JUDGMENT delivered the 23rd day of February, 2012, by O’Donnell J.
1 The plaintiffs in this case, Mr. Glynn and Mr. McCabe, appeal against the decision of Finlay Geoghegan J. that the claims made by them against the first and second named defendants Jonathan Owen and Allan Owen, cannot be pursued, since they are derivative claims made on behalf of the fourth and fifth named defendants, to which the rule in Foss v Harbottle (1843) 2 Hare 461 applies so that such claims can only be brought by the company. The plaintiffs had argued that they came within the exception to that rule, where their claims involve a fraud on the minority in circumstances where the alleged wrongdoers are in control of the company. They also argued that there was a further wider exception to the rule, where it was required by the interest of justice. Finlay Geoghegan J. held that the fraud on the minority exception did not apply, and that if there was a wider exception in the interests of justice, that too did not apply.
2 The background to the proceedings has been set out with great clarity in the judgment of the trial judge. It is however necessary to repeat it here in some detail in order to identify the issues which arise on this appeal.
3 The two plaintiffs are businessmen who at the time of these proceedings were involved in the environmental technology industry. They met the second defendant, Allan Owen, who had invented a product which separated oil and water, and had a particular application in the food industry in removing liquids, greases, fats and oils from waste water prior to it going into the drainage system. The product was known as “Fatstrippa”. The first named defendant Jonathan Owen is the son of the second named defendant, and was involved in business in the United Kingdom. The third named defendant Mr. Leyland, is a businessman from Northern Ireland who had dealt with the plaintiffs and who had been introduced by them to the first and second named defendants. Together the five men agreed to set up business to manufacture the Fatstrippa product. The fourth defendant, the holding company, was incorporated, and Allan Owen assigned to it his patent applications in six European countries in respect of the Fatstrippa product. The fifth named defendant was licensed to distribute and sell the product. For present purposes the division of function between the two companies is not material, and they will be referred to hereafter as “the company”. The product was manufactured under licence in Donegal and was sold mainly in the United Kingdom through a distribution company BPET in which Jonathan Owen (the first named defendant) had an interest. The company had no employees. Each of the five men were directors of the company and held 20% of the shares each. Initially, the second named plaintiff Kevin McCabe was designated the chief executive officer, and the second named defendant Allan Owen was the chairman. The companies were incorporated in April 2001. At the same time, licence agreements were entered into between the two companies, the patent applications were assigned, and shareholder agreements were entered into between the shareholders to which the respective companies were parties. Those agreements contained provisions in relation to non competition with the business of the company and non disclosure of trade secrets and confidential information in relation to the company.
4 There appears to have been an ongoing difference of opinion between the two plaintiffs and the first and second named defendants as to the strategy to be followed by the company. The plaintiffs favoured a major expansion of the business funded by extensive borrowing, while the Owens favoured a more low key licensing approach. This undoubtedly was the source of tension between the parties. The particular source of the present dispute between the parties was, essentially, the activities of the first named defendant Jonathan Owen (and to a lesser extent his father) in the United Kingdom, and latterly and more importantly, in relation to the United States of America.
5 In early 2004 difficulties arose with the United Kingdom distributor BPET. It became insolvent. It was proposed to establish a new United Kingdom distributor “Fatstrippa U.K.”. An accountant, Ms. Pamela Lewis, who was already an advisor to the first and second defendant was being proposed as a shareholder and director of Fatstrippa U.K. There was concern about the amount of outstanding debt from BPET to the company. In the autumn of 2004 the second plaintiff Mr. McCabe was informed of certain allegations in relation to the Fatstrippa business in the United Kingdom. He organised a subcommittee of the board to investigate the allegations. He also retained Paul O’Kelly, an accountant in O’Kelly Sutton, the company’s accountants, to work with him. In the subsequent disputes, there is no doubt that Mr. O’Kelly was identified as being aligned with the plaintiffs, and Ms. Lewis with the first and second named defendants.
6 It became clear that there were two separate matters of concern. The first was the activities of the first named defendant in respect of BPET, its insolvency and the amount owed to the company. But it also appeared that both Jonathan Owen and his father had had dealings with persons in the United States and in China in respect of the Fatstrippa product which was of concern to the plaintiffs. The trial judge described these matters as follows:
“The second plaintiff appears to have learnt in the course of the investigations what he perceived as disturbing additional information surrounding the insolvency of BPET and the use to which monies earned by that company had been put. Alleged wrongdoing by the first defendant was central to those allegations.
