Derivative Claims UK: Shareholder Actions Explained
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A derivative action is one of the more unusual tools in company law. It lets a shareholder step forward and bring a claim in the name of the company itself, usually against a director who has breached their duties. The shareholder does not win damages personally, any remedy flows back to the company.
That makes these claims distinct from ordinary civil litigation and from unfair prejudice petitions, which are often confused with them. This page walks through how derivative claims work in England and Wales, what the court looks for before granting permission, the procedural stages involved, and the practical considerations shareholders should weigh up before starting down this road.
It is written for shareholders, company secretaries, and anyone trying to understand whether a derivative claim might fit their circumstances.
Overview
A derivative claim is a legal action brought by a shareholder on behalf of the company, seeking a remedy for wrongs done to the company rather than to the shareholder personally. The rationale is straightforward: where directors or officers have acted in breach of their duties, the company itself is usually the proper claimant.
But if those same directors control the company, they are unlikely to authorise the company to sue itself or its own board. The derivative action solves that problem by allowing a shareholder to stand in the company's shoes, with the court's permission.
In England and Wales, derivative claims are governed by Part 11 of the Companies Act 2006, which put the procedure on a statutory footing and replaced the older common law rule in Foss v Harbottle. The statutory framework covers claims against directors for negligence, default, breach of duty, and breach of trust.
It also extends to certain claims against third parties who have been involved in such wrongdoing. Any damages or other remedy awarded go to the company, not the shareholder bringing the action.
Key steps
- Confirm you have standing to bring the claim. You need to be a registered member of the company at the time you issue the claim. Beneficial owners holding shares through a nominee do not qualify in their own name. Check the register of members, and if you hold through a broker or nominee, consider whether the shares can be transferred into your name first.
- Identify the cause of action clearly. A derivative claim must be based on an actual or proposed act or omission involving negligence, default, breach of duty, or breach of trust by a director. Gather the evidence that supports this, board minutes, contracts, correspondence, accounts, and anything showing the director's conduct and the loss caused to the company.
- Apply to the court for permission to continue the claim. After issuing the claim form, you must apply for permission. The court considers the application in two stages: first, whether you have a prima facie case on the papers alone, and second, a fuller hearing where the company can respond. Without permission, the claim cannot proceed.
- Satisfy the court on the statutory factors. The judge will weigh whether you are acting in good faith, whether a hypothetical director acting properly would pursue the claim, whether the conduct has been authorised or ratified by the company, and the views of independent shareholders. Be ready to address each of these factors with evidence, not assertion.
- Progress the litigation to trial or settlement. Once permission is granted, the claim proceeds like any other High Court matter, with pleadings, disclosure, witness statements, and eventually trial. Any settlement also needs court scrutiny because the claim belongs to the company. Costs orders can favour the shareholder if the claim is properly brought.
Common questions
Q Who actually benefits from a successful derivative claim?
The company does, not the shareholder who brought the claim. If the court orders damages, compensation, or an account of profits, that money goes to the company. The shareholder only benefits indirectly, through any resulting improvement in the value of their shares. This is why derivative claims are different from personal actions and from unfair prejudice petitions, where a shareholder may be bought out.
Q What is the difference between a derivative claim and an unfair prejudice petition?
A derivative claim remedies a wrong done to the company and any recovery goes to the company. An unfair prejudice petition under section 994 of the Companies Act 2006 is a personal remedy for a shareholder whose interests have been unfairly prejudiced, often resulting in the other shareholders being ordered to buy them out. They address different problems and the choice between them matters a great deal.
Q Can I bring a derivative claim against someone who is not a director?
The statutory regime primarily targets directors, including shadow and de facto directors. Claims can also reach third parties who have assisted a director's breach or knowingly received company assets. The scope is narrower than it sounds, and the court will scrutinise any attempt to bring in defendants who are not directors. Specialist input is usually needed to frame the claim correctly.
Q Who pays the legal costs?
Initially the shareholder funds the litigation, but the court can make an indemnity costs order requiring the company to cover the shareholder's reasonable costs, win or lose. This is a significant protection, though it is not automatic and usually needs to be argued for at or after the permission stage. Litigation funding and after-the-event insurance are also sometimes used.
Q What does ratification mean and how does it affect the claim?
Shareholders can, in some circumstances, ratify a director's breach by passing a resolution approving the conduct. If the conduct has been validly ratified, the court must refuse permission to continue the derivative claim. There are limits, a director cannot ratify their own wrongdoing by voting their shares, and fraud on the minority generally cannot be ratified at all.
Q How long do derivative claims typically take?
They are rarely quick. The permission stage alone can take months, and a contested trial often runs one to two years from issue, sometimes longer. Disclosure in these cases tends to be heavy because the company's internal records are central. Shareholders considering this route should plan for a substantial commitment of time, attention, and legal cost.
Q Are derivative claims common in private companies?
They are more common in private companies than in listed ones, simply because minority shareholders in close companies often have fewer alternative remedies. Even so, they are not frequent. Most disputes between shareholders and directors are resolved through negotiation, unfair prejudice petitions, or buyout arrangements rather than full derivative litigation.
Sources
This guide is based on primary UK law and official guidance.
- LegislationCompanies Act 2006, Part 11 (Derivative Claims)legislation.gov.uk
- Guidance · HMCTSCivil Procedure Rules, Part 19 (Parties and Group Litigation)justice.gov.uk
- Guidance · Companies HouseCompanies Housegov.uk
Legal disclaimer
This article is for general information only. It is a tool to help you find your way — not legal advice, and not a substitute for speaking to a qualified adviser about your situation.