SHAREHOLDERS REMEDIES [1997] EWLC 246(8) (24 October 1997)

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Case management of shareholder proceedings

8.1 We consider that the problems of the excessive length and cost of many proceedings brought under section 459 should be dealt with primarily by active case management by the courts. (1) (para 2.2)

Preliminary issues

(1) We recommend that greater use should be made of the power to direct that preliminary issues be heard, or that some issues be tried before others. (para 2.10; no new provision proposed)

Power to dismiss claim or part of claim or defence which has no realistic prospect of success

(2) We recommend that the court should have the power to dismiss any claim or part of a claim or defence thereto which, in the opinion of the court, has no realistic prospect of success at full trial. (3) (para 2.18; to be implemented in context of Woolf reforms)

Adjournment to facilitate ADR

(3) We recommend that the Lord Chancellor consider changes to the 1986 Rules (governing unfair prejudice proceedings) so as to include an express reference to the power to adjourn at any stage to enable the parties to make use of mechanisms for ADR for disposing of the case or any issue in it, together with provisions for reporting back to the court as to the outcome along the lines of the 1996 Commercial Court Practice Statement. (4) (para 2.22; to be considered by Lord Chancellor)

Determination of how facts are to be proved

(4) We recommend that the courts power to determine how facts are to be proved should be used pro-actively by the court. (para 2.24; no new provision proposed)

Exclusion of issues from determination

(5) We recommend that in shareholder proceedings the court should have the power to exclude an issue from determination if it can do substantive justice between the parties on the other issues and determining it would therefore serve no worthwhile purpose. (5) (para 2.27; to be implemented in context of Woolf reforms)

Costs sanctions

(6) We recommend that, in proceedings under section 459, the court should have greater flexibility than at present to make costs orders to reflect the manner in which the successful party has conducted the proceedings and the outcome of individual issues. (para 2.32; to be implemented in the context of Woolf reforms)

Presumptions in proceedings under section 459

8.3 We recommend that there should be legislative provision for presumptions in proceedings under sections 459-461 that, in certain circumstances, (a) where a shareholder has been excluded from participation in the management of the company, the conduct will be presumed to be unfairly prejudicial by reason of the exclusion; and (b), if the presumption is not rebutted and the court is satisfied that it ought to order a buy out of the petitioners shares, it should do so on a pro rata basis. (para 3.30; clauses 3 & 4)

(2) the petitioner has been removed as a director or has been prevented from carrying out all or substantially all of his functions as a director; (para 3.43)

(3) immediately before the exclusion from participation in the management, (a) the petitioner held shares in his sole name giving him not less than 10% of the rights to vote at general meetings of the company on all or substantially all matters, and (b) all, or substantially all of the members of the company were directors. (For the purposes of (b), only one joint holder should be counted as a member). (para 3.53)

8.5 The first presumption should provide that, where these conditions are present, the affairs of the company will be presumed to have been conducted in a manner which is unfairly prejudicial to the petitioner, unless the contrary is shown. (para 3.56)

8.6 The second presumption should provide that where the first presumption has not been rebutted and the court is satisfied that it ought to make an order that one or more of the respondents should purchase the petitioners shares, the shares should be valued on a pro rata basis unless the court otherwise orders. (para 3.62)

8.7 We recommend that, if our recommendations for the presumptions are implemented, the Vice Chancellor should be invited to consider whether there should be a practice direction requiring the petitioner to serve a notice on the other members of the company and the company requiring them to purchase his shares valued on a pro rata basis before he starts his proceedings if he then intends to rely on the second presumption. (para 3.64; to be considered by Vice Chancellor)

Other reforms relating to proceedings under sections 459-461

8.8 We make the following additional recommendations in respect of proceedings under sections 459-461.

Imposition of limitation period

(1) We recommend that there should be a time limit for bringing claims under section 459, but that the length of the limitation period and the other relevant details (such as the date from which the limitation period should run) should be considered in the context of the Law Commissions current project on limitation. (para 4.22; to be considered further by Commission in context of review of limitation periods)

Adding winding up to the remedies available under section 461

(2) We recommend that winding up should be added to the remedies available to a petitioner in proceedings under section 459. (para 4.35; clause 5(2))

(3) We recommend that a petitioner should require the courts leave to apply for winding up in proceedings under sections 459-461. (para 4.40; clause 5(1) & (3))

(4) We recommend that a petitioner should also require the leave of the court to apply for a winding up order under section 122(1)(g) of the Insolvency Act 1986 in conjunction with an application under section 459. (para 4.42; clause 7)

(5) We recommend that where a petition under section 459 is amended to include a claim for winding up (whether under section 122(1)(g) or under the new provision) the winding up should be deemed to commence from the date of the amendment. (para 4.46; clause 6 )

(6) We recommend that the Vice Chancellor should be invited to consider whether there should be an amended practice direction setting out a standard form validation order where winding up is sought under the new provision. (para 4.47; to be considered by Vice Chancellor)

Power to determine relief as between respondents

(7) We recommend that the Lord Chancellor consider changes to the 1986 Rules (governing unfair prejudice proceedings) so as to give the court the procedural powers to allow contribution and indemnity claims in proceedings under section 459 if this matter is not dealt with in the general rules introduced under the Civil Procedure Act 1997. (para 4.53; to be considered by Lord Chancellor)

