Minority Protection
Cases
Pender v Lushington
(1877) 6 Ch D 70 Lord Jessel MR wrote
A member “has a right to say, “Whether I vote in the majority or minority, you shall record my vote, as that is a right of property belonging to my interest in this company, and if you refuse to record my vote I will institute legal proceedings against you to compel you.”
“In all cases of this kind, where men exercise their rights of property, they exercise their rights from some motive adequate or inadequate, and I have always considered the law to be that those who have the rights of property are entitled to exercise them, whatever their motives may be for such exercise—that is as regards a Court of Law as distinguished from a court of morality or conscience, if such a court exists. I put to Mr. Harrison , as a crucial test, whether, if a landlord had six tenants whose rent was in arrear, and three of them voted in a way he approved of for a member of Parliament, and three did not, the Court could restrain the landlord from distraining on the three who did not, because he did not at the same time distrain on the three who did. He admitted at once that whatever the motive might be, even if it could be proved that the landlord had distrained on them for that reason, that I could not prevent him from distraining because they had not paid their rent. I cannot deprive him of his property, although he may not make use of that right of property in a way I might altogether approve. That is really the question, because if these shareholders have a right of property, then I think all the arguments which have been addressed to me as to the motives which induced them to exercise it are entirely beside the question……
But there is another ground on which the action may be maintained. This is an action by Mr. Pender for himself. He is a member of the company, and whether he votes with the majority or the minority he is entitled to have his vote recorded—an individual right in respect of which he has a right to sue. That has nothing to do with the question like that raised in Foss v Harbottle[3] and that line of cases. He has a right to say, “Whether I vote in the majority or minority, you shall record my vote, as that is a right of property belonging to my interest in this company, and if you refuse to record my vote I will institute legal proceedings against you to compel you.” What is the answer to such an action? It seems to me it can be maintained as a matter of substance, and that there is no technical difficulty in maintaining it.”
Johnson v Gore Wood & Co
[2000] UKHL 65
“In relation to the issue of reflective loss, Lord Bingham summarised the existing case law in three key propositions:
Where a company suffers loss caused by a breach of duty owed to it, only the company may sue in respect of that loss. No action lies at the suit of a shareholder suing in that capacity and no other to make good a diminution in the value of the shareholder’s shareholding where that merely reflects the loss suffered by the company.
Where a company suffers loss but has no cause of action to sue to recover that loss, the shareholder in the company may sue in respect of it.
Where a company suffers loss caused by a breach of duty to it, and a shareholder suffers a loss separate and distinct from that suffered by the company caused by breach of a duty independently owed to the shareholder, each may sue to recover the loss caused to it by breach of the duty owed to it but neither may recover loss caused to the other by breach of the duty owed to that other.
Giles v Rhind
[2002] EWCA Civ 1428
Waller LJ wrote
“Johnson v Gore Wood & Co is the starting point. …..Lord Bingham referred to the following Court of Appeal authorities: Lee v Sheard [1956] 1 QB 192; Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204; Heron International Ltd v Lord Grade [1983] BCLC 244; R P Howard Ltd v Woodman Matthews & Co [1983] BCLC 117; George Fischer (Great Britain) Ltd v Multi Construction Ltd [1995] 1 BCLC 260; Christensen v Scott [1996] 1 NZLR 273; Barings plc v Coopers & Lybrand [1997] 1 BCLC 427; Gerber Garment Technology Inc v Lectra Systems Ltd [1997] RPC 443; Stein vBlake [1998] 1 All ER 724 and Watson v Dutton Forshaw Motor Group Ltd (unreported) 22 July 1998; Court of Appeal (Civil Division) Transcript No 1284 of 1998. He then summarised the position in the following way:
