Charles Mayo

reports is now the investing public at large, not merely existing shareholders. There is therefore a risk that the inclusion of a responsibility statement from the directors could be used by investors or members of the public to assert that the directors personally owe them a duty of care.

The Directive does provide, in its recitals, for each Member State to determine appropriate liability rules under its national law and to determine the extent of the liability. The issue has been whether the UK could implement the Directive in a way that limits the purpose of the reports (that the Directive requires to be published) to the same purpose as the law currently affords to them when published under the Companies Act.

This issue is addressed in the Companies Act 2006, which has introduced a new civil liability regime. A company will be liable to anyone, who acquired securities in reliance on information in a ‘publication’, for loss suffered in reliance on an untrue or misleading statement in that publication or any omission therefrom. A company will, however, only be liable if a person discharging managerial responsibilities (a PDMR, which includes the directors) knew that the statement was untrue or misleading or was reckless as to whether it was; or knew that the omission was a dishonest concealment of a material fact.

Issuers will therefore have civil liability for statements in reports published under the Disclosure and Transparency Rules only if they were untrue or misleading and were made in bad faith or recklessly, or involved the deliberate and dishonest concealment of material facts. In practice, an issuer is only likely to be liable if a director knew that a statement was wrong or misleading. The intention of the provisions is to restrict third party civil liability by limiting civil liability to this new offence.

Similarly, the Companies Act 2006 introduces a new statutory civil liability regime for directors for directors’ and remuneration reports. Directors will be liable to companies for any loss suffered as a result of an untrue or misleading statement in one of these documents or an omission therefrom. A director will only be liable, however, if he knew that the statement was untrue or misleading or was reckless as to whether it was untrue or misleading or he knew that the omission was a dishonest concealment of a material fact.

So, there could be harbours of sorts but not necessarily ‘safe’ ones.

Shareholder derivative actions

Now, one must finally consider the effect of the changes made by the Companies Act 2006 on the ability of shareholders to bring shareholder derivative actions on behalf of the company against the directors. Generally the board of directors of a company or the shareholders acting collectively in general meeting decide whether to initiate litigation in the name of the company. This is problematic in the case where the wrongdoing director controls the company by owning the majority of the shares or having an influence over the other major shareholders. The wrongdoing director may then be able to suppress litigation even though

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the litigation would be in the company’s best interests. As a result the common law created the shareholder derivative action. This can be brought by an aggrieved minority shareholder who brings the action in the name of the company against the directors for a wrong done to the company, with damages being awarded to the company. The common law attempted to find a balance between protecting the interests of minority shareholders and allowing the collective majority to take the decision whether to pursue litigation. The rule in Foss v. Harbottle24 and various recent alterations in the law have created a set of complex rules for when a derivative action may be taken. The Companies Act 2006 puts the derivative action on a much more modern basis.

The Companies Act 2006 will enable a derivative claim to be brought, in a wider range of circumstances, for an actual or proposed act or omission involving negligence, breach of duty or breach of trust by a director of the company. Before the new Act, negligence would not have been classed as a fraud on the minority unless it could be shown that the majority profited as a result of negligence and the company suffered a loss.

Despite the extension of the grounds for bringing the derivative action, a broad discretion is given to the courts to decide whether to give permission to a member to continue with a derivative action. The court decides whether to dismiss the application or ask for more evidence and can make any consequential order it deems fit. Shareholder derivative actions are also discussed in the following chapter.

24 (1843) 2 Hare 461; 67 ER 189.

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