Shareholders and Corporate loss.

A recent Court of Appeal decision has clarified when a shareholder who has suffered a loss may have a cause of action in circumstances where the company concerned has also suffered a loss.

Background

The Prudential Assurance case established the principle that a shareholder in a company cannot sue for damages in respect of the diminution in the value of the shares held by him caused by a wrong to the company, at least when the company itself has a cause of action entitling it to recover for the wrong to it.

Facts

The claimants were the beneficiaries under a discretionary trust set up in 1989 by their father, George Walker, the founder and chairman of the Brent Walker Group Plc. The principal assets of the trust were shares in a parent company whose ultimate subsidiary companies owned interests in certain French vineyards worth £50m.

The claimants had established a prima facie case that the trustees had committed breaches of trust. They claimed that the trustees had caused the value of a trust shareholding in a company to be diminished by improper diversion or use of the relevant company's assets.

The events that gave rise to this action were connected with efforts by Mr Walker and the Brent Walker Group Plc to prevent that company's financial collapse following the takeover of William Hill and the Mecca group of companies, and the ensuing bond issue and debt restructuring.

Decision

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Decision

The principle in the Prudential Assurance case was considered but the Court of Appeal's decision was based on the principle that, provided claimants can prove that they have suffered a quantifiable financial loss caused by the actionable fault of the defendant, they may recover those losses as damages.

The Court held that the Prudential Assurance principle will not deprive a claimant of an otherwise good cause of action in a case where: the claimant can establish that the defendant's conduct constituted a breach of some legal duty owed to it personally (whether under the laws of contract, tort, trusts or any other branch of the law); and

on its assessment of the facts, the court is satisfied that such breach of duty has caused the claimant personal loss separate and distinct from any loss that may have been occasioned to any corporate body in which the claimant may be financially interested.

If those two conditions were satisfied, the mere fact that the defendant's conduct might also have given rise to a cause of action at the suit of a company in which the claimant was financially interested, whether directly as a shareholder or indirectly as, for example, a beneficiary under a trust, would not deprive the claimant of a cause of action.

The amounts claimed by the claimant beneficiaries in this case overlapped at least in part with amounts that might be claimed by the relevant company. Nevertheless, the Court of Appeal decided that the beneficiaries were entitled to pursue their claim.

Comment

As long as a shareholder's claim satisfies the two conditions mentioned above, the shareholder will be able to sue a third party even where that third party's conduct also gives rise to a cause of action on the part of the company in which the shareholder holds shares.