“These authorities support the following propositions. (1) Where a company suffers loss caused by a breach of duty owed to it, only the company may sue in respect of that loss. No action lies at the suit of a shareholder suing in that capacity and no other to make good a diminution in the value of the shareholder’s shareholding where that merely reflects the loss suffered by the company. A claim will not lie by a shareholder to make good a loss which would be made good if the company’s assets were replenished through action against the party responsible for the loss, even if the company, acting through its constitutional organs, has declined or failed to make good that loss. So much is clear from Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204, particularly at pp 222-223, Heron International, particularly at pp 261-262, George Fischer, particularly pp 266 and 270-271, Gerber and Stein vBlake, particularly at pp 726-729. (2) Where a company suffers loss but has no cause of action to sue to recover that loss, the shareholder in the company may sue in respect of it (if the shareholder has a cause of action to do so), even though the loss is a diminution in the value of the shareholding. This is supported by Lee v Sheard [1956] 1 QB 192, 195-196, George Fischer and Gerber. (3) Where a company suffers loss caused by a breach of duty to it, and a shareholder suffers a loss separate and distinct from that suffered by the company caused by breach of a duty independently owed to the shareholder, each may sue to recover the loss caused to it by breach of the duty owed to it but neither may recover loss caused to the other by breach of the duty owed to that other. I take this to be the effect of Lee v Sheard, at pp 195-196, Heron International, particularly at p 262, R P Howard, particularly at p 123, Gerber and Stein v Blake, particularly at p 726. I do not think the observations of Leggatt LJ in Barings at p 435B and of the Court of Appeal of New Zealand in Christensen v Scott at p 280, lines 25-35, can be reconciled with this statement of principle.
These principles do not resolve the crucial decision which a court must make on a strike-out application, whether on the facts pleaded a shareholder’s claim is sustainable in principle, nor the decision which the trial court must make, whether on the facts proved the shareholder’s claim should be upheld. On the one hand the court must respect the principle of company autonomy, ensure that the company’s creditors are not prejudiced by the action of individual shareholders and ensure that a party does not recover compensation for a loss which another party has suffered. On the other, the court must be astute to ensure that the party who has in fact suffered loss is not arbitrarily denied fair compensation. The problem can be resolved only by close scrutiny of the pleadings at the strike-out stage and all the proven facts at the trial stage: the object is to ascertain whether the loss claimed appears to be or is one which would be made good if the company had enforced its full rights against the party responsible, and whether (to use the language of Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204, 223) the loss claimed is “merely a reflection of the loss suffered by the company”. In some cases the answer will be clear, as where the shareholder claims the loss of dividend or a diminution in the value of a shareholding attributable solely to depletion of the company’s assets, or a loss unrelated to the business of the company. In other cases, inevitably, a finer judgment will be called for. At the strike-out stage any reasonable doubt must be resolved in favour of the claimant.”
Lord Millett’s judgment really needs reading in extenso but it is right to quote p 120G to p 121G:
“The firm’s cross-appeal: recoverable heads of damage
A company is a legal entity separate and distinct from its shareholders. It has its own assets and liabilities and its own creditors. The company’s property belongs to the company and not to its shareholders.. If the company has a cause of action, this represents a legal chose in action which represents part of its assets. Accordingly, where a company suffers loss as a result of an actionable wrong owed to it, the cause of action is vested in the company and the company alone can sue. No action lies at the suit of a shareholder suing as such, though exceptionally he may be permitted to bring a derivative action in right of the company and recover damages on its behalf: see Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204, 210. Correspondingly, of course, a company’s shares are the property of the shareholder and not the company, and if he suffers loss as a result of an actionable wrong done to him, then prima facie he alone can sue and the company cannot. On the other hand, although a share is an identifiable piece of property which belongs to the shareholder and has an ascertainable value, it also represents a proportionate part of the company’s met assets, and if these are depleted the diminution in its assets will be reflected in the diminution in the value of the shares. The correspondence may not be exact, especially in the case of a company whose shares are publicly traded, since their value depends on market sentiment. But in the case of a small private company like this company, the correspondence is exact.
