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Derivative Claims Under the Companies Act 2006: Much Ado About Nothing?


Arad Reisberg


University College London - Faculty of Laws


RATIONALITY IN COMPANY LAW: ESSAYS IN HONOUR OF DD PRENTICE, J. Armour, J. Payne, eds., Hart Publishing, 2009
University College London Law Research Paper No. 09-02

Abstract:     
Whether and, if so, in what circumstances a shareholder should be able to bring an action on behalf of his company (ie a derivative action) is an important aspect of the current debate in the UK, and other jurisdictions, about corporate governance.

This article analyses recent reforms of the derivative claim in the UK. The genesis of the reforms in this area can be traced back to the period between 1995 and 1997 when the English Law Commission conducted an extensive inquiry into shareholder remedies These reforms have been further appraised and amplified through the deliberations of the Company Law Review Steering Group between 1998 and 2001. It was then endorsed by the Government and finally implemented by the Companies Act 2006, not before being modified at almost each stage of its passage.

Recent reforms and modernisation of company law is part of a drive to facilitate enterprise and enhance the attractiveness of the UK as a location in which to do business. The reforms of derivative claims are, naturally, part of this wider drive. The article focuses on those areas that are particularly relevant to the question of whether the new legal framework relating to derivative claims is likely to promote these goals. Received wisdom would say that a favourable corporate legal environment should offer: (1) easy access to the corporate form; (2) minimum interference with management, and (3) appropriate investor protection. The last two features are at the heart of any rules which govern derivative actions. This is because the challenge is to steer a middle course between excessive reliance on a litigation remedy and judicial recourse for the shareholders on the one hand, and unreasonable interference in the affairs of the company on the other hand. Put differently, there is an interaction between managerial freedom and investor protection. Managers can be expected to accept interventionist rules designed to protect investors so long as the loss of autonomy is outweighed by the greater availability of capital or reduction of its cost that results from the boost to investor confidence attributable to those rules. The task for those charged with the role of drawing up a competitive corporate regulatory product for an individual state is thus to strike the right balance between managerial freedom and investor protection. So a key question here is: On the basis of the new framework, how well has the UK Government done in setting this balance in the context of derivative claims?

The article begins by highlighting the deficiencies in the common law, the approach to reform and the guiding principles for resolving the problems identified (section 2). Section 3 analyses the new statutory derivative claim introduced by the Companies Act 2006. It discusses the scope of the new derivative claim and the procedural framework for the application for leave. Section 4 critically assesses recent reforms, looking in particular at major possible obstacles, drawing on recent experience in foreign jurisdictions in which the derivative claim has been put on a statutory footing. This analysis is meant to bring the reader forward to see the impact (in cost/benefit terms) of reforms in what proved to be a rather contentious area of reform. The discussion is also geared towards providing the reader with critical tools to assess the likely impact of these reforms. Finally, section 5 draws some conclusions.

Number of Pages in PDF File: 53

JEL Classification: G34, G38, K41, K22

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Date posted: February 15, 2008 ; Last revised: September 28, 2008

Suggested Citation

Reisberg, Arad, Derivative Claims Under the Companies Act 2006: Much Ado About Nothing?. RATIONALITY IN COMPANY LAW: ESSAYS IN HONOUR OF DD PRENTICE, J. Armour, J. Payne, eds., Hart Publishing, 2009; University College London Law Research Paper No. 09-02. Available at SSRN: http://ssrn.com/abstract=1092629

Contact Information

Arad Reisberg (Contact Author)
University College London - Faculty of Laws ( email )
London WC1E OEG
United Kingdom
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