Double Derivative Actions

The double derivative action normally arises in the context of group companies, or, more
precisely, in the relationship between a parent and a subsidiary company.24 In this case, a
shareholder in the parent company brings a derivative action on behalf of the subsidiary. The
right to bring the action is first derived from the subsidiary to the parent company (in its
capacity as a shareholder in the former) and then derived from the latter to its plaintiff
shareholder.1

English Court of Appeal's decision in Universal Project Management Services Ltd. v. Fort
Gilkicker Ltd.2 In that case, for the first time in England, the court stated clearly that multiple
derivative actions were allowed under English law. Shareholders of holding companies can
thus bring derivative actions on behalf of subsidiaries despite not owning shares directly at the
subsidiary level.

England is certainly not the first jurisdiction to recognize multiple derivative actions. In fact,
multiple derivative actions have been recognized in the United States for more than a century,
since Holmes v. Camp was decided in 1917.3 Canada, Australia, New Zealand, Singapore, and
Hong Kong had also recognized multiple derivative actions prior to Fort Gilkicker4.

Thus, England is developing its multiple derivative action regime along the lines of other
Anglo-American jurisdictions by taking a more pragmatic approach to deal with the ever more
complicated structure of corporate groups. This development is significant, especially taking
into account the increasing use of special purpose vehicles set up in offshore tax havens.5

However, this pragmatic approach may meet problems in the international context when the
multiple derivative action involves a foreign company and thus the inevitable issue of choice

1
The derivative action: an economic, historical and practice-oriented approach: Harald Baum and Dan w.
Puchniak https://www.cambridge.org/core/services/aop-cambridge-
core/content/view/305D7C31A453AEC674BCDA6472FC4431/9780511998027c1_p1-89_CBO.pdf/the-
derivative-action.pdf
2
Universal Project Mgmt. Servs. Ltd. v. Fort Gilkicker Ltd. [2013] EWHC (Ch) 348, [2013] Ch 551 (Eng.)
[hereinafter Fort Gilkicker].
3
Holmes v. Camp, 180 A.D. 409 (N.Y. App. Div. 1917); see also U.S. Lines, Inc. v. U.S. Lines Co., 96 F.2d 148 (2d
Cir. 1938).
4
See Fort Gilkicker [2013] EWHC (Ch) 348 [49], [2013] Ch 551, 564 (Eng.) (the recognition of multiple derivative
action "ensures that English company law runs in this respect in harmony with the laws of Hong Kong,
Singapore, Canada, Australia and New Zealand, all of which have, albeit by different methods, ensured that
injustice of the type described by Lord Millett can properly be addressed.")
5
William J. Moon, Tax Havens as Producers of Corporate Law, 116 MICH. L. REV. 1081 (2018).
of law arises. The emergence of numerous derivative actions in common law systems can be
attributed to pivotal cases in England, the United States, and Hong Kong.

a) Foss v. Harbottle6

Derivative actions first took root in common law as an exception to Foss v. Harbottle, an
English case decided in 1843. The general rule of Foss v. Harbottle is that the company, not the
shareholders, is the proper plaintiff in claims for wrongs done to it. This is sometimes referred
to as the "proper plaintiff rule”7. However, the court did recognize that there might be a need
for an exception in appropriate cases for the interest of justice since "the claims of justice would
be found superior to any difficulties arising out of technical rules respecting the mode in which
corporations are required to sue."8 The English court subsequently developed a number of
exceptions, with the most notable one being the "fraud on the minority" exception as per
Edwards v. Haliwell [1950] 2 All E.R. 1064, 1067 (Eng.) (recognizing four exceptions, namely
(1) ultra vires and illegality, (2) special majority, (3) personal rights, and (4) fraud on the
minority; the fraud on the minority exception has always been said to be the only true
exception). Under this exception, a shareholder must satisfy two litigation conditions, namely
(1) that a fraud, which is a wrong done to the company not the shareholder, has been
perpetrated, and (2) that the company is controlled by the wrongdoers. This exception is
essential for the shareholders since otherwise "the wrongdoers themselves, being in control,
would not allow the company to sue."

