historically, this situation has also been the position under the common law. Essentially, the fact is that the rights of derivative action and the benefit of litigation enforced to the company rather than the members. Because the main principle have not changed by the new statutory, a derivative action still be explained -----an action brought by shareholders on behalf of the company. It is deriving from the company’s right to sue. Therefore, this provision intend to protect the incoming members tend to get the interests of successful management actions, on the contrary, deservedly the person will suffer from the mistake prior to his becoming a member. To even things up, naturedly they have a legitimate right in principle to initiate derivative proceedings.
2.5 Derivative claims against a former director and a shadow director
It is apparently that Section 260(5) provides that derivative claims in Part 11 include a former director and a shadow director. This means that a shadow director is liable in the same way as a registered director of a company. So it is also can be the subject of proceedings in a derivative claim by shareholders. The provision in this section actually express that the scope of those general duties in not clear enough, by the reason of it is not reasonable or desirable to make shadow directors with the full brunt of responsibility for everything, which happen in a company, in the same way as a director. The reason is the same as the disadvantage of over-range the scope of application, and it is also a challenge for the reforms which it might discourage person refuse to providing their services to a company. This issue has not been resolve by the reason of section 170 provides that the general duties apply to shadow director, and to the extent, it is also corresponding the common law rules or equitable #p#分頁標題#e#http://www.ttc-switch.com/Thesis_Writing/principles. Therefore, it is better chose to acceptable this circumstance under the new statutory.
3. The criteria for determining whether to grant permission
The Act
3.1 Prima facie case
3.2 Good faith
3.3 The best interests of the company
3.4 The views of an independent board
4. The statutory remedy in section 994
4.1 Historical background of unfair prejudice
4.2 The weakness of derivative actions
4.3 The scope of unfair prejudice
An Assessment of the likely impact of the new regime
1. The major challenges of the reforms
2. The breadth of discretion provided to the judiciary in the new regime
3. Overview the effect of the new statutory of derivative action
Conclusion