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Shareholder’s personal actions : a comparative study Simcock, David Keith 1977

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SHAREHOLDER'S PERSONAL ACTIONS - A COMPARATIVE STUDY by DAVID KEITH SIMCOCK B. Com A u c k l a n d U n i v e r s i t y 1974 LL.B. ( H o n s ) . A u c k l a n d U n i v e r s i t y 1976 A THESIS SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF •MASTER OF LAW i n THE FACULTY OF GRADUATE STUDIES F a c u l t y o f Law We a c c e p t t h i s t h e s i s as c o n f o r m i n g t o t h e r e q u i r e d s t a n d a r d THE UNIVERSITY OF BRITISH COLUMBIA J u l y , 1977 © D a v i d K e i t h Simcock, 1977 \ In presenting this thesis in partial fulfilment of the requirements fo an advanced degree at the University of Brit ish Columbia, I agree that the Library shall make it freely available for reference and study. I further agree that permission for extensive copying of this thesis for scholarly purposes may be granted by the Head of my Department or by his representatives. It is understood that copying or publication of this thesis for financial gain shall not be allowed without my written permission. Department of lr*f**~' The University of Brit ish Columbia 2075 Wesbrook P l a c e Vancouver, Canada V6T 1W5 Date March 16, 1978 Ci) ABSTRACT S h a r e h o l d e r s i n companies have t r a d i t i o n a l l y been l i m i t e d i n t h e i r a b i l i t y t o b r i n g a c t i o n s t o r e d r e s s wrongs which a f f e c t them i n some way. Q u i t e n a t u r a l l y , t h e y have been p r e v e n t e d from s u i n g when t h e wrong i s r e a l l y t o the company; r a t h e r than t o them. T h i s i s because o f the l o n g s t a n d i n g a c c e p t a n c e o f t h e f a c t t h a t the company i s a l e g a l e n t i t y , s e p a r a t e from i t s members and w i t h i t s own r i g h t s t o sue. However, even where the wrong i s t o the company i t s e l f , r e l i e f has been a v a i l a b l e and i n d i v i d u a l members a l l o w e d t o sue on b e h a l f o f the company i n c e r t a i n c i r c u m s t a n c e s , p a r t i c u l a r l y where t h e wrongdoers t h e m s e l v e s a r e i n c o n t r o l o f the company. A c t i o n s o f t h i s n a t u r e a r e now commonly c a l l e d " d e r i v a t i v e a c t i o n s . " C o n f u s i o n has a r i s e n and f u r t h e r l i m i t a t i o n s d e v e l o p e d because o f the narrow a r e a s i n which the law has a c c e p t e d t h a t a wrong has been committed t o s h a r e h o l d e r s i n t h e i r own r i g h t , e i t h e r i n d e p e n d e n t l y o f , o r t o g e t h e r w i t h , the company. P r o c e e d i n g s b r o u g h t t o remedy wrongs which a f f e c t s h a r e h o l d e r s i n d i v i d u a l l y can be c a l l e d " p e r s o n a l a c t i o n s . " The purpose o f t h i s paper was t o show t h a t t h e r e s h o u l d be, and t o some e x t e n t a l r e a d y i s , a w i d e r b a s i s on which p e r s o n a l a c t i o n s can be commenced than was u s u a l l y r e c o g n i z e d . The need t o d e v e l o p p e r s o n a l a c t i o n s had become n e c e s s a r y because o f the common law and s t a t u t o r y r e s t r i c t i o n s which now s u r r o u n d d e r i v a t i v e c l a i m s . These r e s t r i c t i o n s were c o n s i d e r e d i n some d e t a i l and comparisons made w i t h the p r o c e d u r a l and s u b s t a n t i v e n a t u r e o f ' ( i i ) p e r s o n a l , a c t i o n s i n o r d e r t o show t h a t the l a t t e r a r e i n d e e d t o be p r e f e r r e d where a c h o i c e i s a v a i l a b l e . In t h i s r e g a r d , comparisons were a l s o made w i t h the p o s i t i o n o f both types o f a c t i o n i n the U n i t e d S t a t e s . D e r i v a t i v e c l a i m s a r e s i m i l a r l y bound by p r o c e d u r a l r e q u i r e m e n t s i n the S t a t e s , and t h e r e t o o , p e r s o n a l a c t i o n s a r e o f t e n f a v o u r e d . However, the p l a i n t i f f i n a p e r s o n a l c l a i m i n America w i l l o f t e n be i n a much b e t t e r p o s i t i o n than h i s Commonwealth c o u n t e r p a r t . A c o n s i d e r a b l e body o f s u b s t a n t i v e i n d i v i d u a l r i g h t s have been d e v e l o p e d i n the S t a t e s because p e r s o n a l a c t i o n s have n o t been seen me r e l y as e x c e p t i o n s t o the r u l e t h a t a company s h o u l d b r i n g an a c t i o n i n i t s own name. In f a c t , i t appears as though a p e r s o n a l r i g h t t o b r i n g an a c t i o n f o r c e r t a i n wrongs, such as a b r e a c h o f duty by d i r e c t o r s , may have been r e c o g n i z e d even b e f o r e the company's c o r r e s p o n d i n g r i g h t . A l t h o u g h i t i s no l o n g e r p o s s i b l e f o r the Commonwealth to adopt some o f the p r i n c i p l e s g o v e r n i n g p e r s o n a l a c t i o n s which have been d e v e l o p e d i n the S t a t e s because the laws o f both j u r i s d i c t i o n s have grown up i n d i f f e r e n t ways, much can s t i l l be l e a r n e d from the American e x p e r i e n c e . One a r e a i n p a r t i c u l a r was chosen f o r c l o s e a n a l y s i s and c o m p a r i s o n . T h i s was the body o f r i g h t s a v a i l a b l e t o a s h a r e h o l d e r t o p r o t e c t h i s p r o p o r t i o n a t e i n t e r e s t i n the company. I t was chosen because American j u r i s t s have l o n g r e g a r d e d such r i g h t s as p e r s o n a l and because i t can be argued t h a t the Commonwealth c o u r t s a r e moving i n the same d i r e c t i o n i f , i n f a c t , they have not ^ a l r e a d y done s o . The most common form o f c o m p l a i n t w i l l i n v o l v e the d i r e c t o r s o r m a j o r i t y s h a r e h o l d e r s t r e a t i n g t h e m s e l v e s more f a v o u r a b l y \ ( i i i ) t h an the o t h e r s h a r e h o l d e r s but i n o r d e r t o p r e v e n t such b i a s , some s o r t o f r e s p o n s i b i l i t y has t o be owed by the f o r m e r t o the p l a i n t i f f s . In o t h e r words, a f i d u c i a r y duty by d i r e c t o r s and t o some e x t e n t , m a j o r i t y s h a r e h o l d e r s , must be owed to s h a r e h o l d e r s i n d i v i d u a l l y as w e l l as t o t h e company. I t i s s u b m i t t e d t h a t where a member i s p e r s o n a l l y a f f e c t e d by the a c t i o n o f a c o n t r o l l i n g d i r e c t o r o r s h a r e h o l d e r , such a d u t y s h o u l d be r e c o g n i z e d , both i n p o l i c y and i n p r a c t i c e . I f i t were, the p e r s o n a l r i g h t s o f s h a r e h o l d e r s would be g r e a t l y enhanced. , r In s h o r t , t h e r e has become a p r e s s i n g need t o make a c l e a r d i s t i n c t i o n between p e r s o n a l a c t i o n s and t h o s e by o r on b e h a l f o f companies. U n f o r t u n a t e l y , the t r a d i t i o n a l view has been t h a t even where the d i s t i n c t i o n has been made, p e r s o n a l a c t i o n s have been l i m i t e d t o c e r t a i n narrow a r e a s . T h e r e i s t h e r e f o r e a l s o a need t o expand p e r s o n a l r i g h t s s t o a l l o w them remedies wherever v they have been d i r e c t l y a f f e c t e d . \ (iv) TABLE OF CONTENTS INTRODUCTION 1 CHAPTER I A COMPARISON OF PERSONAL AND DERIVATIVE ACTIONS I n t r o d u c t i o n / A. UNITED STATES (1) THE PERSONAL ACTION In G e n e r a l The R i g h t t o Sue f o r D i v i d e n d s I n s i d e r T r a d i n g Wrongful Redemption Remedies I n d i v i d u a l Recovery R a t i f i c a t i o n (2) DERIVATIVE ACTIONS In G e n e r a l Types o f D e r i v a t i v e A c t i o n s Remedies B. COMMONWEALTH P r o c e d u r a l D i f f e r e n c e s 48 C o s t s 55 J o i n d e r 61 S u b s t a n t i v e Changes Made by S t a t u t o r y D e r i v a t i v e P r o v i s i o n s 64 Remedies 71 S t a t u t o r y P e r s o n a l A c t i o n s 72 4 4 14 19 22 26 30 33 36 "37 45 47 r (v) CHAPTER I I . DUTIES OWED BY DIRECTORS AND MAJORITY SHAREHOLDERS ' 81 A. UNITED STATES B u s i n e s s Judgment Rule 82 D i v i s i o n o f Powers 83 D i r e c t o r s ' D u t i e s 86 M a j o r i t y S h a r e h o l d e r s ' D u t i e s 89 R a t i f i c a t i o n 101 B. COMMONWEALTH D i r e c t o r s ' D u t i e s 112 M a j o r i t y S h a r e h o l d e r s ' D u t i e s 117 R a t i f i c a t i o n 121 Types o f P e r s o n a l A c t i o n 124 CHAPTER I I I . MAINTENANCE OF PROPORTIONATE INTERESTS 126 • I n t r o d u c t i o n ' 126 A. UNITED STATES (1) PRE-EMPTION Common Law R i g h t s o f Pre-emption 127 L i m i t a t i o n s on Pre-emption 132 (2) RIGHTS BASED ON A BREACH OF FIDUCIARY DUTY The L e g a l N a t u r e o f the R i g h t 139 D e t e r m i n i n g the Propes P l a i n t i f f 142 The M e r i t s o f the C o m p l a i n t 148 Remedies 152 B. COMMONWEALTH (1) PRE-EMPTION 154 (vi) (2) OTHER REMEDIES AGAINST IMPROPER SHARE ISSUES I n t r o d u c t i o n 158 Breach o f Duty by D i r e c t o r s 158 Advantages o f b r i n g i n g a P e r s o n a l A c t i o n 180 O t h e r Approaches 184 CONCLUSION 190 BIBLIOGRAPHY 193 - 1 -INTRODUCTION In s i t u a t i o n s i n v o l v i n g modern companies t h e r e can be wrongs committed which a f f e c t e i t h e r the company as a whole o r t h e s h a r e -h o l d e r s i n d i v i d u a l l y , o r b o t h . D i f f i c u l t i e s a r i s e i n many c a s e s because i t i s o f t e n not easy t o d e t e r m i n e j u s t who has s u f f e r e d t h e harm. Where t h e wrong has been done to s h a r e h o l d e r s d i r e c t l y , any s u i t b r o u g h t t o r e d r e s s t h e s i t u a t i o n i s o f t e n c a l l e d a " p e r s o n a l a c t i o n . " On t h e o t h e r hand, i f t h e company has been i n j u r e d , i t can b r i n g an a c t i o n i t s e l f o r i n some c i r c u m s t a n c e s , i n o r d e r t o p r o t e c t m i n o r i t y s h a r e h o l d e r s , a " d e r i v a t i v e a c t i o n " on b e h a l f o f t h e company can be m a i n t a i n e d . However, t h e r e a r e now c o n s i d e r a b l e p r e r e q u i s i t e s t o d e r i v a t i v e a c t i o n s , both a t common law and by s t a t u t e w i t h t h e r e s u l t t h a t i t i s o f t e n p r e f e r a b l e t o b r i n g a p e r s o n a l a c t i o n where p o s s i b l e . U n f o r t u n a t e l y , i n t h e Commonwealth, which f o r t h e purposes o f t h i s paper, i n c l u d e s o n l y G r e a t B r i t a i n , " Canada, A u s t r a l i a and New Z e a l a n d , t h e t r a d i t i o n a l a p p roach has been t h a t s h a r e h o l d e r s w i l l o n l y be a b l e t o b r i n g a p e r s o n a l a c t i o n i f t h e r e has been a b r e a c h o f t h e c o n t r a c t made between them and t h e company. I t w i l l be s u b m i t t e d i n t h i s paper t h a t t h e s e a r e not t h e o n l y c i r c u m s t a n c e s which w i l l s u p p o r t a p e r s o n a l a c t i o n . Indeed, - w h e r e v e r s h a r e h o l d e r s have been harmed " d i r e c t l y , " a word which i s p a r t i c u l a r l y d i f f i c u l t t o d e f i n e , t h e y s h o u l d be a b l e t o b r i n g a p e r s o n a l c l a i m . T h e r e may w e l l be s i t u a t i o n s i n which both t h e company and t h e s h a r e h o l d e r s have each s u f f e r e d because o f t h e wrongdoing, and i n such a c a s e , both s h o u l d have an i n d e p e n d e n t r i g h t o f a c t i o n . For - 2 -example, i f d i r e c t o r s i s s u e new s h a r e s o n l y t o t h e m s e l v e s , and f o r i n a d e q u a t e c o n s i d e r a t i o n , t h e y w i l l have br e a c h e d t h e i r d u t y t o t h e company i n t h a t t h e c o n s i d e r a t i o n i s not s u f f i c i e n t , and w i l l a l s o have br e a c h e d some s o r t o f r e s p o n s i b i l i t y t o t h e s h a r e h o l d e r s not t o t r e a t t h e m s e l v e s more f a v o u r a b l y than o t h e r s . I t i s t h i s second d u t y which i s not y e t a c c e p t e d by Commonwealth c o u r t s . Because p e r s o n a l a c t i o n s have sometimes been c o n f u s e d w i t h d e r i - , v a t i v e c l a i m s and because the f o r m e r may grow i n p o p u l a r i t y because o f t h e p r o c e d u r a l d i f f i c u l t i e s s u r r o u n d i n g d e r i v a t i v e a c t i o n s , i t i s i m p o r t a n t t o u n d e r s t a n d t h e n a t u r e o f t h e / d i f f e r e n c e s between them. A g r e a t d e a l can a l s o be l e a r n e d from the American law because t h e American c o u r t s have been v e r y much c l e a r e r than t h e i r Commonwealth c o u n t e r p a r t s i n d i s t i n g u i s h i n g the d i f f e r e n t a c t i o n s . Moreover, t h e i r e x p e r i e n c e w i t h s t a t u t o r y p r o v i s i o n s g o v e r n i n g d e r i v a t i v e a c t i o n s i s v a l u a b l e because t h e r e c e n t c o d i f i c a t i o n i m s o m e Canadian p r o v i n c e s i s based, i n p a ^ t , on American c o n c e p t s . Not o n l y i s a knowledge o f the p o s i t i o n i n t h e U n i t e d S t a t e s u s e f u l i n a comparison between p e r s o n a l and d e r i v a t i v e a c t i o n s , but i t a l s o h e l p s t h e development o f an expanded a r r a y o f p e r s o n a l remedies t h e m s e l v e s i n t h e Commonwealth. E a r l y American j u r i s t s seemed v e r y c o n c e r n e d w i t h t h e use o f e q u i t a b l e c o n s i d e r a t i o n s i n r e d r e s s i n g wrongs t o s h a r e -h o l d e r s i n t h e newly emerging companies. R a t h e r than b e i n g bound by p r o c e d u r e , they worked w i t h i n a l e s s r e s t r i c t i v e framework and were a b l e t o draw on non-company law c o n c e p t s t o a f f o r d s h a r e h o l d e r s r e l i e f . The approaches t a k e n t h e r e , a l t h o u g h on somewhat d i f f e r e n t f o o t i n g s , may h e l p i n t h e Commonweailth& : Throughout t h e p a p e r , r e f e r e n c e w i l l be made t o the law i n t h e U n i t e d S t a t e s on a p a r t i c u l a r p o i n t i n t h i s a r e a , and, where p o s s i b l e , comparisons drawn. A f t e r e x a m i n i n g i n g e n e r a l terms t h e p r o c e d u r a l and s u b s t a n t i v e d i f f e r e n c e s between t he two t y p e s o f a c t i o n , a more d e t a i l e d a n a l y s i s o f one a r e a i n which p e r s o n a l c l a i m s a r e p o s s i b l e w i l l be made. The a r e a chosen i s t h e maintenance o f a s h a r e h o l d e r ' s p r o p o r t i o n a t e i n t e r e s t i n a company. In o t h e r words, what remedies does a member have t o p r o t e c t t h e v a l u e o f h i s h o l d i n g i n t h e company v i s - a - v i s t h e o t h e r s h a r e h o l d e r s ? The t y p i c a l wrongs committed i n t h i s r e g a r d , s u p p o r t from both a p o l i c y p o i n t o f view as w e l l as t h e e x i s t i n g law a w i d e r use o f p e r s o n a l a c t i o n s . r - 4 -CHAPTER I A COMPARISON OF PERSONAL AND DERIVATIVE ACTIONS * I n t r o d u c t i o n One o f the most d i f f i c u l t a r e a s o f company law i s the r e s o l u t i o n o f d i s p u t e s between s h a r e h o l d e r s , companies and t h i r d p a r t i e s . The problem a r i s e s because t h e r e i s no l o n g e r m e r e l y a c o n f l i c t between two i n d i v i d u a l s ( o r groups o f p e o p l e ) as was t h e c a s e w i t h e a r l i e r p a r t n e r -s h i p law. Because o f t h e a c c e p t e d view o f a company as a s e p a r a t e l e g a l e n t i t y , d i s t i n c t from i t s members, a ^ h i r d l i t i g a n t now has t o be c o n s i d e r e d . A l t h o u g h w r o n g f u l a c t s , both w i t h i n t h e company o r i n v o l v i n g o u t s i d e r s , may appear toharm the s h a r e h o l d e r s who c o l l e c t i v e l make up an i n c o r p o r a t e d body, i t i s f r e q u e n t l y the company i t s e l f , i n i t s own r i g h t , which has been i n j u r e d . Q u i t e s e n s i b l y , o u r system o f d i s p u t e s o l v i n g t h r o u g h the c o u r t s n o r m a l l y r e q u i r e s t h e p a r t y which has been wronged t o c o m p l a i n . In t h e company law c o n t e x t , t h i s means t h a t where the harm has been done t o the-company, i t s h o u l d be t h e p l a i n t i f f i n any p r o c e e d i n g s . T h i s was r e c o g n i z e d v e r y e a r l y i n the development o f company law i n t he c a s e o f Foss v. Harbottle? The r u l e which has been taken from t h a t c a s e has o f t e n been s a i d t o c o n t a i n two p a r t s , r a t h e r than j u s t one; whether o r n o t t h i s a n a l y s i s i s c o r r e c t , i t i s u s e f u l f o r t h e purposes o f e x p o s i t i o n t o view the c a s e i n t h i s way. The f i r s t p r i n -c i p l e emphasizes t h e g e n e r a l p o i n t made above; t h a t i s , the company i s "the p r o p e r p l a i n t i f f " i n any s u i t b r o u g h t t o r e d r e s s a wrong done ^(1843) 2 Hare 461. T h i s c a s e was d e c i d e d b e f o r e t h e b e g i n n i n g o f r e g i s t r a t i o n o f companies and some 54 y e a r s b e f o r e t h e modern a c c e p t a n c e o f the company as a s e p a r a t e l e g a l e n t i t y i n Salomon v. Salomon & Co. [1897] A.C. 22. - 5 -t o the company. The second i s t h a t i t i s a c c e p t e d t h a t the m a j o r i t y s h a r e h o l d e r s and the d i r e c t o r s r u l e t h e company and t h a t the c o u r t has no p l a c e i n t e r f e r i n g w i t h the " i n t e r n a l management" d e c i s i o n s o f t h e c o n t r o l l e r s . The r e s u l t i s t h a t , s u b j e c t t o the e x c e p t i o n s d i s c u s s e d below, m i n o r i t y s h a r e h o l d e r s have t o s u f f e r t h e w i s h e s o f the m a j o r i t y . Even i f the c o u r t was w i l l i n g t o l o o k i n t o the management o f t h e company, an i n d i v i d u a l a c t i o n c o m p l a i n i n g o f t h e d i r e c t o r s ' d e c i s i o n s would n o t 2 be p o s s i b l e because o f the f i r s t p a r t o f t h e r u l e . T h i s a p p r o a c h , c o u p l e d w i t h o t h e r developments i n the law t o be d i s c u s s e d s h o r t l y , may mean t h a t i f t h e wrongdoers; a r e a l s o i n c o n t r o l o f the company, t h e y c o u l d use t h e i r p o s i t i o n t o p r e v e n t the company from i n s t i t u t i n g p r o c e e d i n g s a g a i n s t t h e m s e l v e s . To m i t i g a t e the p o t e n t i a l abuse which c o u l d a r i s e w i t h t h e w i e l d i n g o f such power, e x c e p t i o n s were c r e a t e d t o a l l o w a c t i o n s t o be b r o u g h t by i n d i v i d u a l s h a r e h o l d e r s on b e h a l f o f the company i n c e r t a i n c i r c u m s t a n c e s . However, as w e l l as wrongs done t o the company, t h e r e a r e a l s o o c c a s i o n s when i n d i v i d u a l s h a r e h o l d e r s p e r s o n a l l y s u f f e r a t the hands o f o t h e r s . They t o o , o f c o u r s e , a r e a l l o w e d t o b r i n g an a c t i o n , but i n t h i s c a s e i t i s on t h e i r own b e h a l f , n o t t h a t o f the company. The d i f f i c u l t y a r i s e s i n d e t e r m i n i n g whether the wrong which has been committed i s a wrong t o the company,'or t o the s h a r e h o l d e r s i n d i v i d u a l l y . I t i s the t h e s i s o f t h i s paper t h a t whereever members have been i n d i v i d u a l l y a f f e c t e d t h e y s h o u l d be e n t i t l e d t o o b t a i n a remedy by b r i n g i n g a p e r s o n a l a c t i o n , r a t h e r than commencing an a c t i o n by o r on 2 For a g e n e r a l d i s c u s s i o n o f t h e r u l e and the e x c e p t i o n s see Wedderburn, " S h a r e h o l d e r s ' R i q h t s and the Rule i n Foss v. H a r b o t t l e " , [1957] Camb. L . J . 194, [1958] Camb. L . J . 93; Beck, "An A n a l y s i s o f Foss v. H a r b o t t l e " , i n Z i e g e l ( e d ) , Canadian Company Law, V o l . 1, ( 1 9 6 7 ) , p. 545. - 6 -b e h a l f o f t h e company. " P e r s o n a l a c t i o n " i s a term which w i l l be used t h r o u g h o u t the paper t o d e s c r i b e a s u i t b r ought t o r e d r e s s a wrong which has harmed the p l a i n t i f f d i r e c t l y . I t i s d i f f i c u l t t o d e f i n e t h o s e wrongs which w i l l " d i r e c t l y a f f e c t " the p l a i n t i f f , and i n any e v e n t , i t i s f o r t h e c o u r t t o d e c i d e i n each c a s e whether any t r a n s -a c t i o n has had t h i s a f f e c t . The d i f f e r e n c e between something a f f e c t i n g a s h a r e h o l d e r d i r e c t l y and something which has o n l y i n d i r e c t c o n s e -quences can perhaps be b e s t e x p l a i n e d by the f o l l o w i n g example.. I f the d i r e c t o r s i n a company g r o s s l y mismanage i t s a f f a i r s w i t h a r e s u l t a n t r e d u c t i o n i n the n e t worth o f t h e company, i t w i l l be the company a l o n e which can c o m p l a i n . A l t h o u g h t h e v a l u e o f t h e s h a r e s o f each member has been r e d u c e d , i t has been r e d u c e d by the same amount f o r a l l o f them and any r e c o v e r y by the company from the d i r e c t o r s would r e s t o r e the company and the members t o t h e i r o r i g i n a l p o s i t i o n s . However, i f the a c t i o n o f t h e d i r e c t o r s had r e d u c e d t h e v a l u e o f j u s t one c l a s s o f s h a r e s by, f o r example, the i s s u a n c e o f new s h a r e s t o a n o t h e r c l a s s o n l y , the f i r s t c l a s s would have been i n j u r e d i n such a way t h a t o n l y r e c o v e r y by them d i r e c t l y would r e s t o r e t h e i r p o s i t i o n . They have been i n d i v i d u a l l y a f f e c t e d by a t r a n s a c t i o n which does n o t n e c e s s a r i l y harm t h e company g e n e r a l l y . I f both the s h a r e h o l d e r s and the company, a r e harmed, t h e y may each have an i n d e p e n d e n t r i g h t t o b r i n g an a c t i o n . To be c o n t r a s t e d w i t h the p e r s o n a l a c t i o n a r e d e r i v a t i v e a c t i o n s b r o u g h t on b e h a l f o f t h e company. The term " d e r i v a t i v e " was d e v e l o p e d i n the U n i t e d S t a t e s and has r e c e n t l y been ado p t e d i n the Commonwealth - 7 -both by the l e g i s l a t u r e and by the j u d i c i a r y . I t s i m p l y means t h a t t h e p l a i n t i f f has d e r i v e d h i s r i g h t t o sue from t h e company's r i g h t and s t a n d s i n p l a c e o f t h e company f o r t h i s a c t i o n . The need t o a l l o w s h a r e h o l d e r s t o sue on b e h a l f o f the company a r o s e p r i m a r i l y , as we have se e n , from t h e r u l e i n Foss v. Harbottle. The p o s i t i o n o f m a j o r i t y s h a r e h o l d e r s was however, made more s e c u r e and the need f o r d e r i v a t i v e c l a i m s t h e r e f o r e more e s s e n t i a l , by l a t e r developments i n the law. One ca s e which has caused s i g n i f i c a n t problems - i s Northwest '5 Transportation Co. v. Beatty. There t h e P r i v y C o u n c i l o v e r r u l e d the Supreme C o u r t o f Canada and s a i d t h a t a d i r e c t o r i s e n t i t l e d t o vot e h i s own s h a r e s a t a s h a r e h o l d e r s m e e t i n g c a l l e d t o c o n f i r m h i s a c t i o n as a d i r e c t o r . In o t h e r words, a s h a r e h o l d e r qua s h a r e h o l d e r can v o t e as he p l e a s e s n o t w i t h s t a n d i n g t h a t by d o i n g so he i s r a t i f y i n g what he c o u l d n o t do as a d i r e c t o r . \ In o r d e r t o p r o t e c t m i n o r i t y s h a r e h o l d e r s t o some e x t e n t , e x c e p t i o n s t o the r u l e i n Foss v. Harbottle, some o f which were s e t o u t i n t h a t c a s e i t s e l f , have been d e v e l o p e d . These e x c e p t i o n s i n c l u d e t h e bases o f some p e r s o n a l a c t i o n s , which perhaps i n t h e o r y s h o u l d have been a b l e t o s t a n d on t h e i r own m e r i t s r a t h e r than as e x c e p t i o n s t o a r u l e c o n c e r n e d w i t h wrongs t o the company. T h a t t h i s d i d n o t happen w i l l be e x p l a i n e d s h o r t l y . The e x c e p t i o n s have been v. most c l e a r l y s e t o u t by J e n k i n s , L . J . i n Edwards v. H a l l i w e l l ^ where 3 S\99 O n t a r i o B u s i n e s s C o r p o r a t i o n s A c t , R.S.O. 1970, c. 53; s.222 B r i t i s h Columbia Companies A c t , 1973, c.18. 