NOTES OF CASES

DOIhttp://doi.org/10.1111/j.1468-2230.1978.tb00819.x
Date01 September 1978
Published date01 September 1978
NOTES
OF
CASES
MINORITY
SHAREHOLDERS
AND
DIRECTORS’
DUTIES
TWENTY years ago the present writer suggested that, in the light of
Alexander
v.
Automatic Telephone
CO.,~
some breaches [of duty
by directors], open to sanction by disclosure (and, therefore, one
would have thought by ratification), allow for
a
minority [share-
holder’s] action in spite of the rule in
Foss
v.
Harbottle.”
Since
then, in one limited area at least, such exceptional cases have been
de~eloped.~ The purpose
of
this note, however, is to refute the
suggestion that
Daniels
v.
Daniels‘
has enlarged the area of that
excepti~n.~
The plaintiffs were minority shareholders. Two defendants (husband
and wife) were the majority shareholders and the directors. The
company was also joined as
a
defendant to the action. The directors
unsuccessfully sought to have the court strike out the statement of
claim as disclosing no cause of action-a feature of the decision
which must itself make commentators pause before attributing pro-
found authority to it, since all the judge needed to determine was
whether the plaintiffs were bound to fail “at this stage of the
game.”6 The plaintiffs alleged that the directors had caused the
company in
1970
to sell land to one
of
them, the wife, at what they
ought to have known was an undervalue, namely
E4,250.
Indeed, in
1974
the wife sold the same land for
€120,000.
Fraud was not as such
alleged in terms. Thus, at first blush, the decision seems to contravene
the proposition that mere
negligence
by directors must be rectified
by an action brought by the company and not (since it is open to
ratification) by minority shareholders suing either personally (since
no duty is owed to them) or in a derivative action (which is confined
to acts done either
ultra vires
or by
fraud
”).7
Further examination of the judgment, however, discloses that this
principle is not infringed, nor is any extension of minority rights in
substance made, by
Daniels
v.
Daniels.
Templeman
J.
discussed the
leading authorities which distinguish, on the one hand, cases of
1
[1900]
2
Ch.
56, C.A.
2
Shareholders Rights and the Rule in
Foss
v.
Horbottle
[1957] C.L.J. 194;
3
Breach of duty by directors under the
‘‘
collateral purposes
principle:
Bamford
v.
Bamford
[1970] Ch. 212;
Hogg
v.
Cramphorn
[1967]
Ch.
254; but see
infra,
note
16.
[1958] C.L.J. 93, 105-106.
..
.
.
.
-.
.
4
[1978] 2
W.L.R.
73,
Templeman J.
See,
ex.
(1978) 94 L.Q.R. 176,
a significant extension
of
the rights
of
minority
shareholders.” Such interpretation
of
Daniels
v.
Daniels
might lead the incautious
reader to conclude that it lends authority to the argument
in
Gower,
Modern
Company
Low
(3rd ed.. 1969), pp. 580-590, as to the way
in
which minority share-
holders’ rights might
be
extended in cases of
negligence
by directors; but the
decision, it
is
submitted for the reasons given below, does not have any such effect.
6
[
19781 2 W.L.R. at p. 80.
Pavlides
v.
Jensen
[1956]
Ch.
565.
569
570
THE
MODERN
LAW REVIEW
[Vol.
41
fraud
where a derivative action may be brought by the minority
against those
in
control of the company,8 and, on the other hand,
cases where the minority has no cause of action against negligent
directors even if their conduct is “ridiculous and absurd” or
if
they are
an amiable set
of
lunatics.” The
ratio decidendi
of his
decision was:
The authorities which deal with
simple fraud
on
the one hand
and gross negligence on the other do not cover the situation
which arises where, without fraud, the directors and majority
shareholders are guilty of
a
breach of duty which they owe to
the company, and
that breach of duty not only harms the
company but benefits the directors.
.
. .
If
minority shareholders
can sue if there is fraud,
I
see no reason why they cannot sue
when the action
of
the majority and the directors, though without
fraud, confers some benefit
on
those directors and majority share-
holders themselves.
. . .
The principle which may be gleaned
from [the cases]1o is that a minority shareholder who has no
other remedy may sue where directors use their powers, inten-
tionally or unintentionally, fraudulently or negligently, in a
manner
which benefits themselves at the expense
of
the
company.”
It is this formulation which may mislead readers to mistake the
essence of the decision for it is couched in language which masks a
critical point. In
Daniels
the
benefit
to the directors “at the
expense of the company
was not just a secret profit gained by them
in the execution of their duties but was an acquisition and disposal
of assets initially owned by the company
itself.
The nature of
fraud
by directors which allows minority shareholders to bring a derivative
action has always been wider than
simple fraud.” It includes all
cases where the directors misappropriate corporate property or
benefits, all cases when they
are endeavouring, directly or indirectly
to appropriate
to
themselves money, property or advantages which
belong to the company or in which the other shareholders are entitled
to participate.”
l2
The appropriation of
advantages
even includes
the filching of contractual opportunities which the company should
have enjoyed.13 The money and other property of the company are
assets
of
which the directors are constructive trustees and strictly
8
Atwool
v.
