The derivative claim: A check on corporate power

MOST business people understand that directors owe duties to the companies they manage. Fewer appreciate what happens when those duties are breached and the company itself refuses to act.

In a well-governed company, the board would investigate the wrongdoing and, where necessary, commence legal proceedings. However, corporate reality is not always so straightforward. Sometimes the very individuals who are alleged to have engaged in misconduct are the persons who control the company’s decision-making processes. In such circumstances, the company may never authorise proceedings against them.

Recognising this problem, section 212 of the Companies Act provides a powerful remedy known as a derivative action. This mechanism enables a shareholder to bring proceedings in the name and on behalf of the company where those in control refuse to do so. It is one of the most important corporate governance safeguards available under modern company law.