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You are here: BAILII >> Databases >> The Law Commission >> SHAREHOLDERS REMEDIES [1997] EWLC 246(6) (24 October 1997)
URL: http://www.bailii.org/ew/other/EWLC/1997/246(6).html
Cite as: [1997] EWLC 246(6)
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PART 6
A NEW DERIVATIVE
ACTION
Introduction
6.1 In this part we are concerned with the law relating to the ability of a shareholder to bring proceedings to enforce a cause of action vested in the company (a derivative action). We explained in the consultation paper that there were two related principles which restrict a members ability to bring such proceedings. The first is the majority rule principle developed as a result of the courts historical reluctance to become involved in disputes over the internal management of business ventures. (1) The second is the proper plaintiff principle which has been described as "... the elementary principle that A cannot, as a general rule, bring an action against B to recover damages or secure other relief on behalf of C for an injury done by B to C". (2) As a company is a separate legal entity, it is the proper plaintiff where it has suffered injury. These principles were applied in the case of Foss v Harbottle (3) and are often applied by the courts as "the rule in Foss v Harbottle". (4)
6.2 However, these restrictions are not absolute. If they were, they would mean that where a wrong has been done to the company by or with the support of the majority shareholders, there could never be any redress. There are cases, therefore, when the rule will not apply and an individual shareholder will be able to bring an action. These were set out by the Court of Appeal in Edwards v Halliwell (5) and restated in Prudential Assurance Co Ltd v Newman Industries Ltd (No 2)("Prudential") (6) in the following terms:
(1) The proper plaintiff in an action in respect of a wrong alleged to be done to a corporation is, prima facie, the corporation.
(2) Where the alleged wrong is a transaction which might be made binding on the corporation and on all its members by a simple majority of the members, no individual member of the corporation is allowed to maintain an action in respect of that matter because, if the majority confirms the transaction, cadit quaestio [the question is at an end]; or, if the majority challenges the transaction, there is no valid reason why the company should not sue.
(3) There is no room for the operation of the rule if the alleged wrong is ultra vires the corporation, because the majority of members cannot confirm the transaction.
(4) There is also no room for the operation of the rule if the transaction complained of could be validly done or sanctioned only by a special resolution or the like, because a simple majority cannot confirm a transaction which requires the concurrence of a greater majority.
(5) There is an exception to the rule where what has been done amounts to fraud and the wrongdoers are themselves in control of the company. (7)
6.3 We noted that only the fifth limb of the restatement in Prudential was a true "exception" to the rule in Foss v Harbottle¸ in that it permitted a shareholder to bring a derivative action (ie an action to enforce the companys cause of action) inspite of the majority rule and proper plaintiff principles. (8) The third and fourth limbs were really situations where the principles had no application; actions under those limbs can be brought by a shareholder as a personal action in his own right, and need not be brought as a derivative action. (9)
6.4 Our view was that the basic approach to the right to bring a derivative action was a sound one: an individual shareholder should only be able to bring such an action in exceptional circumstances. (10) This approach is also reflected in the first, second and fifth guiding principles set out in paragraph 1.9 above (proper plaintiff, internal management, and freedom from unnecessary shareholder interference). But we considered that the rule was complicated and unwieldy. It could only be found in case law, much of it decided many years ago; the meaning of terms such as "wrongdoer control" were not clear; and there were situations which appeared to fall outside the fraud on the minority exception when it might be desirable for a member to be able to bring an action. (11) We also expressed concern at the way in which a member was required to prove standing to bring an action as a preliminary issue by evidence which shows a prima facie case on the merits, and noted that this could easily result in a mini trial which increases the length and cost of litigation. (12) We therefore put forward proposals for a new procedure for derivative actions.
6.5 The substance of our proposal was that the new derivative action would be available to any member if the case fell within the following situation:
that, if the company were the applicant, it would be entitled to any remedy against any person as a result of any breach or threatened breach by any director of the company of any of his duties to the company.
6.6 But this would be subject to tight judicial control at all stages. In particular, an applicant would be required to seek leave from the court by close of pleadings to continue the action and in considering whether to grant leave the court would take account of all the circumstances. (13) Our view was that, for the most part, primary legislation was not required and that this reform should be achieved by rules of court.
6.7 In examining respondents views on these proposals and setting out our final recommendations we consider in turn the following: international developments; the need for a new derivative action; should it be implemented by primary legislation or in rules of court; the position under Scots law; availability of the new derivative action; the extent to which the common law rule should be abrogated; the procedural steps; the issues relevant to the grant of leave; and other relevant provisions.
International developments
6.8 We noted in the consultation paper a number of international developments with regard to the derivative action. Eight of the ten provinces of Canada have since 1975 replaced the rule in Foss v Harbottle with a requirement that the shareholder obtain leave of the court. (14) In Australia and Hong Kong there are legislative proposals for a statutory derivative action. (15) The proposals in Australia (as in Canada) would also replace the fifth limb of the rule in Foss v Harbottle and require the shareholder to obtain leave from the court. (16) The court would decide whether a derivative action should be commenced on the basis of statutory criteria. (17) The Companies Act 1993 of New Zealand introduced a statutory derivative action. (18) There is a statutory derivative action in South Africa by virtue of the Companies Act No 61 of 1973. (19) In 1993, Japan changed its law so as to facilitate derivative actions. (20)
6.9 Thus the introduction of a clear set of rules for the derivative action in this country would follow the lead given in other leading jurisdictions. (21) In an age of increasing globalisation of investment and growing international interest in corporate governance, (22) greater transparency in the requirements for a derivative action is in our view highly desirable. (23)
The need for a new derivative action
6.10 The vast majority of respondents considered that the operation of the rule in Foss v Harbottle was unsatisfactory, and agreed with the problems which we had identified. However, a number of these did express reservations about the need for a new derivative procedure along the lines proposed. Three particular points were made. First, it was said that the derivative action was of such little relevance in practice that there was no point in reforming it. Secondly, some respondents expressed concerns about the adverse consequences of making the derivative action more widely available. Thirdly, several others commented that the proposed new procedure was unlikely to be simpler or more efficient than the current law.
6.11 Dealing with the first point, we accept that, as a matter of practice, derivative actions are brought far less frequently than proceedings under section 459, but we do not accept that this means that no reform should be made. There are still cases where a derivative action is the only or most appropriate route to take. Whilst we noted the tendency of applicants to bring section 459 proceedings in respect of matters which could have given rise to a derivative action, (24) we do not consider that the two should be entirely assimilated. They are different in principle - one gives rise to a personal right which the shareholder can enforce, the other relates to the companys cause of action - and although they may cover some of the same ground, this will not always be the case. As was pointed out on consultation, section 459 has largely become an exit remedy, and what is needed is a remedy for those who want to stay in the company. We consider that a separate and distinct right to bring a derivative action should remain. Section 461(2)(c) provides a means of bringing a derivative action but as we observed in the consultation paper, this has not worked satisfactorily because the court cannot make this order unless it is satisfied that unfair prejudice has occurred and that an order under section 461(2)(c) is the appropriate relief. (25)
6.12 We highlighted the problems with the current procedure with which respondents agreed and these need to be addressed. We consider that the derivative procedure should be rationalised and modernised in accordance with our provisional recommendations. As we noted in the consultation paper, (26) this may also have the added advantage of encouraging some parties to bring claims as derivative actions which they might otherwise have brought under section 459; these are likely to be more focused than the wide-ranging proceedings under section 459. (27)
6.13 So far as the second point is concerned, we do not accept that the proposals will make significant changes to the availability of the action. In some respects, the availability may be slightly wider; (28) in others it may be slightly narrower. (29) But in all cases the new procedure will be subject to tight judicial control. As indicated in the previous paragraph, it may be that some claims will be brought under the new procedure instead of under section 459, but for the reasons given (30) we consider that this is desirable. We do not anticipate that there will be a large overall increase in litigation, (31) but we consider that where litigation is brought, the new procedure will assist in making sure that it is dealt with fairly and efficiently.
6.14 We disagree with the third point. We consider that the proposals will put the derivative action on a much clearer and more rational basis. They will give courts the flexibility to allow cases to proceed in appropriate circumstances, while giving advisers and shareholders the necessary guidance on the matters which the court will take into account in deciding whether to grant leave.
6.15 Accordingly, we recommend that there should be a new derivative procedure with more modern, flexible and accessible criteria for determining whether a shareholder can pursue the action.
Should it be implemented by primary legislation or in rules of court
6.16 We provisionally recommended that, since the reform will in most respects involve questions of procedure, the new derivative action should be governed by rules of court. (32) We continue to believe that the details of the new derivative action should be spelt out in rules of court. However, we consider that the basis of the action should be set out in statute. This is for two main reasons.
6.17 First, we are informed by the Scottish Law Commission that to make changes to analogous actions in Scotland, primary legislation will be required. (33) We consider that it is important that Scottish and English law should remain consistent in the area of company law so far as possible. It is desirable, therefore, both that the provisions relating to shareholder actions in the two jurisdictions should match each other as closely as possible, and that there should be comparable provisions in the legislation on the derivative action and the analogous action under Scots law.
6.18 Second, we consider that it is desirable to include a provision for the derivative action in the Companies Act so that it can be put on a similar footing to the unfair prejudice remedy and so as to alert shareholders, directors and others to the existence of the provisions. In this way, the Companies Act will constitute a more complete code in relation to shareholder remedies.
6.19 The proposed amendments to the Companies Act to set out the basis of the derivative action (and the analogous action in Scotland) are set out in the draft Bill at Appendix A. We propose that the more detailed provisions should be set out in a rule of court, a draft of which is set out in Appendix B. Under English law this rule may be made by the Civil Procedure Rule Committee under section 1(2) of the Civil Procedure Act 1997. (34) There is therefore no need to have an express rule-making power in the primary legislation.
