Towers v African Tug Co [1904] 1 Ch 558

Facts

  • The African Tug Company was established to purchase the businesses of two existing tug companies.
  • The sellers of these companies became directors and held the majority of shares in the new African Tug Company.
  • The directors later sold two tugs to the company at a price above fair value.
  • Mr. Towers, a minority shareholder, commenced legal proceedings on behalf of the company, alleging that the directors breached their fiduciary duties through this transaction.

Issues

  1. Whether a minority shareholder can bring a derivative action on behalf of the company when the alleged wrongdoers control the company.
  2. Whether directors who are majority shareholders and alleged wrongdoers can prevent the company from pursuing claims against them for breaches of fiduciary duty.
  3. Under what circumstances an exception to the general rule barring individual shareholder actions applies.

Decision

  • The court held that a minority shareholder may bring a derivative action where those who committed the alleged wrongdoing control the company and would prevent the company from suing.
  • The court confirmed that the recovery from such actions accrues to the company itself, not to the minority shareholder personally.
  • The decision established that derivative actions may proceed as an exception to the general rule where wrongdoer control exists.

Legal Principles

  • The general rule is that only the company can sue for wrongs done to it, given its nature as a separate legal entity.
  • An exception arises where the alleged wrongdoers are in control of the company, thus preventing the company from suing; in such cases, a derivative action by a minority shareholder is permitted.
  • This exception protects minority shareholders and ensures directors cannot misuse control to avoid accountability for breaches of duty.
  • The case refined the principles originally outlined in Foss v Harbottle, setting a key precedent for derivative actions.

Conclusion

Towers v African Tug Co [1904] 1 Ch 558 affirmed that minority shareholders may bring derivative actions when those in control of the company commit wrongdoing and block the company from acting, thereby strengthening the enforcement of fiduciary duties and enhancing protection for minority interests in corporate governance.

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