Multiple derivative actions and LLPs

/ 25 April 2013

David Whiscombe

We’re indebted to our friends at Olephant for an interesting update on derivative actions. Broadly speaking (lawyers must forgive us our over-simplification) a derivative action is a legal procedure by which minority shareholders in a company can undertake a legal action on behalf of and in the name of the company where the company is disinclined to take the action itself. Typically this would be because the company is under the control of the very person whom it could otherwise be expected to sue.

Until 2006 all derivative actions were governed by the common law. Companies Act 2006 introduced a statutory code. But there is a problem, for the statutory code gives a right of action only to an aggrieved shareholder: where the company which has suffered wrong is a subsidiary of a holding company which is also controlled by the alleged wrongdoer, the Act (unlike the old common law) gives no derivative right (a so-called “multiple derivative right”) to any member of the holding company. So did the 2006 Act intend to abolish multiple derivative rights altogether, or to leave them untidily governed by common law alongside the statutory code for ordinary derivative claims?

In a recent case [2013] EWHC 348 (Ch) in which Olephant triumphed, the court observed that neither interpretation was attractive: the first “hardly commends itself as an exercise in justice”; while the second “does not commend itself as an exercise in common sense”. Happily the court plumped for justice over common sense and decided that multiple derivative rights had not been abolished by the 2006 Act but continued as a common law remedy.

Why does all this matter? Well, partly because the case concerned a joint venture company which was owned not directly by the JV partners but by an LLP in which they had equal shares. Such structures are increasingly common, being attractive both for their flexibility and their tax-effectiveness. It is good to be reassured that their use does not cut off the members from this potentially important remedy; and a salutary reminder not to forget how important it is to address the legal aspects of any novel structure.

David Whiscombe


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