6.20 For the reasons discussed in Appendix D, the draft legislation includes a provision giving the Secretary of State the power, by statutory instrument, to set out in relation to Scotland the matters of which the court should take account in considering the granting of leave and the criteria to be applied in relation to the refusal of leave. We would envisage that the Secretary of State would prescribe similar criteria and matters to those included in our draft rule. A comparable difference in rule-making powers already exists in relation to insolvency. Section 411 of the Insolvency Act provides that in relation to England and Wales rules are to be made by the Lord Chancellor, (35) and in relation to Scotland they are to be made by the Secretary of State. So far as the English rules of court are concerned, the Civil Procedure Rule Committee must consult with such persons as they consider appropriate before making or amending any rules. We would envisage that the Committee would consult with the DTI on any matters which, in relation to Scotland, would come under the rule-making power of the Secretary of State. In this way, a consistency of approach can be maintained for the two jurisdictions.
6.21 The draft rule on derivative actions which is set out at Appendix B is intended to tie in to the Draft Civil Proceedings Rules as closely as possible. We have endeavoured to adopt the vocabulary and approach of the latter in framing our own rule. However, the rules are still being prepared. (36) It may be necessary, therefore, for some minor adjustments to be made to the draft rule on derivative actions to incorporate it into the general body of rules in due course.
The position under Scots law
6.22 We are informed by the Scottish Law Commission that under Scots law, there is no recognised representative or derivative action. A shareholders right to seek a remedy for the company is conferred by substantive law and not by procedural rules. Amendment of Scots law in relation to this right, therefore, involves separate considerations and will require separate legislative provision. The Scottish Law Commissions consideration of the relevant matters and their recommendations to parallel our recommendations discussed in this part of the report, are set out in Appendix D.
Availability of the new derivative action
6.23 Three specific questions were raised in the consultation paper in respect of the availability of the new derivative action: should it only be available in respect of breaches of duty by directors (including claims against third parties as a result of such breaches); should it extend to negligence of directors where they have not benefited personally; and should it be available for breaches of duty by officers or employees. In addition, a fourth question was touched upon which is also relevant to this discussion, namely who should be able to bring a derivative action.
Should it only be available in respect of breaches of duty by a director (including claims against third parties as a result of such breaches)
6.24 The formulation proposed in the consultation paper, (37) limited the availability of the derivative action to claims arising out of a breach of directors duties. Our provisional view was that, in general, if there is no breach of duty by a director the shareholder should not be bringing the action. We pointed out, however, that the relief sought may not be against the director personally, but against a third party. (38)
6.25 A majority of respondents who addressed this issue agreed with our provisional view. However, two particular concerns were raised by those who disagreed. The first was the potential controversy over what amounts to a duty. One respondent referred to the case of Movitex Ltd v Bulfield. (39) Most books, he said, had traditionally referred to a directors duty to disclose a potentially conflicting interest in a company contract; but Vinelott J had held that there was no such duty: the effect of the rule was to place a director under a disability and no more. A second point expressed by the same respondent was that it was fallacious to say that directors were under a "duty" to use their powers for a proper purposes. If they are motivated by an improper purpose, their act or decision may be set aside; but it does not follow from this that they have breached any "duty". Several other respondents also expressed a concern that it may lead to litigation about what is and is not a duty.
6.26 We are not convinced by the second point. If, for example, directors arranged for a company to execute a guarantee in favour of a third party for an improper purpose, and an action was brought to set aside the guarantee, we consider that the cause of action would be regarded as arising from a breach of duty for these purposes. (40) So far as the first point is concerned, we agree that Movitex Ltd v Bulfield does draw very difficult distinctions, (41) and the draft Bill takes account of the present state of the law. (42) Section 317 of the Companies Act 1985 imposes a duty on a director to disclose his interest in transactions with the company in certain circumstances. The better view is that breach of this duty does not affect the transaction. (43) However, many companies have articles requiring a director to make disclosure to the board or to the company if he is interested in a transaction with the company. (44) A breach of the disclosure requirements contained in the articles, where the requirements apply, would constitute a breach of duty for these purposes.
6.27 The second concern raised by respondents was that there may be some situations where it should be possible to bring a derivative action which would fall outside the new procedure. This may be because there is no breach of duty by directors (even on the widest possible meaning of "duty"), or it may be because the cause of action does not arise out of the breach of duty. We consider both these situations in turn.
6.28 The case of Estmanco (Kilner House) Ltd v Greater London Council (45) was given as an example of the first type of case. In Estmanco the wrong found to be a fraud on the minority was conduct of the majority shareholder and not that of the directors. The facts were unusual. The company was a flat management company. The majority shareholder was the Greater London Council ("the GLC"), which owned the block of flats and which had entered into an agreement in writing with the company to sell the flats. Each purchaser of a flat received one of the shares but the shares did not under their terms of issue confer any right to vote until all the flats had been sold. In breach of its agreement with the company, the GLC decided to stop selling the flats and to offer them instead to high priority applicants on its housing list. The directors of the company started proceedings against the GLC to enforce the written agreement but the GLC procured the passing of a resolution of the company in general meeting which directed the directors to withdraw the companys action. A minority shareholder applied to the court for leave to take over the action and to continue it as a derivative action. Sir Robert Megarry V-C found that the GLCs conduct amounted to a fraud on the minority since the prospective right to vote was affected.
6.29 The fraud found by the court was the majority shareholders conduct and not that of the directors. The formulation for the derivative action put forward in the consultation paper does not cover the situation where the wrong relied on is not a breach by the directors of their duties. This does not mean that the shareholder has no remedy, but rather that he cannot pursue one under the new procedure. He would have to proceed under section 459, claiming authority to use the name of the company in proceedings against the GLC. The Court would have to hear the section 459 application rapidly to deal with the situation, but it seems to us preferable to leave the court to do this than, at least in the first instance, to open the door to derivative litigation against third parties by having a wider rule. (In a case such as Estmanco it might in fact be possible to show that the directors had acted in breach of duty for the purposes of the new derivative procedure on the ground that they should not have acted on the resolution passed by the majority shareholders but should have continued to pursue the proceedings). (46)
6.30 One could envisage other situations where the majority abuse their position in a manner which affects the running of the company, but there is no obvious breach of duty by the directors. In our view, what is in issue is a shareholders personal rights against the company because of the conduct of the majority; it is not the companys rights which are being infringed. The appropriate remedy for the shareholder is a personal action under the articles of association or (more likely) a claim under section 459, rather than a derivative action on behalf of the company. We do not consider, therefore, that the derivative action should be available where there has been no breach of duty by the directors.
6.31 So far as the second situation is concerned, one respondent gave the following example. A profitable company is a victim of a tort by a third party, and the board, although otherwise committed to the well-being of the company, have ulterior motives of their own for not wishing to enforce the remedy for the tort. Although the board would in those circumstances be in breach of duty, their breach would not have given rise to the claim.
6.32 We accept that in this type of situation an individual shareholder would have no right to bring a derivative action against the third party tortfeasor under our proposals. (There would of course be a potential claim for damages against the directors themselves, although this may give rise to difficulties of causation or quantification, and it is possible that the directors may not have sufficient funds to meet the claim). However, we do not consider that this is an issue which needs to be addressed for two main reasons.
6.33 First, we are not aware of any cases under the current law where a derivative action has been successfully brought in circumstances such as those described in paragraph 6.31. (47)
6.34 Secondly, (and more importantly) it is consistent with the proper plaintiff principle which we endorsed in the consultation paper and which received virtually unanimous support on consultation. The decision on whether to sue a third party (ie someone who is not a director and where the claim is not closely connected with a breach of duty by a director) (48) is clearly one for the board. If the directors breach their duty in deciding not to pursue the claim then (subject to the leave of the court) a derivative claim can be brought against them. To allow shareholders to have involvement in whether claims should be brought against third parties (49) in our view goes too far in encouraging excessive shareholder interference with management decisions. This is particularly important as we are proposing that derivative actions are to be available in respect of breaches of directors duties of skill and care. (50) A line has to be drawn somewhere and we consider that this is both a logical and clearly identifiable place in which to draw the line. (51)
6.35 There may be situations where the line is not quite so easy to draw. For example, a company may have a claim in negligence against an auditor who fails to spot that the directors have misappropriated corporate assets. The factual background to the claim against the auditor is the breach of duty by the directors, but the auditor has neither participated in the fraud nor received corporate assets. Our view is that it is not appropriate for a derivative action to be brought against the auditor in these circumstances, and we do not consider that it would be possible to bring such an action under the terms of our draft bill. The cause of action against the auditor does not arise as a result of the directors act, but rather their act is merely the setting against which the auditors (separate) default operates.
6.36 One final point made by a few respondents was that there appeared to be some confusion in the consultation paper between a "shadow director" and a "de facto" director in this context. (52) We consider that de facto directors should be included for these purposes, but we consider that they are capable of coming under the definition of director in section 741 of the Companies Act 1985 (53) and no express reference to them is necessary. (54) We also consider that shadow directors should be included. (55) There are many statutory provisions which now impose obligations (56) on them and we consider that a derivative action should be available where the company has a claim in respect of breaches of those obligations. (57)
6.37 We therefore consider that the new procedure should only be available for claims in respect of breaches of duty by a director (including claims against third parties as a result of such breaches), and that for these purposes director should include a shadow director.
