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UK plans to liberalize scope for derivative suits

Daniel Lightman in The Times (U.K.):

"This Court," declared Lord Eldon in 1817, �is not to be required on each Occasion to take the Management of every Playhouse and Brewhouse in the Kingdom.� Lord Eldon reflected the judiciary�s reluctance to interfere with a company�s internal management.

But some critics contend that the Companies Bill now going through Parliament will lead to more lawsuits against directors � so requiring the courts to become more involved in disputes over the internal management of business ventures. The Bill, they say, will deter people from becoming board members. ...

Critics of the Bill have two main concerns: first, the statutory derivative claim will apply to a broader range of conduct than is now possible at common law, since it applies to any breach of duty or negligence, even if the act or omission has not benefited the director and he or she has acted in good faith. The scope of directors� duties is itself widened by the Bill, which puts them on a statutory footing for the first time. Clause 173 imposes on the directors a duty �to promote the success of the company for the benefit of its members as a whole�. They are specifically required to have regard to (among other matters) the interests of the company�s employees, the impact of the company�s operations on the community and the environment, and the desirability of the company maintaining a reputation for high standards of business conduct.

The second concern is that defendants will cut deals in settlement that benefit those who sued but not the shareholders or corporation as a whole. That does sound familiar, doesn't it? On the other hand, backers of the pending bill say it prescribes tight judicial control to prevent unmeritorious claims from going forward -- an improvement, perhaps, over the American model of freewheeling derivative litigation.



Rafael Mangual
Project Manager,
Legal Policy

Katherine Lazarski
Manhattan Institute


Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.