Shareholders: More power to sue directors for negligence 

Disgruntled shareholders in Northern Rock and other troubled British Companies looking to pin blame on senior management will receive a boost next month with the introduction of new laws making it easier to sue individual company directors.

The changes – part of last year’s controversial Companies Act that take effect on October 1 – remove several significant barriers that previously have made suing individual directors of British businesses almost impossible in the absence of fraud.

The new laws allow small shareholders to sue directors for negligence based on things that they have done – or failed to do – without having to prove that the individuals have benefited directly or that they had committed fraud.  Lawyers believe that the Act makes shareholder lawsuits even more likely because it also widens the scope of directors’ duties.  Boards that previously were limited to considering the needs of a company and its shareholders will, from next month, be obliged to consider the company’s impact on new factors, including the “environment” and the “local community” – vague requirements that lawyers say are ripe for test cases until their meaning is refined in court.

Despite their new powers, Michael Todd, QC, of Erskine Chambers, said that shareholders would be prevented from bringing spurious lawsuits because the Act contains “an inbuilt defence mechanism to discourage frivolous claims”.  This includes the need for all lawsuits to be approved by a senior judge before they can proceed.

The new rules introduce so-called “derivative actions”, through which shareholders can sue individual board members on behalf of the company itself.  Any compensation awarded will be paid to the company directly from directors’ own pockets.  The changes also enable shareholders to sue former directors of companies – an option previously available only if a business was in liquidation.

“The Times”: 24.9.07