Derivative Claim Company Law: Everything You Need to Know
A derivative claim company law is a legal action taken against a company's directors by a corporate shareholder.3 min read
A derivative claim company law is a legal action taken against a company's directors by a corporate shareholder.
Introduction of Derivative Actions
The idea that the wishes of the majority shareholders should take precedence in managing a company and choosing its contracts is part of the foundation of company law. As a result, the current common law structure establishes a way in which troubled shareholders can legally dispute the shareholders' majority vote in court. This type of lawsuit is called a derivative action.
Furthermore, Section 212 of the Companies Acts 2014 establishes a legal remedy for any outnumbered shareholders to dispute votes made by the rest of the shareholders.
Definition of Derivative Actions
A legal complaint brought against a corporate individual or group by a shareholder for failure to manage is known as a derivative action. The corporate individual or group being sued could be any or all of the following:
- Corporate directors
- Upper management
- Other shareholders
Essentially, the shareholder filing suit argues that he or she is acting in the corporation's best interest due to decisions made by directors, management, and/or other shareholders that were not beneficial to the business or the entirety of its shareholders. Typically, this action takes place when fraud, poor management, or a lack of integrity is being disregarded by a corporation's management and board of directors.
In establishing a derivative action, the outnumbered shareholder represents the shareholders as a whole in seeking to right any poor decisions made by the bulk of the company's shareholders.
Differences Between Direct and Derivative Claims
Shareholders of a corporation have a unique obligation to the company. Since they own a small share or fraction of the corporation, they have the ability to make decisions that could affect the company, such as bringing legal actions against it.
There are two common types of legal actions that are brought against corporations:
- Direct claims
- Derivative claims
Direct claims pertain to the lawful dues of each separate shareholder. Under this type of claim, a shareholder uses his or her name to bring a lawsuit against a corporation for failing to adhere to its legal duties. The goal of this type of action is justice for any misfortune brought upon the shareholder caused by the corporation's disregard for its legal responsibilities.
Usually, a direct claim is used by shareholders belonging to a smaller corporation who believe that the majority of the shareholders are treating them discriminately. Specifically, the shareholder filing the claim is aiming to right the wrongs of the board of directors or majority shareholders that personally harmed him or her.
Actions that could bring about a direct claim include the following:
- Failure to adhere to legal duties
In contrast, derivative claims are technically brought about by the corporation rather than an individual shareholder. Under this type of claim, the shareholder is filing the suit with the corporation's best interests in mind. He or she is acting as a type of legal agent for the company because management is unwilling or failing to play that role.
Therefore, the purpose of a derivative claim is to receive recompense for failure to adhere to legal duties that are owed to the corporation. Any recompense paid as a result is for the corporation rather than the shareholder acting as its legal agent.
In a derivative action, the shareholder filing the suit is called the "plaintiff," and the corporation is called the "nominal defendant," meaning that the company is the real plaintiff. The shareholder is then entrusted to act in the best interests of the corporation and its shareholders concerning the derivative action. This action provides shareholders with the ability to act when management is either failing to do its duty or acting in a way that is wrong or harmful to the corporation.
Additionally, a derivative claim can be helpful in revealing intercompany fraud or any other type of failure to act responsibly throughout the company. A derivative claim is especially important when the corporate fraud is deep within the company and upper management might be the cause of it.
Another purpose for a derivative claim is to bring suit against shareholders for an illegal sale of corporate stock made by most of the shareholders.
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