Should it extend to negligence of directors (where directors have not benefited personally)
6.38 Our provisional view was that there was a deficiency in the current law, in that section 459 cannot be used in respect of negligence as such, but only for serious mismanagement, and a derivative action based on negligence may only be brought if it can be shown that the majority have profited by the negligence. (58) We therefore provisionally recommended that the new derivative action should be available in respect of negligence. (59)
6.39 The majority of respondents who addressed this issue agreed with the provisional view. For those who disagreed, the main reason given was the risk of increased litigation by disgruntled shareholders. This was not only seen as a problem for large public limited companies but also for small and medium-sized companies. The point was made by several respondents that a shareholder takes the risk that management decisions will turn out to be misguided and that mistakes will be made; this is a business risk taken when deciding to invest. Concern was also expressed by one respondent that it would discourage people from becoming non-executive directors, and another raised the question of the availability of insurance cover for negligence.
6.40 Dealing with the last two points, we do not consider that there is any reason why suitable persons would be discouraged from becoming directors. The courts have been developing the case law on directors duties of skill and care to work out on a case by case basis the extent of the obligations owed by directors. (60) But there is no reason to suggest that the law imposes unduly onerous burdens. As one respondent commented: "Well organised and competent companies run by directors who know and follow their respective duties will have nothing to fear ...". We also understand that insurance cover is quite widely available and generally includes cover for negligence. (61)
6.41 So far as the risk of increased litigation is concerned, we consider that this is overstated. (62) As we have indicated there will be tight judicial control of cases brought under the new procedure. Whilst we accept that investors take the risk that those who manage companies may make mistakes, we do not consider that they have to accept that directors will fail to comply with their duties. There is no reason why directors should necessarily be able to shelter behind a procedural rule to escape liability. The court will consider carefully whether litigation should proceed in the light of all the circumstances (and in particular those which we discuss further below) (63) but where directors fail to comply with their duties we consider that there is no reason in principle why a derivative claim should not be brought against them. This was also clearly the view of the majority of respondents. We therefore consider that the new procedure should be available for breach of directors duties of skill and care.
Should it be available for breaches of duty by officers and employees
6.42 In the consultation paper we gave the examples of an employee accepting a bribe and committing a wrong against a company, or a branch manager of a single branch bank misappropriating company assets and passing them to the majority shareholder. In these circumstances we suggested that it should be open for a shareholder to bring a derivative action under the new procedure, but only if he could show that the claim could have been brought under the "fraud on the minority" exception to the rule in Foss v Harbottle. (64)
6.43 The reason for this was that we did not wish to remove the right to bring an action in circumstances which might have been permitted under the old law. However, there were competing considerations which needed to be addressed in deciding how such actions should be dealt with. On the one hand we considered that it would be desirable to bring such claims within the new procedure; (65) but on the other hand we did not want to extend their availability as this might lead to excessive shareholder interference. Our suggested solution was therefore a compromise between these two considerations, namely that an action could be brought under the new procedure, but only if it would have satisfied the fraud on the minority test. We anticipated that it would only be in very rare circumstances that advantage would need to be taken of this provision, since in most situations there would also be a breach of duty by the directors.
6.44 The responses to the consultation paper suggested that the majority of those who considered this point were in fact against extending the availability of the new derivative procedure to breaches of duty by officers or employees at all. The main reason given was that it was a matter for the directors to decide whether to take action in such cases. One respondent, however, said that his primary concern was for the position of the employees themselves who might become embroiled in litigation, even if it was ultimately found to be unmerited, and who may not have the necessary resources to defend themselves.
6.45 On further consideration, we agree with both these points. The decision on what action to take against employees is very clearly a management decision for the board of directors. Where the claim is not against a director (or arising out of a breach of duty by directors) the board should be making an unbiased decision as to the merits of suing and will probably be much better placed than an individual shareholder to evaluate the costs and benefits involved. (66) There is clearly considerable potential for interference with what are management decisions. There is also the potential for vexatious litigation by disgruntled shareholders against employees which we agree may well be unfair to the employees concerned. In public companies, in particular, there is a risk that shares will be acquired for the sole purpose of bringing proceedings against managers where the person acquiring the share is unhappy with particular management decisions. Whilst these types of applicants would no doubt be refused leave to continue the proceedings, we consider that it is preferable to avoid the possibility of such nuisance claims being brought at all.
6.46 By focusing on breaches of duty by directors, the derivative action will be placed on a more logical and rational basis. We consider that it is consistent with this approach to exclude entirely claims based on breach of duty by employees and officers other than directors (unless of course they also arise out of a breach of duty by directors). We accept that there may be a few very unusual situations involving breaches of duty by employees or other officers which could have come within the common law exceptions. But unless the directors are implicated in the wrongdoing, we do not consider that a derivative action is appropriate. Where what is in issue is the conduct of the majority shareholders (as in the second example given in paragraph 6.42 above), we consider that this is more appropriately dealt with by personal proceedings, and in particular the use of section 459. (67)
Meaning of breach of duty
6.47 We have indicated above (68) that we consider that a derivative action should be available where a cause of action arises out of a breach, or threatened breach, of duty by a director, and that for these purposes, breach of duty should include negligence. We also envisage that a derivative action should be available in respect of a statutory default by a director. (69) Whilst we consider that the expression "breach of duty" is capable of covering both negligence and statutory default, we consider that it would be preferable for the legislation to make this clear. We therefore propose that the legislative provision implementing our recommendation should adopt the expression used in sections 310 (70) and 727 (71) of the Companies Act 1985, namely "negligence, default, breach of duty or breach of trust".
6.48 In the light of the discussion above, (72) there may be some doubt as to whether the obligation of a director not to place himself in a position where his personal interests conflict with his duties to the company would come within the terms of this expression. We do not consider that it would be appropriate to seek to resolve this issue in the limited context of our proposals on the derivative action, since it has far wider implications for company and trust law generally. However, we consider that the legislation should make it clear that a derivative action is available where a cause of action arises as a result of a director putting himself in a position where his personal interests conflict with his duties to the company.
6.49 Accordingly, we recommend that the new procedure should only be available if the cause of action arises as a result of an actual or threatened act or omission involving (a) negligence, default, breach of duty or breach of trust by a director of the company, or (b) a director putting himself in a position where his personal interests conflict with his duties to the company. The cause of action may be against the director or another person (or both). We also recommend that, for these purposes, director should include a shadow director.
Who should be able to bring a derivative action
6.50 In the consultation paper we concluded provisionally that there was no justification for permitting former members to bring derivative actions. (73) Our view was that there is bound to be a current member who (if the wrong has not been ratified) could maintain proceedings. We saw no reason why a former member should be able to bring a derivative claim if the current members were not willing to do so. The vast majority of respondents agreed with this view. For these purposes, "member" is defined by section 22 of the Companies Act 1985. (74) We recommend that the derivative action should be available only to members of the company.
Extent to which common law rule should be abrogated
Should it entirely replace the common law derivative action
6.51 The vast majority of respondents agreed with the provisional view expressed in the consultation question that "an action which can be brought under the new procedure should only be capable of being so brought, and not also under the exceptions to the rule in Foss v Harbottle". (75) The question left open the possibility that derivative actions may still be brought under the common law in circumstances which fell outside the new procedure. (76) However, it was apparent that many respondents considered that the new procedure should entirely replace the existing common law right to bring a derivative action.
6.52 Having considered the matter further, and in the light of the responses to the consultation paper, we consider that it would be desirable for the new procedure to replace entirely the common law right to bring a derivative action. In the consultation paper we quoted the following comments on the Canadian legislation: (77)
It would only lead to confusion to allow both common law and statutory actions. A more orderly development of the law would result from one point of access to a derivative action and would allow a body of experience and precedent to build up to guide shareholders. (78)
6.53 We noted that diverging principles might develop between the new procedure and the procedure at common law which would add to the current confusion. This would go against our stated aim of making the law simpler. We consider that the only way to avoid this problem is for the new procedure to replace the common law derivative action entirely.
6.54 As explained in the consultation paper and noted above, (79) it is not only under the fraud on the minority exception that a shareholder can bring a derivative action. He can also bring one for loss caused by an ultra vires or illegal transaction. He also appears to have the option to bring one in respect of breaches of special resolution procedures. (80) We propose that these situations should also be replaced by the new derivative procedure so that they will be subject to the new restrictions and procedures discussed in this part. (81) We consider that where a director causes a company to enter into an ultra vires or illegal transaction or one for which a special majority is required he will be regarded as having acted in breach of duty for the purposes of the new derivative procedure.
6.55 As indicated above, (82) there may be a few very rare cases which could have been brought as derivative actions under the common law but will not come within the terms of the new procedure. But we consider that if we are to put the derivative action on a new, simpler and more rational basis then this is something which cannot be avoided. As we have explained, we consider that our proposals set logical and clearly identifiable limits on the availability of the action. For any exceptional cases of hardship, there is still the possibility of bringing proceedings under section 459 and, if appropriate, seeking an order that proceedings may be brought on the companys behalf under section 461(2)(c). We therefore recommend that the new derivative procedure should replace the common law derivative action entirely.
Personal actions
6.56 In the consultation paper, we drew particular attention to cases falling under the fourth limb of the restatement of the rule in Prudential, namely claims to establish the invalidity of a transaction for which a special majority is required. (83) It appears that such actions can be brought either as derivative or personal actions. To the extent that they can be brought as personal actions, these are clearly situations where the rule in Foss v Harbottle does not apply. Our provisional view was that as these fell outside the rule in Foss v Harbottle, there was no reason why any special rules should apply to them. A member should be able to continue to bring a personal action without the need to obtain the leave of the court, or to satisfy any other particular procedural requirement. The majority of respondents agreed with our provisional view and we therefore consider that no special provision should be made for actions in respect of transactions requiring a special majority. (84)
6.57 More generally, we do not intend that our proposals in respect of the derivative action should affect any existing personal actions. We have noted above that, in addition to claims in respects of transactions requiring a special majority, a personal action may be brought to restrain an ultra vires or illegal act. (85) A personal action may also be brought in respect of breaches of personal rights arising under the companys constitution. (86) Our proposals are not intended to affect the circumstances in which or the manner in which such actions may be brought.
