Derivative action (ut singuli)
A liability action brought by one or more shareholders against directors in the name and on behalf of the company, whose proceeds go to the company, and a central risk in directors' liability insurance.
When directors harm the company through mismanagement, it is normally for the company itself, acting through its organs, to sue them. But those organs are run precisely by the people concerned, who have no interest in suing themselves. The derivative action lets one or more shareholders bring the action in the company's place, in its name, the damages obtained going to the company rather than to the plaintiff shareholders. The French Commercial Code provides for it in public limited companies and treats as void any clause making its exercise subject to prior approval by the general meeting. Common law systems have an equivalent mechanism, the derivative action, widely used in the United States. For directors' liability insurance, this action is one of the main risks, and it raises a drafting question: since it is brought in the company's name, and the company is often also insured, it could fall under the insured versus insured exclusion. Policies therefore provide an express carve-back for derivative actions brought without the participation of the directors sued.
Textbook case: minority shareholders of a listed company bring a derivative action against the board, alleging it ignored cybersecurity warnings before an attack that cost 80 million euros. If they obtain 25 million, the sum goes to the company; the directors' liability policy pays it thanks to the carve-back for derivative actions.
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