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Derivative Claims Flashcards

1
Q

What is the purpose of derivative claims?

A

Derivative claims allow shareholders to sue on behalf of the company when it fails to act against wrongdoers, typically for breaches of duty by directors or others in control.

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2
Q

What principle underpins derivative claims and was established in Foss v Harbottle (1843)?

A

The principle that the proper claimant for a wrong done to a company is the company itself, supporting majority rule and internal management.

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3
Q

What are the key exceptions to the rule in Foss v Harbottle?

A

Exceptions include ultra vires acts, illegal actions, fraud on the minority, and infringements of personal rights.

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4
Q

What is the reflective loss doctrine?

A

The principle that shareholders cannot claim for losses reflective of the company’s losses, as clarified in Prudential Assurance v Newman Industries (1982).

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5
Q

How did Sevilleja v Marex Financial Ltd (2020) refine the reflective loss doctrine?

A

It limited the doctrine to shareholder claims, excluding claims by other creditors.

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6
Q

Under which section of the Companies Act 2006 are statutory derivative claims defined?

A

Section 260.

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7
Q

What breaches can form the basis of a statutory derivative claim under the CA 2006?

A

Breaches of duty, negligence, breach of trust, or default by directors.

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8
Q

How does the statutory framework under the CA 2006 improve upon the common law approach to derivative claims?

A

It removes the need to prove fraud on the minority or wrongdoer control, making claims more accessible.

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9
Q

What is the first stage in the two-stage permission process for derivative claims?

A

The claimant must establish a prima facie case based solely on their evidence, without company involvement.

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10
Q

What happens during the second stage of the derivative claim process?

A

The court assesses evidence from both parties and applies factors under Section 263 to determine whether the claim should proceed.

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11
Q

What are the mandatory bars to derivative claims under Section 263(2) of the CA 2006?

A

The claim must be refused if a director acting in good faith under Section 172 would not pursue it, or if the act was authorized or ratified.

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12
Q

What discretionary factors do courts consider under Section 263(3) of the CA 2006?

A

Factors include the shareholder’s good faith, importance of the claim to the company, alternative remedies, and the potential for the claim to be pursued personally.

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13
Q

What alternative remedy is often considered instead of derivative claims?

A

An unfair prejudice petition under Section 994 of the CA 2006.

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14
Q

How does the good faith requirement influence the court’s decision on derivative claims?

A

Courts assess the claimant’s motives, refusing claims if they appear driven by personal interests rather than the company’s benefit.

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15
Q

What happens if shareholders ratify a director’s conduct in question?

A

Ratification may bar a derivative claim unless the ratification itself was improper.

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16
Q

How did Mission Capital plc v Sinclair (2008) interpret Section 263(2)?

A

The court denied permission, ruling that a reasonable director acting under Section 172 would not pursue the claim.

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17
Q

What issue arose in Franbar Holdings v Patel (2008) concerning alternative remedies?

A

The court denied the derivative claim, suggesting that a contractual dispute or unfair prejudice petition was more appropriate.

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18
Q

What did Stimpson v Southern Landlords Association (2010) reveal about the good faith requirement?

A

The claim was refused because the claimant’s motivations were personal, focusing on retaining control over the company.

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19
Q

Can derivative claims and Section 994 unfair prejudice petitions proceed simultaneously?

A

Yes, as shown in Phillips v Fryer (2012), if they address different aspects of shareholder rights and governance.

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20
Q

What are multiple derivative claims?

A

Claims brought by a shareholder in a parent company on behalf of a subsidiary within the corporate group.

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21
Q

What case clarified the scope of multiple derivative claims?

A

Universal Project Management Services Ltd v Fort Gilkicker Ltd (2013).

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22
Q

What mandatory bar focuses on good faith under Section 263(2)?

A

The court must refuse claims if a director acting in good faith would not pursue the action.

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23
Q

What discretionary factor under Section 263(3) considers alternative remedies?

A

Whether the shareholder could more effectively address their grievance through a remedy like an unfair prejudice petition.

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24
Q

How do derivative claims promote corporate governance?

A

They hold directors accountable and provide minority shareholders a mechanism to address misconduct.