Procedural steps
Notice to the company
6.58 We provisionally recommended that notice to the company should be a precondition to the grant of leave to a shareholder to maintain a derivative action. The notice period should be 28 days and the notice should specify the grounds of the proposed derivative action. However, we provisionally recommended that the requirement for notice should be waived if the shareholder could show that urgent relief was required, and/or if the court dispensed with the requirement. (87)
6.59 The vast majority of respondents agreed with the provisional recommendations. Several respondents suggested that 28 days was too short as the company may have to investigate the claim and then call a meeting to decide what action to take. We accept that there may need to be some flexibility but consider that this could be achieved under the general rules. (88) We therefore recommend that:
#1(1) unless the court otherwise orders, a claimant should be required to give notice to the company of its intention to bring a derivative action at least 28 days before the commencement of proceedings;
(2) the notice should specify the grounds of the proposed derivative action.~(89)~
Company fails diligently to pursue proceedings
6.60 We also drew attention to the situation where, on receipt of notice, a company commences an action but fails diligently to pursue it. We considered that it should be open to a shareholder to apply to the court for leave to take over the action in these circumstances, and that the court should have to consider the same criteria for leave as those which we proposed for derivative actions generally. (90)
6.61 Having given further thought to this point, we do not consider that the possibility of a shareholder taking over an action commenced by the company should be tied specifically to the situation where the company commences proceedings following receipt of a notice in the manner described above. The company could pre-empt the giving of notice by commencing proceedings before receipt of the notice with no real intention of pursuing the proceedings. The shareholder would have only limited redress in these circumstances. (91) We therefore propose a slightly different scheme for this rule.
6.62 What we recommend is that a shareholder should be able to apply to continue, as a derivative action, proceedings commenced by the company where: (a) the claim is capable of being pursued as a derivative action; (92) (b) the company has failed to prosecute the claim diligently; and (c) the manner in which the company has commenced and continued the action amounts to an abuse of the process of the court. (93)
6.63 This last requirement is proposed in order to prevent undue interference with existing litigation by shareholders. We do not want individual shareholders to apply to take over current litigation being pursued by their company just because they are not happy with the progress being made. The provision is intended to deal with those situations where the companys real intention in commencing proceedings is to prevent a successful claim being brought. In the recent case of Grovit v Doctor, (94) the court held that for a plaintiff to commence and to continue litigation which he had no intention to bring to a conclusion could amount to an abuse of process for the purposes of an application to strike out. We consider that an action commenced by a company for the purposes of preventing a shareholder bringing a derivative action and which it has no real intention of bringing to a conclusion would amount to an abuse of the process of the court for the purposes of the new rule we are proposing.
6.64 As before, we consider that in considering the application to continue the proceedings as a derivative action, the court should consider all the circumstances including the factors specifically set out in connection with the application for leave to continue a derivative action. (95) If, for example, it forms the view that it is not in the interests of the company for the action to proceed, it should dismiss the application to continue it as a derivative action. (96)
6.65 Accordingly, we recommend that a shareholder should be able to apply to continue, as a derivative action, proceedings commenced by the company where:
#1(1) the claim is capable of being pursued as a derivative action;
#1(2) the company has failed to prosecute the claim diligently; and
#1(3) the manner in which the company has commenced and continued the action amounts to an abuse of the process of the court.
Consideration by the court
6.66 Our provisional view was that the court should normally consider the matter of leave at close of pleadings, but should be able to do so earlier, and that the application should normally be heard by a judge rather than a master. We also provisionally recommended that all parties to the proceedings should be parties to the application, should be entitled to receive evidence filed on it, and should be present at the hearing unless the court orders otherwise.
6.67 Most respondents who commented agreed with this view. There was some concern that it should be open to a company to dispose of vexatious litigation at an early stage (some respondents thought that leave should be sought before the action was started), and that the close of pleadings may be too late. As we explained in the consultation paper, case management conferences will be a feature of many cases under the reforms proposed by Lord Woolf. (97) Our provisional view was that where there is to be a case management conference, it will normally be convenient for the issue of leave to be dealt with at this stage. We remain of this view. Indeed, on further consideration, we consider that it would be appropriate to require the court fix a case management conference for all derivative actions. (98) Normally, all parties to the proceedings will be present at the case management conference. (99) We accept that it may be appropriate for the leave hearing to be dealt with earlier in some cases and we consider that it should be within the courts powers to direct an earlier hearing. In an appropriate case it may also be possible for a respondent to apply to strike out the claim at the outset.
6.68 On the application for leave, we recommend that the court should have the power to do the following: grant leave to continue the claim for such period and on such terms as it thinks fit; refuse leave and dismiss the claim; strike out the claim; or adjourn the proceedings relating to the application and give such directions as it thinks fit. (100) If the claimant does not apply for leave at the case management conference (or at such earlier time as the court directs), we recommend that the defendant should be able to apply to strike out the claim. (101)
6.69 Accordingly, we recommend that:
#1(1) where a derivative action is brought, the court must fix a case management conference;
#1(2) unless the court otherwise directs, the claimant must seek leave to continue the derivative action at the case management conference.
Issues relevant to grant of leave
6.70 Our provisional view was that in considering the issue of leave the court should take into account all the relevant circumstances without limit. (102) However, we also listed five specific matters which we considered the court should take into account; the applicants good faith; the interests of the company; that the wrong has been, or may be, approved in general meeting; the views of an independent organ; and the availability of alternative remedies. We proposed that these matters should be set out expressly in rules of court. An additional matter which was not specifically mentioned in the consultation paper, but which we consider should be included in this list, is a decision by the company in general meeting not to sue. (103) We consider each of these matters in turn, but first consider a further issue which we raised, namely whether there should be a threshold test on the merits.
Threshold test
6.71 Our provisional view was that there should be no threshold test on the merits of the case. (104) Our main reason for this was that the inclusion of an express test would increase the risk of a detailed investigation into the merits of the case taking place at the leave stage, and that such a "mini-trial" would be time consuming and expensive. There would of course be some consideration of the merits, since it would clearly be wrong for the court to allow an obviously hopeless case to proceed. (105) But we considered that it would be undesirable to encourage the parties to bring evidence to show that the case met or failed to meet a particular merits test.
6.72 Most respondents who considered this issue agreed with this approach and we remain of the view that there should be no threshold test. We consider that including a specific threshold test would lead to fine distinctions being drawn as to whether the facts of individual cases fall on one or other side of a particular line drawn and we consider that this is undesirable. We consider that it is preferable for the courts to develop a principled approach which is not tied to the rigid language of a particular rule or statutory provision. Accordingly, we recommend that there should be no threshold test on the merits.
Court to consider all the relevant circumstances
6.73 The majority of respondents agreed with the provisional view that the court should consider all the relevant circumstances without limit. One or two expressed concern that this would mean that the reasons for deciding whether a claim should proceed were vague and that it would make it difficult to advise clients with any certainty as to what the result of an application would be. However, we consider that it is important for the court to have the flexibility to look at all the relevant circumstances. There is a danger that any definitive criteria for granting leave would be incomplete and would not fit the circumstances of individual cases. We also consider that the concerns about the difficulties in predicting the outcome of applications for leave are overstated. As indicated, we also proposed a list of specific matters which the court should take into account, and we consider that these, together with the developing case law, will assist practitioners in advising their clients. We therefore recommend that in considering the issue of leave the court should take account of all the relevant circumstances without limit.
6.74 We now consider the specific matters which we recommended the court should take into account in considering the issue of leave together with the additional matter which we consider should be added to this list. (106) As we explained in the consultation paper, we consider that these matters should be set out in an express statement in the rules of court. (107)
Applicants good faith
6.75 The first matter which we considered the court should take into account was the good faith of the applicant. We noted that it was unlikely that a court would grant leave to an applicant whom it considered was acting in bad faith (so that it may not be necessary to state this factor specifically) but considered that since it is a relevant criterion it was of sufficient importance to be mentioned expressly. Although we favoured the test of "honestly and with no ulterior motive" (108) we did not make any recommendation on whether "good faith" should be defined for these purposes. Our view was also that while the applicants good faith was relevant, it should not be a prerequisite for leave.
6.76 There was virtually unanimous support for the view that the court should take account of the applicants good faith and the majority of those commenting also agreed that it should not be a prerequisite. Most of those commenting also considered that good faith should not be defined. A number of respondents made the point that it would be extremely difficult to define, but was generally readily recognisable. We agree. The applicant may benefit commercially if he succeeds in the derivative action, and thus has an ulterior motive in bringing it. But nonetheless, the court may consider that he is an appropriate person to bring the action and that the action ought to be brought. We therefore recommend that the good faith of the applicant should be taken into account by the court but it should not be a prerequisite and should not be defined.
Interests of the company
6.77 The second matter which we considered the court should take into account was the interests of the company. In doing so, the court should have regard to the views of directors on commercial matters. Again, we suggested that this should be a relevant criterion, but the court should not be bound to refuse leave if the proceedings were not in the interests of the company.
6.78 Although a majority of respondents agreed with our provisional view, there was some concern expressed on this last point. A significant number of respondents took the view that if the proceedings were not in the interests of the company, the court should refuse leave.
6.79 We remain of the view that it would not be appropriate to require an applicant to prove that the action was in the interests of the company in order to obtain leave. If this approach were taken in respect of all the factors which we have set out, it would have the effect of laying down a number of hurdles which an applicant would have to overcome in order to obtain leave to continue the proceedings, and lead to detailed argument on whether the applicant had (or had not) satisfied each of the relevant criteria. This may have the effect of lengthening the leave stage and adding to the costs. However, we do accept that if a court is satisfied that the proceedings are not in the interests of the company there is no reason why the proceedings should continue and the court should refuse leave. (109) Accordingly, we recommend that the court should take account of the interests of the company, and in doing so the court should have regard to the views of directors on commercial matters; (110) however, the court should refuse leave if it is satisfied that the proceedings are not in the interests of the company.
