Derivative claim—what it is and when to use it
Produced in partnership with Mark Hubbard of New Square Chambers
Derivative claim—what it is and when to use it

The following Dispute Resolution guidance note Produced in partnership with Mark Hubbard of New Square Chambers provides comprehensive and up to date legal information covering:

  • Derivative claim—what it is and when to use it
  • What is a derivative claim?
  • Basis of a derivative claim
  • Key terms in derivative claims
  • The legal basis for bringing a derivative action
  • Standing to bring a derivative claim
  • Companies against whom a derivative claim can be brought
  • Grounds for bringing a derivative claim
  • Relationship between the statutory derivative claim and the common law
  • Examples of derivative claims
  • more

A guide to specific terminology used in this Practice Note is provided—see below.

What is a derivative claim?

A derivative claim (or derivative action) is a claim brought or continued by a shareholder on behalf of the company in relation to a breach of duty by a director. It will usually be used in circumstances when the majority wrongfully prevent the company bringing or proceeding with such a claim itself. The claim is brought for the benefit of the company. This procedure is necessary as a director owes duties to the company and not to the shareholders.

The derivative claim existed at common law for many years, based on the 'fraud on the minority' exception to the rule of majority control identified in Foss v Harbottle—see Lensi v Westrip at paras [73]–[75]. It is now very largely replaced, by the new provisions of Part 11 of Companies Act 2006 (CA 2006) (as applicable to England and Wales and Northern Ireland, CA 2006, ss 260–264).

Note, however, that the common law derivative claim continues to exist in some circumstances not covered by CA 2006, Pt 11, such as a claim in relation to the conduct of the director of a subsidiary company (a 'double derivative claim') or in relation to a Limited Liability Partnership (LLP). See further below, as well as the cases