Merryweather
(1867) L.R. 5
Eq.
464x1.;
Clinch
v.
Financial Corpn.
(1868) L.R. 5
Eq.
450;
Gray
v.
Lewis
(1873) L.R. 8 Ch.App. 1035;
Menier
v.
Hooper’s Telegraph Works
(1874) L.R. 9 Ch.App. 350;
Mason
v.
Harris
(1879)
11
Ch.D. 97;
Cook
v.
Deeks
[1916]
1
A.C. 554, P.C.
9
Turquand
v.
Marshall
(1869) L.R.
4
Ch.App. 376, 386;
Pavlides
v.
Iensen
(supra),
at p. 570,
arguendo.
10
Alexander
v.
Automatic Telephone Co. (supra); Cook
v.
Deeks (supra); Pavlides
v.
Jensen (supra).
11
[1978]
2
W.L.R. at pp. 79-80 (emphasis supplied).
12
Burlond
v.
Earle
[1902] A.C. 83,93,
per
Lord Davey.
13
Cook
v.
Deeks
[1916] A.C. 554; perhaps even opportunities that the company
could not have used:
Industrial Development Consultants
v.
Cooley
[
19721
1
W.L.R.
443,
sed quaere
whether that was a case where a minority derivative action could be
brought because ratification
of
the breach
of
duty was not available, a’s Prentice
has suggested: [1972] C.B.R. 623, 635.
Sept.
19781
NOTES
OF
CASES
57
1
liable for breach of duty such that misappropriation gives both
company and minority shareholders
a
remedy.
l4
In
Daniels
the directors had clearly misappropriated corporate
assets under their control. The land belonged
ub
initio
to the com-
pany. The directors took that property at
a
value which they could
not be heard to say they did not realise was
a
preposterously low
price. Although, therefore, they were not alleged to be guilty of
‘‘
simple fraud,” they were, on the facts alleged, guilty of
fraud
in the extended sense that allows for
a
minority shareholders’
derivative action.
But objection will immediately be made that in
Duniels
the writ
was not
a
derivative, but a personal, action. True, the company was
joined as a defendant (a primary requirement of the derivative
action); but the writ was
not
in representative form
on behalf of
the plaintiffs and other shareholders other than the defendants
(another condition which a derivative action must satisfy). Indeed,
the judge went out of his way to interpret
Alexander’s
case
l5
an
which he relied and in which fraud was “negatived,” as a case
involving both
a
“personal” action by
a
shareholder and a
corporate
or derivative action.16
The objection, however,
is
untenable.
Wullersteiner
v.
Moir
(No.
2)
’’
illustrated that where no objection is taken to the absence of a
representative form from the minority shareholder’s writ, the deriva-
tive action can proceed.’* Where all the parties are before the
court
l9
and no such objection is taken, as here, the lack of a repre-
sentative writ will clearly not be a good ground for
a
decision against
the plaintiff shareholder, let alone
for
striking out the statement of
claim.
14
Stem
v.
Law
[1964]
A.C.
287,
and note
(8),
supra: Wallersteiner
v.
Moir
119751
1
W.L.R.
991;
Wallersteiner
v.
Moir
(No.
2) 1197.51
Q.B.
373,
explained
(1976) 39
M.L.R.
327, 330;
contra
(1975) 91
L.Q.R.
482.
Contrast the conventional view of the
acquisition of secret profits by directors in the execution of their omce for which
(being a ratifiable breach of duty) the minority cannot sue, though the company
can:
Regd (Hustings) Ltd.
v.
Gulliver
119421
1
All E.R.
378,
H.L.
Sed quaere
whether the minority could sue in such a case if the breach were seen
as
misuse
of a corporate
opportunity
or information which was the
property
’*
of the
company:
[1958]
C.L.J. at p.
103.
The White Paper
The Conduct of Company
Directors
(Cmnd.
7037 (1977)),
para.
3,
seems to suggest that the latter is, or should
be, the correct view. The draft Companies Bill set out in
Changes in Company
Law
(Cmnd.
7291, 1978)
seems to take that view in clause
44
(3)
and
(4)
which
would make a director liable for an advantage gained by use of the company’s money
or
other property
or
of any
relevant information
or
relevant opportunity
obtained by him while he was a director. But the draft Bill goes on to propose a
striking
relaxation
of the existing law by allowing a dirzctor to escape from
all
these
liabilities if
his
action
is
duly authorised
or
ratified
:
clause
44
(6).
This would
mean that breach of duty
as
a constructive trustee would become ratifiable!
l5
[1900] 2
Ch.
56,64,66-67,69,
C.A.
16
119781
1
W.L.R. at p.
77;
see
[1958]
C.L.J. at pp.
101-102.
It
is to
be
noted
that
Bamford
v.
Bamford
119701
Ch.
212,
must have involved a
derivative
action
despite the availability of ratification: see Russell L.J. at p.
242.
lT
119751
Q.B.
373,
C.A.
18
See
(1976) 39
M.L.R. at p.
330,
note
18.
19
See as to the importance of this in actions that involve representative plaintiffs
and
defendants:
Iohn
v.
Rees
[
19691 2
All
E.R.
274.

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