Authorisation and ratification
6.80 Under the current law, if a wrong (111) has been effectively ratified by the company, this will be a complete bar to a derivative action. The wrong will have been cured so that there is no cause of action in respect of which the company (and therefore the shareholder through the derivative action) can bring proceedings. In addition, if a wrong is capable of being ratified (ie it is ratifiable), then even if there has been no formal ratification, it may not be possible for a minority shareholder to bring a derivative action. (112)
6.81 The law on ratification is by no means clear, although we sought to resolve some of the apparent inconsistencies in the case law in our discussion of this topic in the consultation paper. (113) As we noted in the consultation paper, (114) where a shareholder can show fraud and wrongdoer control, purported ratification of the acts in question will be a manifestation of wrongdoer control and will not prevent a minority shareholder from bringing a derivative action. The issue of ratification is therefore closely tied up with the whole question of fraud on the minority, and in order to understand when ratification may be effective it is necessary to examine many old authorities on what constitutes fraud on the minority. There is a danger that our desire to simplify the derivative action could be undermined by the complexities which arise where it is claimed that the relevant breach of duty has been (or may be) ratified.
6.82 As we noted in the consultation paper, a number of other jurisdictions have dealt with this point by providing that ratification should only be treated as an issue which the court should take into account. (115) In framing our provisional recommendations we drew on the provisions in these other jurisdictions, but we also made it clear that our view was that "if [the ratification] was effective in law to cure the breach of duty of which the applicant complained, the court would have to dismiss any claims based on that breach of duty". (116)
6.83 The issue of whether effective ratification should be a complete bar to a derivative action was not directly addressed by many respondents and so it is difficult to draw any conclusive results from the consultation on this point. However, a number of respondents did express serious objections to any change to the substantive law of ratification, not least because of the uncertainty that this would create in certain commercial situations.
6.84 Our view remains that ratification should continue to be effective in the cases where it is currently effective to bar an action by a minority shareholder, (117) but will otherwise be only a factor to which the court has regard. In other words, the fact that a wrong is ratifiable will not prevent a shareholder from commencing a derivative action. However, if there has been effective ratification, then the action cannot proceed as there will be no subsisting cause of action vested in the company which the shareholder can pursue. (118) In some cases, a minority shareholders action has been struck out because the wrong was ratifiable without the court investigating whether ratification would take place. (119) Thus, to a small extent, our recommendation represents a change from the position under the current law. Of course, if the court is faced with a derivative action in respect of a wrong which is ratifiable but has not been ratified, it will be open to it to adjourn the proceedings to allow a meeting to be called for the purposes of ratification. (120) Alternatively, if it is clear that the wrong will be ratified and that no purpose will be served in holding a meeting, the court can use its discretion to refuse leave for the action to proceed. (121) Given that the project is only concerned with remedies and not, for example, with directors duties, we do not consider that it would be within our terms of reference to consider substantive changes to the law of ratification.
6.85 We also consider that there are considerable practical difficulties with an approach which would remove the binding nature of ratification which is effective under the current law. We have already drawn attention to the uncertainty that this may cause in certain transactions. (122) As one respondent put it, the current position would be "replaced by a general discretion of the court to undo transactions or to make the directors responsible for compensating the company." Although there may be a case for modernising and simplifying the law of ratification, we are of the firm view that any changes need to be considered in the context of a comprehensive review of directors duties. It would not be appropriate to make piecemeal changes in the context of our current project on shareholder remedies which may have wider implications. We do not therefore propose any change to the substantive law on ratification.
6.86 We therefore recommend that the court should take account of the fact that the wrong has been, or may be, approved by the company in general meeting; but that effective ratification should continue to be a complete bar to the continuation of a derivative action.~(123)~
6.87 It is open to a majority of members to resolve that no action should be taken to remedy a wrong done to the company. Such a resolution, if made in good faith and what they consider to be for the benefit of the company, will bind the minority. (124) This is not the same as ratification, which has the effect of curing the wrong. (125) Nor is it the same as taking account of the views of an independent organ, (126) which involves considering the views of a particular group within the company. Although not specifically mentioned in the consultation paper, this is clearly a matter which the court should take into account in considering whether to grant leave. Accordingly, we recommend that the court should take account of the fact that the company in general meeting has resolved not to pursue the cause of action.
Views of independent organ
6.88 As we pointed out in the consultation paper, (127) even if there has been no approval (or purported approval) of the wrong, the court may be informed of commercial reasons why the shareholders (or a group of shareholders), or even the directors or a committee of the directors consider that the action should not proceed. The term "independent organ" was used by Knox J in the case of Smith v Croft (No 2) (128) to describe a group of persons within the company whose views would be taken into account for these purposes. Essentially these are persons whose votes would not be disregarded on the grounds that they had been (or would be) "cast with a view to supporting the defendants rather than securing benefit to the company, or that the situation of the person whose vote is considered is such that there is a substantial risk of that happening." (129) Our provisional view was that the views of such an independent organ should be one of the factors which the court should take into account under the new derivative procedure in deciding whether to grant leave.
6.89 Almost all of the respondents who commented agreed with our provisional view. One or two expressed concern that the meaning of "independent organ" was not clear. However, our view is that it is not appropriate to define what this means in the rules. Knox J made clear that the appropriate independent organ will vary according to the constitution of the company concerned and the identity of the defendants. (130) We consider that the courts should be allowed to continue to develop the concept of "independent organ" in line with the current authorities.
6.90 Accordingly, we recommend that the court should take account of the views of an independent organ that for commercial reasons the action should or should not be pursued, but as the law in this area is still in a state of development and should be left to be developed by the courts, the new rule should not provide that its views should be conclusive on the issue whether or not leave should be granted.
Availability of alternative remedies
6.91 The final matter which we considered should be included in the list of matters which the court should take into account was the availability of other remedies. The case of Barrett v Duckett (131) suggests that this is a matter that the courts will take into account under the current law. (132) There was virtually unanimous support for this from respondents, and we therefore recommend that the court should take account of the availability of alternative remedies, but that their availability should not necessarily be conclusive on the issue of whether or not leave should be granted.
6.92 We explained in the consultation paper that a member cannot bring a derivative action if the company is in liquidation. (133) We intend that this should still be the position under our new procedure.
Proper plaintiff principle
6.93 As we made clear in the consultation paper, (134) in the absence of circumstances justifying the grant of leave, we consider that the proper plaintiff principle should apply since, in the words of the Court of Appeal in Prudential (135) it "... is fundamental to any rational system of jurisprudence". (165)
Other relevant provisions
Nature of derivative action
6.94 In the consultation paper we explained that derivative actions are brought in "representative" form; that is to say, the title to the proceedings will state that the plaintiff sues on behalf of himself and all other shareholders in the company other than the defendants. (137) Since the company has not authorised the action, the companys name cannot be used. The company must also be named as a defendant. We consider that derivative actions should continue to be brought in this manner and that the rules should provide that any decision of the court is binding on the other shareholders on whose behalf the action is brought. (138) This will prevent a different shareholder seeking to bring a derivative claim in respect of the same cause of action at a later date (since he will be bound by the result of the derivative action which has already been brought). (139)
6.95 However, an order of the court against a member who is only a represented party (for example for costs) cannot be enforced without the courts leave. (140)
6.96 Accordingly, we recommend that the action should be brought on behalf of all the companys members other than any who are defendants, and a decision of the court should be binding on all the members on whose behalf the action is brought. However, any decision of the court should not be enforced against a person who is not a party to the proceedings without the courts permission.
Additional qualifying requirement
6.97 In the consultation paper we considered and provisionally rejected a requirement that the applicant should have been a shareholder for a minimum period of time. (141) The vast majority of respondents agreed with the provisional view and we remain of the view that there should be no such additional qualifying requirement.
6.98 Also, the applicant need not have been a shareholder at the time when the alleged wrong occurred. The right to bring proceedings as a shareholder in respect of the wrong is part of the bundle of rights represented by a share and can be transferred to a transferee.
Courts power to appoint an independent expert
6.99 We also recommended that the court should not have a special power to appoint an independent expert to investigate and advise on the action along the lines of proposals in the draft Australian legislation. (142) Again, this was supported by most respondents and we maintain our provisional view on this point.
Courts power to adjourn to enable the company to call a meeting
6.100 As part of the courts case management powers in relation to derivative actions, we also provisionally recommended that the rules should expressly provide that the court has power to direct the company to convene a meeting of the shareholders to consider a resolution as to whether the proceedings should be continued. (143) At the same time, we raised for consideration the question of whether the court should have additional powers to determine whether any shareholder should or should not be permitted to vote at such a meeting.
6.101 A large majority of respondents agreed with our recommendation but a significant number expressed reservations on the second aspect which we raised for consideration. The point was made that it was a very radical step to "disenfranchise" a shareholder. It was also pointed out that it may involve pre-judging the issue before the evidence was properly heard; when the court ordered the meeting to be convened, it may not be clear which members are connected with the board and the matters complained of.
6.102 In the light of the responses received, we agree that it would not be helpful or appropriate to give the court power to determine whether a shareholder should or should not be permitted to vote. In so far as any resolution passed purports to ratify or release the relevant cause of action, it will be up to the court on normal principles to decide whether the ratification or release is effective. (144) This it can do in the light of the evidence of the circumstances of the vote and the interests of the relevant parties. We do not consider that it is necessary or helpful for the court to decide before the meeting who may or may not vote on the issue. Where the resolution seeks in more general terms to elicit the views of members on whether legal proceedings should be pursued or continued, then the result of the vote will also provide the court with the information it requires (in particular on the views of any "independent organ") (145) without the need for additional powers to alter voting rights.
