Enforcing Shareholder Remedies:

Derivative Claim:

“A shareholder should always, and only, be given permission to continue a derivative claim if con-
tinuing the claim is ‘in the best interests of the company’. Unfortunately, that is not how the rules
governing derivative claims seem to work in the UK.” Discuss.2020MJZB

‘The derivative claim is a very ineffective way of ensuring that directors comply with their duties. It
would be much better if each shareholder could bring a personal claim against a misbehaving di-
rector for any loss the shareholder suffers as a result of that misbehaviour. Unfortunately, such
personal claims against directors are impossible in the UK.’ Discuss. 2021ZBMJ
- explain the nature of a derivative claim and the purpose behind it – permitting a shareholder to sue a
director for breach where the company itself is unwilling to sue. It would describe the main rules gov-
erning the statutory derivative claim in Part 11 CA 2006, showing the conditions that must be satisfied
for a shareholder to bring such a claim. It might note that some of these conditions have been relaxed
in the new statutory derivative claim compared to the old common law action, such as the abandon-
ment of the requirement to demonstrate ‘fraud’ and perhaps the requirement to show wrongdoer con-
trol.
- It would also note, however, that the claimant must still secure permission to continue the claim and
would analyse the criteria (in s.263(2) and (3)) that the courts apply in deciding whether or not to give
such permission. Such analysis should include some discussion of the relevant case law, such as Iesini,
Franbar, Kleanthous, Singh, Wishart, etc. to show how the courts actually apply the statutory crite-
ria – whether for example, the courts are interpreting them strictly, or more favourably, towards
claimants. A good answer might also try to give a sense of the proportion of claims where permission
to continue is given (less than half).
- A good answer might note the practical problems undermining the effectiveness of derivative claims –
especially the ‘collective action’ problem and ‘free-riding’, the lack of an effective incentive for any
individual shareholder to sue, etc.
- That could provide a good link into the second part of the question, asking whether the derivative claim
should be replaced with personal actions against directors for breach of their duties. A good answer
would consider whether, under UK company law, such actions are ‘impossible’. It might note how the
duties of directors are owed to the company alone (Percival v Wright; s170(1)) but that, exception-
ally, directors can owe duties directly to the shareholders. It would also note how, even if shareholders
are owed some personal duty, still they cannot bring a personal action for ‘reflective loss’ (Johnson v
Gore Wood; Marex).
- The reasons for UK law’s current restrictions on such personal actions might be considered and evalu-
ated – such as avoiding the ‘floodgates’ problem of multiple actions from a single breach of duty; en-
suring sharing amongst all shareholders of whatever money a director has (where the director cannot
afford to fully compensate for the harm they have caused and multiple personal actions would result in
those who sue first securing full compensation but those who sue later receiving nothing); upholding
‘majority rule’; ensuring the normal priority of creditors is protected.

Critically evaluate the effectiveness of ONE of the following two aspects of company law as a mech -
anism of minority shareholder protection:
(a) The common law principles relating to enforcement of the articles of association under section
33 of the Companies Act 2006.
(b) The statutory derivative claim under Part 11 of the Companies Act 2006. 2020ZAON

- (a) It looks at one specific area of minority shareholder protection, namely that provided by the com-
pany’s articles of association. The answer must focus on that. Simply writing out a pre-prepared essay
 on minority protection is insufficient. And an answer that makes no reference to the articles fails to an -
swer the question at all.
- note the continuing uncertainty over key aspects of the ‘statutory contract’, created by s.33 CA 2006,
which permits enforcement of the articles.
- One area of doubt/controversy concerns the enforcement of ‘outsider rights’. A good answer would
discuss some of the relevant case law that illustrates the lack of consistency in the cases, and would
also note academic attempts to explain or resolve such inconsistencies.
- A second area concerns the categorisation of some breaches of duty as ‘mere internal irregularities’,
with the breach of the articles seen as a wrong done to the company to be resolved by the operation of
majority rule. Again, a good answer would note the apparently conflicting case law, such as Pender,
and MacDougall, and again might note academic attempts to resolve this controversy.
- However, the ability of the members to enforce the constitution is subject to an important limitation,
namely that a member can only enforce the constitution if he is acting in his capacity as a member.
Only provisions relating to membership rights will form part of the statutory contract. The case of
Beattie v E and F Beattie Ltd [1938] provides a good example of this.
- This limitation can be criticized. If the company breaches a term of the constitution that does not relate
to a membership right, then that term will not form part of the statutory contract and so cannot be en -
forced. In effect, the company would have been permitted to ignore a provision of the constitution,
without having to amend it. In practice, in such cases, the member will almost certainly be able to com-
mence proceedings under s 994 of the CA 2006, which demonstrates that the unfair prejudice remedy
is likely to be a preferable remedy to enforcing the statutory contract. (Do not elaborate more on
section 994)

-(b) Briefly explain the three principles that form the Rule in Foss v Harbottle
(hereinafter referred to as the Rule). However, the Rule cannot be absolute.
Were it so, wrongs committed by the directors or the majority shareholders
would rarely be subject to litigation. Accordingly, in limited situations, the
courts would allow members to bring actions on a company’s behalf (the ‘de-
rivative action’).
- While the existence of, and justifications behind, the Rule itself are not
open to significant criticism, there is little doubt that the operation of the
Rule and its exceptions came in for significant criticism. The Law Commis-
sion identified four major problems:
1. The Rule and its exceptions are a creation of case law, much of which was
created many years ago.
2. A member who wished to bring an action to recover damages where the
company suffered loss due to a breach of the directors’ fiduciary duties
would need to establish that the wrongdoers had control of the company.
However, what constituted ‘control’ was not clear.
3. A member who wished to bring an action to recover damages where the
company suffered loss due to the negligence of a director would need to
show that the negligence conferred a benefit on the controlling shareholders
(Pavlides v Jensen [1956]), or that the failure of the other directors to bring
an action constituted a fraud on the minority.
4. A member who wished to bring a derivative action will need to establish
standing by showing that he has a prima facie case. The potential exists for
these standing hearings to become minitrials which further increased the al-
ready high cost of litigation.
Accordingly, the Law Commission, along with a number of respondents to the
consultation paper and the Company Law Review Steering Group, recom-
mended that a new derivative action be created. The result was the creation
of the ‘statutory derivative claim’, the details of which can be found in Pt 11
of the Companies Act 2006.
- Part 11 of the 2006 Act does not abolish the Rule in Foss v Harbottle and
the Rule itself and its justifications retain much of their force. However,
the common law derivative action has been abolished and a member can
only bring an action on behalf of the company in accordance with the rules
relating to the new statutory derivative claim.
- Discuss the operation of the statutory derivative claim, focusing in particu-
lar on the differences that exist between the common law derivative action
and the statutory derivative claim. Notable differences include:
1. The rules relating to the derivative action can be found in a mass of com-
mon law, which adversely affected the accessibility and clarity of derivative
actions. Having a statutory derivative claim will better alert members, direc-
tors, and other interested parties to the existence of the remedy. The disad-
vantage of placing the remedy in statute is that alteration of the remedy will
require amending the 2006 Act, and amending legislation is rarely a quick
and simple process.
2. Under the common law, negligence could only form the basis of a deriva-
tive action if the wrongdoer gained some form of benefit from the negligent
act. This limitation has not been preserved in the 2006 Act and derivative
claims can be brought for any negligent act. This reform has caused fears
that derivative claims will increase sharply.
3. A common law derivative action could be based on an act/omission by a di-
rector or a member. A statutory derivative claim can only be based on the
acts/omissions of a director (including former directors and shadow direc-
tors).
4. Permission from the court was required to continue a derivative action,
and this requirement is preserved for derivative claims. However, the 2006
Act provides guidance on what factors are relevant when determining
whether or not to grant permission. Such guidance did not exist under the
common law. To date, few cases have been granted permission to continue—
be prepared to discuss these cases and their impact.
- One final point is worth noting. With the creation of the unfair prejudice
remedy, derivative actions/claims are much less common and it could be ar-
gued that the shareholder remedy is of little significance in practice.