4 W a l l e r s t e i n e r v. M o i r (No.2) [1975] 1 A l l E.R. 849. 5 (1887). 12 App. Cas. 589 ( P . C . ) . 6 [1950] 2 A l l E.R. 1064. - 8 -he l i s t s t h e f o l l o w i n g : 1. U l t r a V i r e s A c t s : ... i n cases where the act complained of i s who l l y u l t r a v i r e s the company... the r u l e has no a p p l i c a t i o n because there i s no question of the t r a n s a c t i o n being confirmed by any m a j o r i t y . Q 2. Fraud on t h e M i n o r i t y : ...where what has been done amounts to what i s g e n e r a l l y L c a l l e d i n these cases a fraud on the m i n o r i t y and the wrongdoers are themselves i n c o n t r o l of the company, the r u l e i s rel a x e d i n favour of the aggrieved m i n o r i t y who are allowed to b r i n g what i s known as a m i n o r i t y share-holders a c t i o n on behalf of themselves and a l l others. 3. S p e c i a l M a j o r i t i e s : An i n d i v i d u a l member i s not prevented from suing i f the matter i s one which could be v a l i d l y done or sanctioned not by a simple m a j o r i t y of the members...but only by ' some s p e c i a l m a j o r i t y . 4. P e r s o n a l R i g h t s : The r u l e "has no a p p l i c a t i o n a t a l l [ i n c a s e s where] t he p e r s o n a l and i n d i v i d u a l r i g h t s o f membership o f [ t h e s h a r e h o l d e r ] have been i n v a d e d . " 9 P r o f e s s o r Gower adds ) a f u r t h e r e x c e p t i o n : Any other case where the i n t e r e s t s of j u s t i c e r e q u i r e that the general r u l e , r e q u i r i n g s u i t by the company, should be disregarded. The t h i r d and f o u r t h e x c e p t i o n s a r e the one which most c l e a r l y a l l o w a p e r s o n a l a c t i o n t o be bro u g h t . Sometimes i t i s d i f f i c u l t t o / d e t e r m i n e which o f t h e s e e x c e p t i o n s i s a p p l i c a b l e . For..example, when a s h a r e h o l d e r c o m p l a i n s about a br e a c h o f t h e a r t i c l e s and t h e r e Ibid., p. 1066-1067. o Perhaps more c o r r e c t l y l a b e l l e d as "Fra u d on the Company" 9 Gower, The P r i n c i p l e s o f Modern Company Law, St e v e n s ( 3 d ) , p.585. A l t h o u g h t h i s f i f t h e x c e p t i o n has come i n f o r some c r i t i c i s m i t a l s o has c o n s i d e r a b l e s u p p o r t . See C h a r l e b o i s v. Bienvenu (1967) 64 D.L.R. (2d) 683. - 9 -has been an o r d i n a r y r e s o l u t i o n a t t e m p t i n g t o r a t i f y t h a t b r e a c h , e i t h e r e x c e p t i o n c o u l d be i n v o k e d . I t i s e i t h e r : a p e r s o n a l r i g h t because o f t h e b r e a c h ( e x c e p t i o n 4) o r an i n v a l i d a t tempt t o a l t e r the a r t i c l e s because a s p e c i a l r e s o l u t i o n i s r e q u i r e d ( e x c e p t i o n 3 ) . However, i n the o t h e r main a r e a o f p e r s o n a l a c t i o n s commonly r e c o g n i z e d , t h a t i s , where an, i n t e r n a l r e o r g a n i z a t i o n o r a l t e r a t i o n o f c l a s s r i g h t s i s c o m p l a i n e d o f , ^ i t i s n o r m a l l y the f o u r t h e x c e p t i o n which i s a r g u e d . I t i s , o f c o u r s e , the t h e s i s o f t h i s paper t h a t the r i g h t t o b r i n g a p e r s o n a l a c t i o n s h o u l d be e x t e n d e d beyond a mere c o n t r a c t u a l b r e a c h , o r where a change i n the a r t i c l e s i s c h a l l e n g e d . O n l y where the p l a i n t i f f can be s a i d t o be s u i n g on a r i g h t which b e l o n g s t o him i n d i v i d u a l l y (as under e x c e p t i o n s 3 and 4) can t h e a c t i o n be p r o p e r l y c a l l e d a p e r s o n a l a c t i o n . As w i l l be s e e n , because t h e r e a r e v a r i o u s forms which a p e r s o n a l a c t i o n can t a k e , t h e r e has been c o n f u s i o n between i t and the d e r i v a t i v e a c t i o n but as l o n g as i t i s bourne i n mind t h a t no p e r s o n a l a c t i o n can l i e u n l e s s a r i g h t owed t o t h a t s h a r e h o l d e r d i r e c t l y has been i n f r i n g e d the c o n f u s i o n s h o u l d be m i n i m i z e d . In some i n s t a n c e s n e i t h e r the,court nor c o u n s e l seem t o have c o n s i d e r e d t h e m a t t e r a t a l l " ' " ' but i t i s s u b m i t t e d t h a t i t i s no l o n g e r p o s s i b l e t o i g n o r e the d i f f e r e n c e s between t h e two a c t i o n s . These d i f f e r e n c e s and t h e r e a s o n s f o r the d i s t i n c t i o n w i l l be d i s c u s s e d s h o r t l y . Brown v. B r i t i s h A b r a s i v e Wheel Co. [1919] 1 Ch. 290; Dafen T i n p l a t e Co. L t d . v. L l a n e l l y S t e e l Co. L t d . [1920] 2 Ch. 124. See o t h e r c a s e s l i s t e d i n Gower, Modern Company Law, op. ait., n o t e 9, p. 593, n . 83. ] 1 P u n t v. Symons & Co. [1903] 2 Ch. 506; P i e r c y v. M i l l s & Co. [1920] 1 Ch. 77. In o r d e r t o u n d e r s t a n d t h e way i n which both p e r s o n a l and d e r i v a t i v e a c t i o n s have d e v e l o p e d t o d a t e , i t i s i m p o r t a n t t o c o n s i e r t h e n a t u r e o f t h e r u l e i n Foss v. Harbottle. The case i s p r i m a r i l y a r e s t r i c t i o n on p r o c e d u r e a l t h o u g h i t i s n o t q u e s t i o n e d t h a t t h e r e a r e s i g n i f i c a n t s u b s t a n t i v e r i g h t s a l s o embodied i n i t . I t e s t a b l i s h e s c e r t a i n r e q u i r e -ments which must be c o m p l i e d w i t h b e f o r e a s u i t based on a sound cause o f a c t i o n can p r o c e e d . The main s u b s t a n t i v e law f o r which we now c r e d i t Foss v. Harbottle i s i n d e e d f o u n d i n the e x c e p t i o n s t o t h e main p r o c e d u r a l r u l e . The c o u r t s i n the e a r l y c a s e s d i s c u s s i n g s h a r e -h o l d e r a c t i o n s were o f t e n more c o n c e r n e d w i t h f i t t i n g t h e f a c t s i n t o the g i v e n r u l e than w i t h d e v e l o p i n g a body o f s u b s t a n t i v e s h a r e h o l d e r r i g h t s . Perhaps t h i s e x p l a i n s why p e r s o n a l a c t i o n s grew o u t o f t h e law c o n c e r n i n g company wrongs and why th e c o u r t s made d i f f e r e n t f i n d i n g s i n a p p a r e n t l y s i m i l a r f a c t s i t u a t i o n s . F or example, why the f a i l u r e t o a l l o w a s h a r e h o l d e r t o v o t e gave r i s e t o a s u c c e s s f u l p e r s o n a l 12 a c t i o n i n Pender v. Lushington and y e t t h e ' f a i l u r e t o h o l d a p o l l 13 when p r o p e r l y demanded i n MaoDougall v. Gardiner - was seen as an " i n t e r n a l i r r e g u l a r i t y " w i t h which t h e m a j o r i t y c o u l d a d e q u a t e l y d e a l . I t i s i n t e r e s t i n g t o no t e t h e d i f f e r e n c e i n the app r o a c h taken by the American c o u r t s . R a t h e r than b e g i n n i n g t h e development o f s h a r e h o l d e r a c t i o n s w i t h a s e t o f r e s t r i c t i o n s w i t h i n which t o f i t t h e c a s e s , t h e c o u r t s took each new s i t u a t i o n as i t came and i f a remedy was n e c e s s a r y t h e y would d e v e l o p one based on the e x i s t i n g t o o l s a t t h e i r command. 1 2 ( 1 8 7 7 ) 6 Ch. D. 70. 1 3 ( 1 8 7 5 ) 1 Ch. D. 13. - 11 -Indeed, i t has been argued t h a t t h e r e i s no c l e a r b e g i n n i n g t o d e r i -v a t i v e , o r what a r e sometimes, a l s o r e f e r r e d t o as s t o c k h o l d e r , a c t i o n s . I t a p p e a r s t h a t the e a r l y d e c i s i o n s d e a l t w i t h d i r e c t o r s as t r u s t e e s f o r t h e s h a r e h o l d e r s ( n o t the company o n l y ) , not;;out o f some i n a t e sense o f the d i r e c t i o n o f company law, but m a i n l y because i t was mani-15 f e s t t h a t some r e d r e s s was r e q u i r e d . For example, i n Robinson v. Smith}^ what t o d a y would be c o n s i d e r e d as a company wrong o n l y was s u c c e s s f u l l y c o m p l a i n e d o f by a few m i n o r i t y s h a r e h o l d e r s . The d i r e c t o r s o f the company were sued (as w e l l as the company i t s e l f , a l t h o u g h t he r e a s o n f o r t h i s i s n o t c l e a r ) because o f a l l e g e d l y f r a u d u l e n t m i s a p p l i c a t i o n o f funds and a remedy was d e v e l o p e d t o c u r b o b v i o u s m a n a g e r i a l abuse. Th e r e was no d i s c u s s i o n o f t h i s b e i n g a se c o n d a r y o r d e r i v a t i v e c l a i m so t h a t even a t t h i s s t a g e .in t h e law's development a p e r s o n a l a c t i o n based on a br e a c h o f d u t y by d i r e c t o r s was emerging. P r u n t y s u g g e s t s t h a t c a s e s d e a l i n g w i t h a c t i o n s a g a i n s t t h i r d p a r t i e s who had had c o n t r a c t w i t h t he company were p e r h a p s . t h e t r u e f o u n d a t i o n o f t h e i d e a t h a t s h a r e h o l d e r s c a n n o t sue on t h e i r own b e h a l f when the wrong i s t o the company. In Forbes v. tfhitloolt'1'a p e r s o n a l s u i t c l a i m i n g f r a u d on the p a r t o f t h o s e c o n t r a c t i n g w i t h the company was d e f e a t e d because the r i g h t s b e l o n g e d t o the company as a whole and i t a l o n e c o u l d b r i n g t h e a c t i o n . No t r u s t a n a l o g y c o u l d be used 14 See P r u n t y , "The S h a r e h o l d e r s ' D e r i v a t i v e S u i t : Notes on i t s D e r i v a t i o n , " 32 N.Y.U.L.R. 980. 15 For a f u l l d i s c u s s i o n on d i r e c t o r s ' d u t i e s see C h a p t e r I I , infra, p. 84 f f . 1 6 3 Pa i g e Ch. 222. (1832). 1 7 3 Ed. Ch. 446 (1841). / - 12 -i n t h i s i n s t a n c e because t h e t h i r d p a r t i e s were i n no d i r e c t c o n t a c t w i t h t he s h a r e h o l d e r s , but o n l y w i t h t he company. A l t h o u g h i t a p p e a r s t h a t t h e C o u r t ' s f e a r was t h e p o s s i b i l i t y o f ^ d o u b l e r e c o v e r y and o f i n d i v i d u a l s r e c o v e r i n g what was i n e f f e c t due t o t h e company (damages were c l a i m e d i n t h i s c a s e ) t h e s e i d e a s were n o t v o i c e d a t t h i s s t a g e . In f a c t , l a t e r c a s e s a l l o w e d i n d i v i d u a l s t o sue even t h i r d p a r t i e s 18 i f t h e y had asked t h e company t o do so f i r s t and i t had r e f u s e d . Here a g a i n , a b r e a c h o f t r u s t , t h i s time because o f t h e d i r e c t o r s ' r e f u s a l , was used as the b a s i s o f t h e s u i t although' i t now a p p e a r s t h a t t he company's r i g h t t o sue a l s o had t o be c o n s i d e r e d , a t l e a s t where o u t s i d e r s were c o n c e r n e d . Because the company was a l r e a d y c o n s i d e r e d as a s e p a r a t e l e g a l e n t i t y i t was n o t such a b i g s t e p f o r bre a c h o f t r u s t a c t i o n s t o be viewed as s e c o n d a r y , o r d e r i v a t i v e , 19 even where o n l y i n t r a c o r p o r a t e wrongs were a t i s s u e . However,, i t s h o u l d be s t r e s s e d t h a t o n l y because the s u i t s a g a i n s t o u t s i d e d e f e n -d a n t s were f i n a l l y s u c c e s s f u l d i d t h e i d e a o f an a c t i o n on b e h a l f o f t h e company emerge. N e v e r t h e l e s s , by t h e time t he Supreme C o u r t o f t he U n i t e d S t a t e s was a b l e t o s e t o u t i n one d e c i s i o n t h e r e q u i r e -20 ments o f d e r i v a t i v e a c t i o n s , t he c o n c e p t o f a s e c o n d a r y a c t i o n had become dominant. By t h i s s t a g e i f a s h a r e h o l d e r w i s h e d t o b r i n g a p e r s o n a l a c t i o n ( o f t e n c a l l e d a " d i r e c t " a c t i o n i n the S t a t e s ) he 1 0 Dodge v. Woolsey, 59 U.S. 331 (1855). 1 9 House v. Cooper, 30 Barb. 157 (1858); Ross v. B e r n h a r d , 396 U.S. 531 (1855). 2 0 Hawes v. Oakland, 104 U.S. 450 ( 1 8 8 1 ) , (' - ,13 -would n o r m a l l y have t o show a wrong done t o him, e i t h e r as w e l l a s , o r i n s t e a d o f t o t h e company; however, he was s t i l l a b l e t o use t h e b r e a c h o f t r u s t c o n c e p t which had e a r l i e r g i v e n him a g e n e r a l r i g h t t o sue as l o n g as he was p e r s o n a l l y a f f e c t e d by t h e b r e a c h . The r e s u l t o f a slow development o f l e g a l r i g h t s p r e c e d i n g any d e t a i l e d a n a l y s i s o f the" r e s t r i c t i o n s s u r r o u n d i n g t h e s e r i g h t s was a c l e a r e r u n d e r s t a n d i n g o f t h e bases o f the remedies used, as w e l l as an a p p a r e n t l y more open p o l i c y o f p r o v i d i n g r e d r e s s whereever i t was needed. The d i f f e r e n c e i n a t t i t u d e between t h e l e g a l systems i s 21 summed up w e l l by P r u n t y when he s a y s : E n g l i s h cases of the p e r i o d abound w i t h argument on j u r i s d i c t i o n , p a r t i e s , and the form of the b i l l ; l i t t l e time i s spent on a n a l y s i n g the l e g a l r e l a t i o n -ships which are being recognized between i n v e s t o r and manager. American cases are l e s s t e c h n i c a l , but heavy w i t h d i s c u s s i o n of the emerging r e l a t i o n s h i p and i t s l e g a l i n c i d e n t s . The somewhat p r a g m a t i c approach o f t h e American c o u r t s has con-t i n u e d t o t h e p r e s e n t time but perhaps more i n r e l a t i o n t o t h e p e r s o n a l a c t i o n than d e r i v a t i v e a c t i o n s . I t i s o p p o r t u n e a t t h i s s t a g e t o d i s c u s s some o f t h e p r i n c i p l e s which now s u r r o u n d t h e p e r s o n a l a c t i o n and f o r t h e sake o f a b e t t e r comparison t h e p o s i t i o n i n . t h e U n i t e d S t a t e s w i l l be examined f i r s t . 21 P r u n t y , op. cit., note 14, p. 993. i - 14 -A.' UNITED STATES (1) The P e r s o n a l A c t i o n  In G e n e r a l As has been i n d i c a t e d , t h e p e r s o n a l ' a c t i o n , which prbceded t h e development o f t h e d e r i v a t i v e a c t i o n , has become l i m i t e d t o s i t u a t i o n s where t h e p l a i n t i f f has been p e r s o n a l l y a f f e c t e d . I t has however, remained l a r g e l y f r e e o f t h e r e s t r i c t i o n s which now s u r r o u n d t h e d e r i v a t i v e a c t i o n and i s i n no way an e x c e p t i o n t o a g e n e r a l r u l e as i t i s i n t h e Commonwealth. In f a c t , t h e r e a r e no s p e c i f i c r e q u i r e -ments, such as b e i n g a s h a r e h o l d e r a t t h e time t h e a c t i o n i s b r o u g h t , r o r making demand on t h e d i r e c t o r s o r s h a r e h o l d e r s , which have t o be f u l f i l l e d b e f o r e commencing a p e r s o n a l s u i t . A l l t h a t t h e c o u r t r e q u i r e s i s t h a t t h e r e has been i n j u r y t o t h e p l a i n t i f f d i r e c t l y r a t h e r than harm caused i n c i d e n t a l l y by a wrong done t o t h e company. The r e a s o n s f o r p r e v e n t i n g p e r s o n a l a c t i o n s i n a l l c a s e s a r e t h e same as t h o s e i n t h e Commonwealth and have now been a r t i c u l a t e d i n s e v e r a l c a s e s . For example t h e Supreme C o u r t o f Texas in.First state 22 23 Bank of.Enless v. Bolinger : c i t e s " rom an e a r l i e r c a s e and says 24 o f a c l a i m i n which t h e o n l y e n t i t y i n j u r e d was t h e company: Such a c t i o n must be brought by the c o r p o r a t i o n , not alone to avoid a m u l t i p l i c i t y of s u i t s by the v a r i o u s stockholders and to bar a subsequent s u i t by the c o r -p o r a t i o n , but i n order that the damages so recovered may be a v a i l a b l e f o r the payment of the co r p o r a t i o n ' s c r e d i t o r s , and f o r p r o p o r t i o n a l d i s t r i b u t i o n to the stockholders as dividends, or f o r such other purposes as the d i r e c t o r s may l a w f u l l y determine. 2 2 431 S.W. 2d 782. 23 k Commonwealth o f M a s s a c h u s e t t s v. D a v i s , 168 S.W. 2d 216 (1942). 2 4 431 S.W. 2d 782, 784. - 15 -The p o s s i b i l i t y o f t h e damages r e c o v e r e d b e i n g made a v a i l a b l e t o t h e i n d i v i d u a l s h a r e h o l d e r s w i l l be c o n s i d e r e d s h o r t l y . A n a t u r a l d i s t i n c -t i o n i s made between t h e company and t h e m a j o r i t y o f s h a r e h o l d e r s which means t h a t even a s h a r e h o l d e r w i t h a l l o f t h e s h a r e s cannot sue on a r i g h t i n d e p e n d e n t o f t h e company's, where o n l y c o r p o r a t e 25 r i g h t s have been i n j u r e d . The form by which a p e r s o n a l a c t i o n may be b r o u g h t i s v a r i e d and can l e a d t o c o n f u s i o n w i t h d e r i v a t i v e a c t i o n s where s i m i l a r f o r m a t s a r e p o s s i b l e . I f t h e wrong done has a f f e c t e d t h e p l a i n t i f f o n l y , he b r i n g s the a c t i o n a l o n e , but i f a l l o f t h e o t h e r s h a r e h o l d e r s , not i n c l u d i n g any d e f e n d a n t s h a r e h o l d e r s , a r e s i m i l a r l y a f f e c t e d he may choose t o b r i n g a r e p r e s e n t a t i v e a c t i o n on b e h a l f o f a l l o f them. . The advantages o f b r i n g i n g a c l a s s a c t i o n a r e t h a t a more c o n s i s t e n t p i c t u r e o f i n j u r y may be p r e s e n t e d t o the c o u r t and o t h e r s h a r e h o l d e r s may i n t e r v e n e which means a s p r e a d i n g o f t h e c o s t s and t h e work i n v o l v e d i n t h e a c t i o n . I t i s however, not mandatory t o j o i n t h e o t h e r s h a r e h o l d e r s , even where t h e y a r e i n a p o s i t i o n s i m i l a r t o t h e p l a i n t i f f ' s . Of c o u r s e , o t h e r s h a r e h o l d e r s may sometimes have t o be j o i n e d as d e f e n d a n t s not because t h e y a r e t h e a l l e g e d wrongdoers but because t h e y have i n t e r e s t s which compete w i t h the p l a i n t i f f ' s . T h i s c o u l d o c c u r where a c l a i m f o r a p e r c e n t a g e o f p r o f i t s b e f o r e d i v i d e n d s i s made a g a i n s t the company i f o t h e r s h a r e h o l d e r s a r e c l a i m i n g a d i r e c t d i s t r i b u t i o n , o r where an o p t i o n agreement i n f a v o u r inter 27 a l i a o f some o f t h e o t h e r s h a r e h o l d e r s i s b e i n g a t t a c k e d . In some 2 5 G r e e n v. V i c t o r T a l k i n g Machine Co., 24 F. 2d 378 (1928). 26 Dupignac v. Bernstrom, 76 N.Y.S. 381. 27 ,' ^ T h a t c h e r v. J e r r y O'Mahony I n c . , 121 A. 2d 50. - 16 -c a s e s , where the r i g h t s o f a l l s h a r e h o l d e r s a r e a f f e c t e d , i t i s p o s s i b l e t o i n c l u d e t h e o t h e r s h a r e h o l d e r s as nominal d e f e n d a n t s i n s t e a d o f ^ 28 j o i n i n g them as p l a i n t i f f s : , i f t h e c o u r t i n s i s t s on them b e i n g j o i n e d . The p r o p e r d e f e n d a n t s i n a p e r s o n a l a c t i o n a r e s i m p l y t h o s e p a r t i e s agan'nst whom an o r d e r i s r e q u i r e d , o r as we have seen, whose r i g h t s a r e a f f e c t e d . T h i s r u l e a p p l i e s t o t h e company as w e l l as t o d i r e c t o r s ; f o r example i n a n ' a c t i o n by m i n o r i t y s t o c k h o l d e r s a g a i n s t a m a j o r i t y s t o c k h o l d e r t o h o l d t h e l a t t e r as t r u s t e e , f o r "the p l a i n t i f f s i n d i v i d u a l l y , o f t h e p r o c e e d s o f s a l e s o f c o r p o r a t e p r o p e r t y , t h e c o r p o r a t i o n i s n o t 29 a n e c e s s a r y , o r even a p r o p e r , d e f e n d a n t . Whether o r n o t t h e company i s j o i n e d as a d e f e n d a n t w i l l depend no t o n l y on t h e remedy b e i n g s ought but a l s o on whether t h e c l a i m i s seen as p e r s o n a l o r d e r i v a t i v e . Where f o r example, t h e p l a i n t i f f s seek t h e d i s t r i b u t i o n o f a premium made on a s a l e o f c o n t r o l t h e company w i l l not have t o be j o i n e d i f 30 t h e a c t i o n i s b r ought as a i n d i v i d u a l one, but w i l l i f i t i s b r o u g h t 31 d e r i v a t i v e l y . S i m i l a r l y , d i r e c t o r s need not be j o i n e d i f t h e y t a k e no p a r t ^ i n t h e wrongdoing. C e r t a i n l y , m e r e l y by j o i n i n g t h e company o r t h e d i r e c t o r s as d e f e n d a n t s o r even by b r i n g i n g the a c t i o n as a r e p r e s e n t a t i v e one, does not change i t s n a t u r e from p e r s o n a l t o d e r i v a t i v e . The c h a r a c t e r o f t h e a c t i o n i s d e t e r m i n e d by t h e n a t u r e o f t h e s u b s t a n t i v e c l a i m , not i t s f o r m . x po C o r n e l l v. M o r - N e l l Development Corp., 253 N.Y.S. 2d 54. " S o u t h e r n Pac. Co. v. B o g e r t , 250 U'.S. 483 (1919). 