SDI Retail Services v King & ors

The court considered an application by SDI Retail Services Ltd for permission to continue a derivative claim on behalf of Rangers Retail Ltd challenging TRFC's purported termination of an intellectual property licence agreement (the IPLA). The judge applied the statutory tests in the Companies Act 2006, in particular s.260(3) (scope of derivative claims), the mandatory bar in s.262(3) and the discretionary factors in s.263(3) and (4). The judge held that SDI had raised a sufficiently arguable case that directors (Mr King and Mr Murray) had breached fiduciary duties by procuring or approving the purported termination and by taking steps inconsistent with the Company's interests, so s.260(3) was satisfied.

The court rejected the submission that the shareholders' agreement (clause 12.1(n)) operated as a complete bar to derivative proceedings and concluded that no hypothetical director acting under s.172 would refrain from pursuing the claim given the risk of total destruction of the Company's business. For these reasons the court granted permission to continue the derivative claim.

Background and parties: Rangers Retail Ltd (the Company) was 49% owned by SDI and 51% by TRFC. The Company's entire business depended on an intellectual property licence agreement dated 27 January 2015 (the IPLA) with TRFC. SDI applied for permission to continue a derivative claim on the Company's behalf after TRFC served a letter of 17 May 2016 purporting to terminate the IPLA for alleged repudiatory breaches.

Nature of relief sought: SDI sought permission to bring derivative claims for declaratory and injunctive relief to vindicate the IPLA and to claim damages against TRFC, together with compensation from Mr King and Mr Murray for procuring TRFC's purported termination and breaching fiduciary duties.

Procedural posture: The matter proceeded direct to an oral s.261(4) hearing by consent order so the ex parte prima facie stage under s.261(2) was not carried out.

Issues for decision: (i) whether the claims fell within s.260(3); (ii) whether any mandatory bar under s.262(3) (notably the hypothetical s.172 director test) required refusal of permission; (iii) whether discretionary factors in s.263(3) and (4) supported permission; and (iv) whether the shareholders' agreement (clause 12.1(n)) precluded the derivative claim.

Court's reasoning: The judge found on the pleaded facts that the alleged wrongs arose from director conduct and therefore fell within s.260(3), including that Mr King and Mr Murray were involved in TRFC's decision to purport to terminate the IPLA and thereafter acted consistently with TRFC's position (including discouraging sub-licensees and endorsing a supporter boycott). The defendants' reliance on the Company's articles and the SHA did not displace the statutory and equitable duties pleaded: the articles did not amount to a waiver of fiduciary duties and clause 12.1(n) of the SHA was not to be read as precluding derivative proceedings or as binding the Company to forgo any remedy to protect its sole asset. Objectively, a hypothetical director acting under s.172 would, at least provisionally, pursue the claim because the alternative was destruction of the Company's business; SDI offered to fund and indemnify the Company. The discretionary factors (good faith, importance of enforcement, value to the company, limited risk of adverse costs) also favoured granting permission. The court therefore granted permission to continue the derivative claim.

Wider comment: The court emphasised that it was not conducting a trial; the decision was a provisional assessment of statutory tests and admissible evidence. The judge noted that SDI's funding and indemnity offer was material to the costs risk assessment.

Application allowed. The court granted SDI permission to continue the derivative claim on behalf of Rangers Retail Ltd. The judge concluded that the pleaded claims fell within s.260(3) of the Companies Act 2006; the mandatory bar in s.262(3) was not made out because a hypothetical director acting under s.172 could, on the material before the court, properly seek to continue the claim; and the discretionary factors in s.263(3)/(4) favoured granting permission. The shareholders' agreement provision alleged to prevent litigation (clause 12.1(n)) did not preclude the derivative proceedings.