6.103 So far as the terms of the relevant rule are concerned, we consider, on reflection, that it is the power to grant an adjournment which needs to be expressed, rather than the power to direct the company to convene a meeting. (146) Accordingly, we recommend that the rules on derivative actions should provide that the court has power to adjourn a hearing to enable a meeting of shareholders to be convened for the purpose of considering a resolution affecting the claim.
Costs indemnity orders
6.104 We provisionally recommended that the courts power to make costs indemnity orders in derivative actions should remain unchanged and this view received virtually unanimous support on consultation. (147)
Courts power to substitute claimant
6.105 We drew attention in the consultation paper to the fact that it may be appropriate for the court to substitute a new plaintiff in the derivative action, for example if the existing plaintiff has some conflict of interest which makes him unsuitable to be a representative plaintiff. (148) We suggested that the courts existing power to add or substitute parties should be sufficient for these purposes.
6.106 The relevant provisions on the addition and substitution of parties under the Draft Civil Proceedings Rules are contained in Part 18. These are currently being reviewed by the Lord Chancellors Department as part of the continuing work on the implementation of the new rules.
Leave of the court for discontinuance or compromise of proceedings
6.107 We also provisionally recommended that the rules governing the new derivative action should provide that the applicant should not enter into any compromise or abandon the proceedings without the leave of the court. (149) We pointed out that the absence of such a provision could give rise to serious possibilities of collusion, with the directors buying off the plaintiff in disregard of the rights of the company and its members. (150) Our provisional view was widely supported on consultation, and accordingly we recommend that the rules should provide that no proceedings brought by a shareholder under the provisions relating to derivative actions may be discontinued or compromised without the leave of the court.
Remedy
6.108 A further issue which we raised was whether it should be open to the court to make an order granting a personal benefit to the shareholder bringing the derivative action, such as an order that the defendant wrongdoers buy the claimants shares. (151) We provisionally rejected this suggestion and our provisional view has been confirmed on consultation.
Multiple derivative actions
6.109 Finally, in connection with the new derivative procedure, we raised the issue of whether a shareholder in a parent company should be able to bring a derivative action on behalf of a subsidiary or associated company within the group (which we referred to, for simplicity, as a "multiple derivative action"). (152) We expressed no provisional view but invited comments on this point.
6.110 Although a small majority of respondents who addressed this issue did consider that provision should be made for multiple derivative actions, we are not persuaded that it would be helpful or practicable to include such a provision. We consider that this situation is likely to be extremely rare and that any rule attempting to deal with it would be complicated and unlikely to be able to cover every conceivable situation. We consider that the question of multiple derivative actions is best left to the courts to resolve, if necessary using the power under section 461(2)(c) of the Companies Act 1985 to bring a derivative action. Accordingly, we do not consider that there should be any express provision dealing with multiple derivative actions.
Conclusion
6.111 To summarise, we recommend that the right to bring a derivative action at common law should be replaced by a simpler and more modern procedure. We recommend that the basis of the right to bring a derivative action should be set out in the Companies Acts, (153) but that the details of the procedure should be set out in rules of court so as to give maximum flexibility. (154)
6.112 The derivative action should be available to current members of the company where the cause of action arises as a result of an actual or proposed act or omission involving negligence, default, breach of duty or breach of trust by a director, or a director putting himself in a position where his personal interests conflict with his duties to the company (although the claim itself need not be against a director). For these purposes, director should include both shadow and de facto directors. However, derivative claims should be subject to tight judicial control at all stages.
6.113 We recommend that a claimant should be required to give notice to the company of his intention to bring a derivative action at least 28 days before proceedings are commenced. He should be required to obtain leave of the court in order to continue a derivative claim beyond the preliminary stages and in deciding whether to grant leave the court should take into account all the relevant circumstances. These should include: the good faith of the applicant; the interests of the company; the fact that the wrong has been or may be approved by the company in general meeting (but effective ratification should continue to be a complete bar to a derivative action); whether the company in general meeting has resolved not to pursue the cause of action; the views of an independent organ that for commercial reason the action should or should not be pursued; and the availability of alternative remedies. The court should have an express power to adjourn the proceedings to enable a meeting of shareholders to be convened for the purpose of considering a resolution affecting the claim.
6.114 The action should continue to be brought on behalf of all the companys members other than any who are defendants, and a decision of the court should be binding on all the members on whose behalf the action is brought. No discontinuance or compromise of the proceedings should be permitted without leave of the court. It should also be possible to continue, as a derivative action, proceedings commenced by the company where the company has failed to prosecute the claim diligently and the manner in which the company has commenced and continued the action amounts to an abuse of the process of the court.
(1) The principle is based on the doctrine of separate corporate personality and on the early partnership principle that courts would not interfere between partners except to dissolve the partnership; see Wedderburn, "Shareholders Rights and the Rule in Foss v Harbottle" [1957] CLJ 194, 196. See Carlen v Drury (1812) 1 V & B 154, 158; 35 ER 61, 62: "This Court is not to be required on every Occasion to take the Management of every Playhouse and Brewhouse in the Kingdom" per Lord Eldon LC.
(2) See Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204, 210. To allow a third party to bring an action in relation to wrongs done to another could lead to multiple actions being brought against a single defendant in relation to a single wrong.
(3) (1843) 2 Hare 461; 67 ER 189.
(4) See Wedderburn, "Shareholders Rights and the Rule in Foss v Harbottle" [1957] CLJ 194, 195-198. See also Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204, where the Court of Appeal referred to the rule in Foss v Harbottle as embracing both the "elementary" proper plaintiff principle and "... a related principle, that an individual shareholder cannot bring an action in the courts to complain of an irregularity ... if the irregularity is one which can be cured by a vote of the company in general meeting". Ibid, at p 210. See generally Consultation Paper No 142, paras 4.1-4.6.
(5) [1950] 2 All ER 1064, 1066-1069, per Jenkins LJ.
(6) [1982] Ch 204.
(7) Ibid, at pp 210-211. Edwards v Halliwell also makes it clear that the enforcement of the personal rights of individual members does not come within the rule, although as discussed below, the rule does have implications for such personal actions; see para 7.7 below. For a recent case where, following Edwards v Halliwell, the rule was held to have no application, see Wise v Union of Shop, Distributive and Allied Workers [1996] ICR 691.
(8) See Consultation Paper No 142, para 16.14 and para 4.5, n 13.
(9) See Consultation Paper No 142, para 16.14, and see para 6.56 below. Although note that where a shareholder is seeking compensation for loss caused by an ultra vires or illegal transaction, the wrong is done to the company and the claim must be brought by derivative action; see Smith v Croft (No 2) [1988] Ch 114. Also, it appears that an action to restrain breaches of special resolution procedures and to prevent the company from acting on resolutions passed as a result of such breaches can be either in personal or derivative form; see Quin & Axtens Ltd v Salmon [1909] AC 442.
(10) Consultation Paper No 142, para 4.6.
(11) See Consultation Paper No 142, paras 14.1-14.3. So far as the third point is concerned, we noted that an action to recover damages suffered by a company by reason of the negligence of a director could not be brought by a minority shareholder unless it is possible to prove that the negligence conferred a benefit on the controlling shareholders, or that the failure of the other directors to bring an action constitutes a fraud on the minority. This is discussed further below; see paras 6.38-6.41.
(12) Ibid, at para 14.4.
(13) We provisionally recommended that express reference should be made to five specific matters which the court should take into account. In our final recommendations we have added an additional specific matter to which we consider express reference should be made. See para 6.70 below.
(14) In 1975 the Canadian federal Parliament passed the Canada Business Corporations Act (CBCA) which followed the publication of the Dickerson Report (Proposals for a New Business Corporations Law for Canada) in 1971. Section 239 of the CBCA sets out a statutory right to apply for leave to bring an action on behalf of a corporation or to intervene in an action to which it is a party. Seven out of the ten Canadian provinces (Alberta, Saskatchewan, Manitoba, New Brunswick, New Foundland, Nova Scotia and Ontario) have enacted or amended provincial statutes so as to contain measures which are very similar to the CBCA. An eighth (British Columbia) has also enacted legislation which provides for the creation of a derivative action scheme, but differs to a significant degree from the CBCA. The remaining two provinces (Prince Edward Island and Quebec) continue to rely on the common law. See Brian Cheffins, "Reforming the Derivative Action: The Canadian Experience and British Prospects" A Paper presented at the Cambridge Conference on Shareholders Rights and Remedies (April 1997) pp 7-8. See also Consultation Paper No 142, Appendix F and G.
(15) For details of the draft provisions published by the Attorney-Generals Department in Australia, see Proceedings on Behalf of a Company, Draft Provisions and Commentary (1995); See also Consultation Paper No 142, Appendix F. For the proposals in the new Ordinance for Hong Kong, see Review of the Hong Kong Companies Ordinance Consultancy Report (March 1997), recommendation 7.08.
(16) See draft Bill s 245B(1) published by the Attorney-Generals Department in Australia, Proceedings on Behalf of a Company, Draft Provisions and Commentary (1995) pp 3 and 11. See also Consultation Paper No 142, Appendix G.
(17) Ibid, s 245B(2) and p 5.
(18) See sections 165-168 of the New Zealand Companies Act 1993. See also Consultation Paper No 142, Appendix F and G.
(19) See sections 266-268 of the South African Companies Act No 61 of 1973. See also Consultation Paper No 142, Appendix F and G.
(20)Articles 267 to 268 of the Commercial Code of Japan; see Mark D West, "The Pricing of Shareholder Derivative Actions in Japan and the United States" (1994) 88 North Western University Law Revision 1436, and Professor Hiroshi Oda, "Derivative Actions In Japan" 48 Current Legal Problems (1995) 161.