3 0 J o n e s v. H.F. Ahmanson & Co., 460 P. 2d 464 ( 1 9 6 9 ) . 3 1 P e r l m a n v. Feldmann, 219 F. 2d 173 (1955). ( I t was o r i g i n a l l y t h o u g h t t h a t i t was n o t p o s s i b l e t o j o i n a 32 p e r s o n a l a c t i o n w i t h a d e r i v a t i v e c l a i m as t h e s e a c t i o n s were con-s i d e r e d i m c o m p a t i b l e , but the b e t t e r view today i s t h a t such j o i n d e r i s now p o s s i b l e . As l o n g as the c l a i m s a r i s e o u t o f the same c i r -cumstances and t h e r e a r e common q u e s t i o n s o f law o r f a c t t o be 32A d e c i d e d , c l a i m s i n the a l t e r n a t i v e can be made; t h i s i s a l s o 33 s a n c t i o n e d by s t a t u t e i n some s t a t e s . I t a l s o seems to be p o s s i b l e t o b r i n g a d e r i v a t i v e a c t i o n ,at one time and a p e r s o n a l c l a i m l a t e r , 34 and v i c e v e r s a . T h i s c e r t a i n l y a c c o r d s w i t h the t h e o r y o f the two t y p e s o f a c t i o n , as both a r e supposed t o remedy s e p a r a t e wrongs. N e v e r t h e l e s s , t h e r e w i l l be i n s t a n c e s when the r e l i e f a f f o r d e d t o the i n d i v i d u a l p l a i n t i f f w i l l be the same as t h a t which the company would have been g r a n t e d , so t h a t a second a c t i o n would be s u p e r f l u o u s . T h i s would be the c a s e f o r example, when an i n j u n c t i o n i s d e c l a r e d t o p r e v e n t an imminent s h a r e i s s u e . However, i t appears to make no d i f f e r e n c e t o e i t h e r c l a i m i f damages can be, o r a r e , awarded i n both a c t i o n s . D e s p i t e t h e f a c t t h a t t h i s may r e s u l t i n an added bonus to the s h a r e h o l d e r p l a i n t i f f s because they w i l l b e n e f i t by an i n c r e a s e i n the company's a s s e t s as w e l l as by t h e i r own judgment, the c o u r t s do n o t l i f t the c o r p o r a t e v e i l . To do o t h e r w i s e would i n d e m n i f y the d e f e n d a n t a g a i n s t one o f the p l a i n t i f f s ; a l t h o u g h s h a r e h o l d e r s may b e n e f i t t w i c e , the d e f e n d a n t does n o t pay more than the a c t u a l damages s u f f e r e d as a r e s u l t o f h i s w r ongdoing. Both p l a i n t i f f s have s u f f e r e d i n d e p e n d e n t l y and both can 3 2 S h e b e r g v. De Garmo, 143 P. 2d 74 (1943). 3 2 A B e n n e t t v. B r e u i l P e t r o l e u m Corp. 99 A 2d 236 (1953) 33 E.g. New Y ork, C i v i l P r a c t i c e Law #601. 3 4 L i k e n v. S h a f f e r , 64 F. Supp. 432. . - 18 -r e c o v e r whatever t h e y have l o s t . The o n l y i n s t a n c e o f t h e c o u r t s d o i n g o t h e r w i s e i s when members a r e p e r m i t t e d t o r e c o v e r i n d i v i d u a l l y i n a d e r i v a t i v e a c t i o n . In t h e s e s i t u a t i o n s , a p e r s o n a l c l a i m i s not pos-35 s i b l e but d i r e c t r e c o v e r y i s awarded t o e x p e d i t e j u s t i c e . The n a t u r e o f p e r s o n a l a c t i o n s i s t h e same as any o t h e r a t law o r i n e q u i t y ; whether c o r p o r a t e o r n o t . I t has no p e c u l i a r : f e a t u r e s , a p p e a r s t o no l o n g e r have any p r e - r e q u i s i t e s and has c o s t s awarded on t h e normal b a s i s . However, as has been s u g g e s t e d a l r e a d y , because t h e same s e t o f f a c t s can g i v e r i s e t o both p e r s o n a l and d e r i v a t i v e c l a i m s and because t h e format; o f t h e s e c l a i m s a r e o f t e n s m i l i l a r , c o n f u s i o n between t h e two sometimes a r i s e s . Moreover, i n some areaSjthlreis s t i l l c o n s i d e r a b l e j u d i c i a l d e b a t e as t o what t h e t r u e n a t u r e o f the c o u r s e o f a c t i o n s h o u l d be. I t i s t h e r e f o r e proposed t h a t , b e f o r e c o n s i d e r i n g d e r i v a t i v e a c t i o n s , . t h o s e s i t u a t i o n s which commonly g i v e r i s e t o a p e r s o n a l c l a i m s h o u l d be examined. A v e r y g e n e r a l i z e d d i s t i n c t i o n , which by no means c o v e r s a l l o f t h e s i t u a t i o n s , i s t h a t where t h e r e has been a b r e a c h o f t h e c o n t r a c t 37 between t h e company and i t s members, t h e r e w i l l be an i n d i v i d u a l a c t i o n whereas, where t h e r e has been a b r e a c h o f a d u t y owed t o t h e company, a d e r i v a t i v e a c t i o n w i l l l i e . However, i t seems c l e a r t h a t , a t l e a s t where i n d i v i d u a l s a r e d i r e c t l y a f f e c t e d , a p e r s o n a l a c t i o n i s p o s s i b l e f o r a b r e a c h o f d i r e c t o r s ' d u t y as t h a t d u t y i s owed t o the 35 See d i s c u s s i o n on i n d i v i d u a l r e c o v e r y , infra, p. 33. 36 E s p e c i a l l y w i t h r e g a r d t o a c t i o n s c o m p e l l i n g t h e payment o f d i s c r e t i o n a r y d i v i d e n d s . See infra, p. 19 and f o l l o w i n g . 37 The e x t e n t o f t h e p r i n c i p l e o f a c o n t r a c t between t h e company and i t s members w i l l be examined l a t e r . See infra, p. 84. S u f f i c e i t t o say a t t h i s s t a g e t h a t t h e c o n c e p t i s b r o a d e r than i n t h e Commonwealth but d e s p i t e t h i s , i t i s , not o f t e n d i r e c t l y r e f e r r e d t o . I n s t e a d , r i g h t s which a r e i m p l i e d l y based i n c o n t r a c t may be l o o k e d a t from a d i f f e r e n t p e r s p e c t i v e . - 19 -s h a r e h o l d e r s as w e l l as t o t h e company. A n o t h e r a p p r o a c h i s t o say t h a t where an i n d i v i d u a l ' s s h a r e s have been a f f e c t e d he w i l l have a d i r e c t c l a i m but i f t h e c a p i t a l o f t h e company as a whole i s i n j u r e d , o n l y t h e company i t s e l f can c o m p l a i n . The main p e r s o n a l a c t i o n s s e t 38 - o u t i n some o f t h e l i s t s which have been attempted i n c l u d e d : (1) The r i g h t t o compel payment o f d e c l a r e d o r mandatory d i v i d e n d s and t o seek payment o f discretionary d i v i d e n d s . (2) The r i g h t t o compel i n s p e c t i o n o f t h e company's books ^ o r r e c o r d s . (3) The r i g h t t o v o t e . (4) The r i g h t t o p r o t e c t p r e - e m p t i v e r i g h t s and t o p r o t e c t one's p r o p o r t i o n a t e i n t e r e s t i n the company from a l l manner o f " s q u e e z i n g o u t " t e c h n i q u e s . (5) The r i g h t t o e n j o i n a t h r e a t e n e d u l t r a v i r e s a c t i o n . (6) The r i g h t t o have t h e c o n t r a c t between t h e company and th e s h a r e h o l d e r s c o m p l i e d w i t h . (7) The r i g h t t o r e c o v e r from an i n s i d e r who p u r c h a s e d t h e s h a r e h o l d e r s ' s h a r e s w i t h o u t p r o p e r d i s c l o s u r e . (8) The r i g h t t o r e c o v e r from m a j o r i t y s h a r e h o l d e r s f o r w r o n g f u l r e d e m p t i o n . W i t h o u t g o i n g r i g h t t h r o u g h t h e l i s t , some items on i t r e q u i r e a m p l i -f i c a t i o n a t t h i s s t a g e a l t h o u g h i t i s proposed t h a t i t e m 4 d e a l i n g w i t h preemption and p r o p o r t i o n a t e i n t e r e s t s be d e a l t w i t h a t l e n g t h l a t e r i n t h i s paper. v The R i g h t t o Sue f o r D i v i d e n d s The a b i l i t y t o s u c c e s s f u l l y seek t h e payment o f d i v i d e n d s which a r e n o r m a l l y d i s t r i b u t e d o n l y a t t h e d i s c r e t i o n o f t h e d i r e c t o r s a p p e a r s 38 Henn, The Law o f C o r p o r a t i o n s , West ( 2 d ) , pp. 757-8; F l e t c h e r , V o l . 13 C y c l . Corp. pp. 295-6. u n i q u e t o t h e U n i t e d S t a t e s . A l t h o u g h i t i s a c c e p t e d t h a t t h e d i r e c t o r s have t h e power t o r e f u s e d i v i d e n d s and t h a t t h e company ca n n o t n o r m a l l y i n t e r f e r e w i t h a power g i v e n t o t h e ' d i r e c t o r s , t h e r e may be c i r c u m -s t a n c e s i n which t h e d i r e c t o r s a c t f r a u d u l e n t l y , i n bad f a i t h o r j u s t r a r b i t r a r i l y i n w i t h h o l d i n g them. I t i s o f c o u r s e , d i f f i c u l t t o d e f i n e "bad f a i t h " a c c u r a t e l y but an att e m p t was made i n Gottfried v. 39 Gottfried where t h e c o u r t i n c l u d e d t h e f o l l o w i n g i n a l i s t o f f a c t s r e l e v a n t t o t h e i s s u e : Intense h o s t i l i t y of the c o n t r o l l i n g f a c t i o n against the minority; exclusion of the minority from employ-ment by the corporation; high s a l a r i e s , or bonuses or corporate loans made to the o f f i c e r s i n cont r o l ; . . . the existence of a desire by the c o n t r o l l i n g d i r e c t o r s to acquire the minority stock i n t e r e s t s as cheaply as pos s i b l e . I t c o n t i n u e d by s a y i n g t h a t " [ t ] h e e s s e n t i a l t e s t o f bad f a i t h i s t o de t e r m i n e whether t h e p o l i c y o f t h e d i r e c t o r s i s d i c t a t e d by t h e i r p e r s o n a l i n t e r e s t s r a t h e r than t h e c o r p o r a t e w e l f a r e . D i r e c t o r s a r e f i d u c i a r i e s . T h e i r cestui.que t r u s t a r e t h e c o r p o r a t i o n and t h e s t o c k h o l d e r s as a body." A l t h o u g h i t i s c l e a r from t h i s and many o t h e r c a s e s t h a t i s ' p o s s i b l e t o ask t h e c o u r t t o d e c l a r e a d i v i d e n d , i t i s n e v e r t h e l e s s o n l y on r a r e o c c a s i o n s t h a t such an o r d e r w i l l be , 4 0 made. The t r u e b a s i s o f t h i s a c t i o n i s f a r from, c l e a r . Some c a s e s s u g g e s t t h a t " t h e r i g h t t o d i v i d e n d s i s an i n c i d e n t o f t h e o w n e r s h i p 41 o f s t o c k " a l t h o u g h t h e r e i s no d i s c u s s i o n here o f t h e a r t i c l e s o r 3 9 7 3 N.Y.S. 2d 692 (1947)'. 40 D i v i d e n d s were o r d e r e d t o be d e c l a r e d i n Dodge v. For d Motor Co., 170 N.W. 668 (191 9 ) ; S t a r r i n g v. Kemp, 188 S.E. 174 (193 6 ) ; P a t t o n v. N i c h o l a s , 279 S.W. 2d 848 (1955). 4 1 K n a p p v. Bankers S e c u r i t i e s Corp. 230 F. 2d 717, 721 (1956). - 21 « t h e s h a r e c o n t r a c t . However, i t i s p o s s i b l e t h a t s e p a r a t e i n h e r e n t 42 43 r i g h t s , such as t h e r i g h t t o v o t e and t h e r i g h t o f p r e - e m p t i o n , a r e i m p l i e d l y c o n t a i n e d i n t h e c o n t r a c t u a l r e l a t i o n s h i p between t h e company and i t s s h a r e h o l d e r s so t h a t t h e r e i s n o t h i n g i n c o n s i s t e n t w i t h t h e r e b e i n g an i n c i d e n t a l r i g h t t o d i v i d e n d s . O t h e r c a s e s s i m p l y , c o n c e n t r a t e on t h e d i r e c t o r s ' d u t i e s owed t o t h e s h a r e h o l d e r s and d e t e r m i n e whether o r not t h e r e has been a b r e a c h o f t h i s d u t y war-r a n t i n g an o r d e r f o r d i v i d e n d payment. A b r e a c h o f d u t y would be an e q u i t a b l e c l a i m whereas a s u i t based on an o w n e r s h i p r i g h t i s a t law but t h e d i f f e r e n t a p p r o a c h e s do n o t seem t o have been commented on by t h e c o u r t s , and both appear v a l i d . T h e r e i s s t i l l c o n s i d e r a b l e d i s c u s s i o n on whether a c l a i m f o r 44 d i v i d e n d s s h o u l d be b r o u g h t p e r s o n a l l y o r d e r i v a t i v e l y . The m a j o r i t y f a v o u r t h e view t h a t i t i s p e r s o n a l , based l a r g e l y on t h e i n h e r e n t r i g h t i d e a , a r g u i n g t h a t t h e o n l y p e o p l e b e n e f i t t i n g from a s u c c e s s f u l s u i t a r e t h e i n d i v i d u a l r e c i p i e n t s o f t h e d i v i d e n d s . The company i s i n f a c t t h e p a r t y which r e a l l y l o s e s because i f may.be f o r c e d t o pay 45 t h e d i v i d e n d s . However some c a s e s , i n c l u d i n g Gordon v. Elliman see t h e m a t t e r more as a b r e a c h o f t h e d i r e c t o r s ' d u t y t o t h e company ) - t h a t i s , by not p a y i n g t h e d i v i d e n d s t h e y have a c t e d i n bad f a i t h and not f u l f i l l e d t h e i r d u t y t o a c t i n t h e b e s t i n t e r e s t s o f t h e company. T h i s has been c o n s i d e r e d a b r e a c h because o f t h e f r i c t i o n 4? H.Y. R e i f s n y d e r v. P i t t s b u r g h Outdoor A d v e r t i s i n g Co., 173 A. 2d 319 ( 1 9 6 1 ) . 4? • Stok e s v. C o n t i n e n t a l T r u s t Co., 78 N.E. 1090. 4 4 R a y n o l d s v. Diamond M i l l s Paper Co., 60 A. 941 (1905); Knapp v. Bankers S e c u r i t i e s C orp., supra, n o t e 41; D o h e r t y v. Mutual Warehouse Co., 245 F. 2d 609 (1957). 4 5 1 1 9 N.E. 2d 331 N ( 1 9 5 4 ) . - 22 -i t c a u s e s w i t h i n t h e company and t h e p o t e n t i a l l y a d v e r s e a f f e c t i t 46 might have on t h e company's f u t u r e w e l l b e i n g . I t i s s u b m i t t e d t h a t t h e f o r m e r a p p r o a c h i s more l o g i c a l and s h o u l d now p r e v a i l as t h e Elliman c a s e which c o n c e r n e d s e c u r i t y - f o r - c o s t s l e g i s l a t i o n has been o v e r r u l e d i n e f f e c t by a change i n t h i s l e g i s l a t i o n . I n s i d e r T r a d i n g Where d i r e c t o r s o r o t h e r i n s i d e r s c o n c e a l i n f o r m a t i o n which i s a v a i l a b l e t o them because o f t h e i r p o s i t i o n w i t h i n a company t h e y may be a b l e t o r e a p l a r g e p r o f i t s by b u y i n g s h a r e s from members a t a p r i c e below t h e i r t r u e v a l u e i f t h e member i s not a l s o aware o f t h i s i n f o r m a t i o n . S h o u l d t h e s e l l i n g s h a r e h o l d e r be a b l e t o r e s c i n d t h e s a l e c o n t r a c t o r g e t damages f o r t h e p r o f i t he has l o s t i f t h e d i r e c t o r s have m i s r e p r e s e n t e d t h e t r u e p o s i t i o n o r even i f t h e y have j u s t o m i t t e d t o t e l l o f i t ? Long b e f o r e t h e r e was any s t a t u t o r y 47 r e g u l a t i o n o f i n s i d e t r a d i n g , t h e c o u r t s had d e v e l o p e d some con-t r o l s o v e r t h i s a r e a but o n l y a f t e r a v e r y laissez-faire b e g i n n i n g . I t i s i n t e r e s t i n g t o note t h a t t h e problem o f c o n t r o l a r o s e not because i t was t h o u g h t t h a t d i r e c t o r s owed no f i d u c i a r y d u t y t o s h a r e h o l d e r s a t a l l , but because t h e y m i g h t not owe t h i s d u t y i n t h e 46 L y d i a E. Pinkham M e d i c i n e Co. v. Gove, 20 N.E. 2d 482. 47 S. 16 S e c u r i t i e s Exchange A c t , 1934 which p r o v i d e s t h a t d i r e c t o r s o r owners o f more than t e n p e r c e n t i n any c l a s s o f e q u i t y c a p i t a l i n a l i s t e d company who a r e t r a d i n g i n t h e s e s h a r e s must d e c l a r e a l l t r a d i n g d u r i n g e v e r y month and must d i s g o r g e a l l " s h o r t - s w i n g " p r o f i t s made by b u y i n g and r e s e l l i n g w i t h i n a s i x month p e r i o d r e g a r d l e s s o f d i s c l o s u r e . The p r o f i t s a r e t o be p a i d t o t h e company, not the p a r t i e s i n v o l v e d i n t h e s h a r e t r a n s a c t i o n s . See a l s o Rule 10b-5 which has g i v e n r i s e t o c i v i l l i a b i l i t y - Reynolds v. Texas G u l f S u l p h e r 309 F. Supp. 548 (1970); S h a p i r o v. M e r r i l l Lynch P i e r c e Fenner & Smith I n c . 495 F. 2d 228 (1974). - 23 -p a r t i c u l a r c i r c u m s t a n c e s o f a s h a r e p u r c h a s e . T h i s i s i n marked c o n -t r a s t w i t h t h e E n g l i s h p o s i t i o n which d i d not r e s t r i c t d i r e c t o r s i n t h e i r d e a l i n g s w i t h s h a r e h o l d e r s because i t was h e l d t h e r e was no 48 d u t y owed t o t h e l a t t e r a t a l l . The l a c k o f r e s t r i c t i o n i n t h e S t a t e s came about because i t w a s f e l t t h a t s h a r e s were p r i v a t e p r o p e r t y and as d e a l i n g i n them was not a c o r p o r a t e t r a n s a c t i o n t h e normal f i d u c i a r y d u t y d i d not a p p l y . T h i s was not t h e c a s e i n t h e e v e n t o f f r a u d o r a c t i o n a b l e m i s r e p r e s e n t a t i o n because t h e r e t h e common law remedies were always a v a i l a b l e , but i t was t h e o r i g i n a l so c a l l e d v" 49 " m a j o r i t y r u l e " i n t h e e v e n t o f n o n d i s c l o s u r e . T h i s r u l e s a i d t h a t t h e r e was no d u t y a t a l l owed by d i r e c t o r s w i t h r e g a r d t o s h a r e t r a n s a c t i o n s w i t h s h a r e h o l d e r s w i t h t h e r e s u l t t h a t t h e y c o u l d a c t w i t h t o t a l i m p u n i t y d e s p i t e t h e i m p o r t a n c e o f ' t h e i r " s e c r e t " i n f o r m a t i o n . A t t h e o t h e r extreme was t h e " m i n o r i t y r u l e " which p r o v i d e d t h a t i n a l l c i r c u m s t a n c e s where a d i r e c t o r was d e a l i n g w i t h a s h a r e h o l d e r , he owed a f i d u c i a r y d u t y t o d i s c l o s e t o t h a t s h a r e h o l d e r any i n f o r m a t i o n which may m a t e r i a l l y a l t e r t h e v a l u e 50 o f t h e s h a r e s . A more moderate approach which has f o u n d c o n t i n u a l and growing f a v o u r i s t h e " s p e c i a l f a c t s d o c t r i n e . " T h i s p r o v i d e s an e x c e p t i o n t o t h e m a j o r i t y r u l e when t h e r e a r e s p e c i a l c i r c u m s t a n c e s which g i v e r i s e t o a f i d u c i a r y d u t y i n t h e p a r t i c u l a r t r a n s a c t i o n . 51 T h i s a r o s e i n t h e l e a d i n g c a s e o f Strong v. Repide when t h e d i r e c t o r 4 8 P e r v i c a l v. W r i g h t , [1902] 2 Ch. 421. 49 Speed v. T r a n s a m e r i c a Corp., 71 F. Supp. 457 ( 1 9 4 7 ) . u J a c o b s o n v. Y a s c h i k , 155 S.E. 2d 601 (1967). 5 1 2 1 3 U.S. 419 (1900). - 24 -o f a company owning l a n d which he knew was t o be i m m i n e n t l y s o l d t o t h e Government a t a l a r g e p r o f i t c o n c e a l e d h i s r e a l i d e n t i t y and bought s h a r e s from a member t h r o u g h a b r o k e r . The vendor was h e l d e n t i t l e d t o r e s c i n d t h e c o n t r a c t , because under t h e s e c i r c u m s t a n c e s t h e r e J was a p o s i t i v e d u t y on t h e d i r e c t o r t o d i s c l o s e t h e i n f o r m a t i o n he had a f f e c t i n g t h e v a l u e o f t h e s h a r e s . O t h e r i n s t a n c e s o f s p e c i a l f a c t s p r o d u c i n g t h i s d u t y might i n c l u d e knowledge o f an impending unusual d i v i d e n d , p o s s i b l e s a l e s o r p u r c h a s e s by t h e company o f v a l u a b l e p r o p e r t i e s o r c i r c u m s t a n c e s s u r r o u n d i n g t h e s h a r e h o l d e r such as t h e l a c k o f b u s i n e s s acumen, t h e u n a v a i l a b i l i t y o f a r e a d y market f o r t h e s h a r e s , t h e n o n - d i s c l o s u r e o f t h e p u r c h a s e r ' s t r u e i d e n t i t y o r t h e f a c t t h a t t h e d i r e c t o r made approaches t o t h e s h a r e h o l d e r t o i n d u c e him t o s e l l . Even i f t h e s p e c i a l f a c t s d o c t r i n e i s a c c e p t e d , f u r t h e r problems a r i s e when t h e t r a n s a c t i o n s a r e c o n d u c t e d t h r o u g h t h e s t o c k exchange because t h e d i r e c t o r has no c o n t a c t w i t h t h e v e n d o r and has no easy ' o p p o r t u n i t y t o a d v i s e him o f any m a t e r i a l i n f o r m a t i o n . I t has been 52 argued t h a t even i n t h e s e c i r c u m s t a n c e s , d i r e c t o r s s h o u l d make an i B a l l a n t i n e on C o r p o r a t i o n s , C a l l a g h a n & Co., 1946, p. 215. One s o l u t i o n which has been adopted because o f t h e d i f f i c u l t y o f t r a c i n g s a l e s t h r o u g h t h e s t o c k exchange i s t o a l l o w a d e r i v a t i v e a c t i o n based on t h e i d e a t h a t the i n s i d e r s ( i n t h i s c a s e , d i r e c t o r s ) have br e a c h e d t h e i r f i d u -c i a r y d u t y t o t h e company by making s e c r e t p r o f i t s . R a t h e r than l e t t i n g t h e i n s i d e r s keep t h i s p r o f i t , t h e c o u r t a l l o w e d t h e company t o r e c o v e r a l t h o u g h i t d i d not r u l e o u t t h e p o s s i b i l i t y o f a p e r s o n a l s u i t as w e l l . Diamond v. Oreamuno, 248 N.E. 2d 910 (1969). T h i s p o s s i b i l i t y was l a t e r p i c k e d up by t h e F e d e r a l C o u r t (2nd C i r c u i t ) i n S h a p i r o v. M e r r i l l Lynch, P i e r c e , Fenner & Smith I n c . , supra, n o t e 47, where a p e r s o n a l a c t i o n was a l l o w e d f o r damages even though no p r i v i t y between t h e d e f e n d a n t s and the p l a i n t i f f s c o u l d be e s t a b l i s h e d . In f a c t , some o f t h e d e f e n d a n t s were qu j ' l t y o n l y o f p r o m u l g a t i n g c e r t a i n i n f o r m a t i o n which t h e y s h o u l d have kept s e c r e t ; t h e y t h e m s e l v e s , d i d n o t s e l l any s h a r e s a t a l l . - 25 -a t t e m p t t o promulgate as much i m p o r t a n t i n f o r m a t i o n t o t h e p u b l i c as ' p o s s i b l e t o p r e v e n t them t a k i n g p e r s o n a l advantage o f any n o n - d i s -c l o s u r e . C e r t a i n l y , i f any c o n s p i r a c y t o a f f e c t t h e v a l u e o f t h e s h a r e s on t h e market i s p e r p e t u a t e d , no immunity s h o u l d be o b t a i n e d p u r e l y because a l l o f t h e d e a l i n g was done t h r o u g h a s t o c k exchange. In t h e e v e n t o f p r o o f o f c o n c e a l m e n t o f m a t e r i a l i n f o r m a t i o n t h e most normal remedy i s r e s c i s s i o n o f t h e s a l e c o n t r a c t . However damages can be awarded, t h e measure u s u a l l y b e i n g t h e d i f f e r e n c e between t h e p r i c e p a i d f o r the s h a r e s by t h e d i r e c t o r and t h e i r t r u e v a l u e a t 53 t h e t i m e o f t h e s a l e t a k i n g t h e u n d i s c l o s e d i n f o r m a t i o n i n t o a c c o u n t . F u r t h e r problems can a r i s e i;n t h e c a s e o f " t i p p e e s " who a r e a d v i s e d t o buy the s h a r e s by t h e d i r e c t o r s ; however d e f e n d a n t d i r e c t o r s and a m a j o r i t y s h a r e h o l d e r have been h e l d l i a b l e f o r damages f o l l o w i n g a s a l e by a n o t h e r s h a r e h o l d e r who was i n d u c e d t o s e l l because o f an a r t i f i c i a l l y d e p r e s s e d market even though t h e d e f e n d a n t s were not t h e 54 p u r c h a s e r s . S i m i l a r l y , i n s i d e r s have been h e l d l i a b l e t o m i n o r i t y p l a i n t i f f s where the f o r m e r w i t h h e l d knowledge o f an imminent t a k e o v e r so t h a t t h e b i d d e r was a b l e t o buy t h e p l a i n t i f f s ' s h a r e s a t a lower 55 p r i c e than he p a i d t h e d e f e n d a n t s . \ A g a i n , t h e d e f e n d a n t s t h e m s e l v e s were not p r i v y t o any c o n t r a c t w i t h t h e p l a i n t i f f s . J J H o t c h k i s s v. F i s c h e r , 16 P. 2d 531 (1932); Low v. Wheeler, 24 C a l . R p t r . 