Derivative Action

Proper Claimant

The claimant must be a shareholder. He need not have a significant shareholding. He need not be a shareholder of long standing. It appears that the court may allow a shareholder to take action, even if the claimant has become a shareholder in order to take action.

The claimant shareholder must establish that he possesses the legal standing to bring a derivative action. He must establish a prima facie case that the action falls within the exceptions to the rule in Foss v Harbottle. Generally, this will require that there has been fraud on the minority.

The shareholder does not claim in his own name for his own loss. He claims in the company’s name for the company’s loss. It follows that any sum recovered goes to the company. However, the costs are for the account of the company, provided that the action has been given prior approval by the court.


Convening an EGM  I

Before taking the application, the shareholders must generally attempt to have a shareholders meeting convened, in order to resolve that the company take action against the directors/ controllers. If they are willing to cause the company to take action, then the derivative action is unnecessary.

The court at the preliminary application may direct that a meeting of members shall take place/ It may give directions as to the convening and conduct of the meeting and for the reporting to the court of the proceedings at the meeting.


Convening an EGM II

In some cases, it will be clear that the directors/ controllers will not approve the taking of action. The requirement to convene a general meeting may not be required where it would be obviously futile in the circumstances. This may be the case where

  • it can be shown either that the prospective defendant commands the majority of the votes so that it would be absurd to call the meeting; or
  • it can be shown that there has been a general meeting substantially approving of what has been done; or
  • it can be shown from the acts of the company as a company, distinguished from the mere acts of the directors of it, that they have approved of what has been done, and have allowed a long time to elapse without interfering so that they do not intend

Control

The derivative action requires that the controlling shareholders are unwilling to take the requisite action against the defendant directors / shareholder because they are in control of the company. The courts formerly adopted a conservative approach to ‘control’, usually requiring that the defendants control a majority of the voting shares.

The courts now take a more flexible approach. If the alleged “wrongdoers” are ineffective control, this will suffice. What constitutes “control” must be determined in a common-sense way in the context of the relevant facts and company structure.

What is meant by ‘control’ embraces a broad spectrum extending from an overall absolute majority of votes at one end to a majority of votes at the other end made up of those likely to be cast by the defendant plus those voting with him as a result of influence or apathy.


Prior Consent

The minority shareholder, who seeks to bring a derivative action must obtain the prior leave (consent) of the court in a preliminary application made on notice of motion on affidavit. The application must be supported by an opinion of counsel as to whether there is a reasonable case or not. The court may, if he thinks fit, approve the continuance of the proceedings until the close of pleadings, or until after discovery or until trial.

The court may require notice to be given to one or two of the other minority shareholders – as representatives of the rest – so as to see if there is any reasonable objection.

The courts have indicated that the preliminary application should be simple and inexpensive and should not be allowed to escalate into a minor trial. The court should simply ask is there a reasonable case for the minority shareholder to bring at the expense (eventually) of the company? If so it may be allowed to proceed.

The courts may allow a claimant to amend his pleadings and claim if it is in substance, a derivative action.


Application for Leave

An application for leave to commence a derivative action is made by an originating application in which is sought:

  • the leave of the court to commence the derivative action;
  • where relevant, an order requiring the company to indemnify the applicant in respect of the whole or part of the costs and expenses reasonably incurred by the applicant in conducting the derivative action (including any costs for which the applicant may be made liable in such action), and
  • any interim relief of an urgent nature.

The application must be supported by an affidavit setting out:

  • the nature and extent of the evidence available to support the applicant’s claim to be entitled to bring the intended derivative action;
  • the nature and extent of the evidence available to support the applicant’s assertion that the company is entitled to make the claim to which the intended derivative action relates;
  • the basis of the deponent’s belief as to the existence of the facts or circumstances;
  • the efforts, if any, made by the applicant to cause the company to prosecute the claim concerned;
  • the basis on which it is alleged that it is reasonable and prudent in the interests of the company that the applicant be given leave to commence the intended derivative action;
  • evidence, where available, of the views of members other than the applicant;
  • an opinion of counsel as to whether the applicant has a realistic prospect of success in the intended derivative action; and
  • a draft of any statement of claim, in the intended derivative action.

Preliminary Hearing

On the return date of the originating application (or on any adjournment from such date), the court may, in addition to any other order it may make:

  • direct service of notice of the application on any other member or another person, including mode of service and the time allowed for such service (and the court may for that purpose adjourn the hearing or further hearing of the application to a date specified);
  • give directions as to the filing and delivery of any further affidavits;
  • make such orders and give such directions (including a direction that a meeting of members take place) as it considers appropriate for the purpose of ascertaining the views of members whose interest in the subject matter of the proposed derivative action is independent of that of the applicant and the respondent.

The respondent who has been served with the originating application and who intends to oppose the application may file a replying affidavit setting out his grounds of opposition and verifying any facts or circumstances relied on. The applicant may file a further affidavit replying to any matter verified in an affidavit of a respondent, in which event a copy of that affidavit shall be served upon the respondent before the return date of the Originating application.

A member may apply for leave to defend on behalf of a company a claim or a counterclaim against such company, and the above provisions, with the necessary modifications, apply to the application.


Further Directions

Where the court has directed that a meeting of members shall take place, it may give directions as to the convening and conduct of the meeting and for the reporting to the court of the proceedings at the meeting.

