Derivative Actions: When can a shareholder sue on behalf of a company?

A derivative action refers to proceedings taken on behalf of a company by a member of that company. The right to issue derivative proceedings is not automatic and instead, leave to commence an action of this type must be granted by the High Court.

In this first article in a series on corporate disputes, we look at the requirements to obtain approval from the court to bring a derivative action, as recently considered by the High Court in Sutton v Salumi Grazing Limited t/a Salumi Grazing & Ors [2025] IEHC 49 (Sutton).

The Rule in Foss v Harbottle

A key cornerstone of company law is the rule in Foss v Harbottle [1843] 2 Hare 461, namely, when a company suffers a legal wrong it is only the company itself which may sue in respect of any resulting damage. This is because a company is deemed to be a separate legal entity, distinct from its shareholders. It is not, therefore, generally open to an individual shareholder to bring proceedings on behalf of the company, where a majority of the members of the company have not chosen to do so.

There are, however, a number of recognised exceptions to this rule. These involve;

• An act which is illegal or ultra vires the company;

• An irregularity in the passing of a resolution which requires a qualified majority;

• An act purporting to abridge or abolish the individual rights of a member; and

• An act which constitutes a fraud against the minority shareholder(s) and the wrongdoers are in control of the company (fraud exception).

As detailed in Glynn v Owen [2007] IEHC 328 (Glynn), a very strong case is required to allow a derivative action to proceed as there is a reluctance for the courts to interfere in the internal management of a company.

Fraud Exception

The most commonly invoked exception is that of fraud against the minority shareholder(s). In Connolly v Seskin Properties Limited [2012] IEHC 332, the High Court found that the onus is on an applicant to establish that a wrong was done to the company at a time when the company was controlled by the alleged wrongdoers and those wrongdoers benefited from the wrongdoing.

It is not necessary to establish fraud in the criminal sense and as held in Crindle Investments v Wymes [1998] 4 IR 567 it has been found to exist in different situations involving “varying degrees of moral turpitude”.

In Sutton, the court was satisfied to grant leave to the applicant shareholder to bring a derivative action in the name of the company against inter alia a fellow director and shareholder, noting that the concept of fraud in this context can include situations where a director is in breach of their fiduciary duty to the company, which in this instance involved alleged misappropriation of the company's business and assets.

In terms of satisfying the court that the alleged wrongdoers were in control of the company, the High Court in Glynn held that what constitutes ‘control’ is to be determined in a common-sense way in the context of the relevant facts and company structure.

In Sutton, the fact the application for leave was brought by a 50% shareholder of a company, which had one other 50% shareholding, did not preclude the application succeeding even though the applicant was not strictly a minority shareholder. As there was no mechanism within the company by way of shareholders agreement or casting vote to break a deadlock,  the court noted that if the applicant brought a resolution for the company to bring a legal action against the other shareholder, the latter could have blocked it by voting against it.

Procedure

Order 15 Rule 39 Rules of the Superior Courts (RSC) sets out the procedure for the application, which is brought by originating Notice of Motion, with the company named as a respondent, and supported by an affidavit detailing inter alia;

• The nature and extent of the evidence supporting the applicant’s entitlement to bring the derivative action and the assertion that the company is entitled to make the claim;

• Any efforts made by the applicant to cause the company to prosecute the claim;

• The basis upon which it is reasonable and prudent in the interests of the company for the claim to proceed;

• Evidence, if available, of the views of the other members of the company;

• An opinion of counsel as to whether there is a realistic prospect of success; and

• A draft of the summons and statement of claim in the intended derivative action.  

Realistic Prospect of Success

In Fanning v Murtagh [2009] 1IR 551, the court emphasised the high bar for an applicant to have locus standi to bring a derivative action, noting that it must establish to the court that there is a realistic prospect of success based on the available evidence at the leave application.

This high threshold was reflected in the subsequently introduced Order 15 Rule 39 RSC,  which includes as a requirement an opinion of counsel on whether an applicant has a realistic prospect of success with the intended derivative action. However, in Sutton,  where the application was brought by a lay litigant, the High Court opined that the constitutional right of access to the courts suggests that it is to be inferred that this rule should not be applied so rigidly as to do an injustice. It granted the application for leave in the absence of an opinion of counsel, finding there to be reasonable prospects of success for the claim that the fellow shareholder, in breach of fiduciary duty, orchestrated the transfer of the company's business to a new entity he controlled.

Court Discretion

As detailed in the Sutton judgment, even if an applicant satisfies the court that the intended action has a realistic prospect of succeeding, the granting of leave is still discretionary and the court can take into account matters such as delay, the views of other minority shareholders, alternative remedies, whether efforts have been made internally to persuade the company to take the action, and whether the proposed litigation is prudent and in the interest of the company and not for some ulterior purpose.

Third Parties

In Sutton, the court held that the landlord who had allegedly unlawfully terminated the company's licence could also be sued as part of the derivate action, even though it was not an ‘insider’ of the company. While it is a requirement for a derivate action based on the fraud exception that there be a wrongdoer who has control of the company and that wrongdoer will, by definition, be an insider, this does not mean that any other person who may have committed a wrong as part of the same events against the company cannot also be sued as part of the same case.

Court Powers

In addition to granting leave to commence a derivative action, the court, at this point, can also require the company to indemnify the applicant in respect of costs reasonably incurred in conducting the derivative action. It can also order that the action not be discontinued or compromised without further leave of the court and it can give directions for the conduct of the proceedings in a manner which is just, expeditious and likely to minimise costs.

In Sutton, the court limited the underlying derivate action to a number of specific claims, excluding others raised by the applicant.

Conclusion

The threshold to even be entitled to commence a derivative action is high. It should also be borne in mind that the applicant does not act in a personal capacity but rather on behalf of all shareholders and any damages awarded in derivative proceedings belong to the company and not the applicant.

As such, derivative actions are a special type of proceedings to fit particular circumstances and should be considered in the context of minority shareholder remedies, including oppression proceedings under the Companies Act, which allow a shareholder to take an action in a personal capacity and recover accordingly.