Lecture 1
Structure of the lecture
1) Background and Key Issue-Enforcing Duties
2) The Rule in Foss v Harbottle !
3) The True Exception to the Rule in Foss v Harbottle
4) Statutory Derivative Claims
5) Continuing a Derivative Claim and Procedural Points
6) Double derivative Actions
7) Personal Claims by Shareholders and the ‘No Reflective Loss’ principle
8) Remedies available to shareholders
a) Enforcing DDs
b) Directors owe duty to coy, so there is a problem here.
i) So if owe duty to coy, how can shareholders be owed a duty?
ii) Hence derivative action
iii) They sue on behalf of the coy
9) Whole starting point for PQ is
a) Statute FIRST if some engagement required with the principles, then engage w/
common law principles
10) When essay qn, maybe regarding some form of comparison, obv no order here
11)
Enforcing duties
1) Director duties owed to company (s. 170(1) CA)
2) ! If director duties owed to company, only company can enforce that right
3) ! Proper plaintiff rule - Foss v. Harbottle
4) Proper plaintiff is the coy itself (by right la)
Foss v Harbottle
1) SHs bring action against the company’s directors alleging that land sold to company at
exorbitant price
, 2) Brought action on behalf of themselves and all other shareholders
3) Held the conduct complained of was a wrong done to the company and only the
company could sue
4) Question was whether shareholders could sue individually, or only sue as a whole
5) Allegation was property was misapplied
a) Misappropriation of coy property
b) Shareholders bringing action against directors
6) It was incompetent for shareholders to bring the claim. By right, ought to have been the
coy itself bring the claim.
a) The proper plaintiff is the coy itself
b) Not the shareholders
What is the rule in Foss v Harbottle
1) Where a wrong has been done to the company, … could an individual shareholder sue
derivatively (for and on behalf of the company) or should litigation be left to the company
in its corporate character?
2) Who is the ‘proper plaintiff’?
a) It is prima facie … the company itself
3) No action can be allowed to proceed where the act complained of is capable of
ratification (‘if mere majority is in favour of what has been done’)
a) If irregularity or not breach of duty, if it can be ratified, then court wont allow the
action to proceed
4) However, if any breach of duties, this can make it diff for shareholders to bring an action
5) Its a rule of standing
a) When wrong done to coy, the suing is done by the coy
Theory behind the rule: who can be entrusted with decision to
litigate
1) Ownership and control of companies and the principle of majority rule
2) Separate legal personality of a company sue and be sued in its name
3) S.33 contract and the binding of the dissenting minority
4) Management autonomy decision to litigate is in the hands of the board of directors
5) Judicial reluctance to interfere in the internal management of companies
6) All these factors together shows why the decision to litigate for and behalf of the coy
should be left to the coy itself
a) Examination of why have the proper plaintiff rule
, 7) The exception therefore is DAs. so need to evaluate the advantages and disadvantages
of the PPR, and why need the exception
Evaluate
1) Advantages
a) Convenience
b) Avoids wasteful litigation
c) Prevents nuisance litigation
d) Prevents litigation which could leave the coy worse off
2) Disadvantages
a) Problem of wrongdoer control
b) Risk of vulnerable minority shareholders
Exceptions to Rule in foss v harbottle (as recognised in the
common law)
1) Where the act complained of was illegal or wholly ultra vires;
2) Where the matter in issue requires the sanction of a special majority; 3
3) Where the act complained of was an invasion of the members’ personal rights;
4) Where was a fraud on the minority and the wrongdoers were in control
a) Edwards v. Halliwell [1950] 2 All ER 1064
5) Query: what is the true exception?
6) UK Courts have been quick in the past to deny shareholders the standing to bring
derivative actions.
a) Because may have vexatious litigation
The first 3 are not true exceptions to rule in FVH
1) If such action has been taken, even CL recognised that action can be ratified.
Action itself becomes voidable. (if fraud not possible to ratify, and hence void)
2) CL position: CL recognise that benefit of DA is to coy itself
Many exceptions to FVH rule
Proper plaintiff principle is THE principle, so the exceptions ARE there
What is the ‘true exception’ to the rule in foss v harbottle
1) Where a fraud has been perpetrated against the company and the wrongdoers are
in control
, LRC recommendation
1) In 1998, The Law Commision published a report on Shareholder Remedies !
a) https://s3-eu-west-2.amazonaws.com/lawcom-prodstorage-11jsxou24uy7q/uploa
ds/2015/03/ lc246_Shareholder_Remedies.pdf
2) Concluded that law’s reticence to allow access to the derivative action was wise but
overstated.. Rule was complicated and unwieldy.
3) Recommended a new derivative procedure with more modern, flexible and accessible
criteria for determining whether a shareholder can pursue the action.
Statutory derivative action part 11 CA 2006
Statutory derivative action
1) Introduced in CA 2006, ss. 260-64
2) Exclusive method for pursuing derivative actions
3) Replaces common law rules associated with the rule in Foss v. Harbottle
4) Enacted to give effect to the recommendations of the Law Commission-no major change
in principle.
5) Intention: strike a balance between protecting directors from vexatious claims while
protecting rights of shareholders to bring meritorious claims.
Statutory derivative action part II of CA 2006
1) Applies to
a) ! Proceedings brought by a member
b) ! Cause of action vested in the company
c) ! Seeking relief on behalf of the company
d) ^ As mentioned in s.260(1) CA 2006
2) ! When can a derivative action be brought?
3) ! ‘…may be brought only in respect of a cause of action arising from an actual or
4) proposed act or omission involving negligence, default, breach of duty or breach of trust
by a director (or 3P) of the company’ s.260(3) CA 2006
5) ! Or in pursuance of an order of court in proceedings under s.994 (UP)
Structure of the lecture
1) Background and Key Issue-Enforcing Duties
2) The Rule in Foss v Harbottle !