(21) We note that there was an opposition amendment to the Companies Bill in 1979 which was designed to introduce a derivative action subject to leave of the court. The amendment was withdrawn following discussion in Committee; see Hansard (HC) Standing Committee A, 22 November 1979.
(22) See for example, interim report of the Hampel Committee, Committee on Corporate Governance, Preliminary Report (August 1997), para 1.5.
(23) An alternative approach to the derivative action is to be found in the EC Draft Fifth Directive for the Harmonisation of Company Law. For the 1988 text, see J Dine, EC Company Law (1st ed, 1991) paras A8.20-A8.93. Under this provision proceedings are to be commenced on behalf of a public company in respect of directors liabilities for breach of duty if "... so requested by one or more shareholders who hold shares of a nominal value or, in the absence of a nominal value, an accounting par value which the Member States may not require to be greater than 10% of the subscribed capital. ..." (art 16). No work is currently under way on the Fifth Directive and the ultimate fate of this draft procedure for a derivative action is uncertain. See Commission Consultation Paper on Company Law (March 1997), p 7.
(24) See Consultation Paper No 142, para 16.3.
(25) Some respondents suggested that the court should be given power to make this order at an interim stage, but that course would still involve two sets of proceedings.
(26) Consultation Paper No 142, para 15.5.
(27) We did raise on consultation the question of whether it would be appropriate to require all claims which can be brought by or on behalf of the company to be so brought (ibid, at para 16.1). Our provisional view was that this would not be appropriate and that a claimant should have the right to choose whether to bring a derivative action or proceedings under s 459, or cumulative claims under both. The vast majority of respondents agreed with our provisional view. A majority of respondents also agreed with our provisional view that the court should not have the power in proceedings under s 459 to make an order in favour of the company where such an order was not in fact sought by the claimant. We maintain our provisional view on these two points.
(28) In particular in relation to negligence of directors; see paras 6.38-6.41 below.
(29) Where, for example, the claim does not arise out of a breach of duty by a director; see para 6.24 below.
(30) Derivative actions are likely to be more focused and therefore easier for the courts to manage.
(31) This is supported by the experience in Canada; See B Cheffins (S J Berwin Professor of Corporate Law (elect), University of Cambridge), "Reforming the Derivative Action: The Canadian Experience and British Prospects" A Paper presented at the Cambridge Conference on Shareholders Rights and Remedies (April 1997).
(32) See Consultation Paper No 142, para 15.3.
(33) See para 6.22 below and Appendix D.
(34) See, however, n 89 below.
(35) In concurrence with the Secretary of State.
(36) See paras 1.28-1.30 above on the current position in respect of the Draft Civil Proceedings Rules.
(37) And set out in para 6.5 above.
(38) Eg for knowing receipt of money or property transferred in breach of trust or for knowing assistance in a breach of trust.
(39) [1988] BCLC 104. This case was based on an equivalent decision on trusts by Megarry V-C in Tito v Waddell (No 2) [1977] Ch 106, 246-250 (which concerned a limitation issue).
(40) See Rolled Steel Products (Holdings) Ltd v British Steel Corp [1984] BCLC 466.
(41) These are driven by s 310 of the Companies Act 1985. This section prohibits, inter alia, provisions in the articles which exempt a director from liability in respect of any "negligence, default, breach of duty or breach of trust". Articles often provide that a director may be interested in a contract with his company provided he makes disclosure of his interest in the manner required by the articles. Such a provision was held by Vinelott J in Movitex Ltd v Bulfield [1988]BCLC 104 not to infringe the predecessor of s 310 since, as the restriction on "self-dealing" was a disability, the provision did not involve exempting directors from liability for "breach of duty or breach of trust". See also Guinness plc v Saunders [1990] 2 AC 663; Lee Panavision Ltd v Lee Lighting Ltd [1991] BCC 620; and Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549.
(42) See para 6.48 below and see s 458A(2) inserted by clause 1(1) of the draft Bill in Appendix A.
(43) See the cases cited in n 41 above.
(44) Regulation 85 of Table A sets out such a requirement.
(45) [1982] 1 WLR 2.
(46) Under regulation 70 of Table A, the power to manage the company is vested in the directors. It is for the directors, not the company in general meeting, to decide whether proceedings should be pursued. See the case of Breckland Group Holdings Ltd v London and Suffolk Properties Ltd [1989] BCLC 100 where it was held that the company in general meeting could not intervene to adopt unauthorised proceedings; the only organ which could do so was the board.
(47) We also note that in Canada, where there is no such restriction, it appears that there have only been two cases where the subject-matter of the proposed litigation was an action against a third party. In both, the judge dismissed the application and in so doing expressed scepticism as to whether derivative litigation was appropriate for the type of proceedings involved; see Brian Cheffins, "Reforming the Derivative Action: The Canadian Experience and British Prospects" A Paper presented at the Cambridge Conference on Shareholders Rights and Remedies (April 1997).
(48) Eg for knowing receipt of money or property transferred in breach of trust or for knowing assistance in a breach of trust.
(49) Other than where the claim arises out of the breach of duty.
(50) See paras 6.38- 6.41 below.
(51) The shareholders do, of course, have the right to remove the directors by ordinary resolution if they do not approve of the manner in which the directors are managing the company; see s 303 of the Companies Act 1985.
(52) See Consultation Paper No 142, para 16.8.
(53) Section 741(1) provides that: "In this Act, "director" includes any person occupying the position of director, by whatever name called".
(54) See Re Lo-Line Electric Motors Ltd [1988] BCLC 698. For a discussion of the difference between de jure, de facto and shadow directors, see Re Hydrodam (Corby) Ltd [1994] 2 BCLC 180, 183.
(55) Section 741(2) provides that: "In relation to a company, "shadow director" means a person in accordance with whose directions or instructions the directors of the company are accustomed to act. However, a person is not deemed a shadow director by reason only that the directors act on advice given by him in a professional capacity."
(56) Eg Companies Act 1985, sections: 309 (directors to have regard to interests of employees); 319 (directors contract of employment for more than 5 years); 320 (substantial property transactions involving directors). See also Insolvency Act 1986, s 214 (wrongful trading).
(57) It remains an open question whether shadow directors can also be said to owe fiduciary duties to the company, although for a contrary view, see Penningtons Company Law (1995 7th ed) p 712. Our provision is not intended to impose obligations on shadow directors which they do not already have. It simply enables a shareholder to enforce a cause of action which the company would already have under the current law.
(58) See Consultation Paper No 142, para 16.9. See also paras 4.10-4.11 and 9.44-9.48; cf Hollington, Minority Shareholders Rights (2nd ed 1994) p 15, para 2-021.
(59) We also noted that it appeared that the Jenkins Committee had intended section 461(2)(c) to be available in the case of negligence; see the Report of the Company Law Committee (1962) Cmnd 1749, paras 206-207, and see Consultation Paper No 142, paras 7.10-7.11.
(60) In Re City Equitable Fire Insurance Co Ltd [1925] Ch 407, Romer J concluded that a director need not exhibit in the performance of his duties a greater degree of skill than may reasonably be expected of a person of his knowledge and expertise. In Dorchester Finance Co v Stebbing [1989] BCLC 498 Foster J held that the proposition of Romer J applied only to the exercise of a director of his skill. This duty was to be distinguished from his duty of diligence, where what was required was "such care as an ordinary man might be expected to take on his own behalf". However, in Norman v Theodore Goddard [1991] BCLC 1027 and Re DJan of London Ltd [1994] 1 BCLC 561, Hoffmann J in drawing from the statutory test for wrongful trading in s 214 of the Insolvency Act 1986, expressed the view that both elements of the duty of care are to be assessed objectively.
(61) See generally V Finch, "Personal Accountability and Corporate Control: The Role of Directors and Officers Liability Insurance" (1994) 57 MLR 880.
(62) We also note that the experience in Canada suggests that there will not be a dramatic increase in the amount of litigation; see Brian Cheffins, "Reforming the Derivative Action: The Canadian Experience and British Prospects" A Paper presented at the Cambridge Conference on Shareholders Rights and Remedies (April 1997).
(63) See paras 6.73-6.92 below.
(64) See Consultation Paper No 142, paras 16.10-16.11.
(65) So as to avoid diverging principles and procedures; see para 6.53 below.
(66) See Brian Cheffins, "Reforming the Derivative Action: The Canadian Experience and British Prospects" A Paper presented at the Cambridge Conference on Shareholders Rights and Remedies (April 1997) at p 16.
(67) See para 6.30 above.
(68) See paras 6.5, 6.37 and 6.41.
(69) For example, the failure to obtain approval for a substantial property transaction involving a director, under s 320. See British Racing Drivers Club Ltd v Hextall Erskine & Co (a firm) [1997] 1 BCLC 182.
(70) Which avoids certain provisions exempting officers and auditors from liability.
(71) Which gives the court power to grant relief in certain cases.
(72) See paras 6.25-6.26 above.
(73) See Consultation Paper No 142, para 20.33.
(74) Section 22 provides as follows: "(1) The subscribers of a companys memorandum are deemed to have agreed to become members of the company, and on registration shall be entered as such in its register of members. (2) Every other person who agrees to become a member of a company, and whose name is entered in its register of members, is a member of the company." For a recent decision of the Court of Appeal of the Cayman Islands on the position of beneficial owners, see Jonasson v Svanstrom 4 April 1997 (unreported, Cayman Islands CA). See also J Payne, "Derivative Actions by beneficial shareholders" (1997) 18 Company Lawyer 212. As to the ability of a beneficial owner to compel a registered member to bring an action, see Mutual Life Insurance Co of New York v The Rank Organisation Ltd [1985] BCLC 11 (in that case, a personal action was brought by a beneficial owner to enforce the articles of association). Section 459(2) extends the meaning of "member" to include a person who has acquired shares by operation of law, and thus to include the case of a personal representative who may have been refused registration (see para 4.57, n 68 above), but we do not consider that a similar extension is required or appropriate in the case of a derivative action.
