Directors’ Duties and Shareholder Litigation in the Wake of the Financial Crisis

Directors’ Duties and Shareholder Litigation in the Wake of the Financial Crisis

Corporations, Globalisation and the Law series

Joan Loughrey

The financial crisis revealed failings at board level at many financial institutions. But despite calls for bank boards to be held to account, there has been a remarkable paucity of litigation against bank directors for breach of their duties to their institutions. This book assesses whether the law relating to directors’ duties and shareholder litigation has contributed to this, taking into account the changes to both that were introduced by the Companies Act 2006.

Chapter 7: An assessment of the present state of statutory derivative proceedings

Andrew Keay and Joan Loughrey

Subjects: business and management, corporate social responsibility


On 1 October 2007 a significant portion of the Companies Act 2006 (‘the Act’) became operative. Included in the provisions put into force on that day was Part 11 of the Act, which provides for a derivative proceedings regime. Part 11 was enacted in response to the recommendations of both the Law Commission1 and the Scottish Law Commission.2 The regime effectively overhauls the common law position which required a share- holder who wished to bring proceedings to enforce the rights of his or her company to establish an exception to the rule in Foss v Harbottle.3 The rule in Foss provided essentially that if a company was prejudiced in some way it, and it alone, had to bring proceedings against those who had committed the harmful action against it. The shareholders did not have standing to take action. If the wrongdoers were in control of the company, as directors or majority shareholders, usually the company would refrain from taking any legal action, for obvious reasons. Share- holders were left to instituting a derivative action on behalf of their company, and most often shareholders, in bringing such actions, would rely on the ‘fraud on the minority’ exception. This provided that if a shareholder could establish that the action harming the company constituted a fraud on the minority and the wrongdoers controlled the company, he or she would be permitted to take derivative proceedings. The proceedings derived from the rights of the company.

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