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Law Notes Company Law Notes

Derivative Action & Ratification Of Breaches Of Duty Notes

Updated Derivative Action & Ratification Of Breaches Of Duty Notes

Company Law Notes

Company Law

Approximately 805 pages

Company law notes fully updated for recent exams in the UK. These notes cover all the major LLB company law cases and so are perfect for anyone doing an LLB in the UK or a great supplement for those doing LLBs abroad, whether that be in Ireland, Canada, Hong Kong or Malaysia (University of London). These notes were formed directly from a reading of the cases and main texts and are vigorous, concise and very well written.

Everything is conveniently split up by topic as you can see by the list o...

The following is a more accessible plain text extract of the PDF sample above, taken from our Company Law Notes. Due to the challenges of extracting text from PDFs, it will have odd formatting:


G&D Chapter 16: Directors’ Duties (pp568-76) 164

Shareholder Approval / Whitewash of Specific Breaches of Duty 164

What is being decided? 164

Who can take the decision for the company? 165

Disenfranchising particular voters 165

Voting majorities 166

Non-ratifiable breaches 166

G&D Chapter 17: The Derivative Claims and Personal Actions against Directors 166

The Nature of the problem and the Potential Solutions 166

The board and litigation 167

The shareholders collectively and litigation 167

Derivative claims 167

Other possible solutions 167

The General Statutory Derivative Claim 168

The scope of the statutory derivative claim 168

Deciding whether to give permission for the derivative claim 169

Varieties of derivative claim 170

Subsequent conduct of the derivative claim 170

The Statutory Derivative Claim for Unauthorised Political Expenditure 171

Shareholders’ Personal Claims against Directors 172

Conclusion 173

Personal Claims 173

When may such claims arise? 173

Peskin v Anderson [2001] 1 BCLC 372 173

Priority as between the company and the member (no reflective loss) 174

Prudential Assurance v Newman Industries (No 2) [1982] Ch 204 174

Johnson v Gore Wood and Co [2002] 2 AC 1 / HL 174

Giles v Rhind [2002] 4 All ER 977 175

Gardner v Parker [2004] 2 BCLC 554 177

Perry v Day [2005] 2 BCLC 405 177

Mitchell, Shareholders’ Claims for Reflective Loss (2004) 120 LQR 457 177

Statutory Derivative Action [contrast Foss v Harbottle] 179

Bhullar v Bhullar [2015] EWHC 1943 179

Cinematic Finance v Ryder [2010] All ER 283 179

Kleanthous v Theo Paphitis [2011] EWHC 2287 (Ch) 179

Stainer v Lee [2010] EWHC 1539 (Ch) 180

Mission Capital v Sinclair [2008] EWHC 1339 180

Franbar Holdings v Patel [2009] BCLC 1 181

Iesni v Westrip Holdings [2010] BCC 420 181

Stimpson v Southern Private Landlords [2009] EWHC 2072 183

Bridge v Daley [2015] EWHC 2121 183

Cullen Investments v Brown [2015] EWHC 473 185

Re Fort Gilkicker Ltd [2013] EWHC 348 (Ch) 185

Hirt, The Company’s Decision to Litigate against its Directors [2005] JBL 159 185

Introduction 185

Problem underlying enforcement of directors’ duties 186

Legal Strategies to deal with the underlying problem 186

Analysis and evaluation of present law and reform proposals wrt legal strategies 188

Conclusion 188

Worthington, Corporate Governance: Remedying and Ratifying Directors Breaches (2000) 116 LQR 638 188

A Keay & J Loughrey, Derivative Proceedings in a Brave new World for Company Management and Shareholders [2010] JBL 151 189

Questions 189

G&D Chapter 16: Directors’ Duties (pp568-76)

Shareholder Approval / Whitewash of Specific Breaches of Duty

In line with the general law, those to whom duties are owed can release those who owe them duties from their legal obligations. Hence, the company too can release the directors from their general duties, within limits.

What is being decided?

Company will normally act by resolution of either the board or the general meeting:

  • What does their resolution seek to achieve?

  • Decision to authorise / ratify a breach will have effect of either treating director having never committed a breach or are deemed to have not committed the breach. Prior approval is authorisation while post-facto approval is ratification.

  • These are different from affirmation, which is making an avoidable contract binding onto the company, and adoption, where the transaction is one which is beyond the powers of the directors but is one that can be entered into by the shareholders.

  • Affirmation / adoption does not by itself amount to implicit forgiveness and may still enforce personal remedies against directors.

  • However, a single resolution may be aimed at both affirmation and waiver.

  • Ex ante authorisation may either be given on a specific case-by-case basis or generally via the AoA, although this will be viewed with more suspicion – Sharma v Sharma [2013]. This is because such an investor who has given a general waiver will necessarily be less well informed on the facts of any particular breach which goes to the issue of informed consent.

  • Authorisation and ratification are recognised in S180(4)(a), which aims to preserve the common law as it stands for authorisation.

  • S239 seeks to recognise and amend the common law rules on ratification.

  • There is therefore a difference in what is needed if approval is given on the day before the breach compared to the day after the breach.

Who can take the decision for the company?

Which corporate organ? Board or delegates – pursue legal claim against third parties, affirm voidable contracts, waive breaches of duty committed by third parties dealing with the company. However, where the wrong was committed by a director, the common law rule is that the members must approve the breach in a general meeting. This is parallel to the power which beneficiaries under a trust have to ratify the breaches of trustees.

The common law has been modified by the CA – SS177, 180(1)(b) – advance authorisation of self-dealing transactions – merely need board notification. SS176, 180(1)(a) – breaches to the conflict of interest rule – board authorisation is possible subject to AoA. In these cases, the potential mischief is not great enough to require the cumbersome general meeting approval procedure.

In contrast, the common law rules are not modified wrt advance authorisation of proposed breaches of other general duties per SS171-4 and 176.

The common law position of GM approval also applies wrt ratification. As a result, there is a divergence between the rules for ratification and authorisation.

Note however that this does not apply to companies in the vicinity of insolvency – in those cases, it would be more appropriate to wait for the insolvency practitioner to be appointed, who may or may not exercise that power on behalf of the creditors – West Mercia Safteywear Ltd v Dodd [1988].

Disenfranchising particular voters

Where authorisation decision is given by board itself, the conflicted director should not be in a...

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