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25
How does the two-stage permission process safeguard against frivolous claims?
It ensures unmeritorious claims are filtered out early while requiring rigorous evidence at the second stage.
26
What is the importance of Foss v Harbottle (1843) in derivative claims?
It established the foundation for company autonomy and majority rule, limiting individual shareholder actions.
27
How does the reflective loss doctrine affect shareholder claims?
It bars claims for losses reflective of the company’s losses to prevent duplicative litigation.
28
What does Section 260 of the CA 2006 cover?
It defines derivative claims and outlines the grounds and scope for bringing such claims.
29
How does the CA 2006 balance shareholder empowerment and company autonomy?
By allowing derivative claims with safeguards to ensure they are in the company’s best interest and not abusive.
30
How did Iesini v Westrip Holdings Ltd (2009) clarify the prima facie stage of derivative claims?
The court emphasized that claimants need only demonstrate a prima facie case to proceed to the second stage.
31
What is the role of Section 263(2) in derivative claims?
It sets mandatory bars, such as refusing permission if a director acting in good faith under Section 172 would not pursue the claim or if the act was ratified by the company.
32
What did the court decide in Stimpson v Southern Landlords Association (2010) regarding good faith?
The court refused the derivative claim because the claimant’s motivation was personal rather than for the company’s benefit.
33
How does Section 263(3) guide courts in discretionary decisions about derivative claims?
It provides factors like the importance of the claim, shareholder good faith, alternative remedies, and the overall benefit to the company.
34
Why is Mission Capital plc v Sinclair (2008) significant for derivative claims?
It illustrated the court's discretion in refusing claims under Section 263(2) when a director acting in good faith would not pursue the action.
35
What are the practical implications of Section 260’s inclusion of shadow directors in derivative claims?
Shareholders can bring claims against individuals influencing the company’s actions without formal board membership.
36
How did Franbar Holdings v Patel (2008) clarify the relationship between derivative claims and unfair prejudice petitions?
It established that courts may prioritize alternative remedies if they better address the claimant’s grievances.
37
What principle was upheld in Universal Project Management Services Ltd v Fort Gilkicker Ltd (2013) regarding multiple derivative claims?
Courts permit these claims if a parent company shareholder has no other recourse for wrongdoing affecting a subsidiary.
38
How does Section 263(3) factor in the company’s decision-making?
If the company decides not to pursue the claim or ratifies the conduct in question, courts may refuse permission for a derivative claim.
39
What role does the prima facie stage play in the derivative claim process?
It ensures claimants present sufficient initial evidence, preventing unmeritorious claims from proceeding to the full permission hearing.
40
How does the reflective loss doctrine interact with derivative claims?
It prevents shareholders from claiming personal losses when the company itself has the right to recover those losses.
41
What is the effect of ratification on derivative claims?
Ratification by shareholders can bar a derivative claim unless the ratification itself was improperly obtained.
42
Why is Phillips v Fryer (2012) significant for simultaneous derivative claims and unfair prejudice petitions?
It established that both claims can proceed if they address distinct shareholder and governance issues.
43
How does Section 260 of the CA 2006 expand the scope of derivative claims compared to common law?
It allows claims for negligence or breach of trust without requiring fraud or wrongdoer control.
44
What did Rolled Steel Ltd v British Steel Corp (1986) clarify about ultra vires acts?
It emphasized that directors exceeding their powers could still bind the company, exposing directors to liability.
45
How do multiple derivative claims address wrongdoing in subsidiaries?
They enable parent company shareholders to bring claims when the subsidiary itself cannot act due to wrongdoer control.
46
What happens if a shareholder brings a derivative claim in bad faith?
Courts will typically dismiss the claim, as shown in Stimpson v Southern Landlords Association (2010).
47
How does the Companies Act 2006 reduce barriers to derivative claims?
It removes complex common law requirements and provides a statutory framework with a clear two-stage permission process.
48
What does Section 263 require when assessing the good faith of the shareholder bringing a claim?
Courts examine the claimant’s motives to ensure the action is genuinely for the company’s benefit.
49
How did Iesini v Westrip Holdings Ltd (2009) shape the interpretation of a prima facie case?
It highlighted that evidence at this stage need only show sufficient merit to warrant further consideration.
50