This causes no difficulty where the company has a cause of action and the shareholder has none; or where the shareholder has a cause of action and the company has none, as in Lee vSheard [1956] 1 QB 192, George Fischer (Great Britain) Ltd v Multi Construction Ltd [1995] 1 BCLC 260, and Gerber Garment Technology Inc v Lectra Systems Ltd [1997] RPC 443. Where the company suffers loss as a result of a wrong to the shareholder but has no cause of action in respect of its loss, the shareholder can sue and recover damages for his own loss, whether of a capital or income nature, measured by the diminution in the value of his shareholding. He must, of course show that he has an independent cause of action of his own and that he has suffered personal loss caused by the defendant’s actionable wrong. Since the company itself has no cause of action in respect of its loss, its assets are not depleted by the recovery of damages by the shareholder.
The position is, however, different where the company suffers loss caused by the breach of a duty owed both to the company and to the shareholder. In such a case the shareholder’s loss, in so far as this is measured by the diminution in value of his shareholding or the loss of dividends, merely reflects the loss suffered by the company in respect of which the company has its own cause of action. If the shareholder is allowed to recover in respect of such loss, then either there will be double recovery at the expense of the defendant or the shareholder will recover at the expense of the company and its creditors and other shareholders. Neither course can be permitted. This is a matter of principle; there is no discretion involved. Justice to the defendant requires the exclusion of one claim or the other; protection of the interests of the company’s creditors requires that it is the company which is allowed to recover to the exclusion of the shareholder. These principles have been established in a number of cases, though they have not always been faithfully observed.”
He also dealt with Leggatt LJ in Barings in the following way:
“In Barings plc v Coopers & Lybrand [1997] 1 BCLC 427 a parent company, brought an action in negligence against the auditors of a wholly-owned subsidiary. Leggatt LJ correctly distinguished both Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204, where the shareholder had no independent cause of action of his own, and George Fischer (Great Britain) Ltd v Multi Construction Ltd [1995] 1 BCLC 260, where the company had none. Here each of them had its own cause of action. But he stated, at p 435B-E, that if the shareholder suffered loss as a result of a breach of duty on the part of the defendant owed to it, it could not be disentitled from suing merely because the damages claimed would or might include damages for which the defendant was liable to the company. There was, he said, no legal principle which debarred a holding company from recovering damages for loss in the value of its subsidiaries resulting directly from the breach of a duty owed to the holding company as distinct from a duty owed to the subsidiaries. I do not accept this as correct.”
Thereafter he dealt with Christensen v Scott [1996] 1 NZLR 272 and having quoted the following passage from Thomas J giving the judgment of the court, which is in the following terms:
“the diminution in the value of Mr and Mrs Christensen’s shares in the company is by definition a personal loss and not a corporate loss. The loss suffered by the company is the loss of the lease and the profit which would have been obtained from harvesting the potato crop. That loss is reflected in the diminution in the value of Mr and Mrs Christensen’s shares. They can no longer realise their shares at the value they enjoyed prior to the alleged default of their accountants and solicitors.”
Lord Millett then continued:
“I cannot accept this reasoning as representing the position in English law. It is of course correct that the diminution in the value of the plaintiff’s shares was by definition a personal loss and not the company’s loss, but that is not the point. The point is that it merely reflected the diminution of the company’s assets. The test is not whether the company could have made a claim in respect of the loss in question; the question is whether, treating the company and the shareholder as one for this purpose, the shareholder’s loss is franked by that of the company. If so, such reflected loss is recoverable by the company and not by the shareholders.
Thomas J acknowledged that double recovery could not be permitted, but thought that the problem did not arise where the company had settled its claim. He considered that it would be sufficient to make an allowance for the amount paid to the liquidator. With respect, I cannot accept this either. As Hobhouse LJ observed in Gerber Garment Technology Inc v Lectra Systems Ltd [1997] RPC 443, 471, if the company chooses not to exercise its remedy, the loss to the shareholder is caused by the company’s decision not to pursue its remedy and not by the defendant’s wrongdoing. By a parity of reasoning, the same applies if the company settles for less than it might have done. Shareholders (and creditors) who are aggrieved by the liquidator’s proposals are not without remedy; they can have recourse to the Companies Court, or sue the liquidator for negligence.
