The Morgan Crucible Company Plc v Hill Samuel & Co. Ltd & Ors

On an application under R.S.C. 0.18, r.19(1)(a), pleaded facts are assumed to be true unless manifestly incapable of proof. The question is whether the claim is bound to fail.

A duty of care for negligent misstatement may be arguable where, after an identified takeover bidder has emerged, directors or professional advisers make express representations intended to influence the bidder’s conduct and the bidder relies on them. This may distinguish Caparo Industries PLC v. Dickman [1990] 2 W.L.R. 358, whose ratio concerned statutory accounts prepared for shareholders’ class rights rather than investment decisions. The City Code provides background but is not itself the source of a legal duty. Liability still requires personal negligence, not a warranty of accuracy.

Morgan Crucible appealed, with leave, from Hoffmann J’s refusal to permit amendment of its statement of claim. The action arose from its contested bid for First Castle Electronics PLC. Morgan Crucible alleged that the target company’s directors, financial adviser Hill Samuel, and auditors Judkins negligently prepared or circulated financial statements, a profit forecast, and takeover defence documents.

Following the House of Lords decision in Caparo Industries PLC v. Dickman [1990] 2 W.L.R. 358, the proposed amendments confined the pleaded duty to representations made after Morgan Crucible had become an identified bidder. The central issue was whether, assuming the pleaded facts to be true, the amended claims disclosed a reasonable cause of action or were bound to fail.

The appeal was allowed. Morgan Crucible was granted leave to amend its statement of claim and further and better particulars. The defendants were ordered to deliver defences within 14 days, and the application for leave to appeal to the House of Lords was refused.

1. Strike-out test. On an application under R.S.C. 0.18, r.19(1)(a), the court examines the pleading without evidence and assumes that pleaded facts are true unless they are manifestly incapable of proof. The question was whether Morgan Crucible was bound to fail in establishing a duty of care.
2. Directors. The case did not depend on a sudden emergence of duty merely because the bid was announced. It concerned express representations in defence and recommendation documents issued after the bidder had been identified. On the assumed facts, the directors knew and intended that Morgan Crucible would rely on those representations in deciding whether to make or increase its bid, and Morgan Crucible did so. A relationship of proximity was therefore arguable, subject to justice and reasonableness at trial.
3. Caparo. The essential point in Caparo was that the statutory audit was directed to enabling shareholders to exercise their class rights in general meeting, not to assisting investment decisions by a potential bidder. The present pleading alleged representations made for the specific purpose of influencing an identified bidder. The claim was consequently arguable as a distinction from Caparo.
4. City Code and wider considerations. The City Code formed part of the commercial background but imposed no legal obligation and was not relied on as the source of the alleged duty. Economic consequences, the possibility of a white knight, equality in the market, and indeterminate liability were matters for trial and were not sufficiently clear to justify striking out the claim.
5. Advisers and auditors. Against Hill Samuel and Judkins, the absence of direct contact or a request for advice, conflicting interests, or lack of financial connection did not conclusively negate proximity. The same arguable case therefore existed against each defendant.
6. Any liability of an individual director would require proof of personal negligence. The defendants were not treated as warranting the accuracy of the accounts or forecast.

• Court of Appeal (Civil Division) allowed the appeal, granted leave to amend, ordered defences within 14 days, and refused leave to appeal to the House of Lords.
• High Court of Justice, Chancery Division Hoffmann J refused leave to amend the statement of claim on the ground that the proposed negligence claims were bound to fail for want of a duty of care.