Advertisement of section 459 petitions

(8) We recommend that the Lord Chancellor consider changes to the 1986 Rules (governing unfair prejudice proceedings) so as to include an express provision stating that no advertisement of section 459 petitions should take place except in accordance with an order of the court, and so as to confirm the meaning given by the courts to "advertisement" in this context by an appropriate definition. (para 4.56; to be considered by the Lord Chancellor)

Articles of Association

8.9 We recommend that appropriate provisions should be included in Table A to encourage parties to sort out areas of potential dispute at the outset. (para 5.2) In particular we recommend that a shareholders exit article in the terms of the draft Regulation 119 set out in Appendix C should be included in Table A (para 5.32; Appendix C)

A new derivative action

8.10 We recommend that there should be a new derivative procedure with more modern, flexible and accessible criteria for determining whether a shareholder can pursue the action. (para 6.15)

Availability of the new derivative action

(1) The new procedure should only be available if the cause of action arises as a result of an actual or threatened act or omission involving (a) negligence, default, breach of duty or breach of trust by a director of the company, or (b) a director putting himself in a position where his personal interests conflict with his duties to the company. The cause of action may be against the director or another person (or both) (para 6.49; clause 1)

(2) For these purposes, director should include a shadow director. (para 6.49; clause 1)

(3) The derivative action should be available only to members of the company. (para 6.50; clause 1)

Extent to which common law rule should be abrogated

(4) The new derivative procedure should replace the common law derivative action entirely. (para 6.55; clause 1)

Notice requirements

(5) (i) Unless the court otherwise orders, a claimant should be required to give notice to the company of its intention to bring a derivative action at least 28 days before the commencement of proceedings.

(ii) The notice should specify the grounds of the proposed derivative action. (7) (para 6.59; rule 50.4)

Company fails diligently to pursue proceedings

(6) A shareholder should be able to apply to continue, as a derivative action, proceedings commenced by the company where:

(iii) the manner in which the company has commenced and continued the action amounts to an abuse of the process of the court. (para 6.65; rules 50.9, 50.10 & 50.11)

Consideration by the court

(7)(i) Where a derivative action is brought, the court must fix a case management conference.

(ii) Unless the court otherwise directs, the claimant must seek leave to continue the derivative action at the case management conference. (para 6.69; rules 50.5 & 50.6)

Issues relevant to the grant of leave

(9) In considering the issue of leave the court should take account of all the relevant circumstances without limit. (para 6.73; rule 50.7(1))

(i) the good faith of the applicant (which should not be defined); (para 6.76; rule 50.7(2))

(ii) the interests of the company (having regard to the views of directors on commercial matters); (8) (para 6.79; rule 50.7(2))

(iii) the fact that the wrong has been, or may be, approved by the company in general meeting (but effective ratification should continue to be a complete bar); (9) (para 6.86; rules 50.7(2) & 50.8(4))

(iv) the fact that the company in general meeting has resolved not to pursue the cause of action; (para 6.87; rule 50.7(2))

(v) the views of an independent organ that for commercial reasons the action should or should not be pursued; (para 6.90; rule 50.7(2))

(11) The court should not grant leave to continue the proceedings if it is satisfied that the action is not in the interests of the company; (para 6.79; rule 50.8(3))

Other relevant provisions

(12) The action should be brought on behalf of all the companys members other than any who are defendants, and a decision of the court should be binding on all the members on whose behalf the action is brought. However, any decision of the court should not be enforced against a person who is not a party to the proceedings without the courts permission. (para 6.96; rule 50.2)

(13) The court may adjourn a hearing to enable a meeting of shareholders to be convened for the purpose of considering a resolution affecting the claim. (para 6.103; rule 50.3)

(14) No proceedings brought by a shareholder under the provisions relating to derivative actions may be discontinued or compromised without the leave of the court. (para 6.107; rule 50.14)

Reform of section 14

8.12 We do not recommend any reform of section 14 of the Companies Act 1985. (para 7.12)

Pre-action discovery

8.13 We do not recommend any extension to the right to disclosure of documents specifically for shareholder proceedings. (para 7.16)

(1) Active case management for Scotland is a matter for rules of court to be drawn up by the appropriate authority. Where appropriate, the power of the Secretary of State under s 411 of the Insolvency Act 1986 to make rules, so far as it relates to a winding up petition, is also available in relation to a petition under s 459 (by virtue of s 461(6) of the Companies Act 1985). In so far as the matters covered by the recommendations set out in this summary might be appropriate for consideration as regards rules of court for the Scottish courts, any further consultation required in that regard will be a matter for the appropriate rule-making authority.

(2) Although primarily directed at claims brought under s 459, these recommendations apply to all shareholder proceedings unless otherwise indicated.

(4) Practice Statement (Commercial Cases: Alternative Dispute Resolution) (No 2) [1996] 1 WLR 1024.

(7) We have incorporated this recommendation into the draft rule in Appendix B (Rule 50.4), as it is an integral part of the procedure that we are recommending. However, it may be that this provision should properly appear in a pre-action protocol or Practice Direction as it does not concern the procedure in court. The proposed primary legislation for Scotland contains a specific provision for notice to be given by a shareholder wishing to bring a shareholders action (analagous to the derivative action under English law) (see s 458B(3)-(5) in clause 1(1) of the draft Bill at Appendix A) but we do not consider that a similar provision is required for England and Wales.

(8) This does not of course mean that the court would be bound to accept the views of the directors. The existence of a conflict of interest may affect the weight to be given to them, and the court would give no weight to views which no reasonable director in that position could hold.

(9) There may well be other situations in which the court would have to dismiss the action, eg if there had been a binding release; see para 6.87, n 125 above.

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