538 (1962). C f . t h e measure used under Rule 10b-5 c i v i l a p p l i c a t i o n s , infra, p. 30,. 54 Cochran v. Channing Corp., 211 F. Supp. 239 (1962). 55 Low v. Wheeler, supra, note 53. \ - 26 -Wrongful Redemption In t h e . a r t i c l e s o r by-laws i n most companies i n the S t a t e s , t h e r e i s power t o pu r c h a s e t h e company's own s h a r e s and, i n the c a s e o f p r e f e r e n c e s h a r e s , t o redeem them u s i n g t h e company's money. N o r m a l l y t h i s power i s d e l e g a t e d t o th e d i r e c t o r s b u t , as w i t h a l l o t h e r mana-g e r i a l powers, has t o be e x e r c i s e d i n t h e b e s t i n t e r e s t s o f th e company and not f o r the d i r e c t o r s ' p e r s o n a l advantage. E s p e c i a l l y where redemption can be p a r t i a l w i t h i n one c l a s s , o r can i n v o l v e a l l o f one c l a s s but not o t h e r s i n t h e company, t h e r e i s room f o r abuse by t h e d i r e c t o r s o f t h e i r power. I t can be used t o f a v o u r t h e s h a r e -h o l d e r s which r e m a i n , by removing o t h e r s who c o u l d have s h a r e d i n th e company's w e a l t h . A l t e r n a t i v e l y , i t can f a v o u r t h o s e whose s h a r e s have been r e a c q u i r e d by a l l o w i n g them t o esca p e an imminent l i a b i l i t y . I f such an abuse o c c u r s a p e r s o n a l a c t i o n based on a bre a c h o f f i d u c i a r y d u t y w i l l be p e r m i t t e d . 56 The l e a d i n g c a s e i n t h i s a r e a , Zahn v. Transamerica Corp., i n v o l v e s an a c t i o n a g a i n s t m a j o r i t y s h a r e h o l d e r s r a t h e r than d i r e c t o r s . A company had two c l a s s e s o f s h a r e s : t h e "A" s h a r e s had a r i g h t t o an equal s h a r e on a w i n d i n g up and t h e r i g h t t o c o n v e r t t o "B" sh a r e s whenever t h e y chose but t h e y had no v o t e and c o u l d be redeemed f o r a f i x e d d o l l a r amount a t any t i m e ; t h e B s h a r e s were g i v e n a v o t e and t h e r i g h t t o redeem t h e A s h a r e s . The d e f e n d a n t , T r a n s a m e r i c a C o r p o r a t i o n , bought l a r g e b l o c k s o f both A and B s h a r e s , c o n v e r t e d i t s A s h a r e s i n t o B s h a r e s and then., t h r o u g h i t s c o n t r o l o f th e board redeemed most o f t h e r e m a i n i n g A s h a r e s . I t then d i s s o l v e d t h e 5 6 1 6 2 F. 2d 36 (1947). - 27 -company, p a y i n g i t s e l f a l a r g e w i n d i n g - u p d i v i d e n d based on a v e r y l a r g e i n c r e a s e i n the v a l u e o f t h e s t o c k - i n - t r a d e ( t o b a c c o ) h e l d by t h e company. The r e s u l t was t h a t a p e r f e c t l y l e g a l r e d e m p t i o n and d i s s o l u t i o n had been made t o f a v o u r t h o s e i n c o n t r o l a t t h e expense o f t h e A s h a r e h o l d e r s . The l a t t e r had had t h e o p p o r t u n i t y t o con-v e r t t h e i r s h a r e s a t any t i m e but were not g i v e n t h e i n f o r m a t i o n about t h e i n c r e a s e d t o b a c c o p r i c e s t o know t h a t such c o n v e r s i o n was w o r t h w h i l e . A p e r s o n a l , r e p r e s e n t a t i v e a c t i o n by a s h a r e h o l d e r who had had some o f h i s s h a r e s redeemed (and was t h e r e f o r e no l o n g e r a member i n r e s p e c t o f t h e s h a r e s which were t h e s u b j e c t o f t h e a c t i o n ) was s u c c e s s f u l i n h i s c l a i m f o r damages based on a b r e a c h o f t h e d u t y owed by m a j o r i t y s h a r e h o l d e r s t o m i n o r i t i e s . The quantum, 57 which was not s e t t l e d u n t i l s e v e r a l y e a r s l a t e r , was based on what t h e A s h a r e h o l d e r s would have g o t ' o n a d i s s o l u t i o n assuming t h e y had c o n v e r t e d t h e i r s h a r e s t o B s t o c k i m m e d i a t e l y p r i o r t o t h e w i n d i n g up. The c o u r t f e l t t h i s a s s umption was r e a s o n a b l e because a d i s i n t e r e s t e d d i r e c t o r a t e would have o f f e r e d t h e A s h a r e h o l d e r s a chance t o be redeemed, o r t o c o n v e r t , b e f o r e p r o c e e d i n g w i t h t h e d i s s o l u t i o n . Other s i t u a t i o n s i n v o l v i n g d i s p u t e s o v e r t h e r e d e m p t i o n o f s h a r e s have i n c l u d e d a r e d e m p t i o n made p u r e l y because t h e v p l a i n t i f f was 58 p e r s i s t e n t i n h i s r e q u e s t s t o examine t h e books o f t h e company, red e m p t i o n by t h e d e f e n d a n t o f h i s own s h a r e s t o a v o i d a c o n t r a c t u a l 57 135 F. Supp. 176 sub noft. Speed v. T r a n s a m e r i c a C o r p o r a t i o n . 5 8Waldman v. M i l l e r - W o h l Co., 28 A. 2d 148 (1942). 59 r e s p o n s i b i l i t y , p u r c h a s e by t h e company o f i t s own s h a r e s from t h e fin b r o t h e r o f t h e m a j o r i t y s h a r e h o l d e r f o r no c o r p o r a t e purpose a t a l l and a redemption made to p r e v e n t a compulsory w i n d i n g up o f a company. Once a g a i n , what i s r e q u i r e d f o r a s u i t o f t h i s n a t u r e i s t h a t t h e p l a i n t i f f be d i r e c t l y a f f e c t e d by t h e r e d e m p t i o n . The o t h e r causes o f a c t i o n l i s t e d above a r e , f o r t h e most p a r t , s e l f e x p l a n a t o r y . The g e n e r a l c o n c e p t o f a c o n t r a c t between t h e 62 company and i t s s h a r e h o l d e r s w i l l be d i s c u s s e d more f u l l y l a t e r . One which may need some a m p l i f i c a t i o n i s t h e r i g h t t o p r e v e n t a t h r e a t e n e d u l t r a v i r e s a c t . Based on t h e i d e a t h a t t h e s h a r e h o l d e r s a r e t h e u l t i m a t e b e n e f i c i a r i e s o f a t r u s t f u n d a d m i n i s t e r e d by t h e managers o f t h e company, t h e y a r e seen t o have a r i g h t t o e n j o i n a m i s a p p l i c a t i o n o f t h i s f u n d . Note however, t h a t t h i s r i g h t does n o t u s u a l l y c o n t i n u e when t h e w r o n g f u l a c t has been e x e c u t e d f o r a t t h i s i 63 p o i n t , t h e company becomes t h e p r o p e r p l a i n t i f f . T h e r e a r e some t r a n s a c t i o n s which appear t o harm an i n d i v i d u a l s h a r e h o l d e r , o r may even be d i r e c t e d a t him o r a c l a s s o f s h a r e h o l d e r s s p e c i f i c a l l y , and y e t a r e such t h a t a p e r s o n a l a c t i o n c a n n o t be m a i n t a i n e d . For example, a g e n e r a l r e d u c t i o n i n t h e v a l u e o f s t o c k 5 9 S p e c t v. E a s t w o o d - N e a l l e y Corp., 95 A 2d 485 ( 1 9 5 3 ) . 6 0 V a n n v. I n d u s t r i a l P r o c e s s e s Co., 247 F. Supp. 14 (1965) 6 1 B u s s v. J.O. M a r t i n Co., 50 C a l . R p t r . 206 (1966). ^ I n f r a , p. 84. CO Johnson v. American G e n e r a l I n s . Co. 296 F. Supp. 802. - 29 -caused by mismanagement o r by a scheme t o d e p r e s s t h e market v a l u e 64 o f t h e s h a r e s w i l l g e n e r a l l y g i v e r i s e t o a d e r i v a t i v e a c t i o n o n l y . 65 I t has been s a i d t h a t : Waste and mismanagement, and a l s o i n t e r f e r e n c e w i t h a corporation's business, are wrongs to the c o r p o r a t i o n , and although i n d i r e c t l y r e s u l t i n g i n a d e p r e c i a t i o n i n the value of i t s shares of stock they nevertheless must be redressed by means of a s u i t by or on behalf of the c o r p o r a t i o n . . . However, where t he p l a i n t i f f s u f f e r s harm p e c u l i a r t o h i m s e l f o r , h i s c l a s s he may be a b l e t o sue f o r a br e a c h o f d u t y , n o t w i t h s t a n d i n g fifi t h a t t h e company may a l s o have a r i g h t t o sue. S i m i l a r l y , when t h e company has a c o n t r a c t w i t h t h i r d p a r t i e s , an i n d i v i d u a l s h a r e -h o l d e r c a n n o t p e r s o n a l l y sue f o r i t s b r e a c h , even i f he i s t h e o n l y s h a r e h o l d e r and was a s i g n a t o r y t o t h e c o n t r a c t i n h i s c a p a c i t y as a d i r e c t o r . One t h i n g t h a t i s c l e a r i s t h a t t h e c a t e g o r y o f a l l o w a b l e p e r s o n a l a c t i o n s i s not c l o s e d . However, i t i s not easy t o e x t r a p o l a t e from the^above s i t u a t i o n s any c l e a r i n d i c a t i o n o f a more g e n e r a l p r i n c i p l e by which p e r s o n a l a c t i o n s may be r e c o g n i z e d . Even s t a t e m e n t s such a s : "A p e r s o n a l a c t i o n w i l l l i e whereever any s h a r e h o l d e r has been i n d i v i -d u a l l y ' and p e r s o n a l l y a f f e c t e d " a r e not d e f i n i t i v e . C e r t a i n r i g h t s , which a l t h o u g h not p a r t o f any fo r m a l c o n t r a c t between t h e company and i t s members, a r e n e v e r t h e l e s s seen as i n c i d e n t a l t o t h e ow n e r s h i p o f s h a r e s a r e s a t i s f a c t o r y t o e x p l a i n t h e bases o f p a r t i c u l a r c l a i m s but do not go any f u r t h e r towards d e v e l o p i n g a g e n e r a l r u l e . These 64 Coronado Development Corp. v. M i l l i k i n , 22 N.Y.S. 2d 670. 6 5 K o b i n v. Goodman, 222 N.Y.S. 2d 744. 66 Jones v. H.F. Ahmanson & Co., s u p r a , note 30. " - 30 -i n c l u d e t h e r i g h t s t o v o t e , t o pre-emption and t o d i v i d e n d s . A p a r t from t h e s e c a s e s however, i t seems t h a t more g e n e r a l e q u i t a b l e p r i n c i p l e s a p p l y t o a f f o r d i n d i v i d u a l s h a r e h o l d e r s p e r s o n a l r e m e d i e s . Indeed, i t i s perhaps i m p o s s i b l e t o be more s p e c i f i c than t h e c o u r t 67 was i n Jones v. H.F. Ahmanson & Co. T h e r e , w h e r e . T r a y n o r C.J. was d i s t i n g u i s h i n g between p e r s o n a l and d e r i v a t i v e a c t i o n s , he s a i d : I f the i n j u r y i s not i n c i d e n t a l to an i n j u r y to the c o r p o r a t i o n , an i n d i v i d u a l cause of a c t i o n e x i s t s . T h i s has been u s e f u l l y expanded upon by a Canadian d e c i s i o n , a l t h o u g h s t i l l i n g e n e r a l terms o n l y . The O n t a r i o C o u r t o f Appeal i n Goldex 68 Mines Ltd. v. R e v i l l s a i d : In the context of the wholes judgment, we b e l i e v e Traynor C.J. meant by t h i s [ s t a t e m e n t ] : . . . [an i n j u r y ] not a r i s i n g simply because the c o r -p o r a t i o n i t s e l f has been damaged, and as a con-sequence of the damage to i t , i t s shareholders have been i n j u r e d . Remedies As w i t h t h e o t h e r f e a t u r e s o f p e r s o n a l a c t i o n s , t h e r e i s n o t h i n g s u b s t a n t i a l l y d i f f e r e n t about t h e remedies a v a i l a b l e under such a c t i o n s from t h o s e a v a i l a b l e under o t h e r d i r e c t . a c t i o n s . In o t h e r words, t h e f u l l a r r a y o f l e g a l and e q u i t a b l e r e l i e f , i n c l u d i n g damages can be used. V e r y o f t e n however, a l l t h a t w i l l be r e q u i r e d i s an i n j u c t i o n t o p r e v e n t an imminent wrong o r a d e c l a r a t i o n t o r e c t i f y an a c t i o n o f d i r e c t o r s o r o t h e r s h a r e h o l d e r s which has. a l r e a d y o c c u r e d . N e v e r t h e l e s s damages o r o t h e r money awards a r e p o s s i b l e and w i l l be used i n a l l t y p e s o f p e r s o n a l a c t i o n s • , where a p p r o p r i a t e . In some 67 <--•-- -'\ Xupfay- note .30. 6 8 ( 1 9 7 4 ) 54 D.L.R. (3d) 672. - 31 -c a s e s , such as a c l a i m t o f o r c e t h e payment o f a d i s c r e t i o n a r y d i v i -dend, t h e v e r y n a t u r e o f t h e a c t i o n c o n t e m p l a t e s t h e payment o f money out by t h e company t o t h e p l a i n t i f f s . Where t h e o r d e r o f t h e c o u r t i n r e s p e c t o f d i v i d e n d s i s t o remain i n f o r c e f o r s e v e r a l y e a r s , i t can be backed up w i t h o t h e r s a n c t i o n s such as t h e t h r e a t o f t h e com-" 69 p u l s o r y w i n d i n g up o f t h e company i f t h e o r d e r i s not c o m p l i e d w i t h . S i m i l a r l y , i n i n s i d e r t r a d i n g c a s e s , i t i s d i f f i c u l t t o remedy any u n f a i r n e s s i n t h e t r a n s a c t i o n s w i t h o u t compensation i n money terms u n l e s s t h e more r e s t r i c t i v e remedy o f r e s c i s s i o n i s used. In d e a l i n g s w i t h s h a r e s t h e measure o f damages i s more d i f f i c u l t t o d e t e r m i n e , a l t h o u g h i t i s r e c o g n i z e d t h a t i n t h e whole a r e a o f p e r s o n a l a c t i o n s , e s p e c i a l l y t h o s e which a r e b r o u g h t as c l a s s a c t i o n s , t h e q u e s t i o n o f the amount o f damages and t h e i r ' d i s t r i b u t i o n i s not an eas y one. Moreover, i t w i l l always be t h e d i r e c t o r s o r o t h e r i n s i d e r s , r a t h e r t h a n t h e company, who pay th e damages i n i n s i d e r t r a d i n g c l a i m s . A r u l e o f damages which has been d e v e l o p e d i n t h e S t a t e s , and which has been r e f e r r e d t o i n Canada i n a c a s e on t h e s t a t u t o r y remedies f o r i n s i d e r t r a d i n g , 7 ^ i s t h e so c a l l e d New York R u l e . I t was e x p l a i n e d i n t h e Reynolds v. Texas Gulf Sulphur Co?^ c a s e as b e i n g t h e d i f f e r e n c e between t h e p r i c e a t which t h e p l a i n t i f f s o l d and the highest intermediate value reached by the stock between the time of the wrongful act complained of and a reasonable time a f t e r the i n j u r e d p a r ty r e c e i v e d , or should have r e c e i v e d n o t i c e of i t , a time w i t h i n which he has had a reasonable opportunity to replace the stock. The r e f e r e n c e t o m i t i g a t i n g l o s s e s by r e p u r c h a s i n g t h e s h a r e s s h o u l d 6 9 P a t t o n v. N i c h o l a s , 302 S.W. 2d'444 (1957). 7 0 G r e e n v. C h a r t e r h o u s e Canada L t d . [1973] 2 O.R. 677. T h i s c a s e was c o n f i r m e d on appeal ( a l t h o u g h one f i n d i n g was r e v e r s e d ) (1976) 12 O.R. (2d) -280. 7^Supra, n o t e 47, a t p. 563. T h i s c a s e was a p e r s o n a l common law c l a i m but was based on a b r e a c h o f Rule 10b-5 under t h e S e c u r i t i e s and Exchange A c t , 1934. - 32 -a l s o be n o t e d , as t h i s t o o has been a c c e p t e d , a t l e a s t i n d i c t a , i n C a n a d a . 7 2 In o t h e r t y p e s o f p e r s o n a l a c t i o n s , where a d e c l a r a t i o n o r i n j u n c -t i o n i s perhaps t h e most common remedy, damages a r e n e v e r t h e l e s s awarded p e r i o d i c a l l y . F o r example, where a p l a i n t i f f has bee n . d e n i e d h i s p r e - e m p t i v e r i g h t s t o new s h a r e s and a t t h e t i m e o f t h e a c t i o n i t has become t o o l a t e o r too d i f f i c u l t t o now g i v e him h i s pro r a t o 73 s h a r e , damages have been g r a n t e d . In t h i s c a s e i t was t h e company which was t h e t r u e d e f e n d a n t and which had t o pay t h e damages. Where t h e r e has been a wro n g f u l r e d e m p t i o n o f ^ s h a r e s , and the p l a i n -t i f f has t h e r e b y l o s t t h e o p p o r t u n i t y t o s h a r e i n an u n d i s c l o s e d i n c r e a s e i n v a l u e o f t h e company's i n v e n t o r y , damages have been awarded t o e f f e c t i v e l y r e s t o r e him t o t h e p o s i t i o n he would have 74 been i n had he not a c c e p t e d t h e re d e m p t i o n . S i m i l a r l y , i n a s i t u a -t i o n where t h e m a j o r i t y s h a r e h o l d e r s so a l t e r e d t h e s t r u c t u r e o f an a s s o c i a t i o n by c r e a t i n g a new p u b l i c company t o which t h e y t r a n s - -f e r r e d o n l y t h e i r own s h a r e s , a p e r s o n a l a c t i o n was a l l o w e d and damages awarded because o f t h e r e s u l t a n t d e c l i n e i n v a l u e o f t h e 75 p l a i n t i f f ' s s h a r e s . A f t e r f i n d i n g l i a b i l i t y , t h e r e was no r e a l d i s c u s s i o n on whether damages would be a p p r o p r i a t e o r whether t h e y 7 fi c o u l d , i n f a c t , be awarded a t a l l . As t h e c o u r t s a i d : Since the damage i s r e a l , although the amount i s s p e c u l a t i v e , e q u i t y demands that the m i n o r i t y stockholders be placed i n a p o s i t i o n at l e a s t as favourable as that the m a j o r i t y created f o r themselves. 72 Green v. C h a r t e r h o u s e Canada L t d . , supra 70. 73 S t o k e s v. C o n t i n e n t a l T r u s t Co, supra, note 43. 74 Zahn v. T r a n s a m e r i c a Corp., supra, n o t e 56. 75 Jones v. H.F. Ahnanson & Co., supra, n o t e 30. 76Ibid., p. 478. - 33 -The quantum d e c i d e d on was e i t h e r t h e a p p r a i s e d v a l u e o f the p l a i n t i f f ' s s h a r e s on t h e d a t e t h e m a j o r i t y t r a n s f e r r e d t h e i r s h a r e s o r t h e f a i r market v a l u e o f a p a r c e l o f s h a r e s i n t h e new company which she ( t h e p l a i n t i f f ) would have g o t i f she had a l s o t r a n s f e r r e d . In t h e l a t t e r c a s e , t h e v a l u e was t o be a s c e r t a i n e d as a t t h e d a t e o f t h e a c t i o n . I t i s c l e a r t h a t s h a r e h o l d e r s can g e t damages i n a p e r s o n a l a c t i o n , to be p a i d by t h e company o r t h e d i r e c t o r s and o t h e r s h a r e h o l d e r s d e p e n d i n g on who i s p r o p e r l y a t f a u l t . What i s not so c l e a r i s when i n d i v i d u a l s h a r e h o l d e r s can s h a r e i n any r e c o v e r y made by the company. I n d i v i d u a l Recovery One o f t h e main r e a s o n s f o r l i m i t i n g p e r s o n a l a c t i o n s t o members who have been d i r e c t l y i n j u r e d i s to. p r e v e n t i n d i v i d u a l s h a r e h o l d e r s r e c o v e r i n g i n a s u i t i n which t h e company i s t h e a g g r i e v e d p a r t y . In o t h e r words, any wrong done t o t h e company can o n l y l e a d t o a c o r p o r a t e r e c o v e r y o f t h e a s s e t s i n v o l v e d o r damages, i n which t h e s h a r e h o l d e r s may b e n e f i t i n d i r e c t l y but not i n d i v i d u a l l y . Indeed, t h i s i s one o f t h e e s s e n t i a l d i f f e r e n c e s between a d e r i v a t i v e and a p e r s o n a l a c t i o n . However, here too t h e r e a r e e x c e p t i o n s . A l t h o u g h c o r p o r a t e r e c o v e r y does u s u a l l y r e d r e s s t h e wrong which has been done and m a i n t a i n s the a s s e t s o f t h e company f o r i t s c r e d i t o r s as w e l l as i t s s h a r e h o l d e r s , t h e r e w i l l be c i r c u m s t a n c e s where i n d i v i d u a l s h a r e h o l d e r s s h o u l d s h a r e i n p a r t o f t h e r e c o v e r y b e f o r e a f u l l r e t u r n t o - t h e s t a t u s quo i s a c h i e v e d . T h i s i n d i v i d u a l r e c o v e r y i n an a c t i o n b rought by t h e company i s t o be d i s t i n g u i s h e d from t h e t r u l y p e r s o n a l a c t i o n . T h e r e have however, been c a s e s where what -34 -would n o r m a l l y be a d e r i v a t i v e c l a i m has been b r o u g h t as a p e r s o n a l a c t i o n i n an attempt t o a c h i e v e p e r s o n a l r e c o v e r y . F o r example, i n Shenberg v. DeGarmo^an i n d i v i d u a l a c t i o n was br o u g h t a g a i n s t two o t h e r s h a r e h o l d e r s who c o n t r o l l e d t h e company a l l e g i n g m i s a p p r o p -r i a t i o n o f t h e company a s s e t s . The c o u r t s a i d t h i s was a d e r i v a t i v e a c t i o n o n l y and t h e p l a i n t i f f would have t o ask f o r a d i s t r i b u t i o n o f a s s e t s o n l y a f t e r t h e y had been r e c o v e r e d by th e company. To do t h i s , he would, o f c o u r s e , run i n t o t h e problems a s s o c i a t e d w i t h an a c t i o n f o r c i n g t h e d e c l a r a t i o n o f d i v i d e n d s . I t c o u l d a l s o be argued 78 o f Jones v. H.F. Ahmanson & Co. t h a t t h i s was an att e m p t t o e n s u r e p e r s o n a l r e c o v e r y by b r i n g i n g a p e r s o n a l r a t h e r t h a n d e r i v a t i v e a c t i o n ; t h i s however, depends on one's views on th e p r o p e r n a t u r e 79 o f t h i s s o r t o f a c t i o n . The main method o f i n d i v i d u a l r e c o v e r y ( a p a r t from i n t h e p e r s o n a l a c t i o n i t s e l f ) i s , however, c o n f i n e d t o a n . e x e r c i s e o f th e c o u r t ' s d i s c r e t i o n i n a p r o p e r l y c o n s t i t u t e d d e r i v a t i v e a c t i o n . Of c o u r s e , t h i s means t h a t t h e r e q u i r e m e n t s o f a d e r i v a t i v e a c t i o n such as a_ demand on t h e d i r e c t o r s and/or t h e company and t h e p o s t i n g o f c o s t s under t h e s e c u r i t y f o r c o s t s l e g i s l a t i o n have t o be c o m p l i e d w i t h . I t remains a moot p o i n t among a c a d e m i c s " a s t o whether t h i s i s a good t h i n g o r whether t h e a c t i o n c o u l d p r o p e r l y be t r e a t e d as a p e r s o n a l 80 one. The main c i r c u m s t a n c e s i n which p e r s o n a l r e c o v e r y w i l l be 7 7 1 4 3 P. 2d 74 (1943 ) . 