What is the importance of Prudential Assurance v Newman Industries (1982) in shareholder litigation?
It established the reflective loss doctrine, barring shareholders from personal claims duplicating company losses.
51
Why might a court suggest pursuing an unfair prejudice petition instead of a derivative claim?
Because it may provide a more direct remedy for shareholder grievances, as in Franbar Holdings v Patel (2008).
52
What safeguards does the two-stage process under the CA 2006 provide?
It ensures claims are filtered for merit while protecting the company from unnecessary litigation costs.
53
How does Section 263(3) address claims that might not benefit the company?
Courts can deny permission if the claim is insignificant to the company’s overall success or stability.
54
What distinguishes derivative claims from personal shareholder actions?
Derivative claims are brought on behalf of the company for breaches of duty, while personal actions address individual shareholder rights.
55
What precedent did Sevilleja v Marex Financial Ltd (2020) establish for creditors and shareholders?
It confirmed that the reflective loss doctrine applies only to shareholder claims, not those of other creditors.
56
Why is good faith essential in derivative claims?
It ensures the shareholder’s motivations align with the company’s interests, preventing misuse of the derivative claim mechanism.
57
What is the primary purpose of Section 260 derivative claims?
To enable shareholders to address serious misconduct when the company is under the control of wrongdoers.
58
What happens if the company ratifies an act central to a derivative claim?
The claim is typically barred unless the ratification process was flawed or improper.
59
How does Section 263 balance corporate autonomy and shareholder rights?
By allowing derivative claims with safeguards to respect majority rule and protect the company from frivolous actions.
60
What principle did Foss v Harbottle (1843) establish for corporate governance?
It reinforced the majority rule, limiting individual shareholder intervention in company management.
61
How does Section 263 ensure alternative remedies are considered before allowing derivative claims?
The court evaluates whether unfair prejudice petitions, contractual claims, or other mechanisms could better resolve the issue.
62
Why are shadow directors included in derivative claims under Section 260 of the CA 2006?
To ensure individuals who exercise significant control without formal appointment are held accountable for breaches of duty.
63
What does the principle of reflective loss prevent in shareholder claims?
It prevents shareholders from pursuing personal claims for losses that mirror the company’s losses, preserving the company’s role as the proper claimant.
64
How does the prima facie stage in derivative claims protect companies?
It filters out weak claims early, reducing costs and disruption for the company.
65
How did Universal Project Management Services Ltd v Fort Gilkicker Ltd (2013) address multiple derivative claims?
It upheld that these claims are permissible when a subsidiary’s wrongdoing impacts the parent company’s shareholders.
66
What does Section 263(2) say about ratified actions in derivative claims?
If the company has ratified the conduct in question, the court must refuse permission for the claim.
67
How does Phillips v Fryer (2012) illustrate flexibility in derivative claims and Section 994 petitions?
It confirmed both actions could proceed if they address separate but related corporate and shareholder issues.
68
How did the reflective loss doctrine evolve in Sevilleja v Marex Financial Ltd (2020)?
It clarified that the doctrine only applies to shareholder claims, not creditors’ claims.
69
What is the role of directors’ fiduciary duties in derivative claims?
Breaches of fiduciary duties, such as loyalty and care, often form the basis for derivative claims under Section 260.
70
How does the good faith presumption in Section 263 influence court decisions?
The court assumes the shareholder acts in the company’s interest unless evidence proves personal motives or ulterior agendas.
71
What does the Turquand rule imply for derivative claims?
While the rule protects outsiders assuming proper governance, internal breaches of duty still justify derivative claims.
72
How did Iesini v Westrip Holdings Ltd (2009) define the prima facie burden of proof?
It emphasized that claimants must present sufficient evidence of a potential claim without requiring detailed company defense at this stage.
73
Why is ratification significant in derivative claims?
It demonstrates the company’s consent, barring claims unless the ratification was invalid or improperly obtained.
74
What is the relevance of ultra vires acts in derivative claims under CA 2006?
While the ultra vires doctrine is largely abolished, directors exceeding powers internally may still face derivative claims for breach of duty.
75
How does the court assess the “importance of the claim” under Section 263(3)?
By evaluating whether the claim materially benefits the company’s financial or reputational standing.
76
What happens if the company has declined to pursue a claim?
