England and Wales High Court (Commercial Court) Decisions

IN THE HIGH COURT OF JUSTICE
IN THE CHANCERY DIVISION
COMPANIES COURT

		31st July. 2000

1. I have to deal with applications for disclosure of documents made by the Claimants against the 1st 2nd and 4th to 8th defendants ("the Defendants" ) in a petition brought by the Claimants against 8 defendants under section 459 of the Companies Act 1985. The application was made in the course of a case management conference when I had to deal with a number of other issues of disclosure, amendment of pleadings, and security for costs. I reserved judgment on the issue which I deal with in this judgment because of lack of time and also because it raises what may be a novel point of law.
2. It is necessary to set out the background facts of the case. I do so from a case summary provided by the Claimants.
3. In their petition under section 459 of the Companies Act 1985 the Claimants allege that the affairs of Nottingham Forest PLC ("the Company") have been conducted in a manner unfairly prejudicial to them. Nottingham Forest Football Club Limited ("the Club" ) operates the football team "Nottingham Forest". Until the matters complained of by the claimants, the Club was a wholly-owned subsidiary of the Company. The Company was established in 1997 for the purpose of acquiring the Club. That acquisition had proceeded against a background of two competing (but unsuccessful) bids, one of which had involved the third Respondent ("Mr Doughty") and one of which had involved a Mr Albert Scardino ("Mr Scardino") . At all material times the Company has been listed on AIM.
4. On 16th July 1999 Mr Doughty entered into an agreement with the Company and the Club under which he would subscribe £6M for 29.75 million new ordinary shares in the Club representing 40.5% of its share capital, with an option to subscribe a further £6M for a further 23.8 million new ordinary shares (following which he would hold 55 % of the enlarged share capital so that he would control the Club and the Company would become a minority shareholder). The agreement was conditional upon the approval of the Company's shareholders by ordinary resolution which approval was obtained at an Extraordinary General Meeting on the 28th July 1999.
5. The Claimants, who between them control 24.3% of the Company's share capital, say that the agreement with Mr Doughty was unfairly prejudicial. The mechanism of allowing Mr Doughty to invest in the Club (rather than the Company) was adopted for no proper purpose of the Company, but specifically to ensure that shareholders in the Company were denied the protections available to them under the Companies Act or the City Code. The Defendants contend that the agreement was made for a proper purpose, namely to ensure the urgent injection of funds into the Club.
6. The Claimants also say that the approval of the Company in general meeting did not render the agreement proper, moreover that such approval was procured buy a tricky circular. In particular the Claimants say that an approach from Mr Scardino to invest in the company was not disclosed to shareholders (who were left with the impression that there was no realistic alternative to Mr Doughty's proposal). The Defendants say that Mr Scardino's approach did not represent a realistic alternative justifying its disclosure. The Claimants also say, and the Defendants deny, that the prices at which the Company's shares were allotted to Mr Doughty and at which he had an option to acquire further shares in the Company, represented an undervalue.
7. The Claimants seek an order setting aside the agreement alternatively an order that their shares be purchased on the basis that the agreement was never entered into. The Claimants served their petition on the Defendants on the 28th October

of last year. The pleadings are now complete and the parties have exchanged lists of documents.

8. The issue with which I have to deal concerns an application by the Claimants for specific disclosure of a number of documents in respect of the whole or parts of which the Defendants contend are protected from disclosure by reason of legal professional privilege. The documents fall into four classes. In respect of the first class a number of documents have been produced on disclosure which have been redacted so as to exclude passages which, it is contended, contain privileged information. In all save one of these documents the redactins have been made to exclude hand-written comments added to those documents. The second classification refers to an advice by Counsel referred to in minutes of a Board meeting of the Company on the 1st July 1999 and a further advice from Counsel referred to in a fax dated the 9th July 1999. The 3rd classification refers to one document only namely a draft of the circular to shareholders which was ultimately distributed to them for the purposes of the Extraordinary General Meeting to approve the transaction with Mr Doughty to which I have already referred. The 4th class of document refers to documents recording legal advice mentioned in paragraphs 28.7, 34.4 and 44.2 of the defence of the Defendants.
9. All the documents in question were brought into existence at about the time of, and are connected with, the decision by the board of the Company to support Mr Doughty's proposed acquisition of shares in the Company and the preparations for an Extraordinary General Meeting of the company to approve that transaction. It is the Defendant's submission that, on the material before the Court, it is apparent that, at all material times, the Directors of the Company realised that to go ahead with the transaction with Mr Doughty would, in all probability, result in litigation of the type which has in fact emerged, brought on behalf of substantial minority shareholders who opposed the Company entering into the transaction and preferred the proposal that Mr Scardino acquire a substantial shareholding. For the purposes of this judgment I am content to assume that such is established.
10. The defendants oppose disclosure on the basis that the documents in question, or the passages in them which have been be redacted, are protected from disclosure by legal professional privilege because they contain communications between the Company and its legal advisors with relation to proceedings with which the Claimants were threatening the Defendants and which have ultimately been commenced. It is accepted by the Defendants that in order to succeed in their opposition to disclosure the Defendants must first establish that advice given to the Company, in these circumstances, is capable of attracting the protection of such privilege.
11. The fundamental rule which governs an attempt by a shareholder to obtain the production of documents by a company in which he holds shares but which documents would otherwise be protected by legal professional privilege is to be found in the judgment of Phillimore LJ in Woodhouse and Co (Limited) v Woodhouse 1914. 30 TLR page 559 . The report summarises his judgment as follows:-

