The Rule in Foss v Harbottle rears its head once more.

Harris v Microfusion 2003-2 LLP [2016] EWCA Civ 1212.

Facts

The appellant (H) appealed against an order for only allowing two derivative claims out of three that were sought. The respondent cross-appealed against the decision to allow the two claims. The appellant alleged that the respondent breached the fiduciary duties they owed.

It was common ground that the common law derivative remedy survived, meaning that a derivative claim could not be brought by an individual member unless the circumstances fell within one of the exceptions set out in Foss v Harbottle (1843) 67 ER 189. The judge deliberated whether the appellant’s proposed claims fell within the fourth exception, which was that ‘H’ alleged “fraud” and no other remedy was available. Relying on Abouraya v Sigmund [2014] EWHC 277 (Ch), the judge held that where there was wrongdoing falling short of “fraud” in the sense of a deliberate and dishonest breach, the fourth exception could only be invoked if that wrongdoing had resulted in a loss to the company and a personal benefit to the wrongdoers. The judge granted ‘H’ permission to follow a claim. ‘H’ felt that all three of his proposed claims satisfied the requirement in Foss v harbottle rule, and he argued that all that was required was an allegation of a breach of fiduciary duty or an abuse or misuse of power.

A derivative claim for the purposes of this case is set out in s260 – 264 Ch 1 Part 11 Companies Act 2006. A shareholder’s derivative suit is a lawsuit brought by a shareholder on behalf of a corporation against a third party. Often, the third party is an insider of the corporation, such as an executive officer or director.

Held

The judge dismissed the appeal and said at paragraph’s see paras 25, 28-40, people were free to join as members of corporate entities on whatever terms they chose, formulated in articles of association, partnership deeds for LLP’s, or shareholders’ agreements. They would, however, be bound by those arrangements, and if majority rule was provided for, the minority would be bound by the wishes of the majority. The majority could choose to excuse breaches of duty by directors, provided they did not use their voting powers to confer benefits on themselves in breach of duty or to prevent the company from recovering any loss. Where the minority was disallowed from remedying a fraud or taking proceedings because of the protection afforded to the fraudulent shareholders or directors by virtue of their majority, the fourth exception prevented the majority from improperly benefitting themselves at the company’s expense. None of H’s proposed claims contained any allegation of deliberate and dishonest breach of duty the second and third involved no personal benefit to the respondent and the first involved insufficient benefit to satisfy the requirements of the fourth exception. Therefore, none fell within the fourth exception and the judge should not have permitted any of them to proceed.

 This case not only highlights that a derivative claim against a company, regarding one’s fiduciary duties, can backfire if the majority choose to excuse s breach of duty by a director, but that a case as old as Foss v Harbottle still holds precedence today, even with the forever growing developments in business and law.

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