European Union: Cullen Investments Ltd & Anor v Brown & Ors (2015)

If it is alleged that a wrong has been committed against a company then, in the usual course of events, the correct claimant is the company itself, with the decision as to whether or not to sue being made by the company's board of directors. Provided the majority agree with the directors' course of action, it is not usually open to shareholders to complain about the decision made. However, there are certain situations in which the court has the discretion to allow shareholders to bring a personal claim, on behalf of the company, to pursue allegations of wrongs committed by the directors. Such claims are known as "derivative actions".

In Cullen Investments Ltd v Brown (2015), the High Court considered the statutory basis for bringing a derivative action in a dispute between joint venture partners, even though it was possible that the claimant shareholder had its own rights of action which might mean there was no need for a derivative action. The question of whether an alternative remedy exists is a key question for the court when considering whether to grant permission for the shareholder to continue the derivative claim under the Companies Act 2006 (the "Act").

The facts

Cullen Investments Ltd ("Cullen"), an investment company, applied for permission to continue a derivative action (the "Action") under s.261(1) of the Act. Cullen brought the Action, on behalf of Kauri Investments Ltd ("Kauri"), against Mr Brown, Kauri's CEO.

In 2005, Mr Brown and Cullen entered into a joint venture, investing in the EU and UK property markets (the "Venture"). Kauri was incorporated by Cullen as a vehicle through which the Venture could be pursued. The parties signed Heads of Agreement and the Venture was pursued successfully for a number of years. The Heads of Agreement contained a term which allowed Mr Brown to invest in property on his own behalf, provided that: he had given Kauri the first right of refusal on any such investment and Kauri had declined; the investment did not materially affect Mr Brown's duties as CEO of Kauri; and the investment did not place Mr Brown in a position of conflict in relation to Kauri.

In 2008, an opportunity arose to enter into a new joint venture agreement with a partner in Germany, investing in German residential property (the "German Option"). Mr Brown raised this with Cullen and a new corporate structure was set, the costs of which were born by Kauri as it was anticipated that the German Option would be pursued for the benefit of the Venture. However, Cullen and Mr Brown could not agree on how to fund the Venture's participation in the German Option, and Mr Brown subsequently contended that, in January 2009, Cullen informed him that it would not advance the capital required to pursue the German Option, and that Mr Brown was free to pursue the German Option in his personal capacity. Mr Brown emailed Cullen, confirming that this was his intended course of action. Cullen did not reply. Mr Brown then secured third party funding for the German Option and signed the deal on 7 April 2009. Consequently, Cullen commenced a claim directly against Mr Brown as well as bringing the Action.

Cullen argued that it had not turned the German Option down and that, alternatively, even if it had done so, Mr Brown's position as CEO required him to offer the German Option to Kauri on such terms as he had negotiated after 22 January 2009. In practice this would have meant asking Cullen's permission to use the money borrowed from the third party funder. Mr Brown argued that he was entitled to invest personally in the German Option because Cullen had turned down the opportunity to do so.

The judgment

The Court had to decide whether Cullen could continue to bring the Action on Kauri's behalf. There were two issues for consideration:

  • whether permission had to be refused under s.263(2) (a) of the Act which provides that permission may be approved if a hypothetical person acting in accordance with the duty to promote the success of the company would not seek to continue the claim, or under s.263(2)(c) of the Act (whether the act or omission was authorised by the company before it occurred, or has been ratified by the company since it occurred) on the basis that the JVA entitled Mr Brown to take up the German Option personally
  • whether any of the considerations listed in s.263(3) (which include whether the member is acting in good faith in seeking to continue the claim, the importance that a person acting in accordance with the duty to promote the success of the company would attach to continuing it, whether a proposed or past act or omission would be likely to be authorised or ratified, whether the company has decided not to pursue the claim or whether the member has a cause of action that he may pursue in his own right rather than on behalf of the company) of the Act meant permission should be refused

In granting Cullen's application, the Court found that permission should not be refused under s.263(2) of the Act. Although some evidence supported Mr Brown's assertion that taking advantage of the German Option was within the terms of his agreement with Cullen, the hypothetical director contemplated by the Act would conclude that:

  • there were good prospects of establishing that Cullen had not refused to take up the German Option and, consequently, that Mr Brown had not been released from his duties. In particular, Mr Brown had not expressly confirmed to Cullen that he was pursuing the German Option in a personal capacity and had therefore failed to make the necessary full and frank disclosure
  • consequently, there was good evidence that Mr Brown had concealed his personal investment in the German Option deliberately and that this conduct did not hold with his contention that his actions were authorised by Cullen
  • the case would turn entirely on the existence of a grant of express authority allowing Mr Brown to take the German Option for himself, with the most likely conclusion being that there was no such grant of authority
  • it was worth taking the risk that the litigation might result in an empty judgment. Had the relevant amount truly not been worth suing for, or had Mr Brown not been able to satisfy any judgment, Mr Brown would surely have raised this in his defence

Further, of the considerations listed in s.263(3) of the Act, only s.263(3)(a), (b) and (f) of the Act were relevant and none of them were adequate to support a refusal of Cullen's application. In particular:

  • there was no basis for concluding that Cullen was lacking in good faith by bringing the claim (s.263(3)(a))
  • the hypothetical director would attach considerable importance to the fact that the claim was being funded by Cullen and there was no financial risk to Kauri. Further, there was a possibility that the litigation could significantly enhance Kauri's funds (s.263(3)(b))
  • although Cullen was also pursuing a remedy in its own right, it was not clear whether Cullen had a direct claim, and the Action was therefore being brought in the alternative so as to mitigate the risk that Kauri, and not Cullen, was entitled to all or part of the relief sought. Although there was a possibility that the Action would prove to be unnecessary, taking such proceedings was worthwhile in order to avoid a potential injustice (s.263(3)(f))

Comment

Clearly, this decision, as with so many, turns on its specific facts, but it is nevertheless beneficial to see the Court's approach to the relevant factors in granting Cullen permission to continue the Action. In particular, the weight given to the fact that Kauri had none of the risk (as Cullen was funding the proceedings), but stood to gain all of the benefit, such that, for the company, there was no downside to the Action continuing, is to be noted. It will be interesting to see how this case develops as it moves forward through the Courts.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions