Pavlides v Jensen
A minority shareholder cannot bring a derivative action for mere negligence by directors from which they did not benefit, because the majority can ratify it.
Facts
A company sold a mine, its main asset, to another company, for £182,000. Mr Pavlides, a minority shareholder, alleged that the mine was worth much more, and that the directors had been negligent in selling it at an undervalue. He brought a derivative action against the directors. The directors had not benefited personally from the sale.
Legal principle
Danckwerts J struck out the claim. There was no allegation of fraud, and the directors had not benefited from the sale, so the case did not fall within the fraud on the minority exception to the rule in Foss v Harbottle. Mere negligence by directors, which did not benefit them, could be ratified by the majority of the shareholders, so it was for the company to decide whether to sue. The position has changed under Part 11 of the Companies Act 2006, which allows a derivative claim for negligence.
Related cases on derivative claims and reflective loss
- Daniels v Daniels [1978] Ch 406
- Edwards v Halliwell [1950] 2 All ER 1064
- Foss v Harbottle (1843) 2 Hare 461
- Franbar Holdings Ltd v Patel [2008] EWHC 1534 (Ch), [2009] 1 BCLC 1
- Iesini v Westrip Holdings Ltd [2009] EWHC 2526 (Ch), [2011] 1 BCLC 498
- Johnson v Gore Wood & Co [2002] 2 AC 1
- Kiani v Cooper [2010] EWHC 577 (Ch), [2010] 2 BCLC 427
- Mission Capital plc v Sinclair [2008] EWHC 1339 (Ch), [2010] 1 BCLC 304
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