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What is the primary purpose of derivative proceedings?
What is the primary purpose of derivative proceedings?
What is a common ground for initiating derivative proceedings?
What is a common ground for initiating derivative proceedings?
Which legal case established the rule in Foss v Harbottle?
Which legal case established the rule in Foss v Harbottle?
What does the proper claimant principle state?
What does the proper claimant principle state?
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Under what condition can individuals pursue claims despite the majority rule principle?
Under what condition can individuals pursue claims despite the majority rule principle?
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What is NOT a ground that would typically warrant derivative proceedings?
What is NOT a ground that would typically warrant derivative proceedings?
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In which scenario might a company NOT take action against its directors?
In which scenario might a company NOT take action against its directors?
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Which of the following best describes the term 'ultra vires'?
Which of the following best describes the term 'ultra vires'?
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What happens to any sums recovered as a result of derivative proceedings?
What happens to any sums recovered as a result of derivative proceedings?
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Which principle states that a corporation cannot take action against a majority-approved transaction?
Which principle states that a corporation cannot take action against a majority-approved transaction?
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What must a person have in order to bring a derivative claim under the Companies Act 2006?
What must a person have in order to bring a derivative claim under the Companies Act 2006?
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Which of the following is NOT a condition under the mandatory test for derivative proceedings?
Which of the following is NOT a condition under the mandatory test for derivative proceedings?
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What is a key element the discretionary test considers when evaluating a derivative proceeding?
What is a key element the discretionary test considers when evaluating a derivative proceeding?
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If a derivative proceeding does not proceed due to court discretion, which of the following is a valid reason?
If a derivative proceeding does not proceed due to court discretion, which of the following is a valid reason?
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Under which section of the Companies Act 2006 can one find procedures related to derivative claims in Scotland?
Under which section of the Companies Act 2006 can one find procedures related to derivative claims in Scotland?
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In the case that ratification occurs regarding a director's conduct amounting to negligence, which section governs this?
In the case that ratification occurs regarding a director's conduct amounting to negligence, which section governs this?
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What is required from a member before a derivative proceeding can be initiated, according to the prima facie test?
What is required from a member before a derivative proceeding can be initiated, according to the prima facie test?
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Which of the following individuals may NOT bring a derivative claim against a director?
Which of the following individuals may NOT bring a derivative claim against a director?
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What does a Wallensteiner order allow a company to do in response to derivative proceedings?
What does a Wallensteiner order allow a company to do in response to derivative proceedings?
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Which of the following scenarios would prevent a derivative proceeding from being permitted?
Which of the following scenarios would prevent a derivative proceeding from being permitted?
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The sole purpose of derivative proceedings is to benefit individual shareholders financially.
The sole purpose of derivative proceedings is to benefit individual shareholders financially.
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A shareholder can initiate derivative proceedings even if the company’s management is fully in agreement.
A shareholder can initiate derivative proceedings even if the company’s management is fully in agreement.
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A common ground for petitioning derivative proceedings is justifiable loss of confidence in the company’s management.
A common ground for petitioning derivative proceedings is justifiable loss of confidence in the company’s management.
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The majority rule principle allows individual shareholders to challenge majority-approved transactions regularly.
The majority rule principle allows individual shareholders to challenge majority-approved transactions regularly.
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Derivative proceedings can lead to recovery sums being awarded directly to individual shareholders.
Derivative proceedings can lead to recovery sums being awarded directly to individual shareholders.
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The rule in Foss v Harbottle allows shareholders to act independently against the company’s management.
The rule in Foss v Harbottle allows shareholders to act independently against the company’s management.
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Fraud is a valid ground for initiating derivative proceedings.
Fraud is a valid ground for initiating derivative proceedings.
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The exceptions to the rule in Foss v Harbottle include ultra vires transactions.
The exceptions to the rule in Foss v Harbottle include ultra vires transactions.
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Shareholders can bring derivative claims for personal infringements of their rights when those infringements do not affect the company’s welfare.
Shareholders can bring derivative claims for personal infringements of their rights when those infringements do not affect the company’s welfare.
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Derivative proceedings originated from equitable principles.
Derivative proceedings originated from equitable principles.
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A derivative claim can be brought against any former member of the company regardless of when the cause of action arose.
A derivative claim can be brought against any former member of the company regardless of when the cause of action arose.
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Permission from the court is required in Scotland to raise derivative proceedings after the claim has been initiated.
Permission from the court is required in Scotland to raise derivative proceedings after the claim has been initiated.
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If the court is satisfied that the claim is likely to be continued by a person acting in accordance with s172, permission for the derivative claim must be granted.
If the court is satisfied that the claim is likely to be continued by a person acting in accordance with s172, permission for the derivative claim must be granted.
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Derivative proceedings must be brought by at least two shareholders of the company for them to be valid.