78 Supra, n o t e 30. 79 See t h e c o n t r a s t i n g a p p r o a c h i n Perlman v. Feldmann, supra, note 31. 80 See: Note, " I n d i v i d u a l R e covery i n D e r i v a t i v e A c t i o n , " 40 Cal. ' L . R . 127 ( 1 9 5 3 ) ; Note, " I n d i v i d u a l Pro Rata Recovery i n S t o c k h o l d e r s ' D e r i v a t i v e S u i t s " , " ? 69 Harv. L.Rev. 1314 ( 1 9 5 6 ) ; G r e m i e r , " P r o r a t a R e covery by S h a r e -h o l d e r s on C o r p o r a t e Causes o f A c t i o n as a Means o f A c h i e v i n g C o r p o r a t e J u s t i c e , " 19 Wash. & Lee L. Rev. 165 (1962). - - 35 -a l l o w e d a r e where the funds would o t h e r w i s e be r e t u r n e d t o the wrongdoers 81 as the c o n t r o l l e r s o f the company, o r where p u r c h a s e r s o f s h a r e s under 82 an impugned s a l e would g e t a de f a c t o r e d u c t i o n i n the p u r c h a s e p r i c e . T h i s can a l s o a p p l y t o the s i t u a t i o n where some o f t h e s h a r e h o l d e r s o t h e r than the p l a i n t i f f have approved o f the wrongdoing o r w a i v e d 83 J t h e i r r i g h t s t o c o m p l a i n . Where the company has been wound up and i t would be i n e q u i t a b l e t o a l l o w a m i s a p p r o p r i a t i o n t o go u n s a n c t i o n e d , 84 i n d i v i d u a l awards have been made. In t h i s i n s t a n c e , i t i s d i f f i c u l t t o a c c u r a t e l y c l a s s i f y t he n a t u r e o f the a c t i o n ; a t r u e d e r i v a t i v e a c t i o n can no l o n g e r be b r o u g h t as the company does n o t e x i s t and y e t the wrong was done t o the company, no t t o the i n d i v i d u a l s h a r e h o l d e r . In a n o t h e r c a s e , a d e r i v a t i v e a c t i o n was no l o n g e r p o s s i b l e because the p l a i n t i f f had s o l d h i s s h a r e s but the c o u r t f e l t i t c o u l d n o t " a l l o w a d i r e c t o r t o m i s a p p r o p r i a t e funds and l e a v e t h o s e i n j u r e d 85 w i t h o u t a remedy" and t h e r e f o r e p e r m i t t e d a p e r s o n a l c l a i m t o s u c c e e d . Such a p r a g m a t i c approach i s however, n o t always adopted:; i f a d e r i - -v a t i v e a c t i o n i s p o s s i b l e then i t has been s a i d t h a t " e q u i t a b l e p r i n c i p l e s demand t h a t t h e t h e o r y o f the a c t i o n be r e c o g n i z e d and t h a t the whole r e c o v e r a b l e amount be d e c r e e d t o be p a i d t o the c o r p o -r a t i o n , n o t w i t h s t a n d i n g r e l e a s e s , r a t i f i c a t i o n s o r w a i v e r s a f t e r 86 t h e e v e n t . " N e v e r t h e l e s s , even t h i s c a s e r e c o g n i z e d t h a t e x c e p t i o n s e x i s t e d and i t now a p p e a r s p o s s i b l e , t h a t s u b j e c t t o the p r o t e c t i o n o f c r e d i t o r s and o t h e r s h a r e h o l d e r s , i n d i v i d u a l r e c o v e r y i s p o s s i b l e 8 1 B a c k u s v. F i n k l e s t e i n , 23 F. 2d 357 (1927). 82 Perlman v. Feldmann, supra, n o t e 30. Even i n t h i s c a s e , the d i s -s e n t i n g j u d g e , Swan C. J . f e l t t h a t the t r u e n a t u r e o f the a c t i o n s h o u l d be r e c o g n i z e d and the damages awarded t o the company. 8 3 B a i l e y v. J a c o b s , 189 A. 320 (1937). 8 4 R U p l i n g e r v. R u p l i n g e r , 48 N.W..2d 73 (1 9 5 1 ) . SSwatson v. B u t t o n , 235 F. 2d 235 (1956). SGKeenan v. Eshleman, 2 A. 2d 904 (1938).-- 36 -i n a p p r o p r i a t e c i r c u m s t a n c e s . R a t i f i c a t i o n B e f o r e l e a v i n g p e r s o n a l a c t i o n s , i t i s i m p o r t a n t t o note t h a t the q u e s t i o n o f r a t i f i c a t i o n i s n o t r a i s e d a t a l l i n c o n n e c t i o n w i t h such c l a i m s . C o n s i s t e n t w i t h the t h e o r y t h a t a p e r s o n a l a c t i o n d e a l s o n l y w i t h wrongs s u f f e r e d i n d e p e n d e n t l y by a s h a r e h o l d e r , a v o t e o f o t h e r s h a r e h o l d e r s , be i t o r d i n a r y o r o t h e r w i s e , t o waive any b r e a c h by d i r e c t o r s c a n n o t be t a k e n t o remove the r i g h t s o f t h e i n d i v i d u a l t o c o m p l a i n u n l e s s he was a p a r t y t o t h a t v o t e . A l t e r n a t i v e l y , i f r a t i f i c a t i o n i s seen n o t so much as a w a i v e r by the company o f a wrong done to i t but as an a d o p t i o n by -a p r i n c i p a l o f an a c t i o n w r o n g f u l l y committed by i t s a g e n t ( b u t one which the p r i n c i p a l c o u l d n e v e r t h e l e s s have d o n e ) , i t s t i l l does n o t go as f a r as b i n d i n g a member w i t h a p e r s o n a l c l a i m because harming an i n d i v i d u a l i s o u t s i d e the power o f the p r i n c i p a l as w e l l . However, t o the w r i t e r ' s knowledge, n e i t h e r o f t h e s e r a t i o n a l e s f o r e x c l u d i n g the p o s s i b i l i t y o f r a t i f i -c a t i o n i n p e r s o n a l a c t i o n s has been v o c a l i z e d ; i t a p p e a r s t h a t i t i s t a c i t l y a c c e p t e d as b e i n g the law i n t h i s a r e a . T h a t r a t i f i c a t i o n i s n o t p o s s i b l e i s s u p p o r t e d by t h e f a c t t h a t demand o f e i t h e r d i r e c t o r s o r s h a r e h o l d e r s >is not r e q u i r e d b e f o r e a p e r s o n a l a c t i o n i s commenced. T h i s , and the f a c t t h a t a s u i t w i l l n o t be d e f e a t e d by a l a t e r v o t e o f the m a j o r i t y make p e r s o n a l a c t i o n s c o n s i d e r a b l y more a t t r a c t i v e then d e r i v a t i v e c l a i m s and e x p l a i n why p l a i n t i f f s w i l l o f t e n argue t h a t a d i r e c t wrong r a t h e r than one t o the company has o c c u r r e d . I - 37 -(2) D e r i v a t i v e A c t i o n s ,In G e n e r a l S i n c e the e a r l y development o f the d e r i v a t i v e a c t i o n as e s s e n t i a l l y a s u i t f o r b r e a c h o f t r u s t , i t has been t h i s a c t i o n r a t h e r than the p e r s o n a l a c t i o n which has become surrounded, by p r o c e d u r a l r e s t r i c t i o n s . I t i s n o t w i t h i n the scope o f t h i s paper to g i v e a f u l j t r e a t i s e on t h e s e f o r m a l r e q u i r e m e n t s o r i n d e e d on the e x t e n t o f t h i s a c t i o n but f o r c o m p a r a t i v e purposes i t i s a t l e a s t n e c e s s a r y t o o u t l i n e some o f i t s , m a j o r f e a t u r e s . These i n c l u d e a p r e - r e q u i s i t e o f s h a r e o wnership a t the time the a c t i o n i s b r o u g h t as w e l l as a t the t ime the wrong was committed, demand on the d i r e c t o r s t o remedy the a l l e g e d wrong, p u t t i n g up money f o r s e c u r i t y o f c o s t s i n some c a s e s , a j r e s t r i c t i o n on p e r s o n a l s e t t l e m e n t o f the a c t i o n and a c e r t a i n r e c o v e r y o f f e e s by s u c c e s s f u l p l a i n t i f f s . T h r oughout any d i s c u s s i o n o f the d e r i v a t i v e a c t i o n the main t h i n g t o be borne i n mind i s t h a t the s h a r e h o l d e r b r i n g i n g the a c t i o n can do n o t more than c o u l d t h e company i f i t was i t s e l f p r o -s e c u t i n g t h e c a s e . The most common r e a s o n t h a t t h e company i s n o t b r i n g i n g the a c t i o n i t s e l f i s t h a t the wrongdoers a r e i n c o n t r o l and do n o t f a v o u r a l l o w i n g the company t o sue t h e m s e l v e s . Because the company i s o f t e n a n e c e s s a r y p a r t y t o the a c t i o n ( i f i t i s t o be bound o r b e n e f i t t e d by i n j u n c t i o n s , d e c l a r a t i o n s o r awards) then i t has t o be j o i n e d as a nominal d e f e n d a n t so t h a t judgment can be awarded i n i t s f a v o u r . Moreover, because i t i s the company's r i g h t s which a r e b e i n g m a i n t a i n e d , a l l o f the non d e f e n d a n t s h a r e h o l d e r s must be j o i n e d as p l a i n t i f f s and the a c t i o n b r o u g h t as a r e p r e s e n t a t i v e - 38 -one, a l t h o u g h f a i l u r e t o do so may be waived by t h e c o u r t i f t h e 87 d e f e n d a n t s do n o t demur. I t i s t h i s r e q u i r e m e n t o f a r e p r e s e n t a -t i v e form which has sometimes l e d t o c o n f u s i o n w i t h p e r s o n a l a c t i o n s b r o u g h t on b e h a l f o f a c l a s s o f s h a r e h o l d e r s . D e s p i t e the f a c t t h a t t h e company i s the p r o p e r p l a i n t i f f and i t would seem i m m a t e r i a l when the p a r t i c u l a r nominal p l a i n t i f f became a s h a r e h o l d e r as l o n g ,as he was a member a t t h e time o f the s u i t , t h e r e i s a r e q u i r e m e n t i n most S t a t e s t h a t such a member d i d a l s o own s h a r e s a t the time the wrong was committed. T h i s r u l e o r i g i n a t e d i n t he F e d e r a l c o u r t s t o p r e v e n t a p e r s o n l i v i n g i n a n o t h e r s t a t e from t h a t i n which the company was r e g i s t e r e d from a c q u i r i n g s h a r e s and g a i n i n g a c c e s s t o the F e d e r a l c o u r t s under t h e i r d i v e r s i t y j u r i s d i c t i o n . However, i t has s i n c e become a p r o c e d u r a l r u l e o f both the F e d e r a l c o u r t and many o f the S t a t e s . Attempts t o m i t i g a t e t h e h a r s h n e s s o f t h i s r u l e have i n c l u d e d arguments t h a t the r i g h t t o c o m p l a i n i s an i n h e r e n t r i g h t e v i d e n c e d by the s h a r e c e r t i f i c a t e i 89 and one which can be t r a n s f e r r e d w i t h t h i s c e r t i f i c a t e . A l t e r n a t i v e l y , t h a t the wrong d i d n o t t a k e p l a c e a t one d i s t i n c t moment i n time so t h a t a p u r c h a s e o f s h a r e s d u r i n g the c o n t i n u a n c e o f the wrong (even i f t h i s i s o n l y the payment o f money under an impeached c o n t r a c t ) i s 90 s u f f i c i e n t t o s a t i s f y t he r e q u i r e m e n t . In one c a s e , the r u l e has i n f a c t been t u r n e d round and used a g a i n s t the company w i t h the r e s u l t t h a t no r e c o v e r y a t a l l was p o s s i b l e ; i t was p r e v e n t e d from b r i n g i n g an d i r e c t a c t i o n i t s e l f because a l l o f the p r e s e n t members 8 7 H i s c o c k v. L a c y , 30 N.Y.S. 860. 8 8 F e d . R. C i v . P. 23.1. - v 8 9 B a n k o f M i l l Creek v. E l k Horn Coal Corp., 57 S.E. 2d 736 (1950) 9 0 B a t e s o n v. Magna O i l Corp., 414 F. 2d 128 ( 1 9 6 9 ) . - 39 -91 were b a r r e d from s u i n g d e r i v a t i v e l y by the r u l e . H a v i n g s a t i s f i e d t h i s contemporaneous ownership r u l e , t h e p l a i n t i f f must a l s o show t h a t he i s a s h a r e h o l d e r a t the time o f the a c t i o n and must remain so u n t i l t h e d i s p u t e i s d e t e r m i n e d by the c o u r t o r s e t t l e d . Once ownership a t the r e l e v a n t times has been e s t a b l i s h e d t h e p l a i n t i f f w i l l n o r m a l l y be r e q u i r e d t o prove t h a t he asked the d i r e c t o r s , and sometimes the s h a r e h o l d e r s , t o b r i n g the a c t i o n t h e m s e l v e s b e f o r e he can p r o c e e d . The r e q u i r e m e n t o f making demand on the d i r e c t o r s stems from t he f a c t t h a t i t i s u s u a l l y t h e y who a r e g i v e n t he a u t h o r i t y t o sue on b e h a l f o f t h e company; because i t i s the company whose r i g h t s a r e being, m a i n t a i n e d i t i s s e n s i b l e thatit»or f t s a l t e r ego, the d i r e c t o r a t e , i s c o n s u l t e d t o see whether i t wishes t o sue. I t may f o r example, be i n the company's i n t e r e s t t o d i s p o s e o f the m a t t e r w i t h o u t the expense o f l i t i g a t i o n . Where demand would be i n e f f e c t u a l , such as where the d i r e c t o r s a r e the wrongdoers and would n a t u r a l l y r e f u s e c o n s e n t t o b r i n g t h e a c t i o n , i t has been h e l d 92 to be u n n e c e s s a r y . In many s t a t e s , t h e r e q u i r e m e n t o f demand has been made s t a t u t o r y w i t h v a r y i n g l e v e l s o f p r o o f and s t a n d a r d s o f 93 r e q u e s t b e i n g c a l l e d f o r . A f u r t h e r and s e p a r a t e requirement' imposed by some j u r i s d i c t i o n s 94 i s t h a t demand must a l s o be made o f the s h a r e h o l d e r s . The b a s i c t e n e t o f the demand r u l e i s t h a t t he p l a i n t i f f s h o u l d e x h a u s t h i s 9 1 C a p i t o l Wine & S p i r i t C orp. v. P o k r a s s , 98 N.E. 2d 704 (1951) 9 2 D a n i e l s v. B r i g g s , 180 N.E. 717 (1932). C f . C a l . C o r p . Code s. 834; N.Y. Bus. Corp. Law s. 6 2 6 ( c ) . 94 C f . comment, "Demand on D i r e c t o r s and S h a r e h o l d e r s as a P r e r e q u i s i t e t o a D e r i v a t i v e S u i t , " 73 Harv. L. Rev. 746 (1960); L e v i t t v. Johnson, 334 F. 2d 815-(1965). - 40 -i n t r a c o r p o r a t e remedies b e f o r e p r o c e e d i n g t o the c o u r t s ; t h i s may i n c l u d e g i v i n g the o t h e r s h a r e h o l d e r s an o p p o r t u n i t y t o d e c i d e how t h e y want to h a n d l e the m a t t e r and perhaps t o r e s o l v e i t by e l e c t i n g a new board o f d i r e c t o r s which w i l l b r i n g the a c t i o n . A g a i n , demand i s n o t n o r m a l l y r e q u i r e d when i t i s o b v i o u s t h a t a r e f u s a l would be g i v e n , and i n p r a c t i c e t h i s o f t e n o c c u r s when the b o a r d has a l s o r e f u s e d c o n s e n t . C o m p l i c a t i o n s a r i s e i n t h i s a r e a because o f p a r t o f F e d e r a l Rule 23.1 mentioned above, which r e q u i r e s a r e q u e s t " i f n e c e s s a r y " , f r o m "the s h a r e h o l d e r s o r members [ t h a t t h e y b r i n g t h e a c t i o n ] and the r e a s o n s f o r [ t h e p l a i n t i f f ' s ] f a i l u r e t o o b t a i n the a c t i o n o r f o r n o t making the e f f o r t . " I t i s n o t c l e a r what i s meant by " i f n e c e s s a r y " and t h e F e d e r a l c o u r t s t h e m s e l v e s have n o t g i v e n a c l e a r i n d i c a t i o n o f when t h e y w i l l r e q u i r e p r o o f o f demand. In some c a s e s i t has n o t m a t t e r e d t h a t the s h a r e h o l d e r s were w i d e l y s c a t t e r e d 95 and d i f f i c u l t t o c o n t a c t but i n o t h e r s where the p l a i n t i f f s and d e f e n d a n t s own l a r g e p a r c e l s o f s h a r e s ( a l t h o u g h n o t n e c e s s a r y the 96 m a j o r i t y ) demand has been d i s p e n s e d w i t h . C o n v e r s e l y , demand has on o c c a s i o n been r e q u i r e d even where the d e f e n d a n t and p l a i n t i f f 97 own n e a r l y a l l o f the s h a r e s between them. In one c a s e where the c o u r t s a i d t h a t the m a j o r i t y were t o be a s k e d , f i r s t t o see whether t h e y wanted to ta k e some a c t i o n t h e m s e l v e s and, second t o d e c i d e t h a t no a c t i o n be b r o u g h t a t a l l , even by the p l a i n t i f f , i t a d o p t e d a r e a -98 s o n a b l e n e s s t e s t i n d e t e r m i n i n g whether demand s h o u l d be made. I f the s h a r e h o l d e r s a r e s m a l l i n number and t h e demand may be c o h e r e n t l y 9 5 H a f f e r v. V o i t , 219 F. 2d 704 (1955).9 6 D e l a w a r e & Hudson Co. v. A l b a n y & S.R. Co., 213 U.S. 435 (1909). 9 7 H a l p r i n v. B a b b i t t , 303 F. 2d 138 (1962). 98 L e v i t t v. Johnson, supra, note 94. - 41 -put t o them w i t h a chance o f a r e a s o n e d r e s p o n s e then such demand be made, but i n c a s e s o f g r e a t burden and u n l i k e l y s u c c e s s i t need n o t . The q u e s t i o n o f demand on s h a r e h o l d e r s r a i s e s t he a s s o c i a t e d i s s u e o f r a t i f i c a t i o n . Is demand b e i n g made p u r e l y t o see whether the company w i l l b r i n g t he a c t i o n i n s t e a d o f the p l a i n t i f f s h a r e h o l d e r 99 o r i s i t , as was s u g g e s t e d i n Levitt v. Johnson, t o g i v e t h e m a j o r i t y a chance t o r u l e t h a t the a c t i o n s h o u l d n o t p r o c e e d a t a l l ? Some c a s e s make a d i s t i n c t i o n between t h o s e t r a n s a c t i o n s which can be r a t i f i e d by the company i n g e n e r a l m e e t i n g and th o s e which c a n n o t . For example, i n Steinberg v. Adams\^ the c o u r t found t h a t no p r o o f o f demand was n e c e s s a r y where the p l a i n t i f f was a l l e g i n g t h a t the de f e n d a n t s had committed an i l l e g a l a c t as t h i s c o u l d n o t be r a t i -f i e d by the s h a r e h o l d e r s . Of c o u r s e , t h i s r a i s e s t he fundamental i s s u e o f when r a t i f i c a t i o n w i l l be p o s s i b l e , an i s s u e complex i n i t s e l f and one which w i l l be d i s c u s s e d i n more d e t a i l l a t e r i n t h i s p a p e r . ^ F or p r e s e n t p u r p o s e s , s u f f i c e i t t o say t h a t t h e r e i s a u t h o r i t y f o r the p r o p o s i t i o n t h a t c e r t a i n a c t s c a n n o t be r a t i f i e d a t a l l and c o n f l i c t i n g c a s e s which would a l l o w r a t i f i c a t i o n , b u t o n l y by a d i s i n t e r e s t e d m a j o r i t y . The way the c o u r t views r a t i f i c a t i o n w w i l l u s u a l l y d e t e r m i n e whether t h e y r e q u i r e demand o f the s h a r e h o l d e r s 102 o r n o t . In Continental Securities Co. V. Belmont where a m a j o r i t y o f s h a r e h o l d e r s , even i f d i s i n t e r e s t e d were not a l l o w e d t o r a t i f y a m i s a p p r o p r i a t i o n by the d i r e c t o r s , demand was no t r e q u i r e d w h i l e i n 99 Supra, note 94. 1 0 0 9 0 F. Supp. 604. ^ S e e infra, p. 81 and f o l l o w i n g , 1 0 2 9 9 N.E. 138 (1912 ) . - 42 -103 the more r e c e n t case) o f Claman v. Robertson a d i s i n t e r e s t e d m a j o r i t y was a l l o w e d t o r a t i f y a sh a r e i s s u e f o r a l l e g e d l y i n s u f f i c i e n t con-104 s i d e r a t i o n and demand was h e l d n e c e s s a r y . The c o u r t t h e r e s a i d : Since a m a j o r i t y of shareholders can r a t i f y the ac t i o n s of the d i r e c t o r s , and s i n c e , i n the present cause, a m a j o r i t y have so r a t i f i e d , i t i s e s s e n t i a l that some a f f i r m a t i v e a c t i o n be taken by the p l a i n t i f f i n order to negate that r a t i f i c a t i o n . That a f f i r m a t i v e a c t i o n must be i n the form of demand made on the shareholders. The c o n f l i c t i n g d e c i s i o n s make any summary d i f f i c u l t b u t i t a p p e a r s as though demand t h a t the s h a r e h o l d e r s : - j b r i n g the a c t i o n i s r e q u i r e d i n most c a s e s where r a t i f i c a t i o n i s p o s s i b l e e i t h e r because the wrong i s n o t such t h a t i t c a n n o t be approved o f o r becaus e . a d i s i n t e r e s t e d m a j o r i t y i s a l l o w e d t o v o t e . U n l e s s demand would be u s e l e s s because o f the p o s i t i o n o f the m a j o r i t y - o r where the 105 r e q u i r e m e n t has been i m p l i e d l y removed by s t a t u t e , i t i s a nec e s -s a r y p r o c e d u r a l p r e l i m i n a r y . Many s t a t e s a l s o r e q u i r e t h e p o s t i n g o f s e c u r i t y f o r t h e expenses o f the c o r p o r a t i o n , i n c l u d i n g i t s c o u n s e l ' s f e e s , by a s h a r e h o l d i n g b r i n g i n g a d e r i v a t i v e c l a i m . Based on a, f e a r o f s t r i k e s u i t s , t h i s l e g i s l a t i o n has become a major s t u m b l i n g b l o c k f o r many l i t i g a n t s , some o f whom t r y t o a c h i e v e t h e i r day i n c o u r t t hrough a p e r s o n a l s u i t i n s t e a d . The most common form o f the r e q u i r e m e n t i s t h a t share-' h o l d e r s w i t h l e s s than a c e r t a i n p e r c e n t a g e ( u s u a l l y f i v e p e r c e n t ) o f t h e o u t s t a n d i n g s h a r e s t h r o u g h d i r e c t ownership o r c o n t r o l o f v o t i n g t r u s t s must p o s t o f bond, the s i z e o f which w i l l be d e t e r m i n e d 1 0 3 1 2 8 N.E. 2d 429 (,1955). 104 i ^Ibid., p. 436. , • 1 0 5 N . Y . Bus. Co r p . Law s. 626; Ohio Rev. Code'Ann s. 2307.311 ; Cal Corp. Code s. 834. I t i s o n l y i m p l i e d l y removed because t h e s e s t a t u t e s do not i n c l u d e a r e q u i r e m e n t o f demand o f the s h a r e h o l d e r s whereas t h e y do r e q u i r e demand o f the d i r e c t o r s . C o n t r a s t F e d e r a l Rule 23.1 which r e q u i r e s b o t h . - 43 -by the c o u r t . T h i s o b v i o u s l y a c t s a g a i n s t the s m a l l s h a r e h o l d e r s but does n o t p r e j u d i c e t h o s e w i t h l a r g e r h o l d i n g s ; i f a p l a i n t i f f can s u c c e e d i n h a v i n g o t h e r s j o i n him i n h i s a c t i o n , t h e i r combined h o l d i n g s may then exceed the minimum p e r c e n t a g e and the p r o v i s i o n can be a v o i d e d . A t t h i s p o i n t , f u r t h e r problems a r i s e i n d e c i d i n g who may i n t e r v e n e and i n what c i r c u m s t a n c e s . The m a j o r i t y view appears t o be t h a t i n o r d e r t o i n t e r v e n e a s h a r e h o l d e r has t o f u l f i l t h e same q u a l i f i c a t i o n r e q u i r e m e n t s as the main p l a i n t i f f Once a d e r i v a t i v e a c t i o n has been s u c c e s s f u l l y commenced the now p r e v a i l i n g r u l e f o l l o w i n g the a d o p t i o n o f F e d e r a l Rule 23.1 i n most j u r i s d i c t i o n s i s t h a t the p l a i n t i f f c a n n o t s e t t l e o r d i s m i s s the a c t i o n w i t h o u t the c o n s e n t o f the c o u r t . T h i s r u l e was d e s i g n e d t o p r e v e n t s h a r e h o l d e r s b r i n g i n g d e r i v a t i v e s u i t s and then b a r g a i n i n g w i t h the d e f e n d a n t s f o r a s e t t l e m e n t which they t h e m s e l v e s m i g h t p o c k e t . I t r e p l a c e s the common law which a l l o w e d p l a i n t i f f s t o h a n d l e the c a s e s i n any way t h e y w i s h e d , the f a c t t h a t i t was r e a l l y t h e company's a c t i o n n o t w i t h s t a n d i n g . Where a s e t t l e m e n t i s p r o p o s e d , the c o u r t w i l l examine i t s m e r i t s and i f i t a c c e p t s i t , i t may s u p e r v i s e i t s e x e c u t i o n . In some j u r i s d i c t i o n s , the c o u r t can o r d e r expenses p a i d out o f the s e t t l e m e n t and the b a l a n c e t o be p a i d o v e r t o the company.