It may give a direction that the application be determined by way of plenary hearing, where the application is likely to involve a substantial dispute of fact, or it is otherwise necessary or desirable in the interests of justice. It may give directions as to the furnishing by the parties to the Court and delivery of written submissions.

It may give directions as to the publication of notice of the hearing of the application and the giving of notice in advance of such hearing to any person other than a party to the proceedings who desires to be heard at the hearing of the application.

The court may hear and determine any application for relief of an interlocutory nature, whether in the nature of an injunction or otherwise. Save where the court otherwise directs, any evidence in proceedings to which this rule relates shall be given on affidavit.


Prima Facie Case

In order to be permitted to bring a derivative action, the shareholder must establish a prima facie case that the company is entitled to the relief and that the action falls within the boundaries of the exception to the general principle that the company is the proper shareholder, the rule in Foss v Harbottle.

The court may determine the preliminary issue as to whether the case potentially falls within the exceptions to the general principle, by establishing that there is a presumptive or prima facie case of “fraud”.

An order made on an application may:

  • give leave to commence a derivative action on such terms or conditions as the Court sees fit to impose;
  • give leave to continue a derivative action only until the close of pleadings, the completion of discovery, or some other specified step in the proceedings or until a specified date, and require a further application for leave to continue the derivative action beyond that step or date;
  • require the company for the benefit of which a derivative action is allowed to be brought to indemnify the applicant in respect of the whole or part of costs and expenses reasonably incurred by the applicant in conducting the derivative action (including any costs for which the applicant may be made liable in such action);
  • order that the derivative action may not be discontinued or compromised without the leave of the Court;
  • give such directions and include such orders for the conduct of the proceedings on the derivative action as appear convenient for the determination of those proceedings in a manner which is just, expeditious and likely to minimise the costs of those proceedings.

Conversion of Claim

Where a claim which might be the subject of a derivative action arises in proceedings pending before the Court, the above provisions with necessary modifications, apply to such a claim. An application for consent is brought by motion on notice in the pending proceedings, and the Court may make any order it considers just:

  • dispensing with any requirement of this rule, where it considers it appropriate to do so having regard to the proceedings had in the pending proceedings; or
  • as to the hearing of the application.

An application for an order that the applicant be given conduct of proceedings and continue those proceedings as a derivative action is made by motion on notice in the proceedings concerned. The motion is grounded on an affidavit which shall:

  • set out the grounds on which the applicant claims that the proceedings should continue as a derivative action, and verify any facts and circumstances relied on in that regard; and
  • set out the nature and extent of the evidence available to support the applicant’s claim to be a proper person to continue the proceedings as a derivative action.

Costs I

The minority shareholder, being an agent acting on behalf of the company, is entitled to be indemnified by the company against all costs and expenses reasonably incurred by him in the course of the agency. This indemnity does not arise out of a contract express or implied, but on principles of equity. It is analogous to the trustee’s indemnity to which a trustee is.

If the action succeeds, the whole benefit will go to the company. Therefore, the minority shareholder should be indemnified against the costs he incurs on its behalf. If the action succeeds, the wrongdoing director will be ordered to pay the costs, but if they are not recovered from him, they should be paid by the company.


Costs II

Assuming that the minority shareholder had reasonable grounds for bringing the action – that it was a reasonable and prudent course to take in the interests of the company, it is reasonable that he should not be liable to pay the costs of the other side. It is reasoned that the company itself should be liable because he was acting for it and not for himself.

The claimant should be indemnified by the company in respect of his own costs even if the action fails. This is on the basis that he who would take the benefit of the claim if it succeeds, ought also to bear the burden if it fails.


References and Sources

Primary References

 

Companies Act 2014 (Irish Statute Book)

Companies Act 2014: An Annotation (2015) Conroy

Law of Companies 4th Ed.  (2016)   Ch.11  Courtney

Keane on Company Law 5th Ed. (2016)  Ch.26 Hutchinson

Other Irish Sources

Tables of Origins & Destinations Companies Act 2014 (2016) Bloomsbury

Introduction to Irish Company Law    4th Ed. (2015) Callanan

Bloomsbury’s Guide to the Companies Act 2015      Courtney & Ors

Company Law in Ireland 2nd Ed. (2015) Thuillier

Pre-2014 Legislation Editions

Modern Irish Company Law   2nd Ed. (2001) Ellis

Cases & Materials Company Law 2nd Ed. (1998) Forde

Company Law 4th Ed. (2008)  Forde & Kennedy

Corporations & Partnerships in Ireland (2010) Lynch-Fannon & Cuddihy

Companies Acts 1963-2012   (2012)  MacCann & Courtney

Constitutional Rights of Companies   (2007)  O’Neill

Court Applications Under the Companies Act (2013) Samad

Shorter Guides

Company Law – Nutshell 3rd Ed. (2013) McConville

Questions & Answers on Company Law (2008)        McGrath, N & Murphy

Make That Grade Irish Company Law 5th Ed. (2015) Murphy

Company Law BELR Series (2015)   O’Mahony

UK Sources

Companies Act 2006 (UK) (Legilsation.gov.uk)

Statute books Blackstone’s statutes on company law (OUP)

Gower Principles of Modern Company Law 10th Ed. (2016) P. and S. Worthington

Company Law in Context 2nd Ed. (2012) D Kershaw

Company Law (9th Ed.) OUP (2016) J Lowry and A Dignam

Cases and Materials in Company law 11th Ed (2016) Sealy and Worthington

 

UK Practitioners Services

Tolley’s Company Law Handbook

Palmer’s Company Law