Holding Company Shareholders Can Bring Derivative Action, Rules Court
In certain circumstances, a company can take action against a third party which causes it to suffer a loss and, if it is in the interests of the company, a competent director will seek to recover the loss for the company by setting a claim in train. The claim would be made by the company, because a company is a legal person in its own right, independent of the directors and shareholders.
However, there may well be circumstances in which the directors do not initiate the appropriate action. In such cases, if the directors refuse to do what should be done, it may be sensible for a ‘derivative action’ to be undertaken by the shareholders. Their right to do so stems from the fact that they are the ultimate owners of the company and thus will ultimately bear any loss.
Prior to the passage of the Companies Act 2006, the right to bring a derivative action was a common law right. The Act, however, defined more closely the circumstances in which a derivative action may be taken. It limits the right, in effect, to members (shareholders) of a company. This seems sensible enough, but the issue gets complicated when a group structure is involved. For example, is a minority shareholder of a holding company able to take an action in order to right a wrong done to a subsidiary in which the shareholder has no direct stake?
In a recent case, the High Court had to consider this problem. It involved a property development funded by two men through a group structure with an LLP at its top. The property was being purchased from the local council by a subsidiary of the LLP by way of an option. The two men fell out over the project when one of them lost confidence in the architect they were using. The dissenting developer was on holiday when the option needed to continue the development had to be exercised. His co-developer formed a new company with a similar name (and wholly owned by him) and it exercised the option with the council. The company which previously held the option estimated that a loss of several million pounds may have resulted.
After an extensive analysis of the applicable law, Mr Justice Briggs concluded ‘with some relief’ that the minority shareholders could bring a claim in such circumstances and that, where applicable, the same rights extend to members of LLPs.
Joint ventures are common in property deals and the use of group structures, with or without an LLP being involved, is also commonplace. This case will give reassurance to those using such structures that a right to seek redress in similar circumstances has not been inadvertently removed by the 2006 Act.
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Universal Project Management Services Ltd. v Fort Gilkicker Ltd. and Others [2013] EWHC 348 (Ch).