Smith v Croft (No 2)
The court may refuse to allow a derivative action to continue where the majority of the minority shareholders, who are independent of the wrongdoers, do not want it to proceed.
Facts
Minority shareholders in a film company, Film Finance Investment, brought a derivative action against the directors and the majority shareholder, alleging that the directors had paid themselves excessive remuneration and that the company had unlawfully given financial assistance for the purchase of its own shares. Another shareholder, which was independent of the directors and held a majority of the shares not held by the wrongdoers, did not want the action to continue.
Legal principle
Knox J struck out the action. He said that the claimant must show that the action falls within the fraud on the minority exception, and that the court may take into account the views of independent shareholders. If the majority of the shareholders who are independent of the wrongdoers do not want the action to be brought, for good reasons, the court should respect their views. The independent shareholder had decided, for proper reasons, that it was not in the company's interests to continue the action. Section 263(4) of the Companies Act 2006 now requires the court to have particular regard to the views of independent members.
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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This summary is for study and revision and is not legal advice. Although our case summaries are checked for accuracy, we do not guarantee that they are free from errors or omissions. Always read the full judgment for the court's reasoning.