(75) Consultation Paper No 142, para 16.13.
(76) The issue here is the right to bring a derivative action; not the right to bring a personal action, for example in respect of transactions requiring approval of a special majority, as the view is taken in the consultation paper that these fall outside the rule entirely. See para 6.56 below.
(77) See Consultation Paper No 142, para 16.13.
(78) S Beck, "The Shareholders' Derivative Action" (1974) 52 Can Bar Rev 159. In Canada this objective is met, however, not by express abrogation of the rule but by requiring that no derivative action be brought without the leave of the court and by laying down conditions for the granting of leave. In New Zealand the legislation expressly provides that no derivative action can be brought except as provided in the section creating the statutory derivative action; and the draft Australian provision abolishes the common law right to bring a derivative action. See Consultation Paper No 142, para 16.12 and Appendices F & G.
(79) See para 6.3, n 9.
(80) On the right to bring a personal action in respect of breaches of special resolution procedures, see para 6.56 below.
(81) A shareholder will of course continue to be able to bring a personal action in respect of breaches of special resolution procedures which will not be subject to these restrictions; see para 6.57 below.
(82) See paras 6.27-6.34 above.
(83) See Consultation Paper No 142, para 16.14.
(84) A shareholder does, however, currently have the option of bringing a derivative action in respect of breaches of special resolution procedures; see Quin & Axtens Ltd v Salmon [1909] AC 442 and Consultation Paper No 142, para 16.14. It is proposed that this should only be possible in future in so far as it comes within the new derivative procedure; see para 6.54 above.
(85) See para 6.3.
(86) See paras 7.2-7.11 below.
(87) Consultation Paper No 142, paras 16.15-16.17.
(88) Rule 5(1)(c) of the Draft Civil Proceedings Rules permits the court to extend or shorten the time for compliance with any rule, practice direction or order or direction of the court. However, see n 89 below. If the notice requirement were to be included in a pre-action protocol then we consider that it should be sufficiently flexible to allow the company more time to consider the claim in appropriate cases.
(90) See paras 6.70-6.92 below.
(91) The shareholder might be able to bring an action against the directors for breach of duty in failing to pursue the proceedings diligently, but he would not be able to pursue proceedings in respect of the original cause of action.
(92) In particular, it must be a cause of action arising out of a breach of duty by a director; see paras 6.24-6.37 above.
(93) See Draft Rule 50.9, Appendix B.
(95) See para 6.70 and paras 6.75-6.91 below.
(96) See Draft Rule 50.10 and 50.11, Appendix B.
(97) See LCD Working Paper on Judicial Case Management, paras 4.6-4.9.
(98) See Draft Rule 50.5, Appendix B.
(99) See LCD Working Paper on Judicial Case Management, para 4.8.
(100) See Draft Rule 50.8(1), Appendix B.
(101) See Draft Rule 50.6(3), Appendix B.
(102) See Consultation Paper No 142, para 16.25.
(103) This is considered, along with the question of whether the wrong has been, or may be, approved in general meeting, under the general heading "authorisation and ratification"; see paras 6.80-6.87 below.
(104) Ibid, at para 16.22.
(105) Apart from the exercise of the courts discretion to grant leave under the new procedure, the court will have the power to dismiss a case or part of a case on the grounds that it has no realistic prospect of success under the proposed new Civil Procedure Rules; see para 2.13 above.
(106) See para 6.70 above and para 6.87 below.
(107) See Consultation Paper No 142, para 16.44. Our provisional view received support from a large majority of respondents. See Draft Rule 50 at Appendix B.
(108) As applied by Lord Denning MR in Central Estates (Belgravia) Ltd v Woolgar [1972] 1 QB 48, 55 (construing the Leasehold Reform Act 1967, sched 3 para 4(1)) and by Plowman J in Smith v Morrison [1974] 1 WLR 659, 676 (construing the Land Registration (Official Searches) Rules 1969).
(109) See Draft Rule 50.8(3), Appendix B.
(110) This does not of course mean that the court would be bound to accept the views of the directors. The existence of a conflict of interest may affect the weight to be given to them, and the court would give no weight to views which no reasonable director in that position could hold.
(111) We include, for this purpose, the situation where a director puts himself in a position where his personal interests conflict with his duties to the company; see para 6.48 above.
(112) See, for example, MacDougall v Gardiner (1875) 1 Ch D 13.
(113) See Consultation Paper No 142, paras 5.6-5.17.
(114) Ibid, at para 5.7.
(115) Ibid, at paras 16.35-16.36.
(116) Ibid, at para 16.37.
(117) As in s 322(2)(c) of the Companies Act 1985.
(118) This point is made clear in Draft Rule 50.8(4), Appendix B.
(119) See, eg, MacDougall v Gardiner (1875) LR 10 Ch App 606; cf Bamford v Bamford [1970] Ch 212.
(120) See paras 6.100-6.103 below.
(121) See Re Savoy Hotel Ltd [1981] Ch 351.
(122) It would also be inconsistent with our second and fifth guiding principles.
(123) There may well be other situations in which the court would have to dismiss the action, eg if there had been a binding release; see para 6.87, n 125 below.
(124) Taylor v National Union of Mineworkers (Derbyshire Area) [1985] BCLC 237, 255. See also Smith v Croft (No 3) [1987] BCLC 355.
(125) In Taylor v National Union of Mineworkers (Derbyshire Area) Vinelott J made it clear that such a resolution could be effective even if the wrong could not be ratified by any majority of the members; ibid, at p 254. Vinelott J also drew a distinction between a resolution not to sue and a binding release. The draft rule set out in Appendix B does not refer to a release but the existence of such a release is one of the matters to which the court would have regard. If it was binding, the derivative action would have to be dismissed. We have not considered the effect of s 310 of the Companies Act 1985 on such a release.
(126) See paras 6.88-6.89 below.
(127) Consultation Paper No 142, para 16.38.
(128) [1988] Ch 144.
(129) Ibid, at p 186.
(130) Ibid, at p 185. See also generally Consultation Paper No 142, paras 4.27-4.29.
(131) [1995] 1 BCLC 243.
(132) See Consultation Paper No 142, para 5.19.
(133) Ibid, at para 5.20. See also Watts v Midland Bank [1986] BCLC 15.
(134) Ibid, at para 16.41. All but one of the respondents agreed with our provisional view.
(135) [1982] Ch 204.
(165) Ibid, at p 210.
(137) Consultation Paper No 142, para 6.5.
(138) See Draft Rule 50.2, Appendix B.
(139) If one shareholder brought a derivative action in respect of a cause of action, and another shareholder brought a second derivative action in respect of the same cause of action while the first was continuing, it is considered that the court would have the power to revoke any leave that it had given in the action which ought to be stayed, or to stay one of the actions under s 49(3) of the Supreme Court Act 1981; see generally the notes to the Supreme Court Practice 1997 vol 2, paras 5202 and 5237 and the cases there cited, for instance Slough Estates Ltd v Slough Borough Council [1968] Ch 299. In that case the court held that a plaintiff who appealed to the Minister in respect of the grant of conditional planning permission and then issued proceedings in the High Court to determine the validity of the planning permission should be put to its election as to which remedy to pursue. It was common ground that to obtain a stay the defendants had to establish: (1) duplication between two sets of proceedings; (2) oppression, vexation or abuse of the process of the court resulting from the continuation of the proceedings sought to be stayed; and (3) the absence of any other consideration against the relief sought (ie the application for a stay). In that case the plaintiff was the party seeking both to appeal to the Minister and to pursue the High Court proceedings, but it is considered that similar considerations would apply where different parties seek to pursue the same claim on a representative basis.
(140) As in Draft Rule 20.3(2) of the Draft Civil Proceedings Rules which deals with other kinds of representative actions.
(141) Consultation Paper No 142, para 16.45.
(142) Ibid, at para 16.47.
(143) Ibid, at para 17.7.
(144) A resolution of the company in general meeting not to pursue the cause of action may also prevent proceedings being commenced or continued; see para 6.87 above.
(145) See paras 6.88-6.90 above.
(146) See Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204, 222 and Hogg v Cramphorn [1967] 1 Ch 254, 270. The court does have powers under the Companies Act 1985 to direct that a meeting be convened in certain circumstances (eg s 371), but we are not proposing any changes to these powers. For a recent discussion of s 371 where the Court of Appeal held that the court had no jurisdiction to affect shareholders voting rights, see Ross v Telford, The Times 4 July 1997.
(147) The proposed primary legislation for Scotland contains a specific provision giving the courts power to make cost indemnity orders (see s 458B(8) in clause 1(1) of the Bill) but the court already has this power in England and Wales; see eg Wallersteiner v Moir (No 2) [1975] QB 373.
(148) See Consultation Paper No 142, para 17.9.
(149) Ibid, at para 17.10.
(150) At para 2.116 of the LCD Working Paper on Judicial Case Management, it is suggested that where parties fail to take steps in an action for a certain period of time the new Civil Procedure Rules might provide for the court to issue an order that unless the parties take steps within a specified period the case would be presumed settled (a settlement order). A failure by the claimant to take those steps pursuant to an agreement with other parties is likely to be a compromise which requires the leave of the court. Clearly if the suggestion in the Working Paper is implemented, care will have to be taken so that it is not possible for a claimant in a derivative action to avoid the requirement for court leave for a compromise of the action by colluding in a situation in which the court makes a settlement order.
(151) Consultation Paper No 142, paras 16.48-16.50.
(152) Ibid, at para 16.51. See, eg, Beck v Value Capital [1975] 1 WLR 6, 11 B-E.
(153) See clause 1 of the draft Bill at Appendix A.
(154) See Draft Rule 50 at Appendix B.