But there is more to it than causation. The disallowance of the shareholder’s claim in respect of reflective loss is driven by policy considerations. In my opinion, these preclude the shareholder from going behind the settlement of the company’s claim. If he were allowed to do so then, if the company’s action were brought by its directors, they would be placed in a position where their interest conflicted with their duty; while if it were brought by the liquidator, it would make it difficult for him to settle the action and would effectively take the conduct of the litigation out of his hands. The present case is a fortiori; Mr Johnson cannot be permitted to challenge in one capacity the adequacy of the terms he agreed in another.”
Lord Goff simply agreed with Lord Bingham and Lord Millett in their conclusion i.e. that Mr Johnson should be entitled to recover damages in respect of all heads of “non-reflective consequential loss which are not too remote”. Lord Cooke was clearly less happy about the very firm lines that Lord Millett and Lord Bingham might be said to be drawing. Lord Hutton also was clearly less happy about the firm lines although did feel that having regard to its history the principle in Prudential Assurance should be followed in preference to the approach of the New Zealand case Christensen vScott.
….. Thus neither Lord Bingham nor Lord Millett would I think argue with the following propositions. First that the principle which Johnson v Gore Wood & Co establishes will not in the words of Sir Christopher Slade in Walker v Stones [2000] 4 All ER 412 at 438:
“operate to deprive a claimant of an otherwise good cause of action in a case where (a) the claimant can establish that the defendant’s conduct has constituted a breach of some legal duty owed to him personally (whether under the law of contract, torts, trusts or any other branch of the law) and (b) on its assessment of the facts, the court is satisfied that such breach of duty has caused him personal loss, separate and distinct from any loss that may have been occasioned to any corporate body in which he may be financially interested.”
Second (as they both recognised) if shareholders have a cause of action in relation to damage suffered by the company in which they hold the shares where that company does not have a cause of action, the shareholders may bring a claim even if in reality they are claiming damages reflective of the loss suffered by the company.
The logic of that second exception ought to be based on the injustice of a wrongdoer being able to defeat a claim by suggesting that the loss being suffered was suffered by the company and is thus irrecoverable by the shareholder although the company does not or may not have a cause of action. But it is right to say that Lord Millett justifies that exception on the basis that “since the company itself has no cause of action in respect of its loss, its assets are not depleted by the recovery of damages by the shareholder”. Thus Lord Millett appears to have in mind the concept that the cause of action which a company has (if it has) is one which enables the company to bring about full recovery.
Lord Bingham at p 95 where he is considering what should constitute a mere “reflection of the loss suffered by the company” put it this way:
“the problem can be resolved only by close scrutiny of the pleadings at the strike-out stage and all the proven facts at the trial stage: the object is to ascertain whether the loss claimed appears to be or is one which would be made good if the company had enforced its full rights against the party responsible, ….”
In Johnson v Gore Wood & Co there was no difficulty about the company having a cause of action and being able to recover on the cause of action. I also think that in the light of Lord Bingham’s observation that it is important for the “court to be astute to ensure that the party who has in fact suffered loss is not arbitrarily denied compensation”, it is clear that he had the particular facts in Johnson v Gore Wood & Co in mind i.e. that there had been nothing to stop the company continuing with its action if it had so chosen.
One situation which is not addressed is the situation in which the wrongdoer by the breach of duty owed to the shareholder has actually disabled the company from pursuing such cause of action as the company had. It seems hardly right that the wrongdoer who is in breach of contract to a shareholder can answer the shareholder by saying “the company had a cause of action which it is true I prevented it from bringing, but that fact alone means that I the wrongdoer do not have to pay anybody”.
…..
So far I have only considered Johnson v Gore Wood & Co. Since that authority analyses such Court of Appeal authorities as there were prior to its decision, I do not find it necessary to analyse those previous Court of Appeal decisions. It seems to me that nothing I have said conflicts with them.