Answer EITHER (a) OR (b):

(a) Does the statutory derivative claim need to be reformed and, if so, how?
(b) ’Section 175 Companies Act 2006 is too strict. A director should be free to take any corporate
opportunities her company does not want. Fortunately, both the board and the shareholders can
easily override section 175 to allow the director to do so.’ Discuss. 2023MJB3

(a) explain the nature of derivative proceedings and the introduction of the SDC (Statutory Derivative
Claim) in 2006. Evaluate how effective the current SDC is. This might involve acknowledging some
strengths of the current claim (including perhaps some comparison of the previous common law action
based on fraud on the minority) but would also analyse whether there are any weaknesses in the SDC. Ex-
amples of weaknesses might include: the fact that the SDC is not available for ‘multiple claims’; uncer-
tainty over the status of wrongdoer control; the low ‘success rate’ that claimants enjoy in winning permis-
sion to continue their claims and the reasons for that low success rate; issues of costs and funding of de-
rivative claims and reasons for shareholders’ reluctance to pursue such claims. A good answer would then
go on to consider what reforms might be introduced to address the problems identified.

(b) explain the nature of the duty in s.175 CA 2006, including how this duty relates to the issue of direc -
tors taking corporate opportunities. The answer would explain how broadly worded subss.175(1) and (2)
are. It would also explore the UK case law that must be used to interpret s.175 and again show how, in
general, this case law has tended to apply the duty in a strict way to directors exploiting corporate oppor-
tunities for their own benefit. A good answer would also acknowledge, however, how the UK cases are
not unrelentingly strict and some have permitted directors to have conflicts of interest, say when deciding
to set up their own business, or in post-resignation situations (e.g. Umunna). A good answer would note
how directors can now authorise conflicts (s.175(4)), and how shareholders can authorise or ratify con -
flicts (although usually there are conditions to be satisfied). Finally, a good answer would consider
whether directors should be permitted to take corporate opportunities that their company has rejected, as
the question suggests.

Unfair Prejudice:

‘The courts’ preference for “buy out” orders under section 996 Companies Act 2006 is inappropri-
ate, for a number of reasons. The rules governing the terms on which the shares will be bought are
very unclear. Such orders do nothing to protect the company itself from whatever misconduct has
occurred. And such orders also undermine the “reflective loss” rule.’
Discuss. 2022MJZB2
- explain briefly the purpose of the regime in s.994 CA 2006, before quickly focusing on the core of the
question – the buyout remedy under s.996. A good answer would explain what this order entails. It
might note how this is now the default remedy (Grace v Biagioli), and might note that buyouts have
many advantages, which explains their popularity. Then it would turn to the alleged defects in these or -
ders.
- First, are the rules governing the price to be paid uncertain? Arguably, they are not. The general princi-
ples are clear: the shares are to be valued independently (not by the company’s auditors and not by the
courts) (O’Neill v Phillips) and, at least in quasi-partnerships, they are to be valued on a pro-rata basis.
But there remains some uncertainty over whether this pro-rata presumption applies to non-quasi part -
nerships: see e.g. Re Addbins and Estera Trust v Singh.
- It seems correct to say that this remedy does little to protect the company. Indeed, if the company is or -
dered to make the purchase, it can harm it. But often, especially in smaller companies, the unfairly
prejudicial conduct (for example, removal of a shareholder as a director) will involve mainly the rights
and interests of the minority shareholder, not of the company itself. In such cases, the company itself
does not really need protection. Nevertheless, some misconduct (e.g., breaches of directors’ duties)
could also harm the company. And, where there are lots of other shareholders also affected by the un-
fairly prejudicial conduct, or where the company has been harmed and is now in financial difficulties
 so that creditors may not be paid, giving a buyout to just one shareholder may not solve the underlying
problem.
- How do buyouts relate to the reflective loss rule? This is perhaps the most difficult part of this ques -
tion, giving an opportunity for excellent candidates to demonstrate their deep understanding of this
area. A good answer would explain this rule. It might note some of the reasons for the rule – say to
stop double recovery for shareholders and double liability for directors. It might then ask whether a
buyout really undermines these reasons. It does not really allow the shareholder to recover twice over.
Nor does it result in directors having to pay twice for any misconduct.

‘When the relationship between shareholders in small companies breaks down, the best solution is
always that the minority leave the company, at a fair price. Section 994 Companies Act 2006
achieves this solution very effectively.’ Discuss. 2023MJB3

- explain why the relationship between minority and majority shareholders might break down in smaller
companies and perhaps relate this to company law’s usual reliance on ‘majority rule’. Then, consider
the different ways such disputes might be resolved. (Good students might see that s.996, in setting out
the orders a court might make, is conveniently summarising different ways disputes might be re-
solved.) Besides the method mentioned in the question (minority exit), other possible solutions could
include majority exit, allowing proceedings to be brought in the name of the company (where the dis-
pute relates, for example, to allegations that a director has breached her duties), as well orders regulat -
ing the affairs of the company, such as insisting that a minority be allowed to participate in the man-
agement of the company. A good answer would discuss the advantages and disadvantages of these dif-
ferent methods.
- It would then explain how s.994 addresses shareholder disputes and evaluate how effectively it does
so. It would explain how the minority can only use s.994 to complain about disputes relating to the
‘conduct of the company’s affairs’ (or ‘an act or omission of the company’) and consider whether this
significantly limits the sort of disputes that can be dealt with under s.994. It would show that the mi -
nority must also establish that their interests have been prejudiced, and would explain that the courts
have given a very expansive meaning to a ‘member’s interests’ in quasi-partnership companies, adding
to s.994’s effectiveness.
- Finally, it would also consider the importance of the price at which the minority ’s shares will be pur-
chased and the principles the courts have developed for determining that price, such as ‘independent
valuation.