Courts may deny permission for a derivative claim under Section 263 if the company’s decision appears reasonable and made in good faith.
77
How does Section 260 simplify the process for derivative claims?
It removes complex common law requirements like fraud on the minority, focusing instead on the statutory framework.
78
What safeguards prevent misuse of derivative claims?
The two-stage permission process, mandatory and discretionary bars, and the good faith requirement ensure claims serve corporate rather than personal interests.
79
How does the reflective loss doctrine preserve company autonomy?
By ensuring only the company can recover for losses reflective of its own losses.
80
What is a derivative claim under Section 263?
A derivative claim under Section 263 is permissible if the company’s decision appears reasonable and made in good faith.
81
How does the reflective loss doctrine preserve company autonomy?
By ensuring only the company can recover for losses it has suffered, avoiding duplicative claims by shareholders.
82
How did Mission Capital plc v Sinclair (2008) clarify the role of Section 172 in derivative claims?
It held that claims must align with what a reasonable director acting in good faith would pursue.
83
Why are shadow directors treated the same as formal directors in derivative claims?
To address situations where non-appointed individuals exert significant control, ensuring accountability.
84
How does the requirement for shareholder good faith protect companies?
It prevents claims driven by personal grievances or power struggles.
85
What is the role of Section 994 unfair prejudice petitions in corporate governance?
They offer an alternative to derivative claims by addressing broader shareholder grievances.
86
What does Section 263(3) require when evaluating shareholder motives?
Courts assess whether the claim is genuinely in the company’s best interests or intended for personal advantage.
87
How does the two-stage process benefit the company?
It reduces costs by allowing only meritorious claims to proceed to full hearings.
88
How does Foss v Harbottle (1843) limit shareholder intervention?
By establishing the company as the proper claimant, preventing individual shareholders from acting unless specific exceptions apply.
89
What impact did Universal Project Management Services Ltd v Fort Gilkicker Ltd (2013) have on derivative claims?
It reinforced the availability of multiple derivative claims to address wrongdoing in corporate groups.
90
How do statutory derivative claims differ from common law claims?
Statutory claims focus on breaches of duty without requiring fraud or wrongdoer control, unlike common law claims.
91
What is the purpose of Section 260 in shareholder litigation?
To provide a statutory mechanism for addressing serious misconduct when the company fails to act.
92
How did Franbar Holdings v Patel (2008) influence the court’s discretion in derivative claims?
It highlighted that courts could prioritize alternative remedies if they are better suited to the situation.
93
How does the court evaluate whether a derivative claim aligns with Section 172?
The court considers whether pursuing the claim aligns with a reasonable director’s duty to promote the company’s success under Section 172.
94
Why are multiple derivative claims significant in group structures?
They allow parent company shareholders to address wrongdoing in subsidiaries where the parent company fails to act, ensuring accountability across corporate groups.
95
What is the significance of Stimpson v Southern Landlords Association (2010) regarding good faith?
It reinforced that personal motives disqualify claims, emphasizing the importance of acting in the company’s interest.
96
How does the reflective loss doctrine ensure fairness in derivative claims?
It avoids duplicative recoveries by limiting shareholders to derivative actions when the company itself has suffered the loss.
97
What role does the two-stage permission process play in controlling frivolous claims?
It filters out meritless claims at the prima facie stage, saving time and resources for the company and the courts.
98
What does Section 263(3) consider regarding the effect of claims on the company?
The court examines whether pursuing the claim would materially benefit the company or its reputation.
99
Why did Mission Capital plc v Sinclair (2008) deny permission for a derivative claim?
The court concluded that a reasonable director acting in good faith under Section 172 would not pursue the claim.
100
How does the ratification of a director’s actions impact derivative claims?
Ratified actions may bar claims unless the ratification was obtained improperly or involved a breach of duty.
101
How does the CA 2006 address breaches of fiduciary duties by shadow directors?
Shadow directors are explicitly included under Section 260, holding them accountable for breaches of duty.
102
What impact does Iesini v Westrip Holdings Ltd (2009) have on the evidentiary burden for derivative claims?
It clarified that claimants need only establish a prima facie case at the initial stage, reducing the burden of proof early in the process.

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