"(The Judge) had read the opinions, and they were taken on behalf of the company and not on behalf of bothers, two of them after the action begun, and the third in preparation for the action. They had to consider the principle applicable where a shareholder was a plaintiff or a defendant in litigation with the company. To his mind, whether he was plaintiff or defendant was immaterial... the principle was that if people had a common interest in property, an opinion having regard to that property, paid for out of the common fund, i.e. company's money or trust fund, was the common property of the shareholder cestuis que trust. But where the parties were sundered by litigation such an opinion obtained by one of them was privileged."

12. In proceedings under section 459 of the Companies Act 1985 the company of which the disputing shareholder's or directors hold shares and over the control of which their dispute arises is only a nominal party to the litigation which, in substance, is a dispute between shareholders. See re Crossmore Electrical and Civil Engineering limited 1 (1989) 5 B.C.C. 37 per Hoffmann J. The same is true where a company is made defendant to a representative shareholders action against directors under the rule in Foss v Harbottle .
13. In W Dennis and Sons v West Norfolk Farmers Limited [1943] Ch. 220 Simonds J was considering an action by shareholders seeking relief against the directors of a company who, they alleged, had improperly exercised their powers to control the company's affairs. In those proceedings the plaintiffs sought disclosure of a report by accountants which had been obtained by the company in anticipation of the dispute. In his judgment Simonds J says this at page 222:-

"Two points have been raised, first whether, having regard to the circumstances in which, and the date on which, the accountants report was made, it is a privileged document, and, secondly, whether, even if it were otherwise a privileged document, it is privileged having regard to the fact that the plaintiffs are themselves shareholders in the Defendant company.

I have formed a clear opinion on second point which disposes of the case. The general rule, which applies equally as between a company and its shareholders and as between a trustee and his beneficiaries is thus stated at pages 518 and 519 of the Annual Practice 1943: "a cestui que trust... is entitled to see cases and opinions submitted and taken by the trustee for the purpose of the administration of the trust; but where stated and taken by the trustees not for that purpose, but for the purpose of their own defence in litigation against themselves by the cestui que trust they are protected... on the same principle a ratepayer would be entitled to see cases and opinions taken by the corporation on the subject of rates... and so in Gourand v Edison Gower Bell Telephone Co Ltd an action by shareholders against the company, the plaintiffs were held entitled to see communications between the company and their solicitors: but similarly a shareholder could not seek counsel's opinion taken by the company in respect of the matter in dispute between them."

In the present case it seems clear that when in January 1938 the defendants instructed the accountants to make a report on the interpretation of the article, and, therefore on the duty of the director's in administering the affairs of the company, they were doing something on behalf all the shareholders. They were seeking to do no more than to perform their duty having regard to the difference of opinion which had arisen on the board, and they did not seek the report because some action was threatened against them. That being so, the plaintiffs, as shareholders, are entitled to see what the accountants reported regarding the rights and duties of the board.

That was the position when the report was commanded. Two days before it was made the plaintiffs instituted proceedings by way of originating summons so that the construction of the article and their rights under it might be determined. The present defendants were necessarily made defendants in those proceedings. It appears to me that the plaintiffs, by instituting the proceedings two days before the report was received, did not lose their right as shareholders to see that which they otherwise would have been entitled to. In other words the report was not a document obtained by the defendants for the purpose of defending themselves against hostile litigation, and it was only where a document is obtained by a company for that purpose that privilege can be claimed. It must never be forgotten that the rules as to privilege are strict, and, as has so often because said, privileges is not to be extended."