^ 0 7 I f the o l d common law s t i l l e x i s t s i n any s t a t e i t does n o t g i v e t h e i n i t i a l p l a i n t i f f a b s o l u t e c o n t r o l o f the c a s e u n l e s s he remains the o n l y p l a i n t i f f ; i f any o t h e r s h a r e h o l d e r s i n t e r v e n e , t h e i r w i s h e s must be taken i n t o c o n s i d e r a t i o n ' v 108 i n the p r o s e c u t i o n o f the c a s e o r i t s s e t t l e m e n t . 1 0 6 B r e s w i c k & Co. v. H a r r i s o n Rye R e a l t y Corp., 114 N.Y.S. 2d 25 (195 1 0 7 N . Y . Bus. Corp. Law s. 6 2 6 ( e ) ; W i s c o n s i n Bus. Corp. Law s.180 405( 1 0 8 W h i t e v. B r i t i s h Type I n v e s t o r s 21 A. 2d 681. - 44 -As i s i n d i c a t e d above, i t i s p o s s i b l e f o r a c o u r t t o o r d e r t h a t the p l a i n t i f f be r e i m b u r s e d f o r h i s expenses o u t o f the r e c o v e r y made by t he company. T h i s i s g e n e r a l l y n o t a s t a t u t o r y power but i s based on the i d e a a t common law t h a t t he p l a i n t i f f was b r i n g i n g t h e a c t i o n on b e h a l f o f the company and had no p e r s o n a l s t a k e i n i t . I f the p l a i n t i f f f a i l s he may f o r f e i t p a r t o f h i s bond p o s t e d as s e c u r i t y o r s i m p l y have c o s t s awarded a g a i n s t him; i n t h i s i n s t a n c e i t appe a r s t h a t t he company does n o t pay the expenses u n l e s s i t has g o t some b e n e f i t o u t o f the a c t i o n . S t r a n g e l y enough, the a b i l i t y t o make the u n s u c c e s s f u l p l a i n t i f f pay c o s t s depends on s t a t u t o r y a u t h o r i -z a t i o n so t h a t i f no such s t a t u t e e x i s t s , t h e company b e a r s t he expense whether the l i t i g a t i o n i s s u c c e s s f u l o r n o t . I f the p l a i n t i f f i s s u c c e s s f u l , and some b e n e f i t i s g a i n e d f o r the company, h i s expenses i n c l u d i n g l e g a l f e e s , w i l l be p a i d by the company. Ther e i s some d i s p u t e as t o whether the b e n e f i t a c h i e v e d must be i n money terms b e f o r e reimbursement i s p o s s i b l e b ut the b e t t e r view ap p e a r s t o be t h a t n o n p e c u n n i a r y b e n e f i t s such as the c a n c e l l a t i o n o f a c o n t r a c t 109 or an improper s h a r e i s s u e w i l l a l s o a l l o w t he p l a i n t i f f t o r e c o v e r . These p r o v i s i o n s a l s o a p p l y where the a c t i o n i s t e r m i n a t e d by s e t t l e m e n t r a t h e r than by judgment as l o n g as t h e c o u r t has u p h e l d the s e t t l e -ment; t h i s i s one r e a s o n why the c o u r t w i l l be i n v o l v e d i n a s e t t l e m e n t even i f i t i s not r e q u i r e d t o be by s t a t u t e . The p r o c e d u r a l and s u b s t a n t i v e p r e l i m i n a r y r e q u i r e m e n t s which have been o u t l i n e d make the b r i n g i n g o f a d e r i v a t i v e a c t i o n i n the U n i t e d S t a t e s a d i f f i c u l t u n d e r t a k i n g . D e s i g n e d p r i m a r i l y t o p r e v e n t s t r i k e 1 0 9 M e n c h e r v. S a c h s , 164 A. 2d 320. - 45 -s u i t s i n which the p l a i n t i f f may d i r e c t l y b e n e f i t and t o l i m i t the d i v e r s i t y j u r i s d i c t i o n o f t h e F e d e r a l c o u r t (a problem which does not a r i s e i n the Commonwealth), t h e s e r e q u i r e m e n t s have s e r v e d t o make the p e r s o n a l o r d i r e c t a c t i o n a more a t t r a c t i v e remedy i n many c a s e s . Of c o u r s e , t h e r e w i l l be i n s t a n c e s when the company,alone has been i n j u r e d so t h a t no p e r s o n a l a c t i o n w i l l be p o s s i b l e . B e f o r e l e a v i n g t h i s t o p i c , i t i s t h e r e f o r e p r o p o s e d t h a t the t y p e s o f a c t i o n which can be b r o u g h t as d e r i v a t i v e c l a i m s o n l y , be b r i e f l y examined; a g a i n , i t i s o u t s i d e the scope o f t h i s paper t o c o n s i d e r them i n any d e t a i l . Types o f D e r i v a t i v e A c t i o n s A l t h o u g h the n a t u r e o f the d e r i v a t i v e a c t i o n i s t h a t i t i s • b r o u g h t ' o n b e h a l f o f the company, t h e r e are s e v e r a l e x p l a n a t i o n s o f why an i n d i v i d u a l i s a l l o w e d t o assume the r i g h t s o f the company i n t h i s way. One, i n f a c t , goes so f a r as t o s u g g e s t t h a t i t i s i n d i v i d u a l r i g h t s which have been a f f e c t e d ^ 0 but a b e t t e r - v i e w i s t h a t t h e r e i s a r i g h t i n e q u i t y a k i n t o s p e c i f i c p e r f o r m a n c e which a l l o w s a s h a r e h o l d e r t o compel the company to. b r i n g an a c t i o n t o e n f o r c e i t s r i g h t s a g a i n s t the w r o n g d o e r s . ^ The a c t i o n i s i n d e e d always b r o u g h t i n e q u i t y u n l i k e ^ a p e r s o n a l a c t i o n which may be e i t h e r a t law o r i n e q u i t y ; t h a t i s , i f i t i s b r o u g h t a t common law a t a l l b ecause many s t a t e s now have s t a t u t o r y p r o v i s i o n s r e g u l a t i n g such s u i t s and we have a l r e a d y seen the w o r k i n g s o f R u le 23.1 i n the , F e d e r a l c o u r t s . The most common cause o f d e r i v a t i v e a c t i o n i s where the d i r e c t o r s 1 1 0 M i m n a u g h v. A t l a n t i c C i t y E l e c . Co., 70 A. 2d 904. 1 1 ' ' r i a l pern v.. Pennsyl vaniab.R. Co., 189 F. Supp. 494; - 46 -have a c t e d i n b r e a c h o f t h e i r f i d u c i a r y d u t y t o the. company and done t h i n g s t o t h e i r own advantage r a t h e r than t o b e n e f i t the company. T h i s can o c c u r i n an o u t r i g h t way where d i r e c t o r s e x p r o p r i a t e the a s s e t s o f the company o r i n a more i n d i r e c t way such as making a g a i n from the s a l e o f a c o n t r o l b l o c k o f s h a r e s . A c t u a l f r a u d i n t he sense o f l e g a l d i s h o n e s t y i s n o t r e q u i r e d but t h e r e must be a c a s e "made out which p l a i n l y shows t h a t such a c t i o n i s f a r opposed to the t r u e i n t e r e s t s o f the c o r p o r a t i o n i t s e l f as t o l e a d t o t h e c l e a r i n f e r e n c e t h a t no one thus a c t i n g c o u l d have been i n f l u e n c e d 113 by an h o n e s t d e s i r e t o s e c u r e such i n t e r e s t s . " E x c e s s i v e pay-ments o u t by the company i n the form o f s a l a r i e s , d i v i d e n d s o r c o n s i d e r a t i o n f o r a s s e t s p u r c h a s e d by t h e company have been s u c c e s s -f u l l y a t t a c k e d as have s i t u a t i o n s where the payment i n t o the company f o r s h a r e s , d e b e n t u r e s o r w a r r a n t s g i v e n by i t have been i n s u f f i c i e n t . However, where the a c t i o n does n o t amount t o f r a u d o r does n o t r e f l e c t a m o t i v e which i s n o t i n the company's b e s t i n t e r e s t the c o u r t w i l l n o t u s u a l l y i n t e r f e r e . In o t h e r words, i f t h e d i r e c t o r s appear t o be a c t i n g u n w i s e l y o r w i t h o u t due e x p e d i e n c e t h i s i s a p u r e l y m a t t e r o f t h e i r b u s i n e s s judgment and w i l l n o t be q u e s t i o n e d by the c o u r t s . On the o t h e r hand mismanagement which does take on an a p p e a r a n c e o f u n f a i r o r i n t e r e s t e d b i a s i s a c t i o n a b l e . For example, c a u s i n g changes i n the market v a l u e ( u s u a l l y d e p r e s s i n g the v a l u e ) by i n t e n t i o n a l m a n i p u l a t i o n so as t o i n d u c e m i n o r i t y s h a r e h o l d e r s t o 114 s e l l o r s u r r e n d e r t h e i r s h a r e s , a r b i t r a r i l y c o n t r o l l i n g t h e s a l e and p u r c h a s e o f a s s e t s so t h a t o t h e r s h a r e h o l d e r s a r e a d v e r s e l y 112 P e r l man v. Feldmann, supra, note 31. 1 1 3 G a m b l e v. Queens County Water Co., 25 N.E. 201. 1 1 4 P a t t o n v. N i c h o l a s , 279 S.W. 2d 848. a f f e c t e d o r a w a s t e f u l use o f company r e s o u r c e s o f t e n f o r p e r s o n a l g a i n have a l l been h e l d t o s u p p o r t a d e r i v a t i v e a c t i o n . G e n e r a l mismanagement o r f r a u d u l e n t a c t s by the c o n t r o l l e r s o f a company a r e t o be d i s t i n g u i s h e d from u l t r a v i r e s a c t s . I t has been seen t h a t t h r e a t e n e d u l t r a v i r e s a c t s can be c o m p l a i n e d o f i n a p e r s o n a l s u i t b u t once such a c t s have been consummated a s e c o n d a r y a c t i o n on b e h a l f o f the company must be m a i n t a i n e d . The main form which u l t r a v i r e s a c t s t a k e i s the use. o f company a s s e t s f o r p u r p o s e s o u t s i d e t h o s e s e t o u t i n i t s c h a r t e r o r a r t i c l e s . I t may f o r example, be o u t s i d e t he power o f a p a r t i c u l a r company t o purchase" i t s own s h a r e s o r t o i s s u e c e r t a i n t y p e s o f s e c u r i t i e s and an at t e m p t t o do so can be impeached. N o r m a l l y , ^ t h e r e s u l t i s t h a t such a c t i o n s a r e v o i d r a t h e r than v o i d a b l e , b ut o f c o u r s e someone must a t t a c k t he t r a n s a c t i o n b e f o r e i t i s s t r u c k down. Remedies The r e l i e f which i s a v a i l a b l e i n a d e r i v a t i v e a c t i o n i s the same as t h a t which the company might have g o t had i t been p l a i n t i f f . In o r d e r t o p r e v e n t a t h r e a t e n e d w r o n g f u l a c t an i n j u n c t i o n w i l l f r e q u e n t l y be g i v e n but once the a c t has been committed o t h e r remedies a r e n e c e s s a r y . These i n c l u d e a d e c l a r a t i o n t h a t a t r a n s -a c t i o n such as a s h a r e i s s u e o r r e d e m p t i o n o r the e n t e r i n g i n t o o f a c e r t a i n c o n t r a c t i s v o i d , o r a d e c l a r a t i o n d e t e r m i n i n g t h e r e l a t i v e i n t e r e s t s o f t h e p a r t i e s . Unpaid s u b s c r i p t i o n s may be o r d e r e d p a i d and where n e c e s s a r y an a c c o u n t i n g can be c a l l e d f o r . S p e c i f i c p e r f o r m a n c e , say o f a t r a n s f e r , o f p r o p e r t y by d i r e c t o r s t o the company where i t i s shown t h a t t h e y bought on the company's 1 1 5 F r a n k l i n Nat. Bank v. K e n n e r l y Coal & Coke Co., 150 A. 902. - 48 -b e h a l f , has a l s o been g i v e n . A r e c o v e r y o f damages by t h e company i n such c i r c u m s t a n c e s as an i s s u e o f s h a r e s f o r less-"than t h e i r t r u e v a l u e o r money m i s a p p r o p r i a t e d by c o n t r o l l e r s i s a common form o f r e d r e s s . I n t e r e s t on the amount r e c o v e r e d can a l s o be awarded. N o r m a l l y t h e r e c o v e r y w i l l be f o r t h e b e n e f i t o f t h e company o n l y but as we have seen when d i s c u s s i n g p e r s o n a l a c t i o n s , i n d i v i d u a l r e c o v e r y i s p o s s i b l e i n c e r t a i n c i r c u m s t a n c e s . B. COMMONWEALTH P r o c e d u r a l D i f f e r e n c e s I t has been seen t h a t i n the S t a t e s t h e r e a r e c o n s i d e r a b l e p r o c e d u r a l and, t o a l e s s e r e x t e n t , s u b s t a n t i v e d i f f e r e n c e s between d e r i v a t i v e and p e r s o n a l a c t i o n s . These d i f f e r e n c e s ^ h a y e ^ c a u s e d t h e p e r s o n a l a c t i o n t o become more p o p u l a r so t h a t whenever a c h o i c e e x i s t s i t w i l l be p r e f e r r e d o v e r the d e r i v a t i v e c l a i m . In t h e Commonwealth, s i m i l a r p r e f e r e n c e may be shown i n the f u t u r e , e spe-c i a l l y i n th o s e j u r i s d i c t i o n s which have c o d i f i e d the p r a c t i c a l r e q u i r e m e n t s f o r d e r i v a t i v e a c t i o n s . ^ T h i s may be e s p e c i a l l y so i f t h e p e r s o n a l a c t i o n i s n o t l i m i t e d t o br e a c h e s o f c o n t r a c t u a l r i g h t s and s u i n g t o e n j o i n proposed u l t r a vires a c t i o n s as i t appears t o be a t p r e s e n t ; i n t h i s r e g a r d , the w r i t e r a g r e e s w i t h 118 P r o f e s s o r Beck who s a y s : [ i ] t i s submitted that the personal r i g h t s category i s i n f a c t much broader than has been thought to be. the case. 1 1 6 B r i t i s h C o lumbia, s. 222 Companies A c t , 1973, c. 18; O n t a r i o , s. 99 B u s i n e s s C o r p o r a t i o n s A c t , 1970, c.53. ^ ^ 7 C f . Gower, Modern Company Law, op. ait., note 9, pp. 593-4. 1 1 8 " T h e S h a r e h o l d e r s ' D e r i v a t i v e A c t i o n , " 1974 Can. Bar Rev. 159, 170. - 49 -In d i s c u s s i n g the t w o ^ a c t i o n s i n the Commonwealth i t i s perhaps b e s t to b e g i n w i t h the p r a c t i c a l r e q u i r e m e n t s which s u r r o u n d them and t o c o n s i d e r the s b u s t a n t i v e d i f f e r e n c e s s h o r t l y . I t s h o u l d be s t r e s s e d t h a t o n l y the d i f f e r e n c e s between the a c t i o n s w i l l be d i s c u s s e d h e r e . The law s u r r o u n d i n g d e r i v a t i v e a c t i o n s per se has been a d e q u a t e l y 119 c a n v a s s e d e l s e w h e r e . , v As i n the U n i t e d S t a t e s where t h e r e a r e no f o r m a l i t i e s t o be co m p l i e d b e f o r e a p e r s o n a l a c t i o n can be commenced, so too i n the Commonwealth such a c t i o n s have v i r t u a l l y no p r o c e d u r a l h u r d l e s t o go th r o u g h . As l o n g as the p l a i n t i f f i s a f f e c t e d by the wrong i t does not m a t t e r when he became a s h a r e h o l d e r . I t i s even a c c e p t a b l e 120 t h a t he p u r c h a s e d s h a r e s p u r e l y t o g e t s t a n d i n g , a l t h o u g h such a c t i o n "would meet w i t h l i t t l e a p p r o v a l i n t h i s C o u r t [ C h a n c e r y ] 121 . . . o r any o t h e r c o u r t " and may a f f e c t the t y p e o f r e l i e f g i v e n o r the o b t a i n i n g o f r e l i e f a t a l l . What i s not a l l o w e d i s a p l a i n t i f f b u y i n g s h a r e s a t someone e l s e ' s i n s t i g a t i o n t o e n a b l e him t o sue; See Gower, Modern Company Law, op. ait. note 9, pp. 588-592; B o y l e & Syk e s , Gore-Brown on Companies, 42nd ed., J o r d a n & Sons, pp. 783-795; P e n n i n g t o n , Company Law, 2nd ed., B u t t e r w o r t h s , pp. 537-539; and see t h o s e a r t i c l e s mentioned i n f o o t n o t e 2, supra. 1 2 0 B l o x a m v. M e t r o p o l i t a n Ry. (1868) L.R. 3 Ch. App. 337. 1 2 1 S e a t o n v. Gr a n t (1867) L.R. 2 Ch. App. 459. Both t h i s case and Bloxam v. M e t r o p o l i t a n Ry., supra, note 120, a r e c i t e d by P r o f e s s o r Gower, Modern Company Law, op. ait., note 90, p. 592 f o r the same p r o p o s i t i o n b u t i n r e s p e c t o f d e r i v a t i v e r a t h e r than p e r s o n a l a c t i o n s . Both c l a i m s were b r o u g h t as r e p r e s e n t a t i v e ones and a l t h o u g h the sub-s t a n c e o f the Seaton case s u i t s a d e r i v a t i v e a c t i o n b e t t e r than a p e r s o n a l one i t i s s u b m i t t e d t h a t the c o u r t i n bo'th c a s e s t r e a t e d the p l a i n t i f f as having„an a c t u a l i n t e r e s t i n the s u b j e c t m a t t e r o f the c l a i m (something': which i s n o t r e q u i r e d i n a d e r i v a t i v e a c t i o n ) and i n Seaton i t s a i d t h a t the p l a i n t i f f by h i m s e l f would have an i n s u f f i c i e n t i n t e r e s t but w i t h a l l o f the o t h e r s h a r e h o l d e r s j o i n e d as w e l l , s u f f i c i e n t i n t e r e s t s were r e p r e s e n t e d t o s u p p o r t the c l a i m . Such an a n a l y s i s would not have been n e c e s s a r y i f i t was the company's i n t e r e s t which was a t s t a k e . ; - 50 -f o r example the d i r e c t o r s o f a r i v a l company c a n n o t a t t a c k t h e i r 122 opponent by t h i s method. I t would appear t o be unusual c i r c u m -123 s t a n c e s , such as a c o n t i n u i n g wrong committed by d i r e c t o r s o r where t h e p l a i n t i f f s u f f e r s a l o s s on s e l l i n g h i s s h a r e s and then 124 buys i n a g a i n , which would a l l o w him t o sue p e r s o n a l l y even i f he bought s h a r e s a f t e r t h e e v e n t . The r e q u i r e m e n t t h a t the p l a i n t i f f have s u f f e r e d p e r s o n a l l y , d e s p i t e t h e f a c t t h a t he bought s h a r e s a f t e r t h e main e v e n t com-p l a i n e d o f i s a l o g i c a l one and i n k e e p i n g w i t h t h e c o n c e p t o f per-, s o n a l a c t i o n s as d e v e l o p e d i n the S t a t e s . I t seems t o have been l o s t s i g h t o f i n Provident International Corp. v. International 125 Leasing Corp. Ltd. but perhaps when the s t a t u t o r y power o f " r e c t i f i c a t i o n o f the s h a r e r e g i s t e r i s i n v o k e d , any member, whether i n j u r e d o r n o t , i s a l l o w e d t o sue p e r s o n a l l y . Assuming t h a t t h e p l a i n t i f f does have t o have been i n d e p e n d e n t l y wronged he does n o t have t o be the r e g i s t e r e d owner o f t h e s h a r e s a t the time t h e a c t i o n i s h e a r d p r o v i d e d t h a t he i s n o t seen t o have waiv e d t h e wrong by s e l l i n g the s h a r e s . A p e r s o n a l a c t i o n can be br o u g h t as a r e p r e s e n t a t i v e c l a i m on b e h a l f o f t h o s e members s i m i l a r l y a f f e c t e d b u t t h e r e i s no j u d i c i a l I og mandate r e q u i r i n g t h i s t o be n e c e s s a r i l y done. T h e r e w i l l however, 122 F o r r e s t v. Ma n c h e s t e r , S h e f f i e l d and L i n c o l n s h i r e R l y Co. 7 J u s . N.S. 887. 1 23 Bloxam v. M e t r o p o l i t a n Ry, supra, note 120. 124 Seaton v. G r a n t , supra, note 121. I t would have been n e c e s s a r y a t t h i s t ime t o own s h a r e s i n o r d e r t o sue because a l t h o u g h t h e a c t i o n here a p p e a r s t o be p e r s o n a l ( s e e f o o t n o t e 121, supra) i t s h o u l d p r o -b a b l y have been t r e a t e d as a d e r i v a t i v e one u n l e s s t h e c o u r t saw the d i r e c t o r s as rowing > a d u t y t o s h a r e h o l d e r s - a m a t t e r which was n o t r a i s e d . 1 2 5 ( 1 9 6 9 ) 89 W.N. ( P t . l ) (N.S.W.) 370-- see a d i s c u s s i o n o f t h i s p o i n t infra . . v 1 2 6 A n s e t t v. B u t l e r A i r T r a n s p o r t L t d . ( N o . l ) (1958) 75 W.N.(N.S.W.)299. - 51 -be o c c a s i o n s when a r e p r e s e n t a t i v e , c l a s s a c t i o n would be p r e f e r a b l e t o an i n d i v i d u a l c l a i m both from t h e p l a i n t i f f ' s p o i n t o f view (because o f a a p r e a d i n g o f the expenses) and the company's i n a v o i d i n g a m u l t i p l i c i t y o f s u i t s . In any e v e n t , from t h e American e x p e r i e n c e , i t would appear t h a t o t h e r s h a r e h o l d e r s would be a l l o w e d t o i n t e r v e n e i n the p l a i n t i f f ' s c a s e even i f i t wasn't b r o u g h t as a c l a s s a c t i o n t o b e g i n w i t h . When c o n s i d e r i n g the d e f e n d a n t s i n a p e r s o n a l a c t i o n i t must be remembered t h a t the company, i f j o i n e d a t a l l , w i l l be br o u g h t i n as a t r u e d e f e n d a n t r a t h e r than as a nominal one as i n a d e r i v a t i v e c l a i m . However, i t i s o n l y n e c e s s a r y t o j o i n the company as a d e f e n -d a n t when i t i s t o be a f f e c t e d by the judgment. F o r example i n 127 Allen v. Hyatt t h e company was not j o i n e d , as the d e s i r e d r e s u l t was m e r e l y a d e c l a r a t i o n t h a t p r o f i t s made on a r e s a l e . o f s h a r e s by " d i r e c t o r s were h e l d i n t r u s t f o r the p l a i n t i f f s . Moreover i f , as I OR a p p e a r s p o s s i b l e f o l l o w i n g the Winchell v. Bel lotto d e c i s i o n , a p e r s o n a l a c t i o n i s a l l o w e d based on the American d e c i s i o n o f Jones 129 v. H.F. Ahmanson & Co. c o m p l a i n i n g o f a c o n s p i r a c y by d i r e c t o r s t o d r i v e down the market v a l u e o f s h a r e s , the company w i l l h o t have t o be j o i n e d here e i t h e r . S i m i l a r l y , d i r e c t o r s need not be i n c l u d e d -as 130 d e f e n d a n t s u n l e s s some r e l i e f i s r e q u i r e d a g a i n s t them. Some o f the r e q u i r e m e n t s f o r a d e r i v a t i v e a c t i o n a t common law have a l r e a d y been m e n t i o n e d ; t h e s e i n c l u d e the f a c t t h a t the c l a i m 127 (1914) 17 D.L.R. 7. ![1977] 1 C.P.C. 338. ] Supra, n o t e 30. 'Gower, Modern Company Law, op. ait., n o t e 9, p. 593. 128 129 130, 131 must always be bro u g h t as a r e p r e s e n t a t i v e one : and t h a t , because i t i s i n f a c t a c l a i m on b e h a l f o f the company, t he company must be j o i n e d as a p a r t y . Of c o u r s e , t h e company can o n l y be a d e f e n d a n t , a l b e i t a nominal one, because the whole raison d'etre o f a d e r i v a t i v e c l a i m i s t h a t the company has been p r e v e n t e d from b r i n g i n g t h e a c t i o n i n i t s own name. As would seem l o g i c a l and i n c o n t r a s t t o the American p o s i t i o n , where the a c t i o n i s on b e h a l f o f the company r a t h e r than the a c t u a l p l a i n t i f f , t h e p l a i n t i f f a p p e a r s n ot t o have t o have been a s h a r e h o l d e r a t the time the wrong was> committed, a l t h o u g h t h e 132 c a s e s c i t e d i n s u p p o r t o f t h i s p r o p o s i t i o n a r e somewhat ambiguous. What i s c l e a r i s t h a t t h e p l a i n t i f f must own some s h a r e s a t the time 133 the a c t i o n i s br o u g h t and remain a member t h r o u g h o u t i t s c u r r e n c y . However, i f he ce a s e s t o be a member the c o u r t may a l l o w the a c t i o n 133 c o n t i n u e d by some o t h e r s h a r e h o l d e r . D e s p i t e t h e f a c t t h a t i t i s a wrong t o the company which i s sought t o be remedied and t h a t t h e p l a i n t i f f need have no i n t e r e s t i n the c l a i m a p a r t from b e i n g a member th e a c t i o n remains one i n .equity and e q u i t a b l e p r i n c i p l e s a p p l y t o the p l a i n t i f f p e r s o n a l l y . T h e r e f o r e , i f he has p a r t i c i p a t e d i n t h e scheme a t t a c k e d i n the a c t i o n o r l a t e r approved o f i t , he w i l l n o t be 134 a l l o w e d t o p r o c e e d . However, mere a c q u i e s c e n c e i n an u l t r a vires a c t under which t h e p l a i n t i f f has r e c e i v e d no b e n e f i t may n o t p r e v e n t 135 him from b r i n g i n g t h e c l a i m . 