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Shareholder Remedies Notes

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Shareholder Remedies If an actionable wrong is committed against the company then this will probably be a breach of directors duty, the proper claimant is the company and since the board holds all of the powers of the company due to the article 3 of the Model Articles it should be the board that enforces these wrongs. Shareholder litigation is a problem because they have ceded the operations of the company to the directors through the articles and, because of the principle of separate legal identity; the shareholders are not injured by wrongs to the company: the company is injured. Furthermore, companies are run on the basis of majority rule and so to allow a shareholder who is in a minority to frustrate that principle through excessive litigation would serve to reduce the effectiveness of company law. Courts also do not want to be made to adjudicate matters of business strategy. The old common law rule in Foss v. Harbottle provided that subject to certain limited exceptions, the proper claimant in an action for a wrong alleged to have been done to the company is the company itself and if the alleged wrong is one which the company could settle for itself or, in the case of an irregularity could ratify or condone by its internal procedure, then no individual member may bring an action. The rule in Foss v. Harbottle covers wrongs to the company and wrongs to the individual member, and it restricts actions coming from individual members in respect of either type. The statutory derivative action only covers wrongs done to the company by the directors or director (CA2006s.260). Personal claims by members remain subject to common rules, in particular the second Foss v. Harbottle restriction regarding procedural irregularities. This was also a theme in the enforcement of the s.33 contract. Foss v. Harbottle

1. It cannot be successful argued that the members of a company assume the right to sue in the name of the company. The company and the members are not the same thing in law.

2. The only question can be whether the specific facts justify a departure from the rule that the company should sue in its own name or in the name of an appointed representative. Edwards v. Halliwell

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There are some exceptions to the rule in Foss v. Harbottle: i)

The act complained of is ultra vires or illegal

ii) The matter is one which can only be sanctioned by a special majority of members. iii) The personal and individual rights of the claimant as a member have been impinged on Or iv) What has been due amounts to a fraud in the minority and the majority are in control of the company.

Wallersteiner v. Moir

1. Lord Denning said that separate legal personality is a fundamental principle of English Company law. It means that companies have their own legal identity, and thus their own legal rights and interests which only the company may claim. Consequently if the company is defrauded by a wrong doer then the company itself is the person with a right to sue for this damage. This is the rule in Foss v. Harbottle

2. Lord Denning said the rule in Foss v. Harbottle is easily applied to wrongs by outsiders or to wrongs by a minority of insiders. But he was less comfortable with the application of Foss v. Harbottle in a situation where the wrong doers are directors who hold a majority of the shares.

3. The problem according to Lord Denning is that if they call a board meeting then they will not authorise proceedings against themselves and if a general meeting is called then they will vote against any suggestion that the company should sue them, thus defeating the idea.

4. In such a situation Lord Denning felt it would be necessary to find other means for an action to be brought as otherwise the law would fail and the would be injustice without redress. In Wallerseiner v. Moir Lord Denning was stating that a special action would be needed where the action is against company insiders, themselves a majority, who should be liable for damages. This is consistent with the development of the derivative action under doctrine under the fraud on the minority exception to the rule in Foss v. Harbottle.

Statutory derivative action: CA2006 s.260

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A derivative claim may only be brought respect of an actual or proposed act or omission of a director which involves negligence, default, breach of duty, or breach of trust.

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Although the claim must relate to a directors conduct, it is possible to bring a derivative claim against a third party in respect of a relevant action or omission

(CA2006s.260(3)) It is irrelevant whether the cause of action was before or after the person seeking to claim became a member. (CA2006s.260(4)) Under CA2006s.261, it is clear that no derivative action claim may be pushed only if the court gives permission. This puts a barrier to minority actions in place, making the courts the gatekeepers to prevent non meritorious actions. CA2006s.263 lays out the conditions should apply when determining whether to allow a claim to proceed.

Whether permission should be given Sets out three criteria which cause automatic refusal:

a) A person acting in accordance with CA2006s.172, duty to promote success of the company, would not seek to continue the claim. b) The proposed conduct constituting wrong doing has been authorised by the company. c) The conduct has actually occurred but it was previously authorised or subsequently ratified by the company. CA2006s.263(2) If the claim is not automatically bared under CAs.263(2) then there are grounds which the court must consider when deciding whether to allow the claim: a) Is the member acting in good faith in seeking the claim. b) The importance that a person acting in accordance with CAs.172 duty to promote the success of the company would attach to continuing the claim. c) If the claim relates to an act or omission yet to occur, whether it is likely that it would either be authorised before or ratified after it actually occurs. d) If the claim relates to an act which has occur, whether it is likely to be ratified by the company e) If the company has decided not to pursue the claim f)

Whether the member should pursue the actions on his own behalf and not on behalf of the company.

