Smith v Croft (No 2) [1987] 3 All ER 909

Facts

  • The case concerned minority shareholders seeking to bring a derivative action on behalf of a company regarding alleged harms done to the company.
  • The claim was heard in the Chancery Division and involved interpretation of Section 210 of the Companies Act 1985 (now Section 260 of the Companies Act 2006).
  • The main factual issue involved whether the applicants had the support of a sufficient segment of the independent minority shareholders to bring a derivative claim.
  • The determination of “independent minority” required excluding shareholders implicated in the alleged wrongdoing or otherwise not impartial.
  • Although the applicant had support from a majority of the independent minority shareholders by number, the court considered the value of their shareholdings insufficient relative to the total value held by all independent minority shareholders.

Issues

  1. Whether the minority shareholders could properly bring a derivative action despite the proper plaintiff rule.
  2. What constituted a “significant portion” of the independent minority, as required under Section 210 of the Companies Act 1985, to permit a derivative action.
  3. How the independent minority should be identified and calculated.
  4. The distinction between statutory derivative actions and other remedies available to minority shareholders.

Decision

  • The court affirmed the proper plaintiff rule: the company is typically the correct claimant in actions concerning harm done to itself.
  • A minority shareholder may only bring a derivative action if those in control of the company are the alleged wrongdoers and block the company from bringing a claim.
  • For statutory derivative claims under Section 210, an applicant must show support from a significant portion of the independent minority, not merely a simple majority by headcount.
  • Support from shareholders must be assessed both by number and by the value of shareholdings.
  • In this case, permission for the derivative action was refused because, although there was majority support by number, the value of their holdings was not deemed sufficient.

Legal Principles

  • The proper plaintiff rule limits actions for harm to the company to the company itself, except in special circumstances.
  • Minority shareholders must show that alleged wrongdoers control the company to justify a derivative action.
  • The “significant portion” requirement for support involves both the number of independent minority shareholders and the value of their shareholdings.
  • The independent minority excludes those involved in or connected with the alleged misconduct.
  • Statutory derivative claims focus on redress for harm to the company, while unfair prejudice petitions address harm to the interests of individual shareholders.

Conclusion

Smith v Croft (No 2) [1987] 3 All ER 909 sets out clear limits for derivative actions by minority shareholders, emphasizing the significant portion requirement for independent shareholder support and the continued relevance of the proper plaintiff rule, delineating the available remedies for minority shareholders and the challenges they face in litigating corporate wrongs.

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