rocedure
Keywords: Derivative claims; Locus standi; Permission to issue
*Comp. Law. 225 The fundamental and well known rule of English law is that only the company and
not its shareholders can maintain proceedings in respect of wrongs done to it. This rule is commonly
referred to as the rule in Foss v Harbottle after the case of that name.1
The foundation of the rule rests first on the principle that the proper plaintiff in an action to vindicate a
wrong to the company is prima facie the company2 and secondly on the principle that the court will not
interfere with the internal management of the company.3 The reasoning behind all of this is that
otherwise there would be a multiplicity of actions, oppressive litigation and the company would risk
ceasing to have control of its corporate destiny. Hence the narrow exceptions developed by case law.
The effect 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 other
problem with the common law rules is that there is a risk that litigation that has been brought may run
the risk of being provoked not by the best interests of the company but by other motives.
These matters have exercised both the Law Commission4 and the Company Law Review5 each of
which recommended some liberalisation in the rules relating to the bringing of derivative actions.
The result of these deliberations are contained in Ch.1 of Pt 11 of the Companies Act 2006. These do
not alter substantially the law as it stands, though some changes are made, but institute a new more
flexible procedure for determining whether a shareholder can pursue an action.
Section 260(2) prevents a derivative claim being brought unless the permission of the court is
obtained to continue it or unless it is brought in pursuance of proceedings for protection of members
against unfair prejudice under s.459 of the Companies Act 1985. Section 260(3) provides that a
derivative claim under the chapter “may be brought only in respect of a cause of action 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” and “[t]he cause of action may be against the director or another
person (or both)”.
The rule in Foss v Harbottle is about locus standi. In that case minority shareholders took an action
against directors in order to compel them to make amends to the company for their fraudulent acts.
The court dismissed that action because the company in general meeting had refused to take any
action against the directors.
Four exceptions to that rule have been recognised at common law:
1) An individual shareholder may always bring an action in respect of an https://www.51lunwen.org/StudentPapers.htmlact which is illegal or ultra
vires the company.
2) A shareholder is entitled to sue where a corporate decision required more than a simple majority of
shareholders and was in fact implemented on a simple majority.
3) A shareholder may sue where there has been a denial of an individual membership right.
4) A shareholder may sue where the majority, who are in control of the company, commit a fraud on
the minority.
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