He also learnt of significant ongoing contacts between the first defendant and a number of U.S. parties. He learnt of ongoing involvement of the second defendant with U.S. parties including, it was alleged, receiving them in London. He learnt of the manufacture in China of products allegedly using Fatstrippa technology, and the first defendant’s involvement in China. He learnt of the proximate arrival of those products from China to the U.S.
The plaintiffs [Mr. Glynn and Mr. McCabe] and the third defendant [Mr. Leyland] were all unaware of any of this activity until the investigation. The first and second defendants [Jonathan and Allan Owen] acknowledged certain of the alleged activities and that these had been undertaken without disclosure to the remaining members of the board.”
7 There is no doubt that these matters, certainly as perceived by the plaintiffs, could have been the source of litigation brought by the company against the first defendant Jonathan Owen in particular, but also against the second defendant, Allan Owen. But as the trial judge observed at page 29 of her judgment:
“It is a matter for the majority of the board of directors or shareholders to determine in an appropriate case whether litigation should be commenced by, and in the name of, a company against an allegedly wrongdoing director or shareholder or directors or shareholders (at least where the alleged wrongdoers are not in control of the company). Often such decisions will be difficult and a matter of delicate judgment as to whether it is in the interests of a company to commence what may be costly litigation against a director or shareholder, particularly where such person may also be necessary to the future development and progress of the company.”
These claims, and the manner in which the company dealt with them (or from the plaintiffs’ perspective did not deal with them) are central to this dispute.
8 At a board meeting on the 9th November, 2004, it was proposed that Mr. Leyland replace Allan Owen as the chairman of the board. In due course this was agreed. While there was a dispute as to precisely what was decided at the meeting, a copy of the handwritten resolution signed by all five directors and shareholders was put in evidence. This provided as follows:
“That the board appoints a member/members to lead the integration and regularisation of all existing Fatstrippa activities, assets, intellectual property, patents, etc. globally. And that the company makes a resolution to appoint a nominated person to act on its behalf in the integration and regularisation of all existing Fatstrippa activities, assets, intellectual property, patents etc. globally, and that only board approved companies can be allowed to represent us in future. This is agreed by all board members as follows. This position to be reviewed by the board in ninety days.”
Mr. Leyland was to be the member of the board to lead the integration and regularisation of the activities and Mr. O’Kelly was to be the nominated person. It seems clear that it was not contemplated that any immediate litigation would be commenced, and instead the reference to ‘integration and regularisation’ is suggestive of a broader process.
9 A further board meeting was held on the 2nd December, 2004. Mr. Leyland acted as chairman. Ms. Lewis attended as an alternate for Mr. Allan Owen. There was a review of what had been done. Again there are some disputes about what transpired at that meeting, but what is not in dispute, is that it was unanimously resolved that “regularisation of the company’s interest in the U.S. will be pursued through negotiation with the Americans rather than legal action”. This is of some significance in the present context. It suggests that at one relevant time everybody in the company was agreed legal action was not desirable, at least at that time. Not only was this an example of the delicate judgment companies must make, to which the trial judge referred, it is also of some importance in this case. Ultimately, a central issue in this case is whether, when Mr. Leyland sided with the Owens in refusing to pursue legal action, he was acting independently in his judgment as to the best interests of the company. One question in such a situation is whether a decision not to pursue proceedings was one to which a director, acting reasonably and disinterestedly, could come. The fact that the position taken by Mr Leyland was one with which, at one time, the plaintiffs themselves agreed, even if reluctantly, makes it more difficult for the plaintiffs to impugn that position now.
10 A further board meeting was held on the 14th of February, 2005. Again Ms. Lewis attended as an alternate director for Mr. Allan Owen although he is recorded as attending as an alternate director for Jonathan Owen. As it happens, Mr. Leyland formally offered his shares in the company for sale and invited the other directors to discuss the mechanism and price for that transaction. He was requested by both Kevin McCabe and Allan Owen to reconsider, and urged to withdraw his offer. In any event nothing further occurred in this regard. The judge found that two other decisions were taken at that meeting. The first was that Mr. O’Kelly and Ms. Lewis (and at Mr. Leyland’s option his nominee) should together formulate a business brief for the company. The second was that it was decided that the company would not take any action against Jonathan Owen arising out of his involvement in BPET, and that Ms. Lewis would not take any action against Mr. McCabe or Mr. O’Kelly. No evidence was given as to what that matter related. For present purposes the significant matter is that this was a further decision not to take action against Jonathan Owen in respect of some of the matters which are now sought to be pursued in these proceedings.
