Putting the spoils of litigation into the shareholders’ pockets: when can shareholders bring a personal action against the directors of their company?

company is legally incorporated it must be treated like any other independent person with its rights and liabilities appropriate to itself”.2 A consequence of this is the “proper plaintiff” principle established in Foss v Harbottle (1843) 2 Hare 461; 67 ER 189: the proper plaintiff in an action in respect of a wrong done to a corporation is the corporation itself.3 It is also a “hallowed rule” that directors owe their duties to the company, not the shareholders,4 and so any loss accruing to the company as a result of the directors’ breach of their duties is recoverable only by the company.5 An obvious problem with this state of affairs is that a company will be unlikely to initiate proceedings against its directors when the company is controlled by those directors.6 While there are good economic reasons for this division of management and ownership,7 shareholders are left with a critical question: under what circumstances can they initiate proceedings to recover loss suffered as a result of company directors’ breach of their duties? Although one writer has referred to the “expansive statutory and common law arsenals” available to aggrieved shareholders,8 it seems rather the case that there are few effective remedies. For shareholders have no contractual relationship with directors,9 and the personal rights conferred on shareholders by statute or general law are largely procedural10 and seem a rather ineffective basis for “scrutinising directorial performance”.