A plaintiff shareholder cannot recover damages merely because the company in which he has an interest has suffered damage. He cannot recover a sum equal to the diminution in the market value of his shares, or equal to the likely diminution in dividend, because such a ‘loss’ is merely a reflection of the loss suffered by the company. The shareholder does not suffer any personal loss. His only ‘loss’ is through the company, in the diminution in the value of the net assets of the company, in which he has (say) a 3 per cent, shareholding. The plaintiff’s shares are merely a right of participation in the company on the terms of the articles of association. The shares themselves, his right of participation, are not directly affected by the wrongdoing. The court rejected the notion that there is any general discretion to ignore the ‘proper plaintiff’ rule whenever the justice of the case so requires. ‘A derivative action is an exception to 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. C is the proper plaintiff because C is the party injured, and, therefore, the person in whom the cause of action is vested.’
‘What [a shareholder] cannot do is to recover damages merely because the company in which he is interested has suffered damage. He cannot recover a sum equal to the diminution in the market value of his shares, or equal to the likely diminution in dividend, because such a ‘loss’ is merely a reflection of the loss suffered by the company. The shareholder does not suffer any personal loss. His only ‘loss’ is through the company, in the diminution in the value of the net assets of the company, in which he has (say) a 3 per cent shareholding.’
If the fraud was not admitted by the insiders, how was it to be proved? ‘It cannot have been right to have subjected the company to a 30-day action (as it was then estimated to be) in order to enable him to decide whether the plaintiffs were entitled in law to subject the company to a 30-day action. Such an approach defeats the whole purpose of the rule in Foss v. Harbottle and sanctions the very mischief that the rule is designed to prevent. By the time a derivative action is concluded, the rule in Foss v. Harbottle can have little, if any, role to play. Either the wrong is proved, thereby establishing conclusively the rights of the company; or the wrong is not proved, so cadit quaestio.’ and answered: ‘In our view, whatever may be the properly defined boundaries of the exception to the rule, the plaintiff ought at least to be required before proceeding with his action to establish a prima facie case (i) that the company is entitled to the relief claimed, and (ii) that the action falls within the proper boundaries of the exception to the rule in Foss v. Harbottle.’
Cumming-Bruce, Templeman and Brightman LJJ
[1982] Ch 204, [1982] 1 All ER 354, [1982] 2 WLR 31
England and Wales
Citing:
Explained – Foss v Harbottle 25-Mar-1843
A bill was lodged by two of the proprietors of shares in a company incorporated by Act of Parliament, on their own and the other shareholders’ behalf. They claimed against three bankrupt directors, a proprietor, solicitor and architect charging them . .
See Also – Prudential Assurance Co Ltd v Newman Industries Ltd ChD 1979
Members of the defendant company had approved in general meeting, of an acquisition of the assets of another company in which its directors were substantially interested. The shareholders’ approval was given on the basis of a circular. The action . .
Cited by:
Cited – Barings Plc and Another v Coopers and Lybrand and Others; etc ChD 23-Nov-2001
The applicant company employed a trader who, through manipulation of trading systems ran up losses sufficient to bankrupt the company. They sought recovery from the defendant auditors for failing to spot the mis-trading and prevent continuing . .
Cited – Konamaneni v Rolls Royce Industrial Power (India) Limited ChD 20-Dec-2001
The claimants founded their action on the assertion that the defendants had been corrupt in obtaining contracts in India. The defendants argued that the English courts had no jurisdiction. The claimants held various small shareholdings in a company . .
Cited – Johnson v Gore Wood and Co (A Firm) ChD 3-May-2002
The respondent firm acted on behalf of the claimant’s companies in land transactions. An option had been taken to purchase land, and he instructed the defendants to exercise it. The landowner claimed the notice to exercise the option was invalidly . .
Cited – Johnson v Gore Wood and Co (a Firm) CA 12-Nov-1998
The claimant had previously issued a claim against the defendant solicitors through his company. He now sought to pursue a claim in his own name. It was resisted as an abuse of process, and on the basis that no personal duty of care was owed to the . .
Cited – Stein v Blake and others CA 13-Oct-1997
The defendants challenged leave to appeal given to the plaintiff against dismissal of his claim following the Prudential Assurance case.
Held: The issue was whether the plaintiff can recover the loss which he has allegedly sustained by reason . .
Cited – Heron International v Lord Grade, Associated Communications Corp. Plc. and Others CA 1983
In the course of a contested take-over bid, the directors of the target company who owned a majority of the company’s voting shares were alleged, in breach of their duties both to the company and to its shareholders, to have accepted proposals which . .
Cited – Cabvision Ltd v Feetum and others CA 20-Dec-2005
The company challenged the appointment of administrative receivers, saying there had been no insolvency.
Held: No question arises of a derivative action arose here. The claimant had standing to apply for declaratory relief since they were . .
Cited – Johnson v Gore Wood and Co HL 14-Dec-2000
Shareholder May Sue for Additional Personal Losses
A company brought a claim of negligence against its solicitors, and, after that claim was settled, the company’s owner brought a separate claim in respect of the same subject-matter.
Held: It need not be an abuse of the court for a shareholder . .
Cited – Christensen v Scott 1996
(New Zealand Court of Appeal) Thomas J said: ‘the diminution in the value of Mr and Mrs Christensen’s shares in the company is by definition a personal loss and not a corporate loss. The loss suffered by the company is the loss of the lease and the . .
Cited – Barclays Bank Plc v Kufner ComC 10-Oct-2008
barclays_kufnerComC2008
The bank sought summary judgment under a guarantee to secure a loan to purchase a luxury yacht which was to be hired out in business. The loan had been charged against the yacht, but when the yacht was re-registered, the bank failed to re-establish . .
Cited – Barclays Bank Plc v Kufner ComC 10-Oct-2008
barclays_kufnerComC2008
The bank sought summary judgment under a guarantee to secure a loan to purchase a luxury yacht which was to be hired out in business. The loan had been charged against the yacht, but when the yacht was re-registered, the bank failed to re-establish . .
Cited – Webster v Sandersons Solicitors (A Firm) CA 31-Jul-2009
The claimant apealed against refusal of permission to amend his claim for negligence against his former solicitors by adding claims from 1993 and 1994 . .
Cited – Emerald Supplies Ltd and Another v British Airways Plc ChD 8-Apr-2009
The claim was for damages after alleged price fixing by the defendants. The claimants sought to recover for themselves and as representatives of others who had similarly suffered. The defendants sought that the representative element of the claim be . .
Cited – Iesini and Others v Westrip Holdings Ltd and Others ChD 16-Oct-2009
The claimants were shareholders in Westrip, accusing the Defendant directors of deliberately engaging in a course of conduct which has led to Westrip losing ownership and control of a very valuable mining licence and which, but for their . .
Lists of cited by and citing cases may be incomplete.
Updated: 07 August 2021; Ref: scu.179876