11 A further board meeting was held on the 14th of April 2005. It recorded that little progress had been made in negotiating with the Americans but the board considered that a further meeting should be arranged. At that meeting however Mr. McCabe proposed and Mr. Glynn seconded a motion that the board immediately proceed to take action against BPET and Jonathan Owen. That proposal was not carried with the other three directors, the Owens, and significantly, Mr. Leyland, voting against. Although Mr. McCabe contended that this decision related to the first named defendant’s activities in the United States, the trial judge concluded that it related only to his activities in the United Kingdom in relation to BPET Not only is that conclusion not capable of being disturbed in this appeal, it appears amply justified by the evidence. Accordingly it appears that even at this late stage even the plaintiffs were not pressing for legal action in respect of the dealings in the USA
12 A board meeting was called for the 17th August, 2005, in the Great Southern Hotel in Dublin Airport to commence at 2 or 2.30 p.m. As the trial judge records the level of mistrust and suspicion between the plaintiffs and the other board members was such that the plaintiffs visited the room and left a recording device in the room. At the hearing of the appeal, the plaintiffs made references to the transcripts at this meeting and also supplied to the court copies of the recording. As the trial judge observed, it is clear from the transcript and indeed the recording that there were extremely heated exchanges in particular those of Mr. McCabe on the one hand and Mr. Allan Owen and Ms. Lewis on the other. The trial judge’s conclusion in relation to this that “the discussion at times appears irrational and certainly not worthy of the parties who all appear in separate lives to have been successful business people” is regrettably fully justified. For the purposes of this appeal, the significance of this meeting is however that it was alleged by the plaintiffs to be evidence of the fact that the three defendants could be regarded as wrongdoing shareholders in control of the company, so as to entitled the plaintiffs to maintain an action on behalf of the company against Jonathan Owen and Allan Owen, as an exception to the rule in Foss v Harbottle. On the 9th September, 2005, solicitors on behalf of the plaintiffs wrote to the other defendants setting out the allegations which formed the subject matter of the underlying proceedings. A plenary summons was issued on the 28th of September 2005, and these proceedings commenced and interlocutory relief was sought.
13 The claims made in the plenary summons certainly included the derivative claims on behalf of the companies against Jonathan Owen and Allan Owen and Stephen Leyland, which are the subject of this appeal, but also claims described as personal claims made by the plaintiffs against all defendants. An initial application was made on behalf of the first three defendants to have a preliminary issue determined as to the plaintiffs’ entitlement to maintain the derivate claims. That course was fully contested, and the plaintiffs’ then counsel argued that the existence of the personal claims made it inappropriate to seek to determine the Foss v Harbottle issue as a preliminary issue. This was a logical approach, since if it was apparent that the court was going to have to hear and determine much of the factual matters as part of the personal claim, it made no sense to embark upon the detour of a trial of a preliminary issue, which could not determine the proceedings as a whole, or significantly shorten the hearing. The motion was dismissed, and costs awarded against the defendants.
14 The case was then included in the commercial list to be heard in early course. On the 31st July 2006 however, the court was asked to receive and file a proposed settlement but not to make it a rule of court. That settlement was not achieved, and the matter was listed for hearing. That hearing was adjourned to allow the parties discuss the matter further because the case appeared capable of settlement. Once again however settlement was not achieved, and the matter was relisted for hearing before the trial judge. On that occasion however it was indicated towards the outset of the proceedings that the plaintiffs were not now proceeding with the personal claims. The only claims being pursued were derivative claims on behalf of the fourth and fifth named defendants. As the trial judge observed, this was a significant change. It brought back into focus the question as to the entitlement of the plaintiffs to maintain any claim by way of exception to the rule in Foss v Harbottle. The judge then directed trial of that preliminary issue. During the course of those proceedings the first and second named defendants appeared to have parted company with their lawyers, and began to represent themselves.
15 The trial judge ruled that she would hear evidence on the preliminary issue, but directed only towards the question of the plaintiffs entitlement to maintain derivative actions pursuant to the exception to the rule in Foss v Harbottle. However, in that regard she ruled that the plaintiffs would not have to establish a prima facie case of wrongdoing: instead it would be sufficient to consider that issue by reference to the case pleaded by the plaintiffs against the defendant. Evidence was therefore to be focussed on the question of control, or the broader question of the justice of the case. Again there was a certain logic to this course, given the stage of the proceedings which had been reached since it would have been pointless to have heard much of the evidence as part of the preliminary issue only to rehear it if the defendants did not succeed on the issue. However it should be said that in determining that the plaintiffs would not be required to show a prima facie case, the judge was adopting a standard which was favourable to the plaintiffs, since that was usually a requirement which had to be established on any preliminary issue in relation to the application of the rule in Foss v Harbottle.