Boris is a director of Crafty plc. In 2021 Boris carelessly caused Crafty to purchase some property
for a price substantially in excess of its true value. As a result, the company lost £500,000.
Sally is a 10 per cent shareholder in, and a director of, Crafty. She and Boris used to be married
but recently went through an acrimonious divorce. Sally estimates her shares in Crafty are worth
£50,000 less because of Boris’s carelessness. Moreover, because of the loss Boris caused the com-
pany, none of the directors (including Sally) were paid a bonus in 2022. Sally estimates this cost her
a further £10,000.
Sally demanded that the company sues Boris for his negligence. Boris threatened to resign as a di-
rector if he were sued. Crafty’s board asked Devina, who is a non- executive director of the com-
pany, to investigate whether legal proceedings should be taken against Boris. Devina recommended
they should not be. Devina is a relative of Boris.
At a poorly attended shareholders’ meeting of Crafty, the shareholders narrowly voted to ratify
any breach of duty by Boris. Boris, and Boris’s mother, Mira, who each own 5 per cent of the com-
pany’s shares, attended the meeting and voted in favour of the ratification.
Advise Sally whether:
(a) if she began a derivative claim against Boris, she would be likely to be given permission to con-
tinue that claim; and
(b) she could sue Boris personally to recover the fall in the value of her shares and the non-payment
of her directors’ bonus.

- The first part looked at enforcement of breaches of duty by a director, via a derivative claim and the
second part at a personal action brought against the director by a shareholder.
- for part (a): explain what a statutory derivative claim is and how it can be brought for any breach of
duty: s.260(3). Boris (‘B’) has probably breached s.174 (there is no need to spend long discussing this,
since we are told he acted ‘carelessly’). Sally (‘S’) must get permission to continue her claim (s.261).
The relevant criteria are in s.263: three mandatory bars (in s.263(2)) and, if no mandatory bar applies,
several discretionary factors (in s.263(3)). A good answer would work through these criteria in a me-
thodical way, starting with mandatory bars and applying them to the facts.
- Discuss the validity of the apparent ratification of B’s conduct, in the light of s.239(4). If B’s and M’s
voted were ignored, would there still have been a majority for ratification (explain the relevance of the
fact the meeting was poorly attended and next consider whether a hypothetical director would think ac-
tion worth pursuing)? A good answer would note Iesini, which gives a list of things to consider. Here,
the claim is large, looks strong and B has some property (his shareholding) so may be worth suing. On
the other hand, B has threatened to resign if sued, which might harm the company (in Kleanthous, this
threat to the company counted against giving permission). Iesini says: only refuse permission based on
this bar if no reasonable director would think claim worth pursuing. That is a high threshold, and prob-
ably unlikely to be met here.
- Since it is far from certain that a mandatory bar applies, a good answer would then address discre-
tionary factors. S may arguably not be acting in good faith, perhaps being motivated by personal ani -
mosity to B. Would a hypothetical director attach much importance to pursuing the claim? Arguably
not: although the claim is large and strong, B could harm the company if he resigns. The board has
voted against company suing, based on a NEDs advice. However, that NED is herself related to the
wrongdoer, so this may carry less weight (see Kleanthous). Ratification looks unlikely (unless another
meeting would see a better attendance by shareholders willing to ratify). S might be able to bring an
action under s.994 and courts often think that’s a preferable solution (see Franbar and Mission) but that
would do little to protect the company and other shareholders who have also suffered as a result of B ’s
breach of duty.
- For part (b) explain how, for S’s personal action to succeed, she must overcome two hurdles. First, she
must have a good cause of action against B – a cause of action that would allow her to claim the losses
she wants to recover. Second, she would have to show that she is not stopped by the ‘reflective loss’
rule (Prudential; Johnson v Gore Wood; Marex). A good answer would emphasise that S would need to
get over both hurdles.
- On the first hurdle: it seems unlikely that S has any cause of action against B. Note that s.994 is not a
cause of action against a director. A good answer might quickly note the different personal actions that
can sometime arise in favour of a shareholder against a director (as identified in Chapter 11 of the MG)
but explain that the facts do not suggest any of them applies to our question.
- Having noted that S probably fails at the first hurdle, a good answer might very quickly consider the
second hurdle – the reflective loss rule. The fall in the value of S’s shares is a reflective loss, suffered
by S in her capacity as a shareholder. So, even if S had a cause of action against B, she could not claim
for that. However, the loss of her director’s bonus, although reflective of harm first caused to the com-
pany, is suffered by her not as a shareholder but as a director/creditor. According to Marex, the reflec-
tive loss principle would not stop her suing in a non-shareholder capacity – so that if she happened to
have a cause of action against B, she would not then be prevented from bringing that claim by the re -
flective loss principle.
- Note: For part (a) failing to focus on the specific issue raised: is Sally likely to be permitted to continue
her claim; failing to apply the criteria that the CA 2006 identifies as relevant when the court is deciding
whether to give permission; failing to note that the ratification may be invalid. For part (b), confusion
about the nature of the personal action Sally might bring against Boris for compensation for the losses
he has suffered. An action for unfair prejudice, for example, although it may be described as a ‘per-
sonal claim’, is not brought against a director for compensation for the fall in the value of shares; ig -
noring, or misunderstanding, the important decision in Marex.

In 2015 Jia and Bo, longstanding friends, formed Deli Ltd, which makes vegetarian meals. Jia and
Bo agreed, informally, that they could each be directors of Deli Ltd, but that any profits earned
during the first ten years should be retained within the company to finance its rapid expansion.
Jia owns 60 per cent of the company’s shares. Originally, Bo owned the remaining 40 per cent.
However, in 2020 Bo needed to raise some cash. Lian, who had not previously known either Jia or
Bo, agreed to purchase half of Bo’s shares. Lian bought the shares because she is passionate about
vegetarianism. Lian has never been a director of the company but it was agreed, again informally,
that she could be a director in the future if she wanted to be.
In 2022 Bo suffered financial problems and, at a board meeting, demanded that the company pay
out some of its substantial profits as dividends. Jia refused, whereupon Bo became very aggressive.
Jia called a shareholders’ meeting at which Jia removed Bo as a director of the company.
In early 2023 Jia announced she was planning to sell some of her own shares to Macburger Foods
plc, a company that has traditionally focused on meat-based products. Lian objected strongly, say-
ing it undermined Deli Ltd’s vegetarian values and reputation. Lian demanded that she (Lian) now
be appointed a director but Jia says she will block Lian’s appointment.
Bo and Lian are each now threatening to bring proceedings under section 994 Companies Act 2006.
Advise Jia whether Bo, or Lian, is likely to succeed if they do bring such proceedings, and what
remedy each would be likely to obtain.

