Airey v Cordell (2006)
The appropriate test for permission to bring a derivative claim was the view of a hypothetical and independent board of directors, and a court had not to assert its own view but merely be satisfied that such a board could take the decision that the minority shareholder applying for permission to proceed would like it to take.
The applicant shareholder (R) applied for permission to amend the particulars of claim to plead a new claim and to continue derivative proceedings on behalf of the fifth and sixth respondent companies (H and N). R was a minority shareholder in H, and N was a wholly owned subsidiary of H. H and N were market leaders in the manufacture and sale of vehicle license plates and number plate components. Using radio frequency identification technology, H and N had developed a product known as "e-Plate", a registered trade mark of N, which allowed vehicles and their movements to be monitored accurately. H and N had arranged to market the e-Plate technology overseas and had expanded their operations to include the development of other electronic technology products. The first three respondents (D) were shareholders and directors in H. R had been notified of a number of proposals concerning the creation of a new company, the fourth respondent (E), of which D would own the majority of the issued share capital, which would acquire a licence to produce, manufacture and market e-Plate technology. R, who had no shares in E, issued proceedings seeking relief against the last proposal, alleging that it involved D acting in breach of their duties as directors or acting oppressively as shareholders, as they had improperly appropriated to themselves property or advantages belonging to H and N or diverting business to themselves that ought to have been given to H and N. D and E did not oppose R's application for permission to amend, but opposed the application for permission to continue the claim as a derivative action. R contended that there was a prima facie case that the last proposal involved a breach of the "no conflict" and "no profit" aspects of the fiduciary duties owed by D, and that the position of D as the directors of H and N and majority shareholders constituted wrongdoer control. D contended that whether a derivative action should continue depended on what a reasonable board of directors would do. They also pointed out that E had been set up to exploit alternative radio frequency identification technology products generally rather than just the e-Plate.
It had to first be established that there was a prima facie case and that an exception to the principle in Foss v Harbottle 67 ER 189 applied, then the correct test to apply in deciding whether to allow permission for a derivative claim was that of the independent board. The availability of an alternative remedy for the minority shareholder would also be of some significance, Foss v Harbottle, Wallersteiner v Moir (No2) (1975) QB 373 and Prudential Assurance Co Ltd v Newman Industries Ltd (No2) (1982) Ch 204 considered. In the instant case, it was accepted that there was a prima facie case and an exception to the Foss v Harbottle principle applied. The dividing line between what majority shareholders could condone and ratify and what they could not was not easy to draw. The appropriate test was the view of a hypothetical and independent board of directors, and a court had not to assert its own view but merely be satisfied that such a board could take the decision that the minority shareholder applying for permission to proceed would like it to take. On the facts of the instant case it could not be said that no reasonable board would pursue D by litigation. It was appropriate to allow a period of time for D to put forward a further proposal to see if the parties could reach agreement. If the court was then satisfied that such a proposal would afford R adequate protection he should not be allowed to proceed with the derivative claim.
Application granted in part