(CA2006s.263(3)) When considering whether to give leave the court shall give particular regard to any evidence as to the views of members who have no direct or indirect personal interest in the matter.(CA2006s.263(4)) Williams believes that the wording of CAs.260(1) means that a multiple derivative claim is now not permitted. This would be a claim by a member of a company which is a member of a company (e.g. a shareholder in a parent company bringing a derivative action for a claim against a subsidiary). Lord Millett in Waddington accepted that multiple derivative claims were available at common law. (This case was in Hong Kong Court of Financial Appeal.) Statutory derivative claims are only available in respect of directors duties. (CA2006s.260(3)) Common law derivative claims have been abolished. They are not an accepted way of obtaining a derivative action claim. (CA2006s.260(2)) Cinematic v. Ryder

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Mr Justice Roth stated that the rule of 'wrong doer control ' still applied to the statutory derivative actions and so only in exceptional circumstances will a majority shareholder

be able to bring a derivative claim under CAs.260 and the court would refuse leave to continue the claim. How the court will decide whether to allow a claim or not fairly on the evidence without turning the pre claim process into a rehearsal of the entire trial is a practical problem. In the mandatory stage: There must be a prima facie case for the claimant. (CA2006s.261(2)) The mandatory bars to an action. (CA2006s.263(2)) Iesini

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If there was a prima facie case, and the situation was not such that no director acting in accordance with the s.172 duty to promote the success o the company would have passed the claim, then the mandatory tests are passed. It will only fail if no reasonable director would pursue the claim if acting in accordance with CA2006s.172 duty to promote the success of the company.

In the discretionary stage: Factors which the court must take into account when deciding whether to allow the claim to proceed. (CA2006s.263(3)) Particular regard to be given to any evidence as the views of members with no personal direct or indirect interest. (CA2006s.263(4)) Iesini

1. At the discretionary stage the court must be satisfied of more than one prima facie case, it must be able to emulate the strength of the claim so as to determine acting in accordance with s.172 and promoting the success of the company would pursue it.

2. Does not want to have a mini trial though

3. As Lord Denning had noted in Prudential v. Newman, the costs of bringing the liquidation may outweigh the remedy. A court must assess whether this is the case and this will be a factor in determining whether pursuit of the claim is in accordance with s.172 duty to promote success. Stainer v. Lee

1. Whether some directors would pursue the claim but others would not, although irrelevant beyond the fact that some would pursue at the mandatory stage, had to be considered in the discriminatory stage.

2. Even if a case is strong, if the remedy is small then it may not be worth pursuing but if it is very strong then it could be worth pursuing as it may provoke an early settlement. On the other hand if the potential remedy is large but the case is not strong then it may not be worth passing. Paphitis

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Although there were arguable claims, the chances of success was significantly less than even and so would not be in the interest of the company to pursue.

If the court considers that a person acting in accordance with s.172 duty to promote the success of the company would not have acted to pursue the claim then it must not allow a derivative action. If the court does not believe this then the court must consider the importance a person acting with s.172 would attach to pursuit of the action. Franbar v. Patel

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The fact that all of the remedies sought by the claimant could be available under an unfair prejudice action under s.994 meant there was less importance to be attached to the derivative action.

Iesini

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If the remedy does not outweigh the cost of bringing an application then this will count against it being important to promote the success of the company.

Kiani v. Cooper

1. Even though the company had gone into liquidation it could still be to promote the success of the company by brining a derivative claim because the size of the claim meant that it could result in the creditors being paid in full.

2. Able to order that the claimants costs be paid by the company if the court deems it appropriate (it did in this case). The court must refuse to allow the claim if the action has been authorised by the company in advance or if it has been ratified subsequently (CAs.263(2)(b)&(c)). If this has not happened then the court must consider whether the company has decided not to pursue the action (CAs.263(3)(e)). Franbar v. Patel

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The decision not to pursue the action is subject to the same validity requirements as any ratification decision would be.

Authorisation in advance can be granted by the normal rules under CAs.180(4) whereby a wrongdoing director may vote to authorise the conduct in advance. Ratification post-facto under CAs.29 imposes restrictions on voting and so neither the director nor any person connected with him. This includes all other directors. Although they may count towards the quorum but just may not vote. For breach of s.175 or s.177 the board can ratify post facto. The s.252 connected persons rules apply.

Old Law Notes on Cases Burland v. Earle

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