The Law Commission

EXECUTIVE SUMMARY

1. This report recommends law reform designed to make shareholder remedies more affordable and more appropriate in modern conditions.

2. There are three main shareholder remedies:

the "unfair prejudice" remedy, in which a member seeks redress for action by the company which injures his interest as a member the derivative action, in which a member seeks to enforce a claim belonging to his company action to enforce the companys constitution.

3. The unfair prejudice remedy and the derivative action are specialist remedies, and the former is far more common than the latter.

4. The unfair prejudice remedy is most commonly used by private companies of which, as at 3 August 1997, there were some 1,080,671 in Great Britain. We recommend statutory and other changes to simplify the remedy, and help reduce its high cost to litigant and taxpayer alike.

5. The derivative action is not common but it is an important mechanism of shareholder control of corporate wrongs. The current law is archaic. Our principal recommendation is for a new rule of court which would set out in a modern and accessible form the circumstances in which the courts will permit the derivative action to be brought. The underlying policy, which is restrictive of the circumstances in which a derivative action may be brought, is not affected.(4)

6. Prevention is better than cure. Litigation is time-consuming and costly. In order to minimise reliance on shareholder remedies, we recommend that a new article is added to Table A, which is the statutory model form of a company's articles of association. This contains a basic dispute resolution mechanism, and will encourage shareholders in future to have pre-agreed routes to resolve disputes without litigation.

7. It is for the Government, Parliament and the new Civil Procedure Rule Committee to decide whether to implement our recommendations.

8. By our principal recommendations we seek

• in relation to unfair prejudice, new primary legislation
• in relation to the derivative action, new primary legislation(5) and a new rule of court
• in relation to Table A, the insertion of a new regulation by statutory instrument.

9. Implementation of the new rule of court for the derivative action and the new regulation in Table A does not depend on Parliamentary time.