Airey v Cordell & Ors

Permission for a derivative action requires more than a prima facie case that the company has a claim and that the case falls within an exception to the rule in Foss v Harbottle. The court must ask whether an honest, independent and impartial board could reasonably authorise the proceedings. The court must not substitute its own view where the decision falls within the range of decisions open to a reasonable board. Permission should be refused where no reasonable board would pursue the litigation. An alternative commercial arrangement may justify refusal if it adequately protects the shareholder’s economic interest and gives the company or its shareholders no materially better result through litigation. The availability of an alternative remedy is relevant but is not an absolute bar.

The claimant was a minority shareholder in Hills Number Plate Holdings Plc and sought to continue, on behalf of that company and its subsidiary, a derivative claim against directors concerning the diversion and proposed exploitation of RFID and E-plate technology through another company.

The defendants accepted that there was at least a prima facie case concerning E-plate and that the claim fell in principle within an exception to Foss v Harbottle. They argued that no independent board would sue at that stage, and that an account of profits or an alternative arrangement would provide an adequate solution. The central issue was the test governing permission to continue the derivative action under CPR 19.9.

1. The court held that the claimant had established a prima facie case both that the companies might be entitled to relief and that the claim fell within an exception to Foss v Harbottle. That was only a minimum threshold and did not itself establish entitlement to continue the proceedings.

2. The appropriate permission test was whether a hypothetical independent board of directors could sanction the proceedings. The court should not decide what it would do if it were the board. Where a range of reasonable decisions existed, permission should not be refused merely because the judge preferred another course. Permission should be refused where no reasonable board would bring the proceedings.

3. The independent-board approach applied to permission to proceed, although authorities concerning costs indemnities had to be treated with care. The availability of an alternative remedy was a relevant factor, but it was not an absolute bar to a derivative claim.

4. An independent board could properly seek a benefit for the companies in return for refraining from injunctive proceedings. In an appropriate case, wider commercial considerations could be taken into account. If a solvent company could not realistically exploit the technology itself, and a proposed new company gave the claimant an interest adequately reflecting what he would have received had the opportunity remained within the group, the court could refuse permission where litigation would achieve no better result.

5. The fourth proposal was insufficiently developed to be accepted as binding, and the court could not say that no reasonable board would pursue the directors. The claims concerning diversion of corporate opportunities and fiduciary duties were at least strongly arguable. Retrospective validation was not taken into account on the application.

6. The action was stayed to allow the parties to agree a detailed proposal or for the defendants to put forward a final proposal satisfying the stated criterion. The matter was reserved to the judge.