The only further authority to which I should refer is Day v Cook [2001] EWCA Civ 592. In that case Mr Day was the principal shareholder in TL, he again was someone who carried on his business through TL and other companies. It was also a case brought against a solicitor for breach of duty where it was difficult to ascertain whether any breach of duty was a breach of the duty owed to a corporate entity rather than the individual. It was not a case where there was any suggestion that the breach of duty to the individual involved the destruction of the corporate entity thus preventing the corporate entity bringing its own claim. Nor was it a case where it was argued that the diminution in value of the shareholding contained different elements one of which could be categorised as a purely personal loss. Arden LJ having analysed Johnson v Gore Wood & Co said this at paragraph 38:
“It will thus be seen from the speeches in Johnson v Gore Wood that where there is a breach of duty to both the shareholder and the company and the loss which the shareholder suffers is merely a reflection of the company’s loss there is now a clear rule that the shareholder cannot recover. That follows from the graphic example of the shareholder who is led to part with the key to the company’s money box and the theft of the company’s money from that box. It is not simply the case that double recovery will not be allowed, so that, for instance if the company’s claim is not pursued or there is some defence to the company’s claim, the shareholder can pursue his claim. The company’s claim, if it exists, will always trump that of the shareholder.”
She however recognised there were limits when she said at paragraph 41:
“However, it is apparent that there are limits to the application of the no reflective loss principle. The principal limit is that the no reflective loss principle does not apply where the company has no claim and hence the only duty is the duty owed to the shareholder (Lord Bingham’s proposition (2)). Likewise it does not apply where the loss which the shareholder suffers is additional to and different from that which the company suffers and a duty is also owed to the shareholder: see Lord Bingham’s proposition (3) and see Heron International Ltd v Lord Grade [1983] BCLC 244, as explained by Lord Millett in Johnson v Gore Wood. There may well be other limits.”
I do not understand Arden LJ or any other members of the court in that case to be going any further than they thought that Johnson v Gore Wood had gone. Nor do I understand them to be suggesting that if a shareholder has suffered a distinct loss he is not entitled to recover that distinct loss. The question whether the destruction of the company disabled the company from bringing a claim simply was not in issue.”
Re Yenidje Tobacco Co Ltd
[1916] 2 Ch 426 Lord Cozens-Hardy MR wrote
“Is it possible to say that it is not just and equitable that that state of things should not be allowed to continue, and that the Court should not, intervene and say this is not what the parties contemplated by the arrangement into which they entered? They assumed, and it is the foundation of the whole of the agreement that was made, that the two would act as reasonable men with reasonable courtesy and reasonable conduct in every way towards each other, and arbitration was only to be resorted to with regard to some particular dispute between the directors which could not be determined in any other way. Certainly, having regard to the fact that the only two directors will not speak to each other, and no business which deserves the name of business in the affairs of the company call be carried on, I think the company should not be allowed to continue. I have treated it as a partnership, and under the Partnership Act of course the application for a dissolution would take the form of an action; but this is not a partnership strictly, it is not a case in which it can be dissolved by action. But ought not precisely the same principles to apply to a case like this where in substance it is a partnership in the form or the guise of a private company? It is a private company, and there is no way to put an end to the state of things which now exists except by means of a compulsory order. It has been urged upon us that, although it is admitted that the “just and equitable” clause is not to be limited to cases ejusdem generis, it has nevertheless been held, according to the authorities, not to apply except where the substratum of the company has gone or where there is a complete deadlock. Those are the two instances which are given, but I should be very sorry, so far as my individual opinion goes, to hold that they are strictly the limits of the “just and equitable” clause as found in the Companies Act. I think that in a case like this we are bound to say that circumstances which would justify the winding up of a partnership between these two by action are circumstances which should induce the Court to exercise its jurisdiction under the just and equitable clause and to wind up the company.”
