Derivative Claims

Requirements to Obtain Permission: What You Need to Prove

To get permission from the court to bring a derivative claim you must first show that you have a prima facie case against the defendants. 

In the case of  ClientEarth v Shell plc the court decided that the claimant had not proved that there was a prima facie case against the directors of Shell as defendants. 

In that case the court said that although the burden of proof was not a high one and that the court’s purpose at this stage, was only to exclude cases without any merit at all, nevertheless the court should adopt a critical approach and even at this early stage there is an obligation on the claimant to provide sufficient evidence to prove there is indeed a prima facie case. 

If you pass the prima facie test the matter then proceeds to a hearing at which the court will consider the application for permission based on the following two further tests as set out in Section 263 of the Companies Act 2006.

First, the court must refuse permission if it is satisfied that: 

1. a person acting in accordance with CA 2006, s 172 (the duty to promote the success of the company) would not continue the claim 
2. The action concerns a future action that has been authorised by the relevant decision making body of the company, or 
3. The action concerns a past act that was authorised by the relevant decision making body prior to its being carried out or ratified after it was carried out 

Then and only if these thresholds are passed, the court go on to make a decision and in doing so ‘must’ take into account a number of factors including the following: 

1. whether the claimant is acting in good faith 
2. The importance that a person acting in accordance with the duty to promote the success of the company would attach to continuing the claim 
3. Whether the act that is the subject of the action is likely to be authorised or ratified in the future by the company 
4. Whether, if a past act or omission, it could be, and in the circumstances would be likely to be, ratified by the company 
5. Whether the company has decided not to pursue the claim 
6. Whether the cause of action could be pursued by the claimant in their own right rather than on behalf of the company 

If the above tests are passed and permission is granted, the claim proceeds as if the company is the claimant, but the shareholder of the company bringing the action has control of it.