- This question deals with the shareholders’ ability to bring proceedings for ‘unfair prejudice’. Many stu-
dents produced a well-structured analysis of the conditions for bringing a successful claim under s.994.
To test the depth of students’ understanding, the problem question is constructed around two minority
shareholders, whose relationship with the majority, and whose complaints, are quite different.
- take each minority shareholder in turn, and work through the different ‘hurdles’ to a successful claim:
is she complaining about the ‘conduct of the company’s affairs’ (or ‘an act/omission of the company’)?
Did this prejudice her interests? Did it do so unfairly?
- For Bo: is she complaining about ‘conduct of company’s affairs’? Yes, the payment (or non-payment)
of a dividend does relate to the conduct of the company’s affairs, as does the removal of a director (see
Home and Office Fire Extinguishers; Re Sam Weller).
- Does this non-payment prejudice her interests? It does not breach her legal rights (she has no right to a
dividend, until one is declared). However, in a quasi-partnership, interests go beyond legal rights. And
Bo’s relationship with Jia looks like a quasi- partnership (Ebrahimi). Per O’Neill, the court can take
into account informal understandings between the parties. But the understanding re the dividends goes
against Bo, not in her favour, so it is unlikely Bo can complain about that. However, the removal as a
director does run counter to their informal agreements.
- Was this prejudicial behaviour unfair? Following cases such as RA Noble, or Waldron v Waldron,
the fact that Bo’s own unreasonable behaviour (becoming aggressive) caused her removal may mean
the prejudicing of her interests was not unfair.
- For Lian: is she complaining about conduct of company’s affairs? Not clear that her complaint about
Jia’s sale of shares would satisfy this requirement: it affects the ownership of the company but perhaps
not its management – compare Graham v Every). Her complaint about non-appointment as a director,
on the other hand, does relate to the conduct of the company’s affairs. However, it is not clear that this
non- appointment would be seen as prejudicing her interests. Lian has no legal right to be a director.
And it is not clear that she (unlike Bo) is in a quasi-partnership relationship. There is no evidence of
any personal relationship with the other shareholders.
- So, for rather different reasons, it seems both Bo and Lian may struggle to win s.994 actions. Finally, a
good answer would consider what remedy would be given if either were able to succeed. Note the like-
lihood of a ‘buy-out’ (Biagioli), with a fair price fixed by an independent valuer (O’Neill v Phillips).
The price for Bo would likely not be discounted (given her quasi-partner status). The price for Lian
might be discounted, given that she seems not to be in a quasi-partnership relationship (Re Blue Index).

Charles owns 30 per cent of the shares of Landbankers plc. Daphne and
Simon each own 10 per cent of Landbankers’ shares. The company has
seven directors, including Charles and Simon. Each director is entitled
to an annual bonus, based on the company’s performance.

In 2020, Charles recommended the company should purchase some

land owned by Annabel, Charles’ mother. Charles, a qualified surveyor,
valued the land at £3million. In fact, it was worth only one third of that
amount.

Charles called a shareholders’ meeting of Landbankers to approve the

purchase of the land. Many shareholders were reluctant to vote to ap-
prove the purchase until Charles reassured them the land was worth the
price being paid and strongly advised them to approve it. The meeting
voted, by a small majority, to approve the purchase. Charles voted in
favour; Simon and Daphne voted against. Landbankers then purchased
Annabel’s land for £3million.

Landbankers has now resold Annabel’s land for just £1million. As a re-
sult of this loss, the value of Landbankers’ shares has fallen and the
company will not be paying any directors’ bonuses for the foreseeable
future. Landbankers’ board has discussed whether to take action
against Charles but, on the advice of Landbankers’ non-executive direc-
tors, has decided not to do so. A badly attended shareholders’ meeting
of Landbankers has voted, by a small majority, to ratify any breach of
duty by Charles. Charles also voted in favour of that resolution.

Advise:
 • a) Daphne, who wants to bring a derivative claim against Charles,
whether she would be likely to be given permission to continue
that claim; and
• b) Simon, who wants to sue Charles for the fall in the value of his
shares and for the non-payment of his director’s bonus.

- This question focuses mainly on Ch.11 of the MG (majority rule and wrongs
against the company). The first part looked at enforcement of breaches of
duty by a director, via a derivative claim, and the second part at a personal
action brought against the director by a shareholder.
- for (a): explain what a statutory derivative claim (DC) is. Explain it can be
brought for any breach of duty – s.260(3). Charles (C) has probably
breached s.174 (explain relevance of his being a surveyor) and perhaps
s.172 if he was acting dishonestly. Daphne (D) must get permission to con-
tinue her claim (s.261). The relevant criteria are in s.263: three mandatory
bars (in s.263(2)) and several discretionary factors (in s.263(3)). Then, ap-
ply these to the facts, starting with mandatory bars.
- There has been an apparent authorisation (in advance) of C’s conduct by
shareholders. If valid, this authorisation would be a mandatory bar requiring
a refusal of permission. Note that, for authorisations (in contrast to ratifica-
tions – see below), s.239(4) does not apply, so there is no requirement to
disregard the votes of C or anyone connected with him. However, Cullen re-
quires authorisations (and presumably ratifications too) to be ‘well in-
formed’: given that C misled – or at least badly advised – the shareholders
how to vote, this authorisation is probably invalid. There’s also a purported
ratification but this must be passed without votes of wrongdoer (i.e. C)
(s.239(4)). C did vote, but if we ignore C’s votes, would there still have been
majority for ratification? Unlikely, since original majority was ‘small’.
- Would a hypothetical director think the action worth pursuing? Note Iesini,
which gives us a list of things to consider. Here, the claim is large, looks
strong and C has some property (his shareholding) so may be worth suing.
We do not know if the company would be harmed in any way by suing C.
Iesini says: only refuse permission based on this bar if no reasonable direc-
tor would think claim worth pursuing. That is a high threshold and is proba-
bly unlikely to be met here.
- Then address the discretionary factors: D seems to be in good faith, the
claim is large and strong, so it is probably quite important to pursue it; the
board has voted against the company suing, and did so on basis of NEDs’
advice, which might influence a judge against giving permission (apply
Kleanthous). Ratification looks unlikely (unless another meeting would see
a better attendance by shareholders willing to ratify). D might be able to
 bring an action under s.994 and the courts often think that is a preferable
solution (see Franbar and Mission) but that would do little to protect the
company and other shareholders who have also suffered as a result of C’s
breach of duty.
- for (b): explain how, for Simon’s (S’s) personal action to succeed, he must
overcome two hurdles. First, he must have a good cause of action against
C – a cause of action that would allow him to claim the losses he wants to
recover. Second, he would have to show that he is not stopped from pursu-
ing this cause of action for these losses by the ‘reflective loss’ rule (Pruden-
tial; Johnson v Gore Wood; Marex). A good answer would emphasise that S
would need to get over both hurdles.
- On the first hurdle: note that s.994 is not a cause of action against a direc-
tor. However, poor advice given to him as a shareholder to vote to approve
the purchase could constitute negligent misstatement by C, giving S a
cause of action in tort. A possible problem for S would be that to sue a di-
rector for negligent misstatement, S would have to show that C assumed
personal responsibility for the advice: Sharp v Blank; Williams v NLHF Ltd.
If S does have this cause of action against C, then he would be claiming
that the losses caused by C’s misstatement are both the drop in the value
of his shares and the reduction in his directors’ bonuses.
- But, turning to the second hurdle, would he be prevented claiming either of
these losses by the ‘reflective loss rule’? Explain clearly that, in respect of
the drop in share value, S is suing ‘as a shareholder’, so that the reflective
loss principle would apply, preventing him from suing (even if he had a
cause of action). For the loss of his bonuses, he would be suing as a direc-
tor, rather than as a shareholder; according to Marex, the reflective loss
principle would not apply to him suing in this capacity – so that if he had a
cause of action against C, he would not be prevented from bringing that
claim by the reflective loss principle.

