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, they had the director return all monies received through his breach of duty, before removing him from office and disqualifying him for five years.

Following our successful action, we restructured 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 the nominee shareholder structure. Clearly the director acted in conflict, with no power to do so under the company’s articles.

The nature of a derivative claim

A group of minority shareholders sought our advice. We brought a derivative claim on behalf of the company against the director for his clear breach of duty. We included various third parties into the claim as defendants since they assisted the director with his breach of duty.

Our arguments and the director’s defence

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 company members supported the claim. However, 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’s view on the minority shareholders’ rights

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.

Protecting minority shareholders

Hence, 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.

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.