14. The cases of Woodhouse and Dennis were cited by Harman J in re Hydrosan Limited [1991] B.C.C. 19 together with other authority including the decision of Hoffman J in the Crossmore Electrical case. Harman J was considering a section 459 Petition where the petitioners were complaining that the company's funds had been improperly applied in financing earlier litigation. The petitioner's were seeking disclosure of documents relating to a rights issue of which complaint was made. Production of those documents was refused by the Registrar on the grounds that they were covered by legal professional privilege.
15. Harman J, applying the rule in Woodhouse ordered that the documents be produced. The petition in that case included a prayer for the winding-up of the company. It was argued that this made the litigation hostile to the company as well as to the respondent shareholders. At page 421 Harman J says this:-

"It is quite true that if a winding-up order is made on a contributory petition the company will suffer what I usually refer to as death, that is, its coming to an end and eventual dissolution, but the wrongs claimed and the nature of the allegations are of wrongs by those in control of the company against a shareholder rather than by the company itself in any real sense. Here in this present case if there were documents created in the course ofproceedings, other than the section 459 petition, such as, it may well be, the claim brought by the petitioner against the company in the Chancery Division for wrongful dismissal and also the claim in an Industrial Tribunal for what is nowadays called unfair dismissal in such matters, it seems to me, the claim is truly against the company. A judgement recovered on it would make the claimant in it a creditor of the company and would found a creditors petition for winding up the company. Such matters, it seems to me, are hostile litigation within the doctrine of Woodhouse and Co v Woodhouse which is an exception to the general rule, but that exception does not in my judgment have any application to documents for a member's just and equitable petition. In such cases the principle applies which Vinelot J asserted in re Kenyan Swansea Limited.

16. In the present case Miss Roberts for the Defendants, while accepting, as she was bound to, that the rule as to disclosure found in the Woodhouse case was applicable to small private companies with limited share holdings, argued that it should not be applied to companies such as the first defendants, a PLC with substantial numbers of shares on issue, quoted on a stockmarket. She pointed out that all the authorities cited in the Hydrosan case were about small private companies with limited issues of shares. To apply the Woodhouse rule to companies such as the first defendant would be impractical and an unjustifiable extension.
17. I am unable to accept that submission. Nothing in the Woodhouse case or the subsequent authorities down to and including the Hydrosan case is supports the proposition that the rule is to be differently applied depending on the size and importance of the company concerned. As the authorities show the rule is based on principles of trust law, an analogy being drawn between the position of directors as fiduciaries and trustees. As the authorities show directors though not properly described as trustees of the assets of the company within their charge, nonetheless owe fiduciary duties to the shareholders which prevent them from applying those assets save for the purpose of the company. Directors are subject to the same duty to shareholders regardless of the size of the company concerned.
18. Miss Roberts was unable, when pressed by me, to produce any satisfactory criterion by which to judge whether the company concerned was one to which the Woodhouse rule as to disclosure would be applied and one that to which it would not.
19. It follows, in my judgment, that the documents in the four classifications which I have set out, and which are the subject of this part of the application, were not documents which were protected from disclosure by legal professional privilege. They were documents which were created or which were added to by lawyers or others for the purpose of procuring the company to take certain actions, albeit it was anticipated that those actions might give rise to litigation in which a challenge would be mounted to their propriety by the present petitioners. In the present case the company has procured the issue of a substantial number of the shares of its subsidiary to Mr Doughty and given him an option to acquire further shares which would render the company a minority shareholder in that subsidiary. It is alleged amongst other matters that the issue of those shares and the granting of the option were at a discount on the true value of the shares at the relevant time as demonstrated by their market price. It is also alleged that the shareholders of the company in general meeting were induced to vote in favour of this transaction as a result of a misleading circular. I say nothing as to whether any of those allegations are justified. I can see powerful contrary arguments. However I can see no reason why the objecting shareholders should not be entitled to see the advice and guidance being given to the company's board at the time these transactions were embarked upon in proceedings in which the company itself only appears as a defendant in a nominal capacity so as to be bound by any order which the Court makes.
20. That disposes of this part of the applications before me and makes it unnecessary for me to have to go on to consider whether the documents or any of them are discloseable on the basis that they are subject to legal professional privilege.