Andrew, Brian, Claire and Delila are equal shareholders and directors
of Watchers Ltd. Andrew, Brian and Claire were friends at university,
and formed the company in 2010, shortly after graduating. Delila first
met the others in 2020 and joined the company in 2021.

In January 2022, Andrew made a negligent business decision that lost

Watchers over £200,000. In February 2022, a board meeting of Watch-
ers was held, from which Andrew was absent. At the meeting, Delila,
who had never got on well with Andrew, argued that proceedings
should be taken against Andrew by Watchers. Brian and Claire re-
jected this. They noted that Andrew’s performance had otherwise been
excellent, and that Andrew would likely leave the company if he were
sued, taking with him many important business contacts of consider-
able value to Watchers.

Delia has now sought the advice of a lawyer as to the steps she might
take in response to Andrew’s behaviour. The lawyer gave her two
pieces of advice. First, the lawyer advised her not to bring a derivative
claim against Andrew, telling her that she would be very unlikely to be
given permission by the court to continue such a claim. Second, the
lawyer also advised her not to bring proceedings under section 994
Companies Act 2006, telling her that she would be unlikely to be able
to show that the affairs of the company have been conducted in a man-
ner that was unfairly prejudicial to her interests. To what extent do
you agree with these two pieces of advice by the lawyer?

- This question covered focused on two areas of the module: deriva-

tive claims, in Chapter 11 of the MG and s.994 CA 2006, covered in
Chapter 12 (statutory minority protection) of the MG. The question
raised very specific issues in relation to these two areas of company
law, and answers needed to focus on these issues.
- focus on the two pieces of advice given by the lawyer. First, regard-
ing the advice about the derivative claim (DC): a good answer might
explain, but only very briefly, what a DC is and where the rules are
now found for it: Part 11 CA 2006. It wouldexplain the sorts of ac-
tions a DC can be brought for (any breach of duty – s.260(3)). Andrew
(A) looks to have committed a breach of s.174.
- Explain D’s need to get permission to continue claim (s.261) and
how the criteria the judge applies in deciding whether to give per-
mission are found in s.263. Explain the division between the three
mandatory bars (in s2.63(2)) and the discretionary factors (in
s.263(3)). Then, apply these criteria to the facts, starting with
mandatory bars.
- There’s no authorisation or ratification, it seems. The third bar – a
hypothetical director would not think the claim worth pursuing –
must be discussed. Note Iesini, which gives us a list of things to
consider in addressing this. Here, the claim is large, it looks strong
and A has some property (his shareholding) so may be worth suing.
It is suggested company would be harmed by suing A. Explain how
Iesini gives the benefit of any doubt to the shareholder (D), in the
sense that a court should only refuse permission based on this
 mandatory bar if no reasonable director would think the claim worth
pursuing. That is a high threshold and is unlikely to be met here.
- Next, address the discretionary factors: D seems to be acting in
good faith. How much importance would a hypothetical director at-
tach to the claim? It looks large and strong but its continuation
could harm the company too, so likely not very important to pursue
it. The board has voted against company suing. Perhaps most impor-
tantly for this question, ratification looks very likely – given attitude
of other shareholders (all of whose votes would, so far as we know,
be counted on any vote to ratify – see s.239(4)). Section 994 remedy
is another possibility – see the rest of the answer. All in all, and es-
pecially bearing in mind likelihood of ratification, the lawyer is prob-
ably correct in saying that permission is unlikely to be given.
- With regard to the advice given about s.994, a good answer might
note that we can identify three separate ‘hurdles’ which the peti-
tioner must get over to succeed under s.994. First, must show the
conduct complained of is ‘conduct of the company’s affairs’, as op-
posed to merely private behaviour outside of the company (see e.g.
Oak Investment Partners v Boughtwood and Graham v Every).
- Second, it must be shown the decision prejudices Delia’s interests.
Again, at first, there seems little difficulty in showing that her inter-
ests are infringed – she is clearly worse off as a result of Andrew’s
decision. A good answer might note s.994 covers conduct that af-
fects ‘members generally’ (rather than only the petitioner) – so
breaches of duty, which affect all members, can be brought within
s.994. The negligent business decision seems likely to be a breach
of duty – s.174 in particular. Mismanagement has been treated as
prejudicial to a shareholder’s interests – at least where that misman-
agement is bad enough to constitute a breach of directors’ duties:
Elgindata.
- Third and finally, is this ‘unfair’ to Delia? Generally, unfairness
seems to flow from the fact of prejudicial behaviour, unless the peti-
tioner has brought the situation on herself by her own bad behav-
iour. This does not seem to be the case here.
- So, while the lawyer’s advice might well be correct about permission
to continue a derivative claim, it looks probably wrong in relation to
the advice about s.994.

In 2000, Ann and Carlos met at university. In 2004 they married. They
immediately bought, and began running in partnership, a hotel. In 2010
they incorporated Hotelux Ltd, to take over the business of running the
hotel. Ann and Carlos each owned 50 per cent of the company’s shares
and were the company’s only directors. They agreed they would share
equally the running of the company.

In 2018, the company needed to raise more finance to purchase an-

other hotel. Ann’s accountant introduced her to Kambili, a venture
capitalist who bought a 20 per cent shareholding in Hotelux (leaving
Ann and Carlos each owning 40 per cent of the shares). Kambili was
appointed a director but has never attended any board meetings. In
2019, it was agreed that Kambili’s son, Tayo, could work for Hotelux
as a manager of one of its hotels.

