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1. Definition in the common law and The approach to reform
Despite the existence of these exceptions there have been continued calls for reform of this area of law on the basis that the exceptions are too narrow and hinder shareholder litigation. Hence the reforms for derivative claim are inevitable trend. To appreciate the scope of the new statutory derivative claim, it is useful to consider the process of the reforms and the expectation of its architects. First of all, the Law Commission acknowledged that the derivative procedure should be rationalized and modernized, especially, in an age of increasing globalization of investment and growing interest in corporate governance greater transparency in the requirements for a derivative claim is highly desirable. The extensive inquiry by the English Law Commission resulted in recommendations to abolish the rule in Foss v. Harbottle and its exceptions. The Law Commission therefore recommended a new form of derivative procedure should replace more or less the existing derivative procedure ‘with more modern, flexible, and accessible criteria for determining whether a shareholder can pursue the action.’ The final expectation is finding speedy, fair, and cost-effective mechanisms for resolving disputes between minority shareholders and those running companies without breaching the balance of power between members and managers.
J Poole and P Roberts did recognize that there is evident show that the Law Commission was intent to satisfy the need to achieve a balance between the ability of the company to function effectively on a day-to-day basis, without the unreasonable interference of challenges from members in one hand, and the other hand is the requirement to protect minority shareholders and enhance shareholder confidence by providing shareholders effective remedies to against wrongdoer.
In terms of procedure, the rules of the court still govern the new derivation claim. It is obviously that the basis of the claim would be spelt out in a new statutory provision in the Act. Nevertheless, ‘The Report opposed any definitive criteria for granting leave on the basis that there is a danger that they would be incomplete and would not fit the situations of each case.’ Actually, the court should take into account all the relevant circumstances without limit. It is unsurprisingly that this approach could easily be seen as maintaining a policy of not favoring derivative claims. If the rules would like to cover any single case, this approach will become a signal of an over-restrictive approach to shareholders.
Then the Company Law Review Steering Group (CLRSG), established to manage the DTI’s review, agreed the recommendations of the law Commission . At the same time, it agreed that the derivative claim should be put on a statutory basis, restricted to breaches of director’s duties, including the duty of care and skill. The CLRSG endorsed that the law on ratification should be modernized and simplified. It was proposed that the new companies’ legislation will extent the scope and practicability of the new derivation claim after the reforms. Where a wrong had not been lawfully ratified, the court still has discretion to consider all the circumstances in determining whether a derivative claim should proceed.
