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

journal contribution
posted on 2004-01-01, 00:00 authored by Ben SaundersBen Saunders
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”.

History

Journal

Company and securities law journal

Volume

22

Pagination

535 - 544

Publisher

Thomson Reuters

Location

New York, N.Y.

ISSN

0729-2775

Language

eng

Publication classification

C1.1 Refereed article in a scholarly journal

Copyright notice

2004, Thomson Reuters

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