In 2020, Ann and Carlos’s marriage broke down. Ann became very de-
pressed and stopped attending board meetings. Carlos persuaded
Kambili to join with him in voting for Ann’s removal as a director, and
Carlos continued running the company alone. Under Carlos’s sole man-
agement, the company’s fortunes have declined considerably. Carlos
recently made a number of Hotelux’s employees redundant, including
Tayo. Kambili complains that this goes against what the shareholders
agreed in 2019. Carlos has offered to buy Ann’s and Kambili’s shares
from them at a fair market price, to be determined by the company’s
auditors.

Advise Ann, and Kambili, whether each of them could bring successful
proceedings under section 994 Companies Act 2006.

- This question concerns Chapter 12 of the module guide. It deals with

shareholders’ ability to bring proceedings for ‘unfair prejudice’. The
question was generally quite well answered, with many students
showing a well-structured analysis of the conditions for bringing a
successful claim under s.994.
- take the two potential claimants separately: you must advise each
and their chances of success may be different.
- Regarding Ann: She is complaining about her removal from the
board. First point: to succeed, she must be complaining about ‘the
way the company’s affairs are being conducted’ (or about ‘an act or
omission of the company’). She must not be complaining about
merely ‘private’ matters outside of the conduct of the company’s af-
fairs. Her complaint of removal from board does surely concern con-
duct of company’s affairs.
- Second point: does this removal prejudice her interests? It clearly
harms her – but does it harm her interests? It probably does not
harm – prejudice – any of Ann’s legal rights (she has no right to be a
director). However, a good answer would note that ‘interests’ may
be broader than strict legal rights. They will be so in a quasi- part-
nership. So, is this company a quasi-partnership? Probably yes:
given partnership history, marriage, participation in management –
Ebrahimi. And a good answer will then explain that in a quasi-part-
nership, Ann’s interests will include her legitimate expectations
based on informal agreements. Here, there was an agreement to
share equally the running of the company.
- Third point: is the prejudicing of her interests unfair? A good answer
would note the relevance here of (i) her own non-participation in
boards – might note rejection of ‘no-fault divorce’ in O’Neill; and (ii)
the offer made to her – but this looks an unreasonable offer given
that it’s based on auditors valuing, rather than independent valua-
tion – see rules on valuation in Bird Precision Bellows, O’Neill,
Estera Trust, etc.
- Finally, discuss likely remedy if she succeeds under s.994.
- Regarding Kambili: There is no need to repeat all the same points
made before. Instead, it is enough to note some of the specific prob-
lems that might derail K’s claim. For one thing, it is not clear he is a
quasi-partner at all (remember that, per Waldron v Waldron, the
quasi-partnership relationship may not necessarily exist between all
the shareholders). If he is not, ask whether he can invoke the infor-
mal agreement regarding his son’s employment, and even if he can,
whether this affects him qua shareholder. If he is not a QP – then
even if he can, note remedy, valuation of shares in a non-QP and why
the offer to him might be more reasonable.

Developers Ltd has two directors, Ai and Bik. The company engages in
property development. Each director owns 30 per cent of the com-
pany’s shares. The company has two other shareholders. Chun, Ai’s
mother, owns 25 per cent of the shares, and Kang owns 15 per cent. Ai
has lent the company £100,000 which is repayable on demand.

In 2019, the company was offered a lucrative opportunity to buy a

large piece of land for redevelopment. Ai and Bik called a board meet-
ing, at which they first decided that Developers would not purchase
the land, and then immediately authorised themselves to buy the land
personally. Ai and Bik subsequently bought the land personally and
have resold it for a large profit.

When Kang, who detests Ai and Bik, discovered these facts, he wrote
to the board demanding that Developers sue Ai and Bik. The board dis-
cussed Kang’s request for five minutes. Ai reminded Bik that if she (Ai)
were sued, she would demand repayment of her loan, which would
cause the company some financial difficulty. The board resolved that
Developers would not sue Ai and Bik. Ai and Bik also called a share-
holders’ meeting, which all the shareholders attended, and which pur-
ported to ratify any breach of duty by Ai or Bik.

Advise Kang whether, if he started a derivative claim against Ai and

Bik, he would be likely to be given permission to continue that claim.

- This question covers derivative claims and, specifically, the rules

and principles that govern the granting of permission to continue
such a claim. These are dealt with in Chapter 11 of the module
guide. It is important to note that the question is very specific. The
instruction at the end tells students to focus on one issue: would K
be likely to get permission. The answer should be directed to that is-
sue.
- explain that derivative claims can brought for directors’ breaches of
duty. Did the directors breach any duty? Discuss briefly s.175 and
relevant case law (e.g. Regal) and apply to facts (it seems quite
clearly a breach of s.175, so the answer here can be quite brief). But
does the board authorise this breach? Section 175(4)(b) allows the
board to authorise a conflict that would otherwise breach s.175 (see
s.175(4)(b)) but only if the authorisation is passed without counting
the votes of the director to be authorised. Here, the two directors
being authorised – Ai and Bik – are the only directors. Without their
votes, there is no resolution authorising their conflict.
- Next, turn to s.263, which contains the criteria the court must apply
in deciding whether to give permission to continue the claim. A good
answer would distinguish between the ‘mandatory bars’ (in s.263(2)
and which, if present, require the court to refuse permission) and the
discretionary factors (s.263(3)). Deal with mandatory bars first. Did
the shareholders ratify the breach? They appear to have done so.
However, ratification is valid if passed without the votes of the
wrongdoer or anyone connected to the wrongdoer. Ai and Bik are
wrongdoers so their votes must be ignored. Chun is Ai’s mother; she
 is connected to a wrongdoer (see ss.252 and 253) and so her votes
must also be ignored. That leaves only K whose votes, on the ratifi-
cation, can be counted. Assuming he voted against, the resolution to
ratify was clearly not passed.
- Next relevant mandatory bar: if a hypothetical director would not
continue the claim. Note Iesini, and the things that such a hypotheti-
cal director would think about when deciding whether to continue
the claim. They include the size of claim (the opportunity they took
was ‘lucrative’) the strength of the claim (it looks a very clear
breach of s.175), whether the company can pay for the proceedings
(we are not told it is in financial difficulties) and any other effects on
the company of continuing the claim. Here, analogous to Kleant-
hous, is Ai’s threat to withdraw her loan, which would cause the
company problems? A good answer would remind us that, per Iesini,
the court should refuse permission on this ground only if ‘no reason-
able director’ would continue the claim. That is a demanding thresh-
old and unlikely to be met here.
- So, probably no bar applies. The court therefore must apply the dis-
cretionary factors in s.263(3). A good answer would work through
those that are most relevant. First, Kang’s good faith might be ques-
tioned, since he ‘detests’ Ai and Bik. But courts rarely find the share-
holder is acting in bad faith. There is no need to repeat the analysis
of the weight a hypothetical director would attach to the claim’s
continuation. Ratification seems very unlikely, given the analysis
above. The company has indeed decided not to sue Ai and Bik (here,
‘the company’ means ‘the board’). Kleanthous showed the court was
prepared to put weight on a board decision not to sue. But here, the
wrongdoers were the only directors on the board, and their decision
looks so quickly taken it might not be accorded much weight. Fi-
nally, should K be pursuing a personal claim: here, this means a
claim under s.994? The court does often see that as a preferable
way for the minority to proceed: see Franbar; Mission Capital. On
balance, it is probably quite likely K would not get permission, given
he owns a small percentage of shares and can probably secure a
better, long-term solution to his problems (especially given his hos-
tility to the board) under s.994 and a buy-out.

