2.7.5 Suits brought directly by a shareholder

A shareholder whose personal rights are infringed may sue in his own name to enforce his rights. Section 994(1) of the Companies Act 2006 permits shareholders who have been "unfairly prejudiced" by conduct in the company to apply for relief. These cases usually involve improper diversion of assets, which result in too low distribution to shareholders or self-serving conduct in favour of directors. They are actions against the company for an order of relief, which may have consequences for the board to be forced to take action. The possible relief can include dismissal of directors, appointment of other directors, forced transfer of shares. The Neath Rugby Ltd., Hawks v. Cuddy1case is a clear example. This power of the court to give any relief to aggrieved shareholders is comparable with the Dutch Enterprise Chamber powers. The difference is that the Dutch Enterprise Chamber always institutes an inquiry, while the UK courts under this section do not, but the parties do go in depth with their evidence.

Once again, cost factors discourage procedures. The easiest first remedy for shareholders that feel wronged is that they can sell their shares. Especially in the case of public companies it is easy to sell shares on the liquid market. Therefore, petitions by shareholders who feel unfairly prejudiced, would tend to take place more often in the case of private companies. However, in the case of private companies, the courts usually do not uphold them.2

In addition to section 994 of the Companies Act 2006, shareholders in a public company can hardly sue in their own name under UK securities law to recover losses caused by false or misleading corporate disclosures. As mentioned in section 463 of the Companies Act 2006, the risks for the directors are negligible. Section 463 on misleading statements of the Companies Act confirms that directors have no liability towards shareholders and only a liability for fraud towards the company and no liability for mere negligence. Section 90A of the FSMA opens a possibility for liability for fraud towards shareholders, but this is hardly ever applied.3 The UK FSA does work with penalties against companies. UK law lacks a provision analogous to SEC Rule 10b-5, the far-reaching US securities law for material misstatements.

UK directors can become liable to shareholders for "listing particulars" (documents in support of a public offering) that fail to include required information or contain certain misleading disclosures. Section 90 of the FSMA provides for the possibility of bringing a claim for compensation against persons responsible for the listing particulars. Directors fall within the definition of responsible persons, including non-executive directors. A claim under section 90 is analogous to a US claim under § 11 of the Securities Act of 1993. Lawsuits of this sort are, however, virtually unknown in Britain.4 This is due to difficulties associated with organizing class actions. The closest British class action has been the "representative action". However, this is a complicated two-stage procedure. Reforms in 2000 introduced the concept of a "group litigation order" and fuelled speculation that there would be a wave of securities fraud cases. This has not yet occurred. The no win, no fee constraints and the "loser pays" rule discourage these actions. Even if such cases were to become common, the company and the insurer would have the deeper pockets and the directors would be able to rely on the "due diligence" defence.

An important point is that many British public companies (and Dutch as well) have a second listing on an American stock exchange and thus face exposure to US securities class actions. Generally, British and Dutch directors are worried about their US exposure and spend a lot of time and expense meeting the SEC requirements. However, out-of-pocket payments by US outside directors in case of damage claims are also rare for the many reasons described in section 3.7 of this study.