European Union: Cullen Investments Ltd & Anor v Brown & Ors (2015)

If it is alleged that a wrong has been committed against a company then, in the usual course of events, the correct claimant is the company itself, with the decision as to whether or not to sue being made by the company's board of directors. Provided the majority agree with the directors' course of action, it is not usually open to shareholders to complain about the decision made. However, there are certain situations in which the court has the discretion to allow shareholders to bring a personal claim, on behalf of the company, to pursue allegations of wrongs committed by the directors. Such claims are known as "derivative actions".

In Cullen Investments Ltd v Brown (2015), the High Court considered the statutory basis for bringing a derivative action in a dispute between joint venture partners, even though it was possible that the claimant shareholder had its own rights of action which might mean there was no need for a derivative action. The question of whether an alternative remedy exists is a key question for the court when considering whether to grant permission for the shareholder to continue the derivative claim under the Companies Act 2006 (the "Act").

The facts

Cullen Investments Ltd ("Cullen"), an investment company, applied for permission to continue a derivative action (the "Action") under s.261(1) of the Act. Cullen brought the Action, on behalf of Kauri Investments Ltd ("Kauri"), against Mr Brown, Kauri's CEO.

In 2005, Mr Brown and Cullen entered into a joint venture, investing in the EU and UK property markets (the "Venture"). Kauri was incorporated by Cullen as a vehicle through which the Venture could be pursued. The parties signed Heads of Agreement and the Venture was pursued successfully for a number of years. The Heads of Agreement contained a term which allowed Mr Brown to invest in property on his own behalf, provided that: he had given Kauri the first right of refusal on any such investment and Kauri had declined; the investment did not materially affect Mr Brown's duties as CEO of Kauri; and the investment did not place Mr Brown in a position of conflict in relation to Kauri.

In 2008, an opportunity arose to enter into a new joint venture agreement with a partner in Germany, investing in German residential property (the "German Option"). Mr Brown raised this with Cullen and a new corporate structure was set, the costs of which were born by Kauri as it was anticipated that the German Option would be pursued for the benefit of the Venture. However, Cullen and Mr Brown could not agree on how to fund the Venture's participation in the German Option, and Mr Brown subsequently contended that, in January 2009, Cullen informed him that it would not advance the capital required to pursue the German Option, and that Mr Brown was free to pursue the German Option in his personal capacity. Mr Brown emailed Cullen, confirming that this was his intended course of action. Cullen did not reply. Mr Brown then secured third party funding for the German Option and signed the deal on 7 April 2009. Consequently, Cullen commenced a claim directly against Mr Brown as well as bringing the Action.

Cullen argued that it had not turned the German Option down and that, alternatively, even if it had done so, Mr Brown's position as CEO required him to offer the German Option to Kauri on such terms as he had negotiated after 22 January 2009. In practice this would have meant asking Cullen's permission to use the money borrowed from the third party funder. Mr Brown argued that he was entitled to invest personally in the German Option because Cullen had turned down the opportunity to do so.

The judgment

The Court had to decide whether Cullen could continue to bring the Action on Kauri's behalf. There were two issues for consideration:

  • whether permission had to be refused under s.263(2) (a) of the Act which provides that permission may be approved if a hypothetical person acting in accordance with the duty to promote the success of the company would not seek to continue the claim, or under s.263(2)(c) of the Act (whether the act or omission was authorised by the company before it occurred, or has been ratified by the company since it occurred) on the basis that the JVA entitled Mr Brown to take up the German Option personally
  • whether any of the considerations listed in s.263(3) (which include whether the member is acting in good faith in seeking to continue the claim, the importance that a person acting in accordance with the duty to promote the success of the company would attach to continuing it, whether a proposed or past act or omission would be likely to be authorised or ratified, whether the company has decided not to pursue the claim or whether the member has a cause of action that he may pursue in his own right rather than on behalf of the company) of the Act meant permission should be refused

In granting Cullen's application, the Court found that permission should not be refused under s.263(2) of the Act. Although some evidence supported Mr Brown's assertion that taking advantage of the German Option was within the terms of his agreement with Cullen, the hypothetical director contemplated by the Act would conclude that:

  • there were good prospects of establishing that Cullen had not refused to take up the German Option and, consequently, that Mr Brown had not been released from his duties. In particular, Mr Brown had not expressly confirmed to Cullen that he was pursuing the German Option in a personal capacity and had therefore failed to make the necessary full and frank disclosure
  • consequently, there was good evidence that Mr Brown had concealed his personal investment in the German Option deliberately and that this conduct did not hold with his contention that his actions were authorised by Cullen
  • the case would turn entirely on the existence of a grant of express authority allowing Mr Brown to take the German Option for himself, with the most likely conclusion being that there was no such grant of authority
  • it was worth taking the risk that the litigation might result in an empty judgment. Had the relevant amount truly not been worth suing for, or had Mr Brown not been able to satisfy any judgment, Mr Brown would surely have raised this in his defence

Further, of the considerations listed in s.263(3) of the Act, only s.263(3)(a), (b) and (f) of the Act were relevant and none of them were adequate to support a refusal of Cullen's application. In particular:

  • there was no basis for concluding that Cullen was lacking in good faith by bringing the claim (s.263(3)(a))
  • the hypothetical director would attach considerable importance to the fact that the claim was being funded by Cullen and there was no financial risk to Kauri. Further, there was a possibility that the litigation could significantly enhance Kauri's funds (s.263(3)(b))
  • although Cullen was also pursuing a remedy in its own right, it was not clear whether Cullen had a direct claim, and the Action was therefore being brought in the alternative so as to mitigate the risk that Kauri, and not Cullen, was entitled to all or part of the relief sought. Although there was a possibility that the Action would prove to be unnecessary, taking such proceedings was worthwhile in order to avoid a potential injustice (s.263(3)(f))

Comment

Clearly, this decision, as with so many, turns on its specific facts, but it is nevertheless beneficial to see the Court's approach to the relevant factors in granting Cullen permission to continue the Action. In particular, the weight given to the fact that Kauri had none of the risk (as Cullen was funding the proceedings), but stood to gain all of the benefit, such that, for the company, there was no downside to the Action continuing, is to be noted. It will be interesting to see how this case develops as it moves forward through the Courts.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.