Minority shareholder - Representative action - Allegations of breach of fiduciary duties

Kleanthous v Paphitis and others: ChD (Mr Justice Newey): 7 September 2011

Section 172 of the Companies Act 2006, so far as material provides: ‘(1) A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (among other matters) to - (a) the likely consequences of any decision in the long term, (b) the interests of the company’s employees, (c) the need to foster the company’s business relationships with suppliers, customers and others, (d) the impact of the company’s operations on the community and the environment, (e) the desirability of the company maintaining a reputation for high standards of business conduct, and (f) the need to act fairly as between members of the company.'

Section 263 of the act provides, so far as material: ‘(2) Permission (or leave) must be refused if the court is satisfied - (a) that a person acting in accordance with section 172 (duty to promote the success of the company) would not seek to continue the claim, or (b) where the cause of action arises from an act or omission that is yet to occur, that the act or omission has been authorised by the company.

(3) In considering whether to give permission (or leave) the court must take into account, in particular - (a) whether the member is acting in good faith in seeking to continue the claim; (b) the importance that a person acting in accordance with section 172 (duty to promote the success of the company) would attach to continuing it; (c) where the cause of action results from an act or omission that is yet to occur, whether the act or omission could be, and in the circumstances would be likely to be - (i) authorised by the company before it occurs, or (ii) ratified by the company after it occurs; (d) where the cause of action arises from an act or omission that has already occurred, whether the act or omission could be, and in the circumstances would be likely to be, ratified by the company; (e) whether the company has decided not to pursue the claim; (f) whether the act or omission in respect of which the claim is brought gives rise to a cause of action that the member could pursue in his own right rather than on behalf of the company.

(4) In considering whether to give permission (or leave) the court shall have particular regard to any evidence before it as to the views of members of the company who have no personal interest, direct or indirect, in the matter’.

The fifth respondent company, Ryman Group Ltd (RGL) had three subsidiaries, the sixth respondent company (RL), CL and NGL. RGL’s shareholders were the applicant, and the first and fourth respondents. The first respondent was the largest shareholder, with 72.4% of the shares.

The ­applicant and the fourth respondent respectively held 15.5% and 12.1% of the shares. RGL’s board of directors included the first, second, third and fourth respondents (the respondent directors) and R. The applicant was not a director of RGL.

In early 1998, and again in February or March of 1998, S, a retailer in Canada and the US who, through SSE Inc (SSEI), owned 60.2% of the issued share capital of La Senza (which carried on a lingerie business), approached the directors of RGL about the possibility of buying its shareholding in La Senza. On those occasions, the shareholders of RGL took the view that RGL should not undertake the acquisition.

However, the first respondent decided (with the blessing of the other directors) that he would like to take on La Senza in a personal capacity. Following negotiations on 3-4 June, the first respondent agreed to buy S’s shares in La Senza through a newly-acquired shelf company (X).

On the request of the first respondent, the directors of RGL agreed to loan X up to £1.8m for the purpose of enabling X to buy shares in La Senza. On that same day, the second and third respondents became directors of X, as did R. The fourth respondent never held shares or share options in X, nor was he ever a director of X. On 4 June, an agreement was entered into pursuant to which, among other things, X agreed to buy SSEI’s shares in La Senza for £1. In 2004, X declared dividends in favour of the first respondent of some £2.7m and £4m in 2006.

In 2006, X sold 90% of its shares in La Senza to a private equity group (LC) for more than £100m. Later in 2006, CL was sold to LC for £5.5m. Following its sale, 47 of CL’s shops seemed to have become La Senza shops, while the remaining 18 were apparently closed. In November 2010, the applicant commenced proceedings against the respondent directors, claiming that the acquisition of La Senza had involved breaches of fiduciary duty on their part.

On the same day, the applicant applied for permission, pursuant to section 261 of the act, to continue the claim as a derivative claim on behalf of RGL and RL. Section 263 was concerned with when permission to continue a derivative claim should be given. Section 263(2) set out the instances when such permission should be refused.

Section 263(2) provided that such permission should be refused if the court was satisfied that: (a) a person acting in accordance with section 172 (duty to promote the success of the company) would not seek to continue the claim, or (b) where the cause of action arose from an act or omission that was yet to occur, that the act or omission had been authorised by the company. In February 2011, the boards of RGL and RL set up committees that resolved not to bring or continue the derivative claim brought by the applicant.The application would be dismissed.

In the light of established authority, the court could potentially grant permission for a derivative claim to be continued without being satisfied that there was a strong case. The merits of the claim would be relevant to whether ­permission should be given, but there was no set threshold (see [42] of the judgment).

In the present case, there were arguable claims against the respondents. However, the chances of them succeeding were significantly less than even. The claims against the fourth respondent were particularly weak. Applying section 263(2)(a) of the act therefore, permission to continue the claim as against him would be refused on the basis that, in the ­circumstances, ‘a person acting in accordance with section 172 ... would not seek to continue the claim’.

With regard to the quantum of the claims, a very large sum could potentially be recovered from the first respondent if an account of profits were ordered. It was much less clear that the Ryman companies would stand to recover very large amounts from the second and third respondents.

On the face of it, the fourth respondent had not received any profits for which he could be liable to account. With regard to the other respondents, the claims which the applicant wished to pursue were not of such strength and size (even in the case of the first respondent) as could make it appropriate for permission to be granted when: (a) that course was strongly opposed, on a reasoned basis, by the Ryman companies’ independent committees as well as by the fourth respondent (see section 263(3)(e) of the act); (b) it was open to the applicant to seek redress by means of an application pursuant to section 994 of the act (see section 263(3)(f)); and (c) much of the money recovered from the respondents could be expected to be returned to them by way of distribution (see [67], [68] of the judgment).

Permission to continue the claim would be refused (see [87] of the judgment).

Richard Keen QC and Andrew Hunter (instructed by Jones Day) for the applicant; Neil Kitchener QC and Sam O’Leary (instructed by Mishcon de Reya) for the first respondent; Richard Snowden QC and Ben Shaw (instructed by Reed Smith) for the second, third and fourth respondents; Michael Todd QC and Mary Stokes (instructed by Ashurst) for the fifth and sixth respondents.