131 T h i s r e q u i r e m e n t i s s u b j e c t t o a r e p r e s e n t a t i v e a c t i o n b e i n g p r a c t i c a b l e . See the d i s c u s s i o n on i t when o n l y two s h a r e h o l d e r s , o r perhaps o n l y one, e x i s t i n F e l d v. G l i c k (1975) 8 O.R. (2d) 8, 13-15. 132 • See f o o t n o t e 121 supra. 1 3 3 B i r c h v. S u l l i v a n [1957] 1 W.L.R. 370. 1 3 d ' Gray v. Y e l l o w k n i f e G o l d Mines L t d . (No. 1) [1947] O.R. 928; Towers v. A f r i c a n Tug [1904] 1 Ch. 558; Henderson v. S t r a n g 54 D.L.R. 674. 1 3R P a c i f i c C o a s t Coal Mines L t d . v. A r b u t h n o t [1917] A.C. 607; Sass v. S t . N i c h o l a s Mutual B e n e f i t A s s o c . [1936] 4 D.L.R. 474. - 53 -The common law p o s i t i o n has been c o d i f i e d and t o some e x t e n t m o d i f i e d by s t a t u t o r y p r o v i s i o n s i n B r i t i s h C o lumbia, O n t a r i o 130 and by the F e d e r a l B u s i n e s s C o r p o r a t i o n s A c t . I t would be i n s t r u c t i v e t o s e t o u t one o f t h e s e s e c t i o n s a t t h i s s t a g e because f r e q u e n t r e f e r e n c e w i l l be made t o i t l a t e r i n t h i s p a r t o f the pap e r . S e c t i o n 222 o f the B r i t i s h Columbia Companies A c t w i l l be used and r e f e r e n c e s t o any d i f f e r e n c e s w i t h t h e o t h e r p r o v i s i o n s w i l l be made where a p p l i c a b l e . T h i s s e c t i o n i s as f o l l o w s : 222. (1) A member or d i r e c t o r of a company may, w i t h leave of the Court, b r i n g an a c t i o n i n the name and on behalf of the company. (a) to enforce any r i g h t , duty, or o b l i g a t i o n owed to the company that could be enforced by the company i t s e l f ; or (b) to o b t a i n damages f o r any breach of any such r i g h t , duty, or o b l i g a t i o n , whether the r i g h t , duty, or o b l i g a t i o n a r i s e s under t h i s Act or otherwise. (2) A member or d i r e c t o r of a company may, w i t h leave of the Court, i n the name and on behalf of the company, defend an a c t i o n brought against the company. (3) A member or d i r e c t o r may, upon n o t i c e to the company, apply to the Court f o r the leave referred-'to i n subsection (1) or (2) and, i f (a) he has made reasonable e f f o r t s to cause the d i r e c t o r s of the company to commence or d i l i g e n t l y prosecute or defend the a c t i o n ; (b) he i s a c t i n g i n good f a i t h ; (c) i t i s prima f a c i e i n the i n t e r e s t s of the company that the a c t i o n be brought or defended; and / (d) i n the case of an a p p l i c a t i o n by a member, he was a member of the company at the time of the t r a n s a c t i o n or other event g i v i n g r i s e to the cause of a c t i o n ; the Court may r e q u i r e that n o t i c e of the a p p l i c a t i o n be served upon such persons, and may grant the leave upon such terms as i t considers ap p r o p r i a t e . (4) While an a c t i o n brought or defended under t h i s s e c t i o n i s pending, the Court may, (a) on the a p p l i c a t i o n of any member or d i r e c t o r , a u t h o r i z e any person to c o n t r o l the conduct of the a c t i o n or give any other d i r e c t i o n s f o r ' the 1 3 6 s . 2 2 2 , B.C. Companies A c t , 1973, c.18 137 s. 99 O n t a r i o B u s i n e s s C o r p o r a t i o n s A c t . 138 s s . 231-233 Canada B u s i n e s s C o r p o r a t i o n s A c t . - 54 -conduct of the a c t i o n ; and (b) on the a p p l i c a t i o n of the person c o n t r o l l i n g the conduct of the a c t i o n , order upon such terms and co n d i t i o n s as i t sees f i t , that the company pay him i n t e r i m c o s t s , i n c l u d i n g l e g a l fees and d i s -bursements, f o r which he may be made accountable to the company by the Court on the f i n a l d i s p o s i t i o n of the a c t i o n . (5) On the f i n a l d i s p o s i t i o n of the a c t i o n the Court may order that the costs taxed as between a s o l i c i t o r and h i s own c l i e n t i n c u r r e d by the (a) member or d i r e c t o r b r i n g i n g or defending the a c t i o n or other person c o n t r o l l i n g the conduct of the a c t i o n be paid to him by the company or other p a r t i e s to the a c t i o n ; or (b) company and any d i r e c t o r or o f f i c e r of the company be paid to them by the member or d i r e c t o r b r i n g i n g the a c t i o n or other person c o n t r o l l i n g the conduct of the a c t i o n . (6) No a c t i o n brought or defended under t h i s s e c t i o n s h a l l be di s c o n t i n u e d , s e t t l e d , or dismissed without the approval of the Court. (7) No a p p l i c a t i o n made or an a c t i o n brought or defended under t h i s s e c t i o n s h a l l be stayed or dismissed by reason only that i t i s shown that an a l l e g e d breach of a r i g h t , duty, or o b l i g a t i o n , owed to the company, has been or might be approved by the members of that company; but evidence of that approval or p o s s i b l e approval may be taken i n t o account ,by the Court i n making an order under t h i s s e c t i o n . (8) For purposes of t h i s s e c t i o n a member inc l u d e s (a) a b e n e f i c i a l owner or a share i n the company, and (b) any other person,who, i n the d i s c r e t i o n of the Court, i s a proper person to make an a p p l i c a t i o n under t h i s s e c t i o n . S u b s e c t i o n 8 was not in. t h e o r i g i n a l p r o v i s i o n b u t was added.by s e c t i o n 45 o f the 1976 Amendment A c t . The main t h r u s t o f the l e g i s l a t i o n i s t h a t t h e l e a v e o f the c o u r t must now be o b t a i n e d b e f o r e a d e r i v a t i v e a c t i o n can be commenced; the s e v e r a l c a s e s which have d e a l t w i t h t h e q u e s t i o n o f l e a v e w i l l be c o n s i d e r e d s h o r t l y . . With r e f e r e n c e t o the q u a l i f i c a t i o n s o f the p l a i n t i f f which a r e n e c e s s a r y b e f o r e l e a v e w i l l be granted,, i t i s i n t e r e s t i n g t o note t h a t t h e common law p o s i t i o n has been a l t e r e d by s u b s e c t i o n 3(d) which r e q u i r e s , i n the case o f an a p p l i c a t i o n by a member, t h a t he be a member a t the time o f the " t r a n s a c t i o n o r o t h e r e v e n t g i v i n g r i s e - 55 -t o the cause o f a c t i o n . " A c c o r d i n g t o the p r o p o s a l s which p r e c e d e d the new Companies A c t , t h i s change was made to a v o i d the o c c u r r a n c e o f s t r i k e s u i t s but i t i s s u g g e s t e d t h a t t h e s e were n e v e r a problem in'Canada i n any e v e n t . The w r i t e r would w h o l e h e a r t e d l y s u p p o r t 139 the comments o f P r o f e s s o r Beck i n a t t a c k i n g the r e v e r s a l o f the o l d p r o v i s i o n i n O n t a r i o which was s i m i l a r t o t h a t i n B r i t i s h C o l u m b i a . U n f o r t u n a t e l y , the 1976 amendment has done n o t h i n g t o r e c t i f y the s i t u a t i o n . I t appears t h a t the new, s u b s e c t i o n 8 was an a t tempt t o go some way towards a d o p t i n g the more l i b e r a l F e d e r a l approach because the words used i n the amendment a r e the same, as t h o s e i n p a r t s (a) and (d) o f s e c t i o n 231 o f t h e Canada A c t . However, the new change has o n l y s e r v e d t o c o n f u s e because i t i s o b v i o u s t h a t sub-s e c t i o n 3(d) can have no r e l e v a n c e t o anybody but a s h a r e h o l d e r . d e s p i t e t h e , f a c t t h a t i t r e f e r s t o "members," a c l a s s which now i n c l u d e s someone who i s seen as a " p r o p e r p e r s o n t o make an a p p l i -c a t i o n " by the c o u r t . C o s t s One r e s p e c t i n which p e r s o n a l and d e r i v a t i v e a c t i o n s a r e the same a t common law, but which has a l s o been a l t e r e d by s t a t u t e , i s r t h e a b i l i t y o f the p l a i n t i f f i n a r e p r e s e n t a t i v e s u i t t o d i s c o n t i n u e o r s e t t l e the a c t i o n . As the dominus litis u n t i l judgment, the 140 p l a i n t i f f may, w i t h o u t the c o n s e n t o f t h o s e whom he r e p r e s e n t s , and n o t w i t h s t a n d i n g t h a t i n the c a s e o f a d e r i v a t i v e c l a i m , the company i s t r u e p l a i n t i f f , s e t t l e the a c t i o n and perhaps r e c e i v e a p r i v a t e payment from t h e company's a s s e t s . In o t h e r words, t h e company which was a l l e g e d l y wronged, may be f u r t h e r harmed by t h e 139 "The S h a r e h o l d e r s D e r i v a t i v e A c t i o n , " op. ait., note 118, pp. 205-206. 140 Re A l p h a Co. L t d . , [1903] 1 Ch. 203. - 56 -a c t i o n o f i t s d i r e c t o r s i n s e t t l i n g t h e m a t t e r , presumably t o t h e i r a dvantage. The problem f o r them i s t h a t s e t t l e m e n t w i t h one p l a i n t i f f w i l l n o t p r e v e n t t h e o t h e r s h a r e h o l d e r s , even i f p r e v i o u s l y 141 j o i n e d i n the r e p r e s e n t a t i v e a c t i o n , from b r i n g i n g t h e i r own c l a i m s . The p o s i t i o n was s i m i l a r a t common law i n the U n i t e d S t a t e s b u t a l t e r e d by F e d e r a l Rule 23.1 so t h a t any s e t t l e m e n t o r d i s c o n t i n u a n c e o f a d e r i v a t i v e a c t i o n r e q u i r e d c o u r t a p p r o v a l . The same r e s u l t has now been a c h i e v e d under s e c t i o n 222(6) and s e c t i o n 99(6) i n O n t a r i o a l t h o u g h t h e F e d e r a l Canadian l e g i s l a t i o n does n o t so l i m i t t h e p l a i n t i f f . The new r e q u i r e m e n t s a r e t o be welcomed as r e c o g n i z i n g t h e t r u e n a t u r e o f the d e r i v a t i v e c l a i m ; < ( t h a t i s , t h a t t h e company i s the r e a l p l a i n t i f f and the r e c o v e r y s h o u l d , i n most c a s e s , be t o i t ) and a c h i e v i n g t h e r e s u l t , f o r which i t was d e v e l o p e d , o f p r e v e n t i n g a m u l t i p l i c i t y o f s u i t s . However, t h e same c o n c e p t u a l r a t i o n a l e f o r t h i s l i m i t a t i o n c a n n o t be a p p l i e d t o p e r s o n a l r e p r e s e n t a t i v e s u i t s under which t h e p l a i n t i f f s h o u l d , and does remain f r e e t o d e t e r m i n e t h e f a t e o f h i s a c t i o n . In t h i s r e g a r d , t h e p e r s o n a l p l a i n t i f f may have a d i s t i n c t p r o c e d u r a l advantage o v e r h i s d e r i v a t i v e c o u n t e r p a r t . A n o t h e r p r o c e d u r a l m a t t e r which i s common t o a l l s u i t s , b u t needs p a r t i c u l a r a t t e n t i o n w i t h r e s p e c t t o r e p r e s e n t a t i v e a c t i o n s , both a t common law and under t h e v a r i o u s s t a t u t o r y p r o v i s i o n s , i s i t h e q u e s t i o n o f c o s t s . Here, t h e problems o f both s e c u r i t y f o r c o s t s b e f o r e o r d u r i n g t h e a c t i o n and c o s t s based on the m e r i t s o f the r c l a i m a r e a t i s s u e . The r u l e s r e l a t i n g t o c o s t s i n a p e r s o n a l n o n - r e p r e s e n t a t i v e a c t i o n a r e the same as, th o s e a p p e r t a i n i n g t o any d i r e c t s u i t ; t h i s a p p l i e s t o both s e c u r i t y - f o r - c o s t s and the award o f 1 4 1 A n s e t t v. B u t l e r A i r T r a n s p o r t L t d . ( N o . l ) ( 1 9 5 7 ) 75 W.N. (N.S.W.) 299. Re C a l g a r y and M e d i c i n e Hat Land Co. [1908] 2 Ch. 652. - 57 -c o s t s a f t e r the a c t i o n . U n l e s s p a r t i c u l a r l e g i s l a t i o n c o v e r s t h e 142 q u e s t i o n o f s e c u r i t y f o r c o s t s none w i l l be o r d e r e d . Once t h e c l a i m has been d e t e r m i n e d , the p l a i n t i f f w i l l have c o s t s awarded f o r o r , a g a i n s t him on the normal b a s i s o f h i s s u c c e s s i n the a c t i o n , s u b j e c t t o the way i n which he c o n d u c t e d t h e c a s e . S i m i l a r l y , i f the p e r s o n a l c l a i m i s b r o u g h t as a r e p r e s e n t a t i v e one, s e c u r i t y f o r c o s t s can o n l y be r e q u i r e d i f l e g i s l a t i o n so p r o v i d e s , o r where the c o u r t has a d i s c r e t i o n t o make such o r d e r s as i t sees f i t , a l t h o u g h here i t i s more l i k e l y t h a t such p r o v i s i o n s e x i s t . However, t h e y may s t i l l be o f l i t t l e r e l e v a n c e t o the t y p e s o f r e p r e s e n t a t i v e a c t i o n s w i t h which we a r e c o n c e r n e d . Under O n t a r i o Rule 3 7 3 ( h ) , s e c u r i t y can be o r d e r e d i n a c l a s s a c t i o n where the p l a i n t i f f " i s n o t p o s s e s s e d o f s u f f i c i e n t p r o p e r t y t o answer the c o s t s o f the a c t i o n and i t appears t h a t the p l a i n t i f f i s p u t ~ f o r w a r d o r i n s t i g a t e d t o sue by o t h e r s " (emphasis a d d e d ) . The second p a r t o f t h i s r e q u i r e -ment i s o b v i o u s l y d e s i g n e d t o p r e v e n t a g r o u p ' o f p o t e n t i a l p l a i n t i f f s p u t t i n g f o r w a r d a man o f s t r a w t o sue on t h e i r b e h a l f i n o r d e r t o l i m i t t h e i r l i a b i l i t y f o r c o s t s s h o u l d they l o s e ; such i s n o t u s u a l l y the c a s e w i t h a r e p r e s e n t a t i v e a c t i o n i n the company s i t u a t i o n . I t i s i n t e r e s t i n g t o n o t e t h a t under the E n g l i s h Supreme C o u r t R u l e s , t h e r e i s an e x p r e s s e x c l u s i o n o f r e p r e s e n t a t i v e a c t i o n s frbm t h e s e c u r i t y f o r c o s t s p r o v i s i o n s . T h i s e x c l u s i o n f a l l s w i t h i n t h a t p a r t o f t h e p r o v i s i o n s d e a l i n g w i t h " n o m i n a l " p l a i n t i f f s , w h ich i s one o f the s u b g r o u p i n g s a l s o used i n O n t a r i o . A g a i n however, i t i s u n l i k e l y t h a t t h i s g r o u p i n g w i l l a p p l y t o p e r s o n a l r e p r e s e n t a t i v e a c t i o n s because i t has been h e l d t h a t a p l a i n t i f f i s o n l y a nominal p l a i n t i f f i f he has no i n t e r e s t w h a t s o e v e r i n t h e r e s u l t o f the a c t i o n . 142 C f . Rule 373, O n t a r i o ; R.S.C. O r d e r 23, r . l i n E n g l a n d . 1 4 3 R o f n a c C o n s t . Co. v. R i o T i n t o M i n i n g Co. [1961] O.W.N. 269. - ' 58 -By t he v e r y d e f i n i t i o n o f a , p e r s o n a l a c t i o n , t he p l a i n t i f f w i l l be i n t e r e s t e d i n i t . The r e s u l t i s t h e r e f o r e t h a t i t w i l l be u n l i k e l y t h a t s e c u r i t y f o r c o s t s w i l l be o r d e r e d i n p e r s o n a l a c t i o n s , whether b r o u g h t i n d i v i d u a l l y o r r e p r e s e n t a t i v e l y . Not so c l e a r i s the p o s i t i o n o f d e r i v a t i v e r e p r e s e n t a t i v e a c t i o n s . The same r a t i o n a l e as e x i s t s f o r n o t b e i n g c o n c e r n e d w i t h Rule 373(h) mentioned above no doubt a p p l i e s here and i t i s a r g u a b l e t h a t a p l a i n t i f f b r i n g i n g an a c t i o n on b e h a l f o f a company i s n o t a L " n o m i n a l " p l a i n t i f f o n l y , because he does have some i n t e r e s t , a l b e i t i n d i r e c t , i n t h e r e s u l t o f the c l a i m . However, o f the t h r e e j u r i s d i c t i o n s i n Canada* which have c o d i f i e d t he d e r i v a t i v e a c t i o n , 144 one o n l y ' has mentioned t h e q u e s t i o n o f s e c u r i t y f o r c o s t s which may l e a v e t he o t h e r two c o n s p i c u o u s by t h e i r o m i s s i o n t o do so. In O n t a r i o , t he c o u r t ' s d i s c r e t i o n when making a o r d e r g r a n t i n g l e a v e , i s e x p r e s s l y l i m i t e d so t h a t i t " s h a l l n o t r e q u i r e t h e s h a r e h o l d e r t o g i v e s e c u r i t y f o r c o s t s . " I t i s a t l e a s t a r g u a b l e t h a t i n n o t r e s t r i c t i n g t h e c o u r t ' s d i s c r e t i o n i n the''other two A c t s , e s p e c i a l l y as t he O n t a r i o l e g i s l a t u r e saw f i t t o do s o , the B r i t i s h Columbia and F e d e r a l c o u r t s c o u l d make such an o r d e r . I f , as appears l i k e l y , the d e r i v a t i v e a c t i o n i s more s u b j e c t t o r e s t r i c t i o n by s e c u r i t y f o r c o s t s c o n t r o l than a p e r s o n a l a c t i o n , the r e v e r s e i s t r u e when we c o n s i d e r t h e award o f c o s t s a f t e r t h e h e a r i n g . Both by s t a t u t e and now a t common law, t h e r e i s some r e c o g -n i t i o n o f the f a c t t h a t a d e r i v a t i v e c l a i m i s r e a l l y b r o u g h t on b e h a l f o f the company, and t h a t t h e r e f o r e the company s h o u l d b e a r 144 S. 99(3) O n t a r i o B u s i n e s s C o r p o r a t i o n s A c t . T h i s s e c t i o n would p r e c l u d e t he o p e r a t i o n o f Rule 373 even i f i t d i d p r e v i o u s l y a p p l y t o d e r i v a t i v e a c t i o n s . - 59 -some o f the c o s t s o f the a c t i o n . In t h i s r e g a r d , the p l a i n t i f f i n a d e r i v a t i v e s u i t has t h e advantage o f b e i n g a b l e t o r e c o v e r some o f the c o s t s o f th e a c t i o n , n o t from h i s f e l l o w p l a i n t i f f s , but from t h e company. I t s h o u l d be not e d however t h a t " t h e l e g i s l a t u r e i n both B r i t i s h Columbia ( s . 2 2 2 ( 4 ) ( b ) and (5) ) and O n t a r i o ( s . 99(4) and ( 5 ) ) has f o l l o w e d the American example and p r o v i d e d t h a t r e c o v e r y o f c o s t s by the p l a i n t i f f w i l l depend on h i s s u c c e s s i n the a c t i o n . T h i s i s n o t e x p r e s s l y s t a t e d t o be the c a s e but c l e a r p r o v i s i o n f o r an award o f c o s t s a g a i n s t the p l a i n t i f f i n t h e c o u r t ' s ' d i s c r e t i o n i s made. On the o t h e r hand t h e F e d e r a l A c t makes r e f e r e n c e o n l y t o the payment o f l e g a l f e e s by t h e c o r p o r a t i o n o r i t s s u b s i d i a r y , a l t h o u g h t h i s s t i p u l a t i o n ( s . 2 3 3 ( d ) ) i s n o t t o l i m i t the power o f th e c o u r t t o make any o r d e r i t t h i n k s f i t and an o r d e r a g a i n s t t h e p l a i n t i f f may s t i l l be p o s s i b l e . T h i s approach r e c o g n i z e s the company as the t r u e p l a i n t i f f i f the c a s e goes i n i t s f a v o u r but n o t i f the company l o s e s . A more c o n s i s t e n t approach seems t o have been d e v e l o p e d a t common law. I t has l o n g been the c a s e t h a t a p l a i n t i f f may be 145 awarded c o s t s i n a d e r i v a t i v e a c t i o n a l t h o u g h h i s own c o n d u c t 145 o f the c l a i m may a l s o d e p r i v e him o f c o s t s . S i m i l a r l y , i t has been r e c o g n i z e d t h a t d e f e n d a n t d i r e c t o r s a r e d o i n g no more i n d e f e n d i n g t h e i r a c t i o n s as d i r e c t o r s than a c t i n g i n a c o r p o r a t e \ "146 c a p a c i t y f o r which the company s h o u l d pay t h e i r c o s t s . In the 147 r e c e n t c a s e o f Wallestevnev v. Moir. (No. 2) the C o u r t o f Appeal 1 4 5 F e r g u s o n v . • W a l l b r i d g e [1935] 3 D.L.R. 66 ( P . C . ) . " 1 4 6 B r e a y v. Royal B r i t i s h N u r s e s ' A s s n . [1897] 2 Ch. 272; N o r t h e r n L i f e A s s u r a n c e Co. v. McMaster [1928] S.C.R. 512. 