Shareholders now have a statutory right to sue directors in derivative actions. Will they use it? asks Dov Ohrenstein
For over 150 years the rule in Foss v Harbottle (1843) 2 Hare 461 has been a familiar part of the company law landscape. The rule prevents claims by shareholders for reflective losses and provides that if a wrong is done to a company then the company is usually the proper claimant in respect of that wrong. Only in exceptional circumstances, for example where the wrongdoer is a majority shareholder, have minority shareholders been able to obtain the court’s permission to bring a derivative claim on behalf of the company.
The two basic requirements at common law for a derivative action are:
- that the alleged wrong or breach of duty is one that is incapable of being ratified by a simple majority of the members; and
- that the alleged wrongdoers are in control of the company, so that the company, which is the “proper claimant” can not claim by itself.
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