Can Shareholders Sue the Board of Directors?

In simple terms, yes. Company directors have obligations to their shareholders to act within the law including in accordance with; their service agreements and contracts with the company; the legislative requirements and provisions of acts and regulations such as the Companies Act 2006; and in accordance with the Articles of Association and Memoranda of the Company. The ultimate aim and goal of these protections are to promote the success of the company for its members’ (or shareholders) benefit. If directors breach their duties, they can face sanctions from company members via the civil courts and potentially criminal penalties.

The Companies Act 2006 sets out several fiduciary duties Directors owe to a Company, including that:

• Directors must act within the parameters laid out in the company’s constitution- the Articles and Memoranda;
• their actions must be consistent with promoting the success of the company;
• Directors must exercise due skill, diligence and care in carrying out their duties;
• Directors must avoid conflicts of interest;
• Directors should refuse benefits or inducements from third parties;
• they must also act impartially and with independent judgment; and
• Directors must declare an interest in any potential transaction or arrangement that the company enters into.

Any failure to act in line with the various requirements may variously amount to a breach of contract, covenant, and/or breach of statutory duty, and shareholders might consider pursuing various claims in those circumstances, including derivative claims.

Because directors owe their duty to the company, shareholders can only bring a claim in the company’s name and for its loss, not for personal benefit. Derivative actions are limited to prevent shareholder abuse. Any action must be in the company’s best interests, and the shareholder must act in good faith. Permission of the court is also needed to pursue these types of disputes which require specialist advice.