THE THEORY AND POLICY OF SHAREHOLDER ACTIONS IN TORT
| Author | M. J. Sterling |
| Published date | 01 July 1987 |
| DOI | http://doi.org/10.1111/j.1468-2230.1987.tb01721.x |
| Date | 01 July 1987 |
THE THEORY AND POLICY
OF
SHAREHOLDER
ACTIONS IN TORT
I. INTRODUCTION
THE
question
of
whether and to what extent shareholders might
bring a personal action in tort against company officials has not
hitherto been considered controversial or problematic in English
law. Although the question has been the subject
of
a considerable
amount
of
litigation in America,’ the only English judicial
authorities which raise the issue squarely concern the protracted
litigation between the Prudential Assurance Company and Newman
Industries Ltd.’
In this article it will be argued that the question in issue is
controversial and problematic, and that when it was considered by
the Court
of
Appeal in
Prudential Assurance
Co.
v.
Newman
Industries No.
23
it received inadequate and unconvincing coverage.
The first part
of
the article examines the relevant parts
of
the
judgment
of
the Court of Appeal and, in particular, analyses the
interpretations placed on particular company law doctrines by the
court. It will then be argued, using both American and English
authority, that no amount
of
analysis
of
the relevant company law
doctrines will lead to a correct determination
of
the proper scope
of
the personal action in tort because the arguments based on
doctrine are intrinsically inconclusive. Finally I shall argue that the
proper scope
of
the personal action in tort can only be determined
by careful attention to relevant arguments of policy; suggestions
will be put forward as to whether and to what extent a personal
action in tort might be allowed.
11.
THE
POSITION
IN
ENGLAND
In
Prudential Assurance
Co.
v.
Newman Industries Ltd.
it was
alleged by
P,
who had a small minority shareholding in the
defendant company, that
B
and
L,
two directors of the company,
had conspired to sell the assets of a company known as Thomas,
Poole and Gladstone China Ltd. (T.P.G.), in which they had a
substantial interest, to the company at an overvalue. The purchase
of
T.P.G.3 assets by the defendant company was approved, as
I
See
167
A.L.R.
279.
An
annotation
to
Sutter
v.
General Petroleum Corporation
170
P.
2d
898 (1946).
*
119811
Ch.
229, [1981]
Ch.
257
(Vinelott
J.);
[1982]
Ch.
204
C.A.
Pennington’s
Company Law
(5th ed.,
1985),
states at
p.51
“.
.
.
a member
of
a company cannot sue in
respect
of
torts committed against
it,
nor can he be sued
for
torts committed by it.” The
author cites
British Thomson
Houston
v.
Sterling Accessories
I19241 2
Ch.
33,
Rainham
Chemical Works
v.
Belvedere Fish Guano
Co.
[1921) 2
A.C.
465, 475-476;
Performing
Rights Society
v.
Ciryl Theatrical Syndicate
[1924]
1
K.B.
1
and
Evans
and Spritebrand
Lrd.
v.
Spritebrand and Sullivan
I19851
2
All
E.R.
415.
These cases can only be used
for
the roposition that a director is not liable
for
torts committed by his company.
468
’
f1982)
Ch.
204.
JULY
19871
POLICY
OF
SHAREHOLDER
ACTIONS IN
TORT
469
required by the Stock Exchange
regulation^,^
by extraordinary
general meetings
of
T.P.G.
and the defendant company but
P
claimed that the shareholders
of
the company had given their
approval on the basis
of
a tricky and misleading circular which was
prepared and distributed by
B
and
L. P
brought a derivative action
based on the alleged breach
of
fiduciary duty5 and also a
representative personal action6 seeking a declaration that an
unlawful conspiracy had taken place and an individual personal
action claiming damages in respect
of
its own loss arising from the
conspiracy.
Vinelott
J.,
at first instance, allowed
P’s
claim for a declaration
that a conspiracy had taken place and ordered an inquiry into the
damage suffered by
P
personally, because in his opinion the
conspiracy had resulted in Newman paying
€445,000
more than the
value
of
the assets acquired under the impugned arrangement. N
therefore unnecessarily increased its overdraft by
€445,000
which
meant that it lost interest on that sum and to that extent lost
profits. This in turn reduced the price at which shares in Newman
Industries Ltd. traded, causing individual shareholders
loss.’
The Court
of
Appeal considered both the representative personal
and the individual personal claims misconceived, giving three
identifiable types
of
reason for their decision. The first was that the
shareholders suffered no personal
loss;
any “loss” was merely a
“reflection”
of
the loss suffered by the company through the
diminution in value
of
its net assets. This argument was justified on
the grounds that
P’s
shares were merely rights
of
participation in
the company on the terms
of
the articles
of
association. The second
was based on the theory
of
corporate personality which, in their
opinion, led to the conclusion that the company alone had a cause
of
action in respect of the tort. The third reason was based on
intrinsic hostility.* It was argued that the personal action was
merely being used as aq attempt to subvert the rule in
Foss
v.
Harborrle9;
that it would cause terrible problems if both the
company and an individual shareholder decided to challenge alleged
wrongdoing at different times; and that difficulties would be caused
if a fraud which was rumoured to be substantial turned out to be
trivial.
‘
Stock Exchange,
Admission
ofSecurifies
10
Lisfing,
Section 6, Chapter
1,
Class 4.
The term “derivative action” is used to signify a minority shareholder action in which
recovery is sought by the shareholder on behalf
of
the company.
This
article is concerned
primarily with personal actions by shareholders but for consideration
of
the derivative
action see sections 4 and
5
infru.
’An action
of
the type authorised under
R.S.C.,
Ord. 15, r.12(1) in which P claims
that he and a class
of
individuals having the same interest have had their personal rights
infrineed.
.....~~.
’
[l?96-]
Ch. 257, 302-303.
*
For
recent evidence of judicial hostility
to
personal actions see
Lee
v.
Chou
Wen
Hsien
11985l
B.C.L.C.
45
(P.C.).
(1843)
2
Hare 461.
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