Mary is a director of Fastways Plc. In May 2018, she negligently forgot

to renew the company’s insurance policies. Shortly thereafter, one of
Fastways’ factories burned down. Fastways suffered a loss of £1 mil-
lion as a result.

John used to be married to Mary. In February 2019, he bought 2 per

cent of the shares in Fastways. He then contacted Fastways board of
directors and demanded that Fastways sue Mary for the loss Fastways
suffered as a result of Mary’s negligence. Fastways’ board met and de-
cided that it would not be in Fastways’ interests to sue Mary. The
board noted that Fastways’ independent non-executive directors had
already recommended that no action should be taken against her. The
board also noted that Fastways’ main customer, Eggtops Ltd, is owned
by Mary’s brother and would probably cease doing business with Fast-
ways if Fastways sued Mary. Fastways board also called a sharehold-
ers’ meeting. The meeting passed a resolution to ‘excuse Mary for her
mistake’. Mary’s mother, Sally, who owns 30% of Fastways’ shares,
voted in favour of the resolution.

John has now begun a derivative claim against Mary and Sally. Advise
him whether he is likely to be given permission to continue that claim
against each of them.

This question relates to Chapter 11 of the module guide. It focuses on

derivative claims, and specifically on the ‘permission’ stage in such
claims – on the criteria that a court must apply when it decides
whether to give a shareholder permission. It requires a student to
demonstrate knowledge of those criteria, and an ability to apply those
criteria to the specific facts of the question.

explain that derivative proceedings are now governed by Part 11 of

Companies Act 2006. Explain need to obtain court’s permission to con-
tinue the claim (s.262) and criteria the court must apply in deciding
whether to give permission. A good answer would distinguish between
the mandatory bars to granting permission, in s.263(2), and the discre-
tionary factors, in s.263(3).

Beginning with the claim against Mary, derivative proceedings can

now be brought in respect of any breach of duty (section 260(3)); there
is now no need to show the breach constitutes ‘fraud’. Mary seems to
have committed a clear breach of s.174.
Starting with the mandatory bars, the ‘excusing’ of Mary’s behaviour
looks like a purported ratification. If valid, this will prevent any possi-
bility of the court granting permission. But is the ratification valid,
given s.239(4)? A good answer would explain that the resolution to rat-
ify must be passed without counting the votes of the wrongdoer and
those connected with her. Mary’s mother is a connected person (see
ss.252–254), so her votes cannot be counted. We do not know whether,
ignoring Mary’s mother’s votes, the resolution would have been
passed, but since she has 30 per cent of the votes, it may not have
been.

Next, applying the mandatory ‘hypothetical director’ bar, consider rele-

vant factors identified in Iesini to decide whether it’s a case where ‘no
reasonable director’ would continue the claim. Case seems strong –
clear breach of s.174 – but note possibility of relief under s.1157. The
size of the claim is large. However, it might damage relationship with
one of company’s main customers (Eggtops).

If no mandatory bar applies, the court will consider discretionary mat-

ters in s.263(3); the possibility John lacks good faith, given Mary is his
former spouse. Note the board’s decision not to sue – the court might
put a little more weight on this, given the recommendation of non-ex-
ecutive directors (see Kleanthous v Paphitis). Note also the courts’
tendency to think the claimant is often better advised to pursue per-
sonal remedy under s.994: see, for example, Franbar, Mission Capital,
but compare Wishart. Perhaps note how, even if permission is given, it
might be only to proceed to the next stage of the proceedings, namely
to ‘discovery’ of documents (Kiani v Cooper; Stainer v Lee).

Finally, what of the action against Sally? A good answer would ask
whether Sally is guilty of any of the forms of wrongdoing (set out in
section 260(3)) which must form the basis of a derivative claim. We are
not told she is a director herself; there is no reason to think she is sub-
ject to any directors’ duties, nor that she has breached any, even if
she were. As a shareholder, she can vote as she wishes. There seems
to be no cause of action at all against her, and certainly no cause of
action that falls within s.260(3). So, it seems very unlikely that John
would be given permission to continue his claim against Sally.

Note: A failure to stick to what the question asked. Too many answers
dealt very superficially with the statutory criteria for granting permis-
sion to continue a derivative claim. Some failed to mention any case
law relevant to the interpretation of those criteria. There were also of-
ten misunderstandings about what the criteria mean, especially for ex-
ample that which asks the court to consider whether a ‘hypothetical
director’ acting in accordance with the duty in s.172 would continue
the claim. Also, a failure to understand s.239(4) CA 2006. Finally, most
answers did not deal separately with the claim against Sally, either
simply ignoring that claim, or treating it as the same as the claim
against Mary.

Fairways Ltd has two shareholders: Investortec plc (which owns 51

per cent) and Assetrich plc (which owns 49 per cent). The company
has two directors: Petra (appointed by Investortec) and Russell (ap-
pointed by Assetrich).

Fairways’ articles say that any contract over £50,000 must be ap-
proved by both directors of the company. It was also agreed, infor-
mally, between Investortec and Assetrich that all profits from Fair-
ways would be paid out as dividends to the shareholders.

In January 2019, Petra’s son, Trevor, was working as an intern for Fair-
ways. He went to one of Fairway’s suppliers, Veronica, to purchase a
new machine for Fairways, for £80,000. Veronica was concerned
whether Trevor was authorised to make the contract. She telephoned
Petra. Without consulting Russell, Petra assured Veronica that Trevor
had full authority. The contract was then made.

A week later, Russell discovered what Trevor had done. Russell re-
minded Petra that he never approved the purchase of the machine,
which he says Fairways does not need. He also complains that no divi-
dends have been paid by Fairways for three years, even though it has
made substantial profits.

Advise Russell whether:

a) Fairways is bound by the contract entered into with Veronica; and

b) Assetrich could successfully take proceedings under section 994

Companies Act 2006 and, if so, what remedy the court would award.