16 The central issue in dispute was the question of control. The plaintiffs made allegations against three defendants and sought to contend that this meant that the defendants were collectively in control. But the fact that the plaintiffs had sued three directors and that they happened to be a majority of both the board and shareholders, could not by that fact alone be determinative of the question of control. Furthermore, in this case as the judge pointed out there was a sharp distinction between the cases made against the Owens defendants, and the third named defendant Mr. Leyland. The central issue in the case therefore became the position of Mr. Leyland within this dispute. It should of course be recalled that Mr. Leyland was introduced to the business by the plaintiffs. In the event, the judge having heard oral evidence including evidence from Mr. Leyland concluded that when he voted with the Owens, he was acting independently and according to his view of what was in the best interest of the company. That was a conclusion which was not only open to the judge upon the evidence, but seemed to have been fully justified by it. That conclusion was however fatal to the allegation of control particularly in relation to the claims made against the Owens. Accordingly, the High Court concluded that the Owens could not be said to be in control of the company, and therefore the exception to the rule in Foss v Harbottle did not apply. Since the logic of that determination was that it would have been open to the company, to pursue the claims, if Mr. Leyland had thought fit, it seemed to follow that even if there was a wider jurisdiction to permit derivative actions where the justice of the case demanded it, this was not such a case.
The Appeal
17 A number of events have occurred in relation to this matter, which at one level made the resolution of the legal issue easier, but at another have made the case as a whole much more difficult. The plaintiffs have appealed against the determination of the trial judge, but in the case of Mr. Leyland only in respect of costs, and that appeal was separately disposed of. Accordingly, the plaintiffs were not contesting, at least for the purposes of this appeal, the conclusion of the trial judge, that Mr. Leyland was not to be treated as a wrongdoer himself. Thus the sole issue was the question of whether the Owens could nevertheless be considered to be in control of the companies so as to permit the plaintiffs to sue on behalf of the company. On the other hand, it appears that the plaintiffs have also dispensed with the services of their lawyers. Accordingly, both the plaintiffs and the defendants represented themselves on this appeal. Mr. Leyland who was legally represented was no longer a party to the appeal. The intricacy of the rule in Foss v Harbottle has caused considerable confusion even amongst experienced lawyers, and is difficult territory to navigate at the best of times. However, to attempt that journey without any legal training and experience, is a very difficult task indeed. In this case it must be said that both the plaintiffs (for whom Mr. McCabe spoke) and the defendants (for whom Jonathan Owen spoke) were articulate and forceful in their presentation. However no authorities were submitted to the court, and while legal submissions were delivered, they transpired to be imperfectly edited versions of the submissions of the High Court, and thus of little assistance on this appeal. Very little attention was addressed to any issue of law.
18 It may be recalled, that the trial judge had accepted that the plaintiffs had established a sufficient case of wrongdoing on the pleadings, and that it was not necessary to establish a prima facie case. The issue of wrongdoing was not in contest therefore on this appeal. However, it was perhaps entirely predictable that the plaintiffs would seek to press upon this court, matters which they clearly considered to be strong evidence of wrongdoing by Jonathan Owen. In particular, they referred to some email correspondence from the Owens’ American contact, to the private email addresses of Jonathan and Allan Owen attaching a spreadsheet that he hoped reflected “everything you have taught us about how to design a Fatstrippa” and asking the Owens to provide “feedback as soon as possible so we can redesign the FSM unit”. Mr. McCabe also referred to other materials. It was only when Jonathan Owen addressed the Court, that it became clear that these matters had not been referred to in the evidence in the High Court, were contested, and that no application had been made to adduce fresh evidence for the purpose of the appeal. Furthermore, as a matter of law this was evidence directed towards an issue which the plaintiffs did not have to establish for the purposes of the appeal. This all contributed to making the hearing and determination of this appeal much more difficult and unsatisfactory from every point of view.
19 In light of the matters raised by the plaintiffs and the reliance they placed upon them it is important therefore to emphasise that the court’s conclusion on the legal issues should not be taken as any determination on the merits of the plaintiffs’ allegations against the Owens. The only issue which this court can determine is the question of the application of the rule in Foss v Harbottle. The court’s decision on that is quite separate from any question of whether the plaintiffs have any claim against the Owens, whether as personal claims, by proceedings pursuant to s.205 of the Companies Act 1963, for oppression or under the Shareholders’ Agreement, or indeed whether these matters or more, would be sufficient to justify a winding up of the company under s.213 of the Act of 1963. Those issues were not raised in these proceedings, or on this appeal.
