Notes Of Cases
| Date | 01 March 1981 |
| Published date | 01 March 1981 |
| DOI | http://doi.org/10.1111/j.1468-2230.1981.tb02747.x |
NOTES
OF
CASES
DERIVATIVE
ACTIONS
AND
Foss
v.
HARBOTTLE
SIXTY-NIN,E
days of argument preceded the judgment of Vinelott
J.
in
Prudential Assurance Ltd.
v.
Navnzan Industries Ltd.
(No.
2)
which touches the most delicate areas of company law and is
a
special feast for devotees of the Rule in
Foss
v.
Harbottle.2
The very facts of the case argue the need for
a
Companies Com-
mi~sion.~ Deceptive malpractices were organised by B and
L,
both
senior directors of two companies, TPG and
N.
B
and TPG held
shares (though not a majority) in
N.
Another company
S
(of which
B
and
L
owned all the shares) held
a
substantial shareholding in
TPG-the company
“
at the centre of the spider’s web ”-which
was in financial difficulties. B and
L
arranged to sell its main assets
to
N
at a gross over-valuation. In accordance with Stock Exchange
requirements, the consent of the shareholders of
N
was obtained,
but by a
“
misleading and tricky
”
circular. The plaintiff company,
P,
a minority shareholder in
N,
suing in
“
representative
”
form
[i.e.
“
on behalf of itself and all the other shareholders
”
of
N,
except the
defendants] claimed damages or compensation against B,
L,
and
TPG.
B,
L
and TPG were found to be liable to
N
and its share-
holders by reason of this deceitful conspiracy to injure them.
Personal and Derivative Actions
For decades company law has suffered the ambiguity of the share-
holder’s
<<
representative action.” It may be a
‘<
true representative
,,
claim-a direct, personal claim by the shareholder to enforce his
rights and those of others of his class. But it may denote the very
different
“
derivative
”
action where the company is joined as a
nominal defendant and the member sues to enforce not his rights but
the company’s rights, and holds the fruits of success not for himself
but for his ~ompany.~ The derivative action is clarified perceptively
by Vinelott
J.
in this case; but it remains in sore need of further
clarification by those who control the Rules of the Supreme
Co~rt.~
1
[I9801
2
All E.R.
841;
also in [I9801 3 W.L.R.
543.
2
(1843) 2 Hare
461.
3
See [19801
2
All E.R.
PP.
846-855; 878-880, where Vinelott
J.
himself made
proposals for changes in the Stock Exchange “Yellow Book.”
Cf.
T.
Hadden,
Fraud in the City: Enforcing the Rules
”
(1980) 1
Company Lawyer
9.
4
Counsel conceded that the knowledge of the fraud of
B
and L, its directors,
must be “imputed” to TPG: [19801 2 All E.R. 878; compare
Belmonr Finance
Corpn.
V.
Williams
[19791
1
Ch. 250, and
ibid.
(No.
2) [I9801
1
All E.R. 393.
5
Gower
Modern Company Law
(4th ed., 19791, pp. 647-652 for the general
requirements for a derivative action; and
Wallersteiner
v.
Moir
(No.
2) [I9751 Q.B.
373, when the Court of Appeal adopted the essential characteristics as described by
Gower
op.
cit.
(3rd ed., 1979). For confusion concerning the nature of a plaintiff‘s
claims, see
Pennell
V.
Venida Znvestments Ltd.
(unreported 1974) discussed by
S.
Burridge
“
Wrongful Rights Issues” (1980)
44
M.L.R. 40, 54-57.
6
A
‘‘
derivative action
”
should be denoted by a special description as such on
the writ. It should not be
‘‘
representative
”
of the members under R.S.C., Ord. 15,
202
Mar.
19811
NOTES
OF
CASES
203
Vinelott
J.
rejected at a previous stage of the litigation the defen-
dants’ argument that
a
truly representative action could not be
joined to
a
derivative action, as
P.
here wished to do. He took
a
liberal view
as
to whether shareholders had or might have separate
interests, rather than the
“
same
”
interest in the action,
as
Ord.
15,
r.
12
req~ires.~ This liberalisation in procedure concerning represen-
tative plaintiffs matches an expansion in actions in tort of the role
of representative defendants.’
But the liberalisation gave rise to problems. The defendants were
liable to
P.
in both its capacities
(as
and for the shareholders; and
as the
“
derivative
”
of
N).
But the Shareholders at the date of the
action might not be the same
as
those at the date of the commission
of the fraud; and here the plaintiff shareholders also had
a
direct
action exceptionally against
B
and
L
in tort for the conspiracy.9
If
compensation were awarded to
P
both
derivatively for
N’s
loss
and
directly for the loss by it as shareholder, an element
of
double-com-
pensation might creep in. Vinelott
J.,
therefore, gave judgment for
the plaintiff (as derivative) for the loss suffered by
N
(difference
between the price paid and the value of the assets if there had been
no fraud); assessed the
“
personal
”
damage of the shareholders (by
reference to the values
of
N’s
shares); but directed that no further
proceedings in the personal or truly representative claims be taken
without leave of the court,’O-altogether
a
skilful solution.
Double-compensation, however, is only one of the problems posed
by permitting
a
plaintiff to sue in two, or even three capacities (a
personal; a
“
truly representative
”;
and a
“
derivative action). It
was once thought that such duplication would not be permitted
ll;
but the more modern view is to the contrary, provided the claims
“
arise out
of
the same transaction.”
l2
This is a sensible develop-
ment, especially now that the minority shareholder may hope to
r.
12
(a
hangover from partnership); and it should be subject to clear rules con-
cerning costs, compromises, control
of
the action, and the exercise
of
judicial dis-
cretion, etc. Since our company law has known
of
‘I
derivative
”
actions since at
least
Afwool
V.
Merryweather (1867)
L.R.
5
Eq.
464n.
(although they were given
the American name by the judges only in the
Wallersfeiner
case) this reform is
hardly premature.
7
Prudential Assurance
Co.
Ltd.
V.
Newman Industries Ltd. 119791 3
All E.R.
507.
Contrast the
formalism
of
EETPU
v.
Times Newspapers
C19801
Q.B.
585.
8
See
Winder
v.
Ward, The Times,
February
27, 1957
(C.A.).
9
Directors
of
coursc
are
normally liable for breach of fiduciary duties only to the
company. But the judge suggested that there
was
here a duty in tort to shareholders
to
“
act honestly and with due care
”
in giving advice:
[I9801 2
All E.R.
853 (cf.
Gething
V.
Kilner [1972]
1
All
E.R.
1166; Allen
V.
Hyaft
(1914)
30
T.L.R.
444),
an additional ground to that
of
conspiracy.
10
This bald account
of
the result does scant justice to the ingenuity
of
the
judgment at pp.
855-860,
and
pp.
877-878.
11
Sfrooud
v.
Lawson 118981 2
Q.B.
44;
Wedderburn
119571
C.L.J. p.
206;
Gore
Browne,
Companies
(43rd
ed.), para.
28.6.
12
119801 2
All
E.R.
p.
860;
A.
L.
Smith L.J.
118981 2
Q.B.
p.
49;
S.
Beck
(1974)
52
Can.B.R.
p.
182;
Hogg
V
Cramphorn 119671
Ch.
254;
Gower,
op. cit.
p.
655,
note
99.
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