Derivative proceedings must be brought by at least two shareholders of the company for them to be valid.
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A derivative claim can arise from an act or omission that is still to occur, provided it has been authorized by the company.
A derivative claim can arise from an act or omission that is still to occur, provided it has been authorized by the company.
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Compensation awarded from derivative proceedings goes directly to the pursuing member who initiated the claim.
Compensation awarded from derivative proceedings goes directly to the pursuing member who initiated the claim.
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The discretionary test for derivative proceedings assesses whether the member is acting in bad faith.
The discretionary test for derivative proceedings assesses whether the member is acting in bad faith.
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In England, a shareholder must seek leave from the court to continue a derivative claim after it has been initiated.
In England, a shareholder must seek leave from the court to continue a derivative claim after it has been initiated.
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The prima facie test ensures there is a valid claim before proceeding with derivative actions.
The prima facie test ensures there is a valid claim before proceeding with derivative actions.
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If a director's actions have been ratified by the company, derivative proceedings are still permissible.
If a director's actions have been ratified by the company, derivative proceedings are still permissible.
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Study Notes
Shareholder Protection: Derivative Proceedings
- Derivative proceedings allow shareholders to sue on behalf of the company, seeking remedies for corporate wrongs. Any recovery goes to the company, not the shareholder.
Common Grounds for Derivative Proceedings
- Failed commercial purpose of the company
- Fraudulent activities
- Deadlock within the company
- Loss of confidence in management
- Exclusion from management
Historical Basis (Common Law)
- Foss v Harbottle: The company itself is the proper claimant in most cases of corporate wrongs.
- Proper claimant principle: The company should take action against wrongdoers. However, if insiders control the company's actions, there may be difficulty in the company taking action.
- Majority rule principle: No individual shareholder can bring an action for a corporate issue that could be decided by a simple majority vote.
Exceptions to Foss v Harbottle
- Transactions requiring special majorities
- Ultra vires (beyond the company's powers) or illegal transactions
- Personal claims of shareholders (e.g., infringements of voting rights)
- Fraud on minority shareholders (requires fraud, wrongdoers controlling, a majority of non-controlled shareholders agreeing, clean hands, and proper corporate purpose)
- Common law derivative actions are complex.
Statutory Derivative Proceedings (Companies Act 2006)
- Statutory procedure: Companies Act 2006, Part 11, sections 260-269 provide a streamlined process for England and Wales / Scotland.
- England: Shareholders can initiate claims but need court permission to continue.
- Scotland: Court permission is needed to initiate and continue a claim.
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Eligibility: Claims must involve director negligence, default, breach of duty, or breach of trust. Applies to former and shadow directors as well.
- Only current shareholders can bring the action. Former members are excluded.
Example Scenarios
- Jane, Bob, and Carol: Alex, a shareholder, can bring a derivative action against Jane and Bob if they breached duty and caused company loss.
- Alex joining after the scheme: Alex can still pursue the derivative action if he joined after discovery but before the full financial loss is realized.
- Sam joining: Since Sam is a former shareholder, they cannot join Alex's action.
Stages of Derivative Proceedings
- Stage 1 (Prima Facie Test): Does the applicant have a valid claim? If not, the action ends. A passing score lets the court demand evidence from the company.
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Stage 2 (Mandatory Test): Are any of the conditions in s263(2)/268(1) met?
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If 'no director test', or action authorized or ratified by the company, the action ends.
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If not met, go to stage 3.
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Stage 3 (Discretionary Test): Consider factors like shareholder good faith, company's decision not to pursue, the possibility of separate recourse, etc.
- Permission to continue or refusal to continue.
Mandatory Test (s263(2)/268(1))
- The shareholder's action wouldn't be pursued by a director in accordance with their duty.
- The cause of action is (or was) authorized or ratified by the company.
Discretionary Test (s263(4)/268(3))
- Consider the shareholder's good faith.
- Company's likely stance.
- If the claim is for a future act, would the company authorize (or ratify) it.
- If the act has occurred, has it likely been authorized or ratified by the company?
- Has the company decided not to pursue the claim?
- Could the member pursue the same cause of action in their own right without derivate claim?
- Shareholder seeking court approval will need to provide evidence of the view of non-interested members of the company
Costs & Financial Considerations
- Compensation: Awards go to the company, but shareholders can recover legal costs.
- Indemnity (Wallensteiner Order): The company may have to indemnify shareholder's costs if they have a reasonable claim.
- Scotland (Wishart v Castlecroft): Similar principles for costs.
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Description
This quiz explores the concept of derivative proceedings in corporate law, allowing shareholders to sue on behalf of their company. It covers common grounds for such proceedings, the historical basis from landmark cases like Foss v Harbottle, and exceptions to established principles. Test your knowledge of shareholder rights and remedies available in corporate governance.
