Derivative Claims Flashcards
What is the purpose of derivative claims?
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.
What principle underpins derivative claims and was established in Foss v Harbottle (1843)?
The principle that the proper claimant for a wrong done to a company is the company itself, supporting majority rule and internal management.
What are the key exceptions to the rule in Foss v Harbottle?
Exceptions include ultra vires acts, illegal actions, fraud on the minority, and infringements of personal rights.
What is the reflective loss doctrine?
The principle that shareholders cannot claim for losses reflective of the company’s losses, as clarified in Prudential Assurance v Newman Industries (1982).
How did Sevilleja v Marex Financial Ltd (2020) refine the reflective loss doctrine?
It limited the doctrine to shareholder claims, excluding claims by other creditors.
Under which section of the Companies Act 2006 are statutory derivative claims defined?
Section 260.
What breaches can form the basis of a statutory derivative claim under the CA 2006?
Breaches of duty, negligence, breach of trust, or default by directors.
How does the statutory framework under the CA 2006 improve upon the common law approach to derivative claims?
It removes the need to prove fraud on the minority or wrongdoer control, making claims more accessible.
What is the first stage in the two-stage permission process for derivative claims?
The claimant must establish a prima facie case based solely on their evidence, without company involvement.
What happens during the second stage of the derivative claim process?
The court assesses evidence from both parties and applies factors under Section 263 to determine whether the claim should proceed.
What are the mandatory bars to derivative claims under Section 263(2) of the CA 2006?
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.
What discretionary factors do courts consider under Section 263(3) of the CA 2006?
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.
What alternative remedy is often considered instead of derivative claims?
An unfair prejudice petition under Section 994 of the CA 2006.
How does the good faith requirement influence the court’s decision on derivative claims?
Courts assess the claimant’s motives, refusing claims if they appear driven by personal interests rather than the company’s benefit.
What happens if shareholders ratify a director’s conduct in question?
Ratification may bar a derivative claim unless the ratification itself was improper.
How did Mission Capital plc v Sinclair (2008) interpret Section 263(2)?
The court denied permission, ruling that a reasonable director acting under Section 172 would not pursue the claim.
What issue arose in Franbar Holdings v Patel (2008) concerning alternative remedies?
The court denied the derivative claim, suggesting that a contractual dispute or unfair prejudice petition was more appropriate.
What did Stimpson v Southern Landlords Association (2010) reveal about the good faith requirement?
The claim was refused because the claimant’s motivations were personal, focusing on retaining control over the company.
Can derivative claims and Section 994 unfair prejudice petitions proceed simultaneously?
Yes, as shown in Phillips v Fryer (2012), if they address different aspects of shareholder rights and governance.
What are multiple derivative claims?
Claims brought by a shareholder in a parent company on behalf of a subsidiary within the corporate group.
What case clarified the scope of multiple derivative claims?
Universal Project Management Services Ltd v Fort Gilkicker Ltd (2013).
What mandatory bar focuses on good faith under Section 263(2)?
The court must refuse claims if a director acting in good faith would not pursue the action.
What discretionary factor under Section 263(3) considers alternative remedies?
Whether the shareholder could more effectively address their grievance through a remedy like an unfair prejudice petition.
How do derivative claims promote corporate governance?
They hold directors accountable and provide minority shareholders a mechanism to address misconduct.
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.
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.
How does the reflective loss doctrine affect shareholder claims?
It bars claims for losses reflective of the company’s losses to prevent duplicative litigation.
What does Section 260 of the CA 2006 cover?
It defines derivative claims and outlines the grounds and scope for bringing such claims.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
