Companies Act ushers in derivatives actions

A raft of legislation has come into force today (1 October) from the age increase for buying cigarettes from 16 to 18 years-old to the introduction of the Companies Act 2006.

The latter is expected to have a major affect on the City. The Companies Act will allow for wider accountability of company directors with affected parties to make claims in so-called “derivative actions”.

The new actions will allow shareholders, acting on behalf of their company, to sue one or more directors for misconduct including negligence or breach of duty without having to show that they personally benefited or were fraudulent.

Campaign groups such as the Corporate Responsibility Coalition (Core), backed by Amnesty International, Friends of the Earth and Action Aid, today circulated to members a guide on the act, including advice on how best to make use of it.

Core today also called for Prime Minister Gordon Brown to make sure that the act is the first step to further reforms on the government’s thinking on business, poverty and the environment as otherwise the Act will lack teeth.

Jenny Ricks, corporates campaigner at Action Aid, said: “Corporate accountability is still seen as an add-on to the functioning of the economy. If the Government is to live up to its commitment to fighting poverty and climate change, we need to make sure that ethical business practices become central to trade, investment and development policy – and that strategy is joined up across government.”

Law firms agree that the Companies Act is a significant milestone in Britain’s legal history but are cautious about how much effect derivative actions will have.

One magic circle litigation partner said that there is expected to be a lot of noise around derivative actions in the coming weeks but it is not definite that any will really take off for some time.

“We have this scenario every time new laws come into play,” said the partner. “In this case there are layers of protection to ensure that no needless disputes start such as there having to be two separate hearings required before any claim can be taken forward.”

Other parts of the Companies Act 2006 coming into force today will see a change to directors duties, giving them the obligation to promote the success of the company for the benefit of its members.

The Act, some claim, represents the biggest shake up in company law in 150 years. It will for the first time require the largest listed companies to report on their social and environmental impacts, as well as obliging company directors to take stock of their business activities’ effects on employees, communities and the environment.