- This question relates to Chapters 12 and 13 of the module guide. It

brings together two different areas of company law. The first con-
 cerns authority to act on behalf of the company, and the conse-
quences of someone exceeding their authority. The second is the
protection afforded to a minority shareholder by s.994 CA 2006.
- For part (a) note that there seem to be two difficulties in finding that
Fairways is bound to the contract with Veronica. The first is that it
is entered into by Trevor, an intern, who (even ignoring the com-
pany’s article about contracts over £50,000) would be unlikely to
have authority to make such a large contract. Veronica did check,
however, and was reassured he had authority. This might seem to al-
low Veronica to claim that Trevor had ‘ostensible or apparent’ au-
thority: see Freeman v Lockyer. However, for that to be so, there
must be a representation to the third party (Veronica) by someone
who does have authority, which it is reasonable for the third party to
rely upon. This gives rise to the second difficulty here, which is that
the representation is by Petra, who does not herself have authority,
because of the limitation in the articles.
- Can Veronica invoke s.40 to overcome this second difficulty? Under
that section, provided Veronica is acting in good faith, the board is
presumed to have full authority to enter this transaction, or to autho-
rise others to do so, disregarding the limit in the articles regarding
contracts for over £50,000.
- For part b) note the conditions attaching to s.994. The petitioner
must be complaining about ‘the conduct of the company’s affairs’.
Russell’s complaints seem to fall into that category – both the con-
tract which should not have been authorised, and the non-payment
of dividends.
- The conduct must also ‘unfairly prejudice’ the ‘interests’ of the
claimant. The scope of a member’s interests includes at least the
member’s legal rights. The failure to follow the constitutional provi-
sion regarding approval of contracts over £50,000 seems clearly to
infringe Assetrich’s rights. The non-payment of the dividend is some-
what different. It does not infringe Assetrich’s legal rights. Rather, it
goes against a shared understanding between the members. It
seems that courts will take account of this, but only in a quasi-part-
nership (O’Neill v Phillips). So, a good answer would explain this, and
then identify whether this company constitutes a quasi-partnership
(Ebrahimi). Re Sam Weller suggests non-payment of dividends can
be unfairly prejudicial, at least in a quasi-partnership where there is
agreement that profits will be distributed.
- As to the remedy, note remedies available in section 996, and the
courts’ preference for ‘buy outs’: Biagioli. Note terms of buyouts: in-
dependent valuation and pro rata purchase price: O’Neill; Re Ad-
dbins.

George owns 70 per cent of the shares of Beasties Ltd. Henry, Joan
and Fiona each own 10 per cent of the shares of Beasties Ltd. The four
shareholders are the company’s only directors. Fiona has also lent
Beasties £100,000. Under a personal guarantee, George personally
promised Fiona to repay that loan to her if Beasties fails to do so.

In 2018, George made a series of negligent decisions which caused

substantial losses for Beasties. The company is now on the verge of in-
solvency, Fiona’s shares are almost worthless, and the company is un-
able to repay her loan.

Fiona demands that Beasties sue George. However, the directors vote
not to take any action. A shareholders’ meeting, attended by all the
shareholders, passes a resolution to ratify George’s breaches of duty.
Only Fiona votes against.

Advise Fiona whether:

a) if she started a derivative claim against George, she would be likely

to be given permission to continue that claim; and

b) could personally claim against George, both for the drop in the value
of her shares and to enforce the personal guarantee in respect of the
loan.

[Do NOT discuss section 994 Companies Act 2006 or section 122(1)(g)
Insolvency Act 1986 in your answer to part (b).]

- This question relates to Chapter 11 of the module guide. Part (a) fo-
cuses on derivative claims, and specifically on the ‘permission’
stage – and the criteria a court applies when deciding whether to
give permission. Part (b) focuses on personal claims against direc-
tors, and the so-called ‘reflective loss’ principle.
- for part a) explain that derivative proceedings are now governed by
Part 11 of CA 2006. Explain such proceedings can be brought in re-
spect of any breach of duty; there is no need to show the breach
constitutes ‘fraud’. A clear breach of s.174 here.
- It would explain the need to obtain court’s permission to continue
the claim (s.262) and criteria the court must apply in deciding
whether to give permission. A good answer would distinguish be-
tween the mandatory bars to granting permission, in s.263(2), and
the discretionary factors in s.263(3).
- The most logical place to start here would be the mandatory bar of
ratification. We are told all the shareholders, apart from Fiona, voted
in favour. Under s.239(4), a resolution for ratification must be passed
without the votes of the wrongdoer/those connected with the wrong-
doer. So George’s votes must be disregarded. However, we are not
told that any of the other shareholders are connected to George,
within the definition in ss.252–4. If that is so, then Henry, Joan and
Fiona would still be entitled to vote. Since Henry and Joan voted in
favour of ratification, the resolution to ratify would still be passed,
by a two-thirds majority. (Remember, to decide if a resolution is
passed, one asks if the required majority (for an ordinary resolution,
more than 50 per cent) amongst the votes actually cast was
achieved, not whether more than 50 per cent of all the votes in the
company supported the resolution). It seems likely, then, that the
ratification is valid.
- An excellent answer might note that there has long been doubt
whether all breaches of duty are capable of ratification. Those
amounting to ‘fraud on the minority’ might still be incapable of ratifi-
cation; see Franbar. However, even if that is so, simple negligence,
as this appears to be, does not constitute fraud. A good answer
might note briefly the other mandatory bars, and discretionary fac-
tors, which a court would have to consider and apply in the event
that the ratification were invalid (say because some other share-
holder’s votes were also to be disregarded).
- For part b) so far as the drop in the value of her shares is concerned,
there are two difficulties in Fiona bringing a personal claim against
George. The first is that George does not appear to have breached
any duty owed to Fiona. George’s duties under ss.171–177 CA 2006
are owed to the company itself, not personally to shareholders. Sec-
ond, the loss for which Fiona is claiming is reflective loss, and can-
not be sued for by a shareholder in a personal action: see Johnson v
Gore Wood.
- Regarding the claim under the personal guarantee, the first problem
alluded to above no longer applies. Fiona has a contractual cause of
action against George. However, an excellent answer might note
 that the claim still seems to be one for reflective loss. Her loss – in-
ability to recover the loan directly from the company – is a reflection
of the harm caused to the company (by George’s negligence). It does
not seem to matter that her claim is qua creditor: see Sevilleja Gar-
cia v Marex Financial Ltd. So, it is arguable that the reflective loss
principle ought to apply to the claim under the personal guarantee.
(That said, personal guarantees are a settled commercial practice,
and it seems most unlikely that the court in Sevilleja intended to
cast doubt on their validity.)

Note: For part (a), the main mistake was a failure to stick to what the
question asked. Too many answers dealt very superficially with the
statutory criteria for granting permission to continue a derivative
claim. There was also often misunderstanding about how ratification,
and s.239(4) CA 2006, operate – see below.

For part (b), many students seemed unaware of the reflective loss prin-
ciple, and how it might apply to the personal claims that Fiona might
wish to bring against George.