Are double derivative actions preserved?

Are double derivative actions preserved?

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Author: Adam Dowdney

In UPMS v Fort Gilkicker the High Court had to decide whether common law recognises the concept of double derivative actions and if so, whether they survived the coming into force of the Companies Act 2006.

The single derivative action is a long standing principle of English company law. It was established by common law as an exception to the harsh rule in Foss v Harbottle that only the company itself had locus standi to bring an action in the company's name. That meant that no action could be taken against directors where those directors controlled the company, or could veto action on the company's part against themselves.

Common law also evolved the derivative action principle to confer a right of action upon persons with the closest sufficient interest, allowing them to bring a claim on the company's behalf - the so-called "double derivative" action.

This was seen as essential to protect minority shareholders, those with a 'locked' 50/50 shareholding and other interested parties who would otherwise be unable to take advantage of the derivative mechanism. It was a development which enabled the courts to deter wrongdoing and serve the interests of justice.

In this case, UPMS was a co-owner with Mr Pearce of an LLP which itself owned all of the shares in Fort Gilkicker Limited (the company). Dr Frischmann (F) and Mr Pearce (P) were the only directors of the company.

F wished to sue P for allegedly acting in breach of his fiduciary duty to the company to the company's detriment. F was unable to use his holding via UPMS or his directorship of the company to bring a derivative action under the Companies Act.

F therefore pursued a double derivative action but it was argued for P that the Companies Act 2006 undermined the entire double derivative principle. It was said that Part 11 codified the existing law regarding derivative actions, and that its provisions applied to all proceedings "by a member company".

Mr Justice Briggs confirmed that the Companies Act 2006 does not however restrict multiple derivative actions, of which double derivative actions is a sub-species. Parliament had intended to and had indeed codified the single derivative action but had not done so in relation to multiple derivative actions.

Double derivative actions therefore continue to be available to members of corporate shareholders when the shareholder itself cannot or will not take action for wrongs done to companies further down the chain.

Perhaps one lesson from this case is that a well drafted shareholders agreement might have set out what the parties could or could not do and the matter might have been settled by pursuing normal contractual remedies.