Ebrahimi v Westbourne Galleries Ltd
[1973] AC 360
Lord Wilberforce wrote
“In England, the leading authority is the Court of Appeal’s decision in In re Yenidje Tobacco Co. Ltd. [1916] 2 Ch. 426 . This was a case of two equal director shareholders, with an arbitration provision in the articles, between whom a state of deadlock came into existence. It has often been argued, and was so in this House, that its authority is limited to true deadlock cases. I could, in any case, not be persuaded that the words ‘just and equitable’ need or can be confined to such situations. But Lord Cozens-Hardy M.R. clearly puts his judgment on wider grounds. Whether there is deadlock or not, he says, at p. 432, the circumstances
‘are such that we ought to apply, if necessary, the analogy of the partnership law and to say that this company is now in a state which could not have been contemplated by the parties when the company was formed …’
Warrington L.J. adopts the same principle, treating deadlock as an example only of the reasons why it would be just and equitable to wind the company up.
In 1924, these authorities were reviewed, approved and extended overseas by the Judicial Committee of the Privy Council in an appeal from the West Indian Court of Appeal (Barbados), Loch v. John Blackwood Ltd [1924] A.C. 783 . The judgment of the Board delivered by Lord Shaw of Dunfermline clearly endorses, if not enlarges, the width to be given to the just and equitable clause. The case itself was one of a domestic company and was not one of deadlock. One of the directors had given grounds for loss of confidence in his probity and (a matter echoed in the present case) had shown that he regarded the business as his own. His Lordship quotes with approval from the judgments of Lord M’Laren in Symington v. Symington’s Quarries Ltd, 8 F. 121 and of Lord Cozens-Hardy M.R. in In re Yenidje Tobacco Co. Ltd. [1916] 2 Ch. 426 ….
This series of cases (and there are others: In re Davis & Collett Ltd [1935] Ch. 693 ; Baird v. Lees, 1924 S.C. 83 ; Elder v. Elder & Watson, 1952 S.C. 49 ; In re Swaledale Cleaners Ltd [1968] 1 W.L.R. 1710 ; In re Fildes Bros. Ltd. [1970] 1 W.L.R. 592 ; In re Leadenhall General Hardware Stores Ltd (unreported), February 4, 1971), amounts to a considerable body of authority in favour of the use of the just and equitable provision in a wide variety of situations, including those of expulsion from office. The principle has found acceptance in a number of Commonwealth jurisdictions. Though these were not cited at the Bar I refer to some of them since they usefully illustrate the principle which has been held to underlie this jurisdiction and show it applicable to exclusion cases….
My Lords, in my opinion these authorities represent a sound and rational development of the law which should be endorsed. The foundation of it all lies in the words ‘just and equitable’ and, if there is any respect in which some of the cases may be open to criticism, it is that the courts may sometimes have been too timorous in giving them full force. The words are a recognition of the fact that a limited company is more than a mere legal entity, with a personality in law of its own: that there is room in company law for recognition of the fact that behind it, or amongst it, there are individuals, with rights, expectations and obligations inter se which are not necessarily submerged in the company structure. That structure is defined by the Companies Act and by the articles of association by which shareholders agree to be bound. In most companies and in most contexts, this definition is sufficient and exhaustive, equally so whether the company is large or small. The ‘just and equitable’ provision does not, as the respondents suggest, entitle one party to disregard the obligation he assumes by entering a company, nor the court to dispense him from it. It does, as equity always does, enable the court to subject the exercise of legal rights to equitable considerations; considerations, that is, of a personal character arising between one individual and another, which may make it unjust, or inequitable, to insist on legal rights, or to exercise them in a particular way.
It would be impossible, and wholly undesirable, to define the circumstances in which these considerations may arise. Certainly the fact that a company is a small one, or a private company, is not enough. There are very many of these where the association is a purely commercial one, of which it can safely be said that the basis of association is adequately and exhaustively laid down in the articles. The superimposition of equitable considerations requires something more, which typically may include one, or probably more, of the following elements: (i) an association formed or continued on the basis of a personal relationship, involving mutual confidence – this element will often be found where a pre-existing partnership has been converted into a limited company; (ii) an agreement, or understanding, that all, or some (for there may be ‘sleeping’ members), of the shareholders shall participate in the conduct of the business; (iii) restriction upon the transfer of the members’ interest in the company – so that if confidence is lost, or one member is removed from management, he cannot take out his stake and go elsewhere.”