Glynn & Anor v Owen & Ors

Factual and Procedural Background

The proceedings commenced in September 2005 involving two plaintiffs and five defendants, all shareholders and directors of two companies (the fourth and fifth defendants), each holding a 20% share. The plaintiffs initially pursued both personal and derivative claims relating to alleged wrongs by the first to third defendants against the companies. The personal claims were later withdrawn, leaving only derivative claims. The matter was listed multiple times for hearing and settlement attempts were unsuccessful.

The dispute concerns alleged breaches of duty and negligence by the first to third defendants in their roles as directors and shareholders of the companies involved in manufacturing and distributing a patented product known as Fatstrippa. The plaintiffs allege wrongful conduct relating to intellectual property, business dealings in the UK, US, and China, and internal management disputes within the companies.

Key events include shareholder agreements executed on 30 April 2001, board meetings discussing expansion and alleged misconduct, investigations initiated by the plaintiffs, and escalating tensions culminating in acrimonious board meetings in 2004 and 2005. The plaintiffs issued proceedings in September 2005, seeking derivative relief on behalf of the companies.

Legal Issues Presented

1. Whether the plaintiffs are entitled to maintain derivative claims on behalf of the fourth and fifth defendants against the first, second, and third defendants, having regard to the rule in Foss v. Harbottle.
2. Whether the plaintiffs can pursue personal claims alongside derivative claims (noting personal claims were later withdrawn).
3. Whether the alleged wrongdoers (defendants) are in control of the companies, a key factor in exceptions to the rule in Foss v. Harbottle.
4. Whether the alleged wrongs constitute a fraud on the minority or fall within other recognized exceptions to the rule in Foss v. Harbottle.
5. Whether the proceedings should be permitted to proceed in the interests of justice despite the rule in Foss v. Harbottle.

Arguments of the Parties

Plaintiffs' Arguments

• The plaintiffs rely on exceptions to the rule in Foss v. Harbottle, particularly the "fraud on the minority" exception, allowing minority shareholders to pursue derivative claims where wrongdoers are in control and have benefited improperly.
• They contend that the defendants' alleged breaches of duty harmed the companies and benefited the wrongdoers, justifying derivative claims.
• They also argue for a broader exception in the interests of justice, permitting derivative claims even absent strict fraud allegations.
• The plaintiffs emphasize the factual matrix, including alleged misconduct in relation to intellectual property, business dealings, and board management, to support their entitlement to proceed.

Defendants' Arguments

• The defendants submit that the rule in Foss v. Harbottle bars the derivative claims as the companies themselves are the proper plaintiffs.
• They argue that the plaintiffs have not established that the alleged wrongdoers are in control of the companies, a necessary condition for the "fraud on the minority" exception.
• They contend that the plaintiffs fail to allege that the defendants personally benefited improperly from the alleged wrongs, which is essential for the fraud exception.
• They maintain that the courts should not interfere with internal company management decisions, particularly where the alleged wrongdoers are not in control.
• The defendants dispute the factual basis for the alleged breaches and emphasize the absence of a controlling majority among the wrongdoers.

Table of Precedents Cited

Court's Reasoning and Analysis

The court first confirmed the rule in Foss v. Harbottle: only the company can sue for wrongs done to it, with derivative actions permitted only as exceptions. The plaintiffs initially pursued both personal and derivative claims but later abandoned personal claims, focusing solely on derivative claims.

The court examined the exceptions to the rule, particularly the "fraud on the minority" exception, which requires that alleged wrongdoers be in control and have benefited improperly from the wrongdoing. It noted that mere negligence without benefit to the wrongdoers is insufficient for derivative claims.

Applying this to the third defendant, the court found no allegation or evidence that he personally benefited improperly from the alleged breaches of duty. Consequently, the plaintiffs failed to bring themselves within the fraud on the minority exception for claims against him. Furthermore, the court determined that the third defendant was not part of a controlling majority of the companies.

Regarding the first and second defendants, the court acknowledged allegations that they personally benefited from the alleged wrongs. However, even assuming their combined 40% shareholding, they did not constitute a controlling majority. The plaintiffs failed to establish that these defendants, together with the third defendant, formed a controlling group.

The court emphasized the importance of not interfering with internal company management and that decisions to pursue litigation should generally be made by the majority of the board or shareholders. It concluded that the plaintiffs had not demonstrated any exceptional circumstances or interests of justice to permit the derivative claims to proceed.

Holding and Implications

The court held that the plaintiffs are not entitled to maintain derivative claims against the first, second, or third defendants on behalf of the fourth and fifth defendants.

The direct effect is that the derivative claims are dismissed at this preliminary stage. The plaintiffs’ personal claims were already withdrawn. No new legal precedent was established. The decision reinforces the strict application of the rule in Foss v. Harbottle and its exceptions, underscoring the necessity of demonstrating control by wrongdoers and personal benefit to sustain derivative claims. The court declined to intervene in the internal management of the companies where the alleged wrongdoers are not in control.