Foss V Harbottle Case Analysis

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A derivative claim is a claim by a member of a company in respect of a cause of action vested in the company and seeking relief on behalf of the company and was established as an exception to the rule in Foss v Harbottle. The derivative action protects the minority shareholders by allowing them to bring an action on behalf of the company (after they got a leave from the court) where the company itself was not pursuing because the wrongdoers were in control and preventing it from initiating an action against them. They seem to be given an opportunity to ‘stand up’ to preserve their interest indirectly and seek the justice for the company as a whole. By bringing this corporate remedy, they may remain as a member of the company and they have a possibility of having an indemnity for cost (as in the judgment of Wallersteiner v Moir (No 2) : the court may order the company to pay the plaintiff’s cost as the benefit of a successful derivative claim will accrue to the company and only indirectly to the plaintiff as a member of the company).
Discussion on sections 260-264
Sections 260-264 of Companies Act 2006 (the Act) can be considered as ‘new regime’ for regulating derivative actions supersedes the common law derivative action. Under the Act, a derivative action may be brought only under statute , by any member , against any director (including former and shadow directors) and other persons implicated in the breach , former directors are included and/or in respect of negligence, default, breach of duty and breach of trust by a director of the company.
The Act allows negligence as the sole ground unlike common law which required the claimant to establish ‘fraud’ even if negligence existed. It is believed that the ‘d...

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...ust make an allegation of negligence”. It seems too easy for the shareholder to bring the action without knowing their hidden agenda. Second, the courts will be more involved with companies' internal management as they are given the full power of giving permission on a derivative action. Besides that, the filtering process is a time-consuming and will affect the interest of the company. Third, even after the prima facie case has been proven, the court must dismiss the claim if it falls under section 263(2). Lastly, when it regards to the court’s discretion whether to allow the claim to proceed, the court has to spend more time to analyze the requirement of good faith, various combinations of interest within the company as a whole, the views of the independent members, the ratification analysis and accordingly shifting away to the nature of the wrongdoing itself.

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