20 The central question on this appeal is whether Jonathan and Allan Owen can be said to be in control of the company, so that the company would not be in a position to decide to pursue Jonathan and Allan Owen for alleged wrongdoing. The concept of control in this context does not have a sharp edge. It is not determined solely by voting power, but can be established where a sufficient number of people vote with the alleged wrongdoers whether by force of habit or otherwise. In large companies with diverse shareholding it may be possible for a shareholder to be in control with much less than 50% of the shares. It is however not necessary to consider the furthest limits of this concept because it is clear that independent judgment by persons alleged to make up the majority is certainly fatal to a conclusion that the company is controlled by the wrongdoers. The court found Mr. Leyland was acting independently, and in his view in the best interests of the company, and that precludes a finding that he was part of the block with the Owens so that the Owens could be said to be in control. That is a determination which was open to the High Court, upon the evidence. In accordance with the established jurisprudence of this Court, it is a conclusion which can only be set aside if there was no evidence to support it, or if the conclusion was not justified from the primary facts found by the judge. Almost inevitably the Plaintiffs did not address the issue in this way, but in any event, and even taking a broad view, there is simply no basis for disturbing the findings of the High Court.
21 Mr. McCabe while pressing his case on the facts with some vigour, did not really address this issue. The principal argument advanced on the question of control was that the votes of the Owens ought to have been excluded, in which case, it was alleged that the two plaintiffs would have outvoted Mr. Leyland. This however is to view the matter the wrong way around. Indeed, the logic of Mr. McCabe’s position was that since wrongdoing was being alleged against all three defendants, then none of them should have been allowed to vote in which case the rule would almost always be circumvented. However, the issue was not who was entitled to take part in any vote, but rather whether the defendants together with Mr. Leyland formed a block so that it was not necessary on the part of the plaintiffs to seek a vote, since the outcome would have been pointless. That was a test which assumes that the alleged wrongdoers would be entitled to vote: the question is whether they had, either as a matter of right, agreement, or other arrangement, sufficient votes to form a blocking majority. The High Court found that they did not. The plaintiffs have not advanced any plausible argument as to why the trial judge’s conclusion in this regard should be overturned.
22 The trial judge also recognised that this conclusion was largely determinative of the question as to whether the Plaintiffs should be permitted to pursue the claims because the justice of the case required it, assuming such a broad exception to the rule exists. Once again, the plaintiffs have not advanced any serious argument as to why this conclusion should be overturned, other than contending that the justice of the case required that they be permitted to proceed. This was assertion rather than argument. Assuming for present purposes that such a jurisdiction exists, it would require some compelling facts. Furthermore in my view, account should be taken of the rule in Foss v Harbottle, and the exceptions to it, was a judicial fashioned remedy for the difficulties faced by minorities in companies. The development of more sophisticated shareholders agreements and the development of a specific statutory remedy for oppression by a majority, have reduced the need for a wide-ranging exception to the rule. None of these remedies are perfect. The reality is that litigation within limited companies can be a very fraught business. If proceedings are permitted under an exception to the rule in Foss v Harbottle the next logical step is an application for an indemnity from the company in respect of costs as in Wallersteiner v Moir (No 2) [1975] Q.B. 373. While the pursuit of proceedings against other directors or shareholders, on behalf of the company and funded by it, may satisfy the human, and perhaps tactical, desire to cause maximum damage to opposing shareholders: it is as a practical matter normally fatal to any prospect of the company continuing in its current form as a business enterprise. The difficulty with any of the forms of litigation open to a shareholder is that they are sometimes crude remedies which risk causing serious damage to the company. As a result, as Keane observed in the context of s.205 proceedings, the proceedings are more effective as an in terrorem weapon to be brandished to secure a settlement. (Keane, Company Law 3rd Ed., (Dublin, 2000) at 26.48. In this case, it is certainly regrettable that after contested proceedings in the High Court and this Court, the plaintiffs have not been able to address the substance, if any, of their complaint against the Owens. It is still more regrettable, that the efforts to resolve this dispute without litigation appear to have been unsuccessful. However, the only argument in favour of permitting the plaintiffs to proceed with the derivative claim on the ground that the interests of justice require it, is the very fact that they are unrepresented parties and are not familiar with the legal system. But that cannot itself be a ground. The principle of equality before the law would seem to require that the same rules are applied to all litigants whatever the nature of their representation. Whether there is any other route by which the parties can address and if necessary ventilate their differences is a matter for them. In the circumstances the appeal must be dismissed and the order of the High Court affirmed.