3) The True Exception to the Rule in Foss v Harbottle
4) Statutory Derivative Claims
5) Continuing a Derivative Claim and Procedural Points
6) Double derivative Actions
7) Personal Claims by Shareholders and the ‘No Reflective Loss’ principle
8) Remedies available to shareholders
a) Enforcing DDs
b) Directors owe duty to coy, so there is a problem here.
i) So if owe duty to coy, how can shareholders be owed a duty?
ii) Hence derivative action
iii) They sue on behalf of the coy
9) Whole starting point for PQ is
a) Statute FIRST if some engagement required with the principles, then engage w/
common law principles
10) When essay qn, maybe regarding some form of comparison, obv no order here
11)
Enforcing duties
1) Director duties owed to company (s. 170(1) CA)
2) ! If director duties owed to company, only company can enforce that right
3) ! Proper plaintiff rule - Foss v. Harbottle
4) Proper plaintiff is the coy itself (by right la)
Foss v Harbottle
1) SHs bring action against the company’s directors alleging that land sold to company at
exorbitant price
, 2) Brought action on behalf of themselves and all other shareholders
3) Held the conduct complained of was a wrong done to the company and only the
company could sue
4) Question was whether shareholders could sue individually, or only sue as a whole
5) Allegation was property was misapplied
a) Misappropriation of coy property
b) Shareholders bringing action against directors
6) It was incompetent for shareholders to bring the claim. By right, ought to have been the
coy itself bring the claim.
a) The proper plaintiff is the coy itself
b) Not the shareholders
What is the rule in Foss v Harbottle
1) Where a wrong has been done to the company, … could an individual shareholder sue
derivatively (for and on behalf of the company) or should litigation be left to the company
in its corporate character?
2) Who is the ‘proper plaintiff’?
a) It is prima facie … the company itself
3) No action can be allowed to proceed where the act complained of is capable of
ratification (‘if mere majority is in favour of what has been done’)
a) If irregularity or not breach of duty, if it can be ratified, then court wont allow the
action to proceed
4) However, if any breach of duties, this can make it diff for shareholders to bring an action
5) Its a rule of standing
a) When wrong done to coy, the suing is done by the coy
Theory behind the rule: who can be entrusted with decision to
litigate
1) Ownership and control of companies and the principle of majority rule
2) Separate legal personality of a company sue and be sued in its name
3) S.33 contract and the binding of the dissenting minority
4) Management autonomy decision to litigate is in the hands of the board of directors
5) Judicial reluctance to interfere in the internal management of companies
6) All these factors together shows why the decision to litigate for and behalf of the coy
should be left to the coy itself
a) Examination of why have the proper plaintiff rule
, 7) The exception therefore is DAs. so need to evaluate the advantages and disadvantages
of the PPR, and why need the exception
Evaluate
1) Advantages
a) Convenience
b) Avoids wasteful litigation
c) Prevents nuisance litigation
d) Prevents litigation which could leave the coy worse off
2) Disadvantages
a) Problem of wrongdoer control
b) Risk of vulnerable minority shareholders
Exceptions to Rule in foss v harbottle (as recognised in the
common law)
1) Where the act complained of was illegal or wholly ultra vires;
2) Where the matter in issue requires the sanction of a special majority; 3
3) Where the act complained of was an invasion of the members’ personal rights;
4) Where was a fraud on the minority and the wrongdoers were in control
a) Edwards v. Halliwell [1950] 2 All ER 1064
5) Query: what is the true exception?
6) UK Courts have been quick in the past to deny shareholders the standing to bring
derivative actions.
a) Because may have vexatious litigation
The first 3 are not true exceptions to rule in FVH
1) If such action has been taken, even CL recognised that action can be ratified.
Action itself becomes voidable. (if fraud not possible to ratify, and hence void)
2) CL position: CL recognise that benefit of DA is to coy itself
Many exceptions to FVH rule
Proper plaintiff principle is THE principle, so the exceptions ARE there
What is the ‘true exception’ to the rule in foss v harbottle
1) Where a fraud has been perpetrated against the company and the wrongdoers are
in control
, LRC recommendation
1) In 1998, The Law Commision published a report on Shareholder Remedies !
a) https://s3-eu-west-2.amazonaws.com/lawcom-prodstorage-11jsxou24uy7q/uploa
ds/2015/03/ lc246_Shareholder_Remedies.pdf
2) Concluded that law’s reticence to allow access to the derivative action was wise but
overstated.. Rule was complicated and unwieldy.
3) Recommended a new derivative procedure with more modern, flexible and accessible
criteria for determining whether a shareholder can pursue the action.
Statutory derivative action part 11 CA 2006
Statutory derivative action
1) Introduced in CA 2006, ss. 260-64
2) Exclusive method for pursuing derivative actions
3) Replaces common law rules associated with the rule in Foss v. Harbottle
4) Enacted to give effect to the recommendations of the Law Commission-no major change
in principle.
5) Intention: strike a balance between protecting directors from vexatious claims while
protecting rights of shareholders to bring meritorious claims.
Statutory derivative action part II of CA 2006
1) Applies to
a) ! Proceedings brought by a member
b) ! Cause of action vested in the company
c) ! Seeking relief on behalf of the company
d) ^ As mentioned in s.260(1) CA 2006
2) ! When can a derivative action be brought?
3) ! ‘…may be brought only in respect of a cause of action arising from an actual or
4) proposed act or omission involving negligence, default, breach of duty or breach of trust
by a director (or 3P) of the company’ s.260(3) CA 2006
5) ! Or in pursuance of an order of court in proceedings under s.994 (UP)