The court's willingness to inject flexibility is even more impressive given that Foss v. Harbottle
was decided in 1843, more than fifty years before the landmark case of Salomon v. Salomon
and one year before the Joint Stock Companies Act, the first modern companies act in England.
At that time, despite still being years before Salomon, the concept of separate legal personality
was already well established. Therefore, unsurprisingly, the court decided the general rule that
the company is the proper plaintiff. While the fraud on the minority exception has been much
criticized for being overly burdensome for minority shareholders, one cannot deny the
exception was indeed a flexible innovation at the time of Foss v. Harbottle. After Foss v.
Harbottle, one of the difficulties was the level of proof required for a plaintiff to prove the
aforementioned litigation conditions for a derivative action9. In Prudential Assurance Co. Ltd.

6
Foss v. Harbottle (1843) 67 Eng. Rep. 189.
7
Oates v Consol. Capital Serv. Party Ltd. (2009) 257 ALR 558, T 124 (Austl.)
8
Foss (1843) 67 Eng. Rep. 189, 203.
9
Prudential Assurance Co. Ltd. v. Newman Indus. Ltd. [1982] Ch 204
v. Newman Industries Ltd, the Court of Appeal found a halfway-house solution and added a
new procedural step; the plaintiff must prove a prima facie case that he has satisfied the
litigation conditions to continue the derivative action if it is challenged by the defendant.
Effectively, this created a leave requirement for a derivative action under the common law. In
fact, this led subsequently to the introduction of Order 15, Rule 12A to the Rules of the Supreme
Court, under which the plaintiff must apply to the court for leave to continue the action if the
defendant has given notice of an intention to defend.10

b) Holmes v. Camp11

The flexible approach to address injustice imposed upon minority shareholders of Foss v.
Harbottle was emphasized by the Appellate Division of the New York Supreme Court's decision
in Holmes v. Camp. Citing from Foss v. Harbottle, the court held that the multiple derivative
action "is an invention of equity, and stockholders are allowed to resort to it, notwithstanding
a lack of direct interest in the relief sought. Holmes led to the subsequent recognition of
multiple derivative actions in other US states. To date, multiple derivative actions are generally
recognized in the United States with plenty of precedents12.

c) Waddington Ltd. v. Chan Chun Hoo Thomas

The Hong Kong Court of Final Appeal, the highest court in Hong Kong, recognized multiple
derivative actions in Waddington Ltd. v. Chan Chun Hoo Thomas13 In Waddington, a
shareholder of a Bermudan company sought to bring a derivative action on behalf of a BVI
subsidiary and a BVI subsubsidiary. The defendant argued, inter alia, that a multiple derivative
action should not be allowed since a company is a separate legal person, and the directors owed
no fiduciary duties to the shareholders of its parent company. This is a formalistic argument.
Lord Millett rejected this approach in favor of a pragmatic approach. To him, what mattered
was "whether the plaintiff has a legitimate interest in the relief claimed sufficient to justify him
in bringing proceedings to obtain it." Since any depletion of a subsidiary's assets invariably
causes indirect loss to the shareholders of the parent company, the answer was plainly "yes."

10
Rules of Supreme Court (Amendment) 1994 1 4, http://www.legislation. gov.uk/uksil994/1975/made
[https://perma.cc/9C8Q-MR7W]
11
Holmes v. Camp, 180 A.D. 409, 412 (N.Y. App. Div. 1917)
12
Lambrecht v. O'Neal, 504 Fed.Appx.23 (2d Cir. 2012), Fishman v. Philadelphia Fin. Life Assurance Co., 2016 WL
2347921 (S.D.N.Y. 2016)
13
Waddington Ltd. v. Chan Chun Hoo Thomas et al. [2008] H.K.C.F.A.R. 1498
He also explained that the recognition of multiple derivative actions did not require piercing
the corporate veil. Thus, there was a clear indication of Lord Millett's strong belief in flexibility.

