The current common law principle is that a shareholder cannot bring an action on behalf of the company for a wrong done to the company. The company is the injured party and therefore any right of action rests in the company. Moreover, the court will not intervene in the internal management of a company acting within its powers. There are limited exceptions to this rule. A shareholder may, for example, bring a claim in the name of the company (a “derivative claim”) where an illegal act has occurred which cannot be ratified by the company, or where the company is controlled by the wrongdoers, leading to a fraud on the minority of shareholders.

The Act establishes a statutory derivative claim procedure to replace and expand upon the common law. Shareholders may only bring claims arising from an actual or proposed act or omission involving negligence, default, breach of duty or breach of trust by a director of the company. Those claims may be brought against a third party as well as against the director himself.

Once proceedings have been issued, the claimant shareholder must apply to court for permission to continue the claim. The claim will be dismissed unless the application and evidence filed by the shareholder establish a prima facie case. If the application is not dismissed, the court may give directions as to the evidence to be provided by the company and may adjourn the proceedings to enable that evidence to be obtained.

Where a claim is brought by the company or a derivative claim is brought by a shareholder, but is then discontinued, a shareholder may apply to the court for permission to continue the action as a derivative claim.

Permission to bring a derivative claim must be refused if the court is satisfied:

The report makes abundantly clear how the Commission intends for complaints to be dealt with in future and what it intends to do about it if they are not! Trusts are encouraged to:

		That a person acting in accordance with a duty to promote the success of the company would not seek to continue the claim; or
		If the act or omission complained of has been authorised or ratified by the company

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In considering whether to give permission, the court must take into account in particular:

		Whether the shareholder is acting in good faith;
		The importance which a person acting in accordance with the duty to promote the company’s success would attach to the claim;
		Whether the act or omission complained of is likely to be authorised or ratified by the company;
		Whether the company has decided not to pursue the claim;
		Whether the act or omission complained of gives rise to a course of action that the shareholder could pursue in his own right rather than on behalf of the company.

It has been suggested that these provisions provide an invitation for litigation. Certainly it seems likely that, when they come into force, there will be claims brought by disgruntled or campaigning shareholders on the basis of alleged breaches by directors of their codified duties. Concern was expressed during the Parliamentary debates on the Bill that allowing derivative claims against third parties may have a potentially very wide application. However, the intention is that they will only be permitted in very narrow circumstances (e.g. a third party’s knowing assistance in a breach of trust committed by a director). Safeguards have been introduced to deter tactical litigation - the applicant must show a prima facie case from the outset of the claim, and the views of shareholders of the company who have no interest in the matter are to be taken into account by the court when considering whether to give permission for the claim to proceed. Inevitably, however, it will be necessary to await judgment in the first claims brought under these provisions in order properly to assess their impact.

In the meantime, company boards may wish to consider the implications that codification of directors’ duties will have on directors’ and officers’ liability insurance. Particular care should be taken to ensure that such policies extend to the defence of derivative claims.