In light of the apparent push for increased shareholder activism and the positive results it mostly brings, the question arises: is there still a place for the traditional shareholder remedies?
It is really a question of timing. The value of activism (for both company and shareholders) lies in its early deployment to stop proposed activities or encourage others. Once any perceived harm has been done (or is about to be done regardless of shareholder objections), the only option for shareholders who do not simply wish to sell and cut their losses may be to look for a remedy in litigation. For example, where there is negligent misrepresentation on the part of the board, it is to be expected that shareholders will still choose to seek redress in court.
Under the Companies Act 2006, shareholders may seek to bring a derivative action against the board on behalf of the company, for breach of the duties owed by the directors to the company. The key distinction under English law, as compared with the regime in the US, is that such a claim, although initiated by shareholders, is brought in the name of the company and on its behalf. This means that the company will also be the recipient of any damages award. In contrast, US securities class actions present shareholders with an opportunity to recover substantial damages for their own account.
Derivative claims can only be brought with the prior permission of the Court and, even then, in limited circumstances. Under section 263(2) (a) of the UK Companies Act 2006, the Court must refuse permission to continue with a derivative action where it considers a notional director acting to promote the success of the company would not seek to continue it. In Mission Capital plc and another,7 the court refused permission for shareholders to continue with the claim because it deemed that such a hypothetical director would not seek to continue the claim as they would be unlikely to attach much importance to it, and the alleged damage suffered was speculative.
An alternative remedy under the Companies Act 2006 is for shareholders to petition the court for relief under section 994, where they can demonstrate that the company is being run in a manner unfairly prejudicial to them, or an actual or proposed act or omission would prejudice their interest.
In practice, this tends to be a minority shareholder remedy; majority shareholders are not barred from bringing such petitions, but they will not successfully demonstrate to the Court that any prejudice is unfair where (by their majority) the prejudicial state of affairs could be easily rectified.
As with any litigation, costs are a key consideration. When contrasted with the position in the US, the lack of shareholders seeking collective redress by way of derivative action in England and Wales is easily explained. Not only will shareholders bringing such a claim under English law not retain the damages award for themselves, they must also fund the litigation, unless they can obtain a court order for a costs indemity from the company.
Under English rules on costs, shareholders also run the risk of an adverse costs order against them should they fail to achieve a successful outcome at trial, meaning they may have to contribute substantially to the defendants’ costs (to the extent they have not obtained ATE insurance to cover all or part of this potential liability). In contrast, parties in the US generally meet their own costs.
For those companies with dual listings in the UK and the US, there is the added risk that, in certain circumstances, shareholders on both sides of the Atlantic may launch an action, meaning they must contend with parallel class action / group litigation in two jurisdictions. Indeed, the supermarket Tesco is currently facing just such a challenge.