D. Universal Project Management Services Ltd. v. Fort Gilkicker Ltd. and Others

The English Parliament reformed the common law rule in the Companies Act 2006 (the 2006
Act). Under this new section, minority shareholders no longer need to prove fraud and control.
Instead, whether leave to continue the derivative action will be granted is subject to court
discretion according to criteria set out in subsections 261-263 of the 2006 Act. However, new
problems soon found their way to the court in the form of multiple derivative actions. In Fort
Gilkicker, the claimant was a member of a limited liability partnership (LLP) who sought to
bring a derivative action on behalf of a wholly owned subsidiary of the LLP. Interpreting the
2006 Act, the court came to the conclusion that "the statutory language does not include a
shareholder in a parent company who is not a shareholder in the company the rights of which
are being asserted," with its clear wording limiting statutory derivative actions to direct
shareholders only, and thus not to multiple derivative actions. Instead, the court held that (1)
multiple derivative actions were allowed under common law, and (2) the common law rules
survived the enactment of the 2006 Act. Fort Gilkicker also displayed the flexible approach by
extending multiple derivative actions to an LLP.

Overall, Fort Gilkicker is at the forefront of the developments of the derivative regime in
England, not only because it recognized multiple derivative actions but also because of the
court's willingness to apply a flexible approach so as to do justice to minority shareholders
whose interests may be jeopardized by the management's control. The court thus valued
flexibility over strict adherence to formalism. In the ever more complex world of corporations,
this flexibility is essential for the ongoing relevance of corporate law to modern corporations.
In this sense, Fort Gilkicker simply followed the underlying mandate of pragmatism that has
existed from Foss v. Harbottle, Holmes, and Waddington.

Abouraya v. Sigmund14. Abouraya has particular relevance to the choice of law issue. In that
case, a shareholder of a Hong Kong company sought to initiate a multiple derivative action
against the director of an English subsidiary. There was potentially a choice of governing law
between Hong Kong law and English law. However, despite the court's recognition that

14
Abouraya v. Sigmund [2014] EWHC (Ch) 277 (Eng.).
multiple derivative actions were viable in cases involving foreign holding companies, the
choice of law aspect was not raised. The court simply treated the case as a domestic one and
applied English law. Abouraya does show that choice of law issues could easily arise in
multiple derivative actions. In fact, these choice of law issues have been common in other
jurisdictions.

Although there is no precedent dealing with choice of law in multiple derivative actions,
English cases on choice of law in a single derivative action do lay down the framework for
multiple derivative actions. The starting point under English law is Konamaneni v. Rolls Royce
Industrial Power (India) Ltd15. In this single derivative action, shareholders of an Indian
company tried to bring a derivative action on behalf of the company against the defendants,
who allegedly paid bribes to the managing director of the company in order to secure a power
plant construction contract in India The court was asked to decide whether English law or
Indian law was to be applied to the right to bring the derivative action The clear answer by
Justice Collins, as he then was, was Indian law, the law of the place of incorporation. He
reached this conclusion by drawing upon the experiences of the US courts, 74 which were
based on the "internal affairs" doctrine.16 Under the doctrine, matters peculiar to the company
and its insiders, such as shareholders and directors, are generally regarded as internal affairs to
be governed by the law of the place of incorporation. In particular, Justice Collins cited with
approval Batchelder v. Kawamoto17, a case decided by the United States Court of Appeals for
the Ninth Circuit. the law of the place of incorporation has the advantage of consistency, which
in turn promotes certainty.18

Apart from certainty, other justifications commonly argued for the internal affairs doctrine
among US commentators include the incorporating state's interest and the implied consent by
the shareholders. First, it has been argued that since it is the state of incorporation that created
the company, that state will have a greater interest in having its law apply to the internal affairs
of the company. However, analysis on state interests has long been limited to the United States
and has not been influential in English courts. The implied-consent justification is more

15
Konamaneni v. Rolls Royce Indus. Power (India) Ltd. [2001] EWHC (Ch) 470, [2002] 1 WLR 1269 (Eng. &
Wales).
16
The term "internal affairs" encompasses "those matters that pertain to the relationships among or between
the corporation and its officers, directors, and shareholders." Sagarra Inversiones, S.L. v. Cementos Portland
Valderrivas, S.A., 34 A.3d 1074, 1081 (Del. 2011).
17
Batchelder v. Kawamoto, 147 F.3d 915 (9th Cir. 1998)
18
The Internal Affairs Doctrine: Theoretical Justifications and Tentative Explanations for Its Continued Primacy,
115 HARV. L. REV. 1480, 1486-87 (2002)
relevant. Since parties to these internal affairs all voluntarily join the company, it is fair to
presume that they have all implicitly agreed to submit themselves to the law of the place of
incorporation of the company.85 With both the plaintiff shareholders and defendant directors
being the corporate insiders, derivative action falls squarely into the domain of the internal
affairs rule under the implied-consent justification.8 6 This rationale can find support in the
facts of Konamaneni. Most of the plaintiff shareholders and the director accused of taking
bribes from the defendants were Indian. The company was incorporated in India, and the
disputed transaction was a power plant project in India. In regard to the justifications of
certainty and implied consent by the corporate insiders, Konamaneni can therefore be seen as
no more than the application of this general choice of law rule to a derivative action. The
principles stated by Justice Collins are obiter since he saw no material difference between
English law and Indian law in the case.

