#16726 - Derivative Action & Ratification Of Breaches Of Duty -

In line with the general law, those to whom duties are owed can release those who owe them duties from their legal obligations. Hence, the company too can release the directors from their general duties, within limits.

Company will normally act by resolution of either the board or the general meeting:

What does their resolution seek to achieve?
Decision to authorise / ratify a breach will have effect of either treating director having never committed a breach or are deemed to have not committed the breach. Prior approval is authorisation while post-facto approval is ratification.
These are different from affirmation, which is making an avoidable contract binding onto the company, and adoption, where the transaction is one which is beyond the powers of the directors but is one that can be entered into by the shareholders.
Affirmation / adoption does not by itself amount to implicit forgiveness and may still enforce personal remedies against directors.
However, a single resolution may be aimed at both affirmation and waiver.
Ex ante authorisation may either be given on a specific case-by-case basis or generally via the AoA, although this will be viewed with more suspicion – Sharma v Sharma [2013]. This is because such an investor who has given a general waiver will necessarily be less well informed on the facts of any particular breach which goes to the issue of informed consent.
Authorisation and ratification are recognised in S180(4)(a), which aims to preserve the common law as it stands for authorisation.
S239 seeks to recognise and amend the common law rules on ratification.
There is therefore a difference in what is needed if approval is given on the day before the breach compared to the day after the breach.

Which corporate organ? Board or delegates – pursue legal claim against third parties, affirm voidable contracts, waive breaches of duty committed by third parties dealing with the company. However, where the wrong was committed by a director, the common law rule is that the members must approve the breach in a general meeting. This is parallel to the power which beneficiaries under a trust have to ratify the breaches of trustees.

The common law has been modified by the CA – SS177, 180(1)(b) – advance authorisation of self-dealing transactions – merely need board notification. SS176, 180(1)(a) – breaches to the conflict of interest rule – board authorisation is possible subject to AoA. In these cases, the potential mischief is not great enough to require the cumbersome general meeting approval procedure.

In contrast, the common law rules are not modified wrt advance authorisation of proposed breaches of other general duties per SS171-4 and 176.

The common law position of GM approval also applies wrt ratification. As a result, there is a divergence between the rules for ratification and authorisation.

Note however that this does not apply to companies in the vicinity of insolvency – in those cases, it would be more appropriate to wait for the insolvency practitioner to be appointed, who may or may not exercise that power on behalf of the creditors – West Mercia Safteywear Ltd v Dodd [1988].

Where authorisation decision is given by board itself, the conflicted director should not be in a position to authorise his own breach. Per S175(6), no conflicted director may count towards quorum or vote.

With ratification, where the director is also a shareholder, his votes and those of connected persons are to be disregarded at the general meeting per S239(4).

However, with authorisation at the general meeting, the common law continues to apply per S180(4)(a). Similarly, Chs 4 and 4A of Pt 10 appear to permit interested directors to vote on resolutions required by those Chapters (subject to stricter requirements for public companies). This divergence is undesirable as a breaching director may seek to get the prospective breach authorised at a general meeting while wielding his own votes.

Allowing directors acting qua shareholder to vote at the general meeting as they saw fit was based on the notion that shareholders do not owe the company fiduciary duties, and that votes are property rights attaching to shares per North-West Transportation v Beatty (1887). However, perhaps the starting point of the law should be that members owe the company to exercise their powers in good faith and for proper purposes. Members should not be allowed to procure forgiveness for themselves and avoiding liabilities for personal remedies for breach of a duty they owe to the company.

What is the necessary majority for approval decisions? At common law, the normal rule is an ordinary majority subject to AoA. Wrt authorisation, CA preserves common law. Wrt ratification, S239(2) says that the ratification decision ‘must be taken by the members’ and ‘may’ be taken by ordinary majority unless by some other rule a higher threshold is required eg AoA.

What if the majority, in approving a breach by the directors, act unfairly to the minority? Minority oppression is dealt with in Pt 4. Before that, it should be considered whether or not the decision taken is valid, and disenfranchising conflicted directors or members as required. Additionally, certain breaches are considered not to be ratifiable.

Are all breaches of law capable of being ratified? This is not expressly answered by CA. At common law, some breaches can neither be authorised nor ratified but the breadth of the rule is uncertain.

The shareholders may not ratify a breach with expropriates company property to themselves – Re Halt George (1964) Ltd [1982]. Hence, directors were not allowed to authorise the diversion of company contracts to themselves in Cook v Deeks [1916]. However, how far does this principle extend? Why did HL in Regal (Hastings) Ltd v Gulliver [1942] believe it possible for the directors to have ratified their breach had they acted qua shareholder to do so at a general meeting? Ultimately, almost every breach will at least involve the potential future misappropriation of corporate property in the form of opportunities meaning forgone potential profits.

However, the general trend is towards allowing ratification. Perhaps this category of non-ratifiable breaches will die a natural death as many of them can be effectively dealt with the rules on directors and shareholders being disqualified in the case of conflicts.

Not every breach of directors’ duties should result in resort to litigation – issue is what is in the best interests of the company – the action of suing, even if an effective remedy is obtained, may lead to reputational damage per Taylor v NUM (Derbyshire Area) [1985] per Vinelott J.

However, a line...

#16726 - Derivative Action & Ratification Of Breaches Of Duty - Company Law

About Oxbridge

More Company Law Samples