What is a derivative action?

  • A derivative action is a lawsuit brought by a stakeholder, on behalf of the organization, against the directors, management or other shareholders of the organization.
  • This type of suit often arises when there is fraud, mismanagement, self-dealing and/or dishonesty which are being ignored by the organization’s directors and officers.
  • In effect, the suing stakeholder claims to be acting on behalf of the company, because the directors and management are failing to exercise their authority for the benefit of the company and all of its shareholders.
  • At common law, the principle is that where a wrong is done to it, only the company as a distinct entity in law may sue for damages. This right does not extend to shareholders and other entities.
  • In a move away from the common law position, s165 of the Companies Act (2008) gives interested parties the right to initiate legal action on behalf of the company where the company has suffered loss or damage.
  • A significant difference between the old Companies Act (1973) and the new Companies Act (2008) is that the ambit of interested parties who can bring an action on behalf of the company has been expanded from just the shareholders to include directors, officers and trade unions.
Directors and Officers Liability