The law of the place of incorporation cannot, however, be applied seamlessly as the choice of
law rule in multiple derivative actions when the parent and the subsidiary are incorporated in
two different jurisdictions. Batchelder v. Kawamoto19, the case approved by Justice Collins in
Konamaneni, was just such a case where the parent company was incorporated in Japan while
the subsidiary was incorporated in California. A decision had to be made between Japanese law
and California law. Multiple derivative actions therefore call for a new choice of law approach.
There are at least four potential choice of law approaches to the governing law issue: (1) the
law of the place of incorporation of the subsidiary; (2) the law of the place of incorporation of
the parent company; (3) the laws of the place of incorporation of both the parent and subsidiary;
and (4) the law with the closest connections to the multiple derivative action. The first two
approaches are the main ideological camps in common law jurisdictions, based on actual
precedents from those jurisdictions. Hong Kong courts appear to have adopted the law of the
place of incorporation of the subsidiary as their choice of law approach.20 the US precedents
are not perfectly consistent on this issue, a substantial number of multiple derivative actions,
particularly those decided by Delaware and New York, have opted for the parent's law of
incorporation.

19
Batchelder v. Kawamoto, 147 F.3d 915 (9th Cir. 1998)
20
Waddington Ltd. v. Chan Chun Hoo Thomas, [2016] H.K.E.C. 1127 (C.A.);
Common law derivative claims

By definition, SDCs involve a member of a company seeking to pursue a cause of action vested
in that company. However it may be that a member of a parent company wants to pursue a
cause of action vested in a subsidiary of the parent company. This is called a “double derivative
claim” (DDC). Alternatively the member may want to pursue a cause of action vested in a
subsidiary of the parent company’s subsidiary. This is called a triple derivative claim. Claims
such as these fall outside the CA 2006 regime, as do claims brought in respect of overseas
companies and LLPs.

In McGaughey v Universities Superannuation Scheme Ltd [2022] EWHC 1233 (Ch)

(McGaughey (Ch)), Leech J defined “multiple derivative claims” (MDCs) to include all
derivative claims other than SDCs and DDCs (paragraph 19). He accepted a submission that
the category of MDCs is not closed. Commenting on the case (an application made by two
pension scheme members for permission to continue several MDCs against directors and
former directors of the scheme’s corporate trustee, a company limited by guarantee) he
acknowledged that successful applications might conceivably be made in such circumstances.
These applicants however had failed to make out the required prima facie cases.

Although there had been some debate about whether DDCs and MDCs had been permissible
at common law, Briggs J in Fort Gilkicker Ltd, Re [2013] EWHC 348 (Ch) considered that
they had been, and that there was good reason for maintaining them, stating (at paragraph 24)
that:

”It is not I think particularly surprising that the court has, where necessary, been prepared to
permit derivative claims to be brought on behalf of companies in wrongdoer control by persons
other than their immediate shareholders without regarding those cases as special, and in
particular without thinking it necessary to distinguish between ‘ordinary’ and ‘multiple’
derivative actions. Once it is recognised that the derivative action is merely a procedural device
designed to prevent a wrong going without a remedy (see [Nurcombe v Nurcombe [1985] 1
W.L.R. 370] at 376A) then it is unsurprising to find the court extending locus standi to members
of the wronged company’s holding company, where the holding company is itself in the same
wrongdoer control. The would-be claimant is not exercising some right inherent in its
membership, but availing itself of the court’s readiness to permit someone with a sufficient
interest to sue as the company’s representative claimant, for the benefit of all its stakeholders.”