Minority shareholders derivative claim

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Gannons brought a derivative claim for minority shareholders against a sole director who breached his fiduciary duty.

Our clients were minority shareholders of a recruitment company operating in the natural resources sector. Its clients are UK and offshore energy providers. The director was an employee, but not a company shareholder.

Actions we took

We enabled the minority shareholders to hold the director accountable for his breach of fiduciary duty. As a result, the director had to return all monies received through his breach of duty, before removing him from office and he was disqualified as a director for 5 years.

Following the derivative claim, we advised our clients on restructuring the company to give minority shareholders the right to appoint a company director and increased the shareholders’ control over board decisions.

Director’s breach of duty

The director liaised with the company’s clients and placed candidates into roles. The company expected a commission fee for each role he filled. However, the director received commission fees from offshore clients, which didn’t appear in the company’s accounts. Over time, these commission fees amounted to a substantial figure.

The director was also a shareholder in a number of offshore clients. He masked his ownership using a nominee shareholder structure. Clearly the director acted in conflict, with no power to do so under the company’s articles.

Derivative claim

Key aspects of derivative claims are that :-

  • they are statutory claims under section 260 of the Companies Act made against directors for breach of statutory and/or common law director duties ;
  • derivative claims must be made by the company itself and not shareholders;
  • as directors generally have day to day control of running a company and derivative claims are made against directors by the company, such claims are unusual in that they are instigated by shareholder action in the name of the company.
  • Specific permission is required from the court to pursue a derivative claim after the claim has been issued at court. The court will need to decide whether the claim is in the best interests of the company and made in good faith or whether the motive for bringing the claim is based on other shareholder motives.

In our case our clients brought the derivative claim against 1 director but included various 3rd parties into the claim as defendants since they assisted the director with his breach of duty.

Result of the derivative claim

We proved to the court, at the permission stage, that:

The claim benefited the company – we first showed the benefit of pursuing the claims outweighed any risks or detriment to the company. If the breach of duty continued, the company would lose its reputation, lose clients, and reduce the confidence of referrers.

The claim was not personal – Other shareholders also supported the claim even though the majority did not want to pursue the director. Nevertheless, a minority did. We asked the court to take the view that the majority would consider the minority claim to be for the company’s benefit and not for a personal or other motive.

The director’s defence – the director argued the offshore clients were his personal contacts, not the company’s contacts. Hence his commission fees should not accrue to the company.

The court held that the benefit did accrue to the company. The director received commission fees from onshore clients for which he accounted to the company. Therefore, the director had full knowledge and understanding of his role and a duty to account to the company for fees received from certain offshore clients.

Remedies after successful derivative claim

The court awarded the company damages payable by the director to the company, that included the commission payments he had obtained. The court then removed the director from office and his position as an employee. The court also granted the minority shareholders an indemnity for their costs, paid by the company, once the company received the commission fees, i.e there was no direct loss to the company.

Understanding the practical issues

This case shows how derivative claims work in practice. If the director’s breach had become public knowledge, and the company had not acted, the company would have lost clients and revenue.

Instead, our commercial experience, and appropriate legal arguments, recovered the profits that were lost due to the director’s breach of duty.

If you need advice on derivative claims, please do get in contact, we are experienced in this area.

John Deane is a partner in the commercial team at Gannons. Derivative claims are complex in their nature, but with the right legal approach, can be successful. If action is not taken, then the damage can often be irreparable. Please do not hesitate to get in touch with John if we can assist. 

 

  • Without the support of the strong team I would never have resolved my problems. They were clear in their advice and quick in dealing with the matter.