1 4 7 [ 1 9 7 5 ] 1 A l l E.R. 849 ( C . A . ) . - 60 -came o u t v e r y c l e a r l y i n f a v o u r o f t h e p l a i n t i f f i n a d e r i v a t i v e a c t i o n b e i n g a b l e t o r e c o v e r c o s t s from t h e company ( i f r e c o v e r y from i n d i v i d u a l d e f e n d a n t s d i d n o t seem l i k e l y ) both where the c l a i m was s u c c e s s f u l 148 and where i t was n o t . L o r d Denning s a i d t h a t i n a d d i t i o n t o g e t t i n g c o s t s f o r a s u c c e s s f u l a c t i o n , the p l a i n t i f f " s h o u l d h i m s e l f be i n d e m n i f i e d by the company i n r e s p e c t o f h i s own c o s t s even i f the . a c t i o n f a i l s . I t i s a w e l l known maxim o f the law t h a t he who would t a k e the b e n e f i t o f a v e n t u r e i f i t s u c c e e d s ought a l s o t o b e a r the burden i f i t f a i l s . " A l t h o u g h t h i s i s n o t t r u e o f an i n d i v i d u a l c l a s s a c t i o n , i t i s i n a d e r i v a t i v e c l a i m where the whole c l a s s r e p r e s e n t s a n o t h e r p a r t y , the company. In o r d e r t o p r e v e n t f r i v o l o u s s t r i k e s u i t s , a l l t h r e e j u d g e s a g r e e d t h a t i f the p l a i n t i f f w i s h e d t o s e c u r e an award o f c o s t s i n h i s f a v o u r (as f a r as was p o s s i b l e w i t h o u t f e t t e r i n g t h e c o u r t ' s d i s c r e t i o n ) he must seek c o u r t a p p r o v a l as t o the r e a s o n a b l e n e s s o f h i s c a s e b e f o r e p r o c e e d i n g . L o r d Denning s u g g e s t e d t h a t a M a s t e r hear the m a t t e r on p r e l i m i n a r y a p p l i c a t i o n w h i l e B u c k l e y and Scarman L . J J . f a v o u r e d a f u l l c o u r t making t h e d e c i s i o n a f t e r the i s s u a n c e o f the w r i t . Whatever approach i s a d o p t e d , i t comes c l o s e t o s a y i n g t h a t l e a v e i s r e q u i r e d b e f o r e the a c t i o n can commence ( i f t he p l a i n t i f f wants to r e c o v e r c o s t s ) and may i n p r a c t i c e t u r n o u t not t o be s u b s t a n t i a l l y d i f f e r e n t from the s t a t u t o r y r e q u i r e m e n t s i n Canada. A l t h o u g h a p l a i n t i f f i n a d e r i v a t i v e a c t i o n has t h e p o t e n t i a l advantage o f h a v i n g h i s c o s t s p a i d he has the d i s a d v a n t a g e o f h a v i n g t o ' g e t the c o u r t ' s l e a v e t o commence h i s a c t i o n t o b e g i n w i t h . J o i n d e r One f i j n a l p o i n t s h o u l d be c o n s i d e r e d b e f o r e l e a v i n g t h e p r o c e d u r a l r u l e s which govern p e r s o n a l and d e r i v a t i v e a c t i o n s . I t has been a c c e p t e d 148 J * Ibid., p. 859. - 61. -149 by many t h a t d e r i v a t i v e and p e r s o n a l a c t i o n s c a n n o t be j o i n e d i n the same s u i t b u t such a r e s t r i c t i o n now appears more l i m i t e d t h a n was once t h o u g h t t o be the c a s e . The c a s e s c i t e d i n s u p p o r t o f the r u l e a g a i n s t j o i n d e r o f such a c t i o n s have been c o n c e r n e d w i t h both common law and s t a t u t o r y r e s t r i c t i o n s . The f o l l o w i n g comment by Smith L . J . i n Strand 150 v. Lawson sums up the r a t i o n a l e b e h i n d a l l o f the c a s e s , whether t h e y a r e t a k i n g t h e i r a u t h o r i t y from t he common law o r from a s t a t u t e ; he said:-, [t.J.he p l a i n t i f f i n t h i s case cannot j o i n the two causes of a c t i o n which he i s p u t t i n g forward i n d i f f e r e n t capa-c i t i e s , unless he can show that they both a r i s e out of the same, t r a n s a c t i o n . I t i s n o t q u e s t i o n e d t h a t t h i s i s i n d e e d t he law, but t h o s e c a s e s i n 151 which d i f f e r e n t t r a n s a c t i o n s gave r i s e t o the ca u s e s o f a c t i o n a t i s s u e s h o u l d n o t be used as a u t h o r i t y f o r the g e n e r a l p r o p o s i t i o n t h a t j o i n d e r 152 o f d i s t i n c t c a u s e s o f a c t i o n a r i s i n g from t h e same f a c t s i s n o t p o s s i b l e . I f , as w i l l be argued l a t e r i n t h i s p aper, a dut y i s owed by d i r e c t o r s t o s h a r e h o l d e r s as w e l l as to the company then a br e a c h by d i r e c t o r s o f t h i s duty may w e l l l e a d t o two s e p a r a t e causes o f a c t i o n which can be j o i n e d i n t h e same s u i t p r o v i d e d they a r e kept d i s t i n c t from one a n o t h e r . T h i s i s s u p p o r t e d by two r e c e n t c a s e s i n Canada which a r e m a i n l y c o n c e r n e d w i t h p r o c e d u r a l r e q u i r e m e n t s b ut which g i v e c l e a r i n d i c a t i o n s t h a t such j o i n d e r , 153 i s n o t an a u t o m a t i c b a r t o the a c t i o n . The f i r s t , Famham v. Fingold 149 B o y l e & Sykess op. eit., note 119, p. 792; Wedderburn, " S h a r e h o l d e r s R i g h t s and the r u l e i n Foss v. H a r b o t t l e , op oit'., n o t e 2, p. 206. 1 5 0 [ 1 8 9 8 ] 2 Q.B. 44, 50. 1 5 1ST,one & H o l t w . Margoli.an^, S i d l e r & Margol t a n ' s ( T r u r o ) L t d . (1957) 8 D.L.R. (2d) 115; Thomas v. H o b l e r (1861) 4 DeG.F.J. 199; O v e r h o l t v. W i l l i a m s [1956] O.W.N. 891; Ruggles v. Ruse (1929) 36 O.W.N. 17; Henderson v. S t r a n g 54 D.L.R. 674; Gray v. Y e l l o w k n i f e G o l d Mines L t d . (No. 1) [1947] O.R. 928. 1 5 2 S e e Beck, op. ait., note 118, p. 182 f o r s u p p o r t f o r t h i s p r o p o s i t i o n . 1 5 3 ( 1 9 7 3 ) 33 D.L.R. (3d) 156. i n f a c t s u p p o r t s the Strou'd\v. Lawson .approach i n r e s p e c t o f p a r t o f the c l a i m which c o n c e r n s i n d i v i d u a l d e a l i n g s by the p l a i n t i f f s w i t h c e r t a i n o f t h e d e f e n d a n t s ; t h e s e d e a l i n g s were n o t the same t r a n s a c t i o n s as l e a d t o the c o m p l a i n t s a g a i n s t t h e o t h e r d e f e n d a n t s and were h e l d i m p r o p e r l y j o i n e d i n the main a c t i o n . However, t h e c o u r t d i d n o t o b j e c t t o t h e j o i n d e r o f o t h e r p e r s o n a l and d e r i v a t i v e c l a i m s e x c e p t on t h e ground t h a t the s t a t e m e n t o f c l a i m i n e x t r i c a l l y mixed t h e two cau s e s o f a c t i o n t o g e t h e r and as the d e r i v a t i v e p a r t r e q u i r e d the c o u r t ' s l e a v e b e f o r e p r o c e e d i n g , t h a t p a r t would be s t r u c k o ut o f t h i s a c t i o n . Leave was however g i v e n t o f i l e a new w r i t which would comply w i t h t h e s t a t u t o r y r e q u i r e m e n t s . An even c l e a r e r s t a t e m e n t o f the p o s s i b i l i t y o f j o i n d e r i s 154 g i v e n i n Goldex Mines Ltd. v. R e v i l l where the O n t a r i o C o u r t o f Appeal a g a i n s t r u c k o u t the w r i t as the s t a t e m e n t o f c l a i m d i s c l o s e d "no attempt t o d i f f e r e n t i a t e between c l a i m s p e r s o n a l t o s h a r e h o l d e r s and c l a i m s which a r e d e r i v a t i v e . " N e v e r t h e l e s s , i t gave l e a v e f o r a . new w r i t t o be i s s u e d -and s a i d : 1 0 0 [The] p l a i n t i f f may decide to apply f o r leave under s.99, and i f i t obtains leave, i t can add to the d e r i v a t i v e claims thus permitted such personal claims as i t sees f i t ( s u b j e c t , of course, to the R u l e s ) . To summarize, the p l a i n t i f f i n a p e r s o n a l a c t i o n has the p r o c e d u r a l advantage o f not h a v i n g t o o b t a i n t h e c o u r t ' s l e a v e b e f o r e p r o c e e d i n g w i t h h i s a c t i o n , remains the dominus litus o f h i s c a s e , does n o t have t o be a s h a r e h o l d e r a t the time the wrong was committed and w i l l n o t n o r m a l l y be l i a b l e t o s e c u r i t y f o r c o s t s o r d e r s . On the o t h e r hand, he has the d i s a d v a n t a g e o f perhaps n ot h a v i n g c o s t s awarded i n h i s f a v o u r , whatever 1 5 4 ( 1 9 7 4 ) 54 D.L.R. (3d) 672 (Ont. C.A.). 155ZMd., p. 682. t h e outcome o f the c a s e . On b a l a n c e , however, i t would appear t h a t b r i n g i n g a p e r s o n a l a c t i o n i s a c o n s i d e r a b l y more a t t r a c t i v e p r o -p o s i t i o n t h a t a d e r i v a t i v e one. T h i s i s bourne o u t by t h e r e c e n t c a s e s c o n s i d e r i n g t h e e f f e c t o f the d e r i v a t i v e l e g i s l a t i o n ; a t t h i s p o i n t t h e s u b s t a n t i v e d i f f e r e n c e s between t he two t y p e s o f a c t i o n a l s o become i m p o r t a n t . S u b s t a n t i v e Changes Made by S t a t u t o r y D e r i v a t i v e P r o v i s i o n s I t now appears s e t t l e d t h a t t h e s t a t u t o r y p r o v i s i o n s d e a l i n g w i t h d e r i v a t i v e a c t i o n s have a b r o g a t e d the common law p o s i t i o n so t h a t i t i s no l o n g e r p o s s i b l e t o b r i n g an a c t i o n on b e h a l f o f the company i n d e p e n d e n t o f t h e s e p r o v i s i o n s . T h i s was a c c e p t e d i n 156 O n t a r i o f i r s t by Farnham v. Fingold and l a t e r f o l l o w e d i n Goldex 1cy 1co Mines Ltd. v. R e v i l l and Feld v. Gliak. D e s p i t e an argument t o the c o n t r a r y , based both on the r u l e o f s t a t u t o r y i n t e r p r e t a t i o n 159 t h a t changes i n t h e common law must be e x p r e s s l y made (w h i c h , i t was ar g u e d , i s n o t done by s.99 o r s.222) and on the d i f f e r e n c e s 160 i n t h e wording between t he O n t a r i o and B r i t i s h Columbia p r o v i s i o n s , 160 the c o u r t s i n B r i t i s h Columbia have r e a c h e d t h e same c o n c l u s i o n . T h i s w i l l p r o b a b l y be a c c e p t e d , and i t i s s u b m i t t e d , r i g h t l y s o, d e s p i t e the u n c e r t a i n b e g i n n i n g s e t by the c o u r t i n Re Northwest Forest Products Ltd. ?^ where no c l e a r answer t o the problem , one way o r Supra, note 153. 157 Supra, note 154; see a l s o S l u t s k y , " S h a r e h o l d e r s ' P e r s o n a l A c t i o n s - New H o r i z o n s " , (1976) 39 M.L.R. 331. 1 5 8 ( 1 9 7 5 ) 8 O.R. (2d) 8. 1 5 9 T . A . Z a c k s , Note (1973) 8 U.B.C. L. Rev. 191. ^ S h i e l d Development Co. v. Synder and Western Mines L t d . [1976] 3 W.W.R. 44. The p l a i n t i f f s i n t h i s c a s e a r g u ed t h a t t h e O n t a r i o p r o v i s i o n was mandatory w h i l e t h e B.C. s e c t i o n was p e r m i s s i v e and t h e r e f o r e s h o u l d alTow a common law a c t i o n as w e l l as the s t a t u t o r y one. 1 6 1 [ 1 9 7 5 ] 4 W.W.R. 724. T h i s case„was n o t r e f e r r e d t o i n t h e S h i e l d Development c a s e , supra, n o t e 160. - 64i -the o t h e r was g i v e n . In most o f the above c a s e s , an attempt t o a v o i d t h e r e q u i r e m e n t o f o b t a i n i n g the c o u r t ' s l e a v e was made on the b a s i s t h a t a t l e a s t 162 p a r t o f the a c t i o n was p e r s o n a l . In one ca s e which w i l l be d i s -c u s s e d more f u l l y l a t e r , a c l a i m was made under t h e O n t a r i o e q u i -v a l e n t o f s e c t i o n 227 i n the B r i t i s h Columbia.Companies A c t . w h i c h c o n c e r n s the c o u r t remedying b r e a c h e s o f the s t a t u t e , perhaps a l s o i n an att e m p t t o a v o i d the r i g o u r s o f the d e r i v a t i v e p r o v i s i o n . In I go one i n s t a n c e however, an appeal f o r l e a v e under s. 99 was made, p r o b a b l y under t h e m i s c o n c e p t i o n t h a t t h e a c t i o n was d e r i v a t i v e i n s t e a d o f p e r s o n a l , but perhaps i n o r d e r t o o b t a i n t h e payment o f i n t e r i m c o s t s by the d e f e n d a n t s under s. 9 9 ( 4 ) . Indeed, t h e r e have been r e l a t i v e l y few a p p l i c a t i o n s f o r l e a v e t o commence a d e r i v a t i v e a c t i o n ^ 4 and i n o n l y one, Re Northwest Forest Products Ltd. has more than a c u r s o r y g l a n c e a t the n a t u r e o f the r e q u i r e m e n t s f o r l e a v e been made. Where l e a v e i s n e c e s s a r y i t s h o u l d be tho u g h t about i n advance because i t appears t h a t a t l e a s t i n O n t a r i o , l e a v e w i l l not.be g i v n nunc pro tunc because t h e r e i s a seven day n o t i c165 p e r i o d which has t o be g i v e n t o the company. The f a c t t h a t t h i s p e r i o d can p r o b a b l y n o t be a b r i d g e d and t h e r e f o r e a summary a p p l i c a t i o n 1 6 2 R e G o l d h a r and Quebec M a n i t o u i M i n e s L t d . (1976) 61 D.L.R. (3d) 612. 1 go Solomon v. M a s f a l l Investments L t d . ( u n r e p o r t e d ) " August 20, 1975 ( O n t a r i o High Ct) but see (1975) CCH D.R.S. p a r a . 1-162. 1 6 4 R e Marc-Jay Investments I n c . and Levy (1975) 50 D.L.R. (3d) 45; Solmon v. E l k i n d ( u n r e p o r t e d ) , S e p t . 17, 1976 ( O n t a r i o High C o u r t ) b u t see (1976) CCH D.R.S. p a r a . 1-574; r e Northwest F o r e s t P r o d u c t s , supra, note'161; Re L a n g l e y A u t o m o t i v e L t d . ( u n r e p o r t e d ) May 6 t h 1976 B.C.S.C. 165 Goldex Mines L t d . v. Rev i l l , p e r Hughes J . In the D i v i s i o n a l C o u r t r e p o r t e d a t [1973] 3 O.R. 869, 886-7. •I gg f o r an i n j u n c t i o n on s h o r t e r n o t i c e c a n n o t be made has been c r i t i c i z e d and may be changed by the l e g i s l a t u r e ; o f c o u r s e , such a r e s t r i c t i o n may n o t a p p l y i n B r i t i s h Columbia a t a l l because no time p e r i o d i s i n v o l v e d t h e r e . A p a r t from the o b v i o u s c o n c l u s i o n t h a t c o u r t s w i l l from now on be f o r c e d t o make c l e a r the d i s t i n c t i o n between p e r s o n a l and d e r i -v a t i v e a c t i o n s , what c o n c e r n s us most i n a d i s c u s s i o n p r i m a r i l y on p e r s o n a l a c t i o n s i s t h e a n a l y s i s made i n Re Northwest Forest Products 167 Ltd. o f the s u b s t a n t i v e r e q u i r e m e n t s o f o b t a i n i n g l e a v e t o b r i n g an a c t i o n . A l t h o u g h i t i s eas y t o say t h a t a d e r i v a t i v e a c t i o n r e q u i r e s l e a v e w h i l e a p e r s o n a l one does n o t , i t i s perhaps i n s t r u c t i v e t o l o o k a t the n a t u r e o f r e q u i r e m e n t s t o be f u l f i l l e d b e f o r e l e a v e i s g i v e n t o h i g h l i g h t the magnitude o f the d i f f e r e n c e s between the two a c t i o n s . Even i n the Northwest Forest Products c a s e o n l y s s . 222 3(a) 168 and (c\ were d i s c u s s e d a t any l e n g t h b u t the comments appear sound and s h o u l d a p p l y i n O n t a r i o as w e l l , d e s p i t e t h e d i f f e r e n c e s between 169 the two p i e c e s o f l e g i s l a t i o n which were a d v e r t e d t o i n the c a s e . "I c c Re G o l d h a r and Quebec Manito u Mines L t d . , supra, a t . p . 618. 167 Supra, note 161. •J g o The manner i n which t he c a s e was bro u g h t a p p e a r s a l i t t l e awkward, a l t h o u g h v a l i d i n p r i n c i p l e . I t c o n c e r n e d an a p p l i c a t i o n f o r l e a v e by m i n o r i t y s h a r e h o l d e r s i n Northwest F o r e s t P r o d u c t s L t d . who c l a i m e d t h a t the d i r e c t o r s i n t h a t company/had been n e g l i g e n t i n the s a l e o f the a s s e t s o f a s u b s i d i a r y company ( n o t w h o l l y owned). I t was t h e harm done t o t h i s s u b s i d i a r y company, F r a s e r V a l l e y P u l p and Timber L t d . , which was f o c u s e d on i n the case r a t h e r than any harm t o the h o l d i n g company. The l a t t e r was seen as i n d i r e c t o n l y , through the h o l d i n g company's s h a r e h o l d i n g i n t h e s u b s i d i a r y . Y e t i t was the s h a r e h o l d e r s i n the h o l d i n g company, not t h o s e i n the s u b s i d i a r y , who b r o u g h t the a c t i o n and t h e y d i d so on b e h a l f o f the h o l d i n g company r a t h e r than t h e s u b s i d i a r y . A l l t h i s was done w i t h o u t l i f t i n g t h e c o r p o r a t e v e i l a l t h o u g h t h e r e appears n o t h i n g wrong w i t h such an ap p r o a c h . i 169 T h a t i s , t h e f a c t t h a t i n B.C. the a c t i o n i s b r o u g h t i n " t h e name and on b e h a l f o f the company" w h i l e i n O n t a r i o the a c t i o n i s " i n a r e p r e s e n t a t i v e c a p a c i t y f o r [ t h e p l a i n t i f f ] and a l l o t h e r s h a r e -h o l d e r s o f the c o r p o r a t i o n s u i n g f o r and on b e h a l f o f the c o r p o r a t i o n . . . " . With r e s p e c t t o s e c t i o n 2 2 2 ( 3 ) ( a ) which c o n c e r n s t h e p l a i n t i f f making r e a s o n a b l e e f f o r t t o cause the d i r e c t o r s t o b r i n g o r d e f e n d t h e a c t i o n the c o u r t h e l d t h a t t h e d i r e c t o r s must be a d v i s e d o f t h e s p e c i f i c c a u s e o f a c t i o n which t h e p l a i n t i f f wants b r o u g h t . However, "no more would be r e q u i r e d than t h a t s u f f i c i e n t t o found an endorsement on a g e n e r a l l y e n d o r s e d w r i t o f s u m m o n s " ^ and on the f a c t s o f t h i s c a s e where two c l e a r r e q u i s i t i o n s a s k i n g t h e d i r e c t o r s t o pass c e r t a i n r e s o l u t i o n s r e c t i f y i n g t h e a l l e g e d n e g l i g e n c e were put f o r w a r d , t h e demand r e q u i r e m e n t was a d e q u a t e l y s a t i s f i e d . The n a t u r e o f t h i s r e q u i r e m e n t a t common law w i l l be c o n s i d e r e d s h o r t l y . A l t h o u g h i t i s not c l e a r from t h i s judgment, because a demand t h a t the s h a r e h o l d e r s f o r c e t h e company t o b r i n g t h e a c t i o n was a c t u a l l y made, i t i s sub-m i t t e d t h a t i n terms o f s e c t i o n 222(3) a demand on the s h a r e h o l d e r s i n a d d i t i o n t o the d i r e c t o r s i s n o t n e c e s s a r y f o r l e a v e t o be g i v e n . The s u b s e c t i o n i t s e l f r e f e r s o n l y t o d i r e c t o r s and t h e r e q u i r e m e n t i s t h a t t h e d i r e c t o r s commence o r de f e n d t h e a c t i o n . T h i s d i f f e r s m a r k edly from the O n t a r i o p r o v i s i o n ( s e c t i o n 9 9 ( 3 ) ( b ) ) which r e q u i r e s " r e a s o n a b l e e f f o r t s t o cause t h e corporation" (emphasis mine) t o commence the a c t i o n and from s e c t i o n 2 3 2 ( 2 ) ( a ) i n the F e d e r a l A c t which r e q u i r e s r e a s o n a b l e n o t i c e t o be g i v e n t o the d i r e c t o r s o f the p l a i n t i f f ' s i n t e n t t o sue i f t h e d i r e c t o r s do n o t do so the m s e l v e s — i n o t h e r words, a l m o s t a s t a t e m e n t o f i n t e n t i o n r a t h e r than a demand Even i f the w i s h e s o f the s h a r e h o l d e r s a r e r e q u i r e d t o be known i n O n t a r i o and the F e d e r a l C o u r t s (and i t i s s u b m i t t e d t h e y a r e n o t , because t h e d e c i s i o n t o sue i s p r o b a b l y d e l e g a t e d t o the d i r e c t o r s a l o n g w i t h t h e i r o t h e r powers) such a r e q u i r e m e n t a p p e a r s u n n e c e s s a r y i n B r i t i s h C o l u m b i a . -^ R e Northwest F o r e s t P r o d u c t s L t d . , supra, n o t e 161. - 67 -The o t h e r p a r t o f the r e q u i r e m e n t f o r l e a v e examined h e r e , and the one which the c o u r t f e l t was th e most i m p o r t a n t , was whether i t was "prima f a c i e i n the i n t e r e s t s o f the company t h a t the a c t i o n be bro u g h t . " The d i s c u s s i o n r e v o l v e d n o t so much around what t h e company's i n t e r e s t s m ight be as about the d e f i n i t i o n o f "prima f a c i e . " I t was h e l d t h a t t h i s means t h a t t h e r e i s " s u f f i c i e n t e v i d e n c e which on the f a c e o f t h a t e v i d e n c e d i s c l o s e s t h a t i t i s , so f a r as can be j u d g e d from the f i r s t d i s c l o s u r e i n the i n t e r e s t s o f the company t o pursue the a c t i o n . " A g a i n , such e v i d e n c e was fo u n d t o e x i s t h e r e . I t i s , o f c o u r s e , i m p o r t a n t t o note t h a t the a p p l i c a t i o n f o r l e a v e " d e c i d e s n o t h i n g more than t h a t an a c t i o n may o r may not be commenced." A l t h o u g h the a c t u a l m e r i t s o f the ca s e w i l l be d e c i d e d o n l y a t a f u l l t r i a l i f l e a v e i s g i v e n , under the s t a t u t o r y p r o v i s i o n s i t has now become i m p o r t a n t t o c o n s i d e r the e f f e c t s o f s h a r e h o l d e r r a t i f i c a t i o n n o t o n l y a t the t r i a l s t a g e but a l s o i n d e t e r m i n i n g whether l e a v e w i l l be g r a n t e d . C o u r t s may, f o r example, c o n s i d e r t h a t i t i s n o t prima f a c i e i n the company's i n t e r e s t t o have t h e a c t i o n b r o u g h t i f t h e m a j o r i t y o f th e s h a r e h o l d e r s have r a t i f i e d t he a l l e g e d wrong. However, i n B r i t i s h Columbia, s e c t i o n . 222(7) p e r m i t s the c o u r t t o t r e a t any a p p r o v a l by the company, o r even a p o s s i b l e a p p r o v a l , as a m a t t e r o f e v i d e n c e o n l y and n o t t o see i t as an a u t o m a t i c b a r t o the a c t i o n . Such an a l t e r a t i o n o f th e common law p o s i t i o n has n o t o c c u r r e d i n O n t a r i o b u t has i n the f e d e r a l l e g i s l a t i o n where i t a p p l i e s t o th e o p p r e s s i o n remedy as w e l l as the d e r i v a t i v e a c t i o n . ^ The c o u r t i n the Northwest Forest Products c a s e d i d i n f a c t d i s r e g a r d the a p p r o v a l by the m a j o r i t y o f th e d i r e c t o r s ' a c t i o n s a l t h o u g h i t d i d so r a t h e r p e r e m p t o r i l y . Once l e a v e has been g i v e n and an a c t i o n commenced, ^ S . , 235, Canada B u s i n e s s C o r p o r a t i o n s A c t . - 68 -r a t i f i c a t i o n may a g a i n be i n i s s u e and the" c o u r t c o u l d d e c i d e t h a t no a c t i o n a b l e harm has been done t o the company, even t r e a t i n g t h e , a p p r o v a l as a m a t t e r o f e v i d e n c e o n l y . No r e p o r t e d d e r i v a t i v e c a s e has y e t been b r o u g h t so i t remains t o be seen j u s t what e f f e c t t h e new s t a t u t o r y p o s i t i o n w i l l have on the p r e s e n t common law r e g a r d i n g r a t i f i c a t i o n . The t r a d i t i o n a l approach a t common law has been t h a t a d e r i v a t i v e a c t i o n would n o t be p o s s i b l e i n s i t u a t i o n s where t he company i n g e n e r a l m e e t i n g had a p p r o v e d , o r might do so , t h e a l l e g e d wrong; t h i s i s the b a s i c r u l e i n Foss v. Harbottle.. The d i f f i c u l t y has been to' d e t e r m i n e the e x t e n t o f such s i t u a t i o n s . R a t i f i c a t i o n w i l l be c o n s i d e r e d i n more d e t a i l i n a l a t e r c h a p t e r b u t s u f f i c e i t a t t h i s s t a g e t o say t h a t i t has sometimes been a b a r t o a s u c c e s s f u l d e r i v a t i v e a c t i o n , not o n l y as a p r e l i m i n a r y m a t t e r but a l s o a f t e r t h e s u b s t a n t i v e h e a r i n g . Such a b a r does n o t e x i s t f o r p e r s o n a l a c t i o n s , o r a t l e a s t s h o u l d 172 n o t do so i n t h e o r y , but two r e c e n t c a s e s may i n d i c a t e t h e c o n t r a r y . The problem which r a t i f i c a t i o n r a i s e s i n c o n n e c t i o n w i t h t h e p r e l i m i n a r i e s t o a d e r i v a t i v e a c t i o n a t common law i s whether demand s h o u l d be made o f the s h a r e h o l d e r s as w e l l as o f the d i r e c t o r s t o see whether t h e company w i l l i n s t i t u t e p r o c e e d i n g s i n i t s own name. With r e s p e c t t o wrongdoing d i r e c t o r s , t h e r e q u i r e m e n t i s t o show t h a t t h e y a r e i n 173 c o n t r o l o f the company. T h i s i s n o r m a l l y done by p r o v i n g t h a t t h e y r e f u s e d t o commence the a c t i o n t h e m s e l v e s , e i t h e r by a s k i n g them 1 7 2 H o g g v. Cramphorn L t d . [1967] Ch. 254; Bamford v. Bamford [1969] 2 W.L.R. 1107. 1 7 3 A t w o o l v. Merryweather (1867) L.R. 5 Eq. 464 and see the l i s t o f cas e s i n Gower, Modern Company Law, op. cit., note 9, p. 589". - 69 -o u t r i g h t o r by p r o v i n g t h a t i t would be f u t i l e t o ask them because t h e i r r e f u s a l would be a c e r t a i n t y . Where t he d i r e c t o r s a r e a l s o the m a j o r i t y s h a r e h o l d e r s i t would seem p o i n t l e s s t o ask them as s h a r e h o l d e r s when they h a v e , a l r e a d y r e f u s e d as d i r e c t o r s . However, some Canadian a u t h o r i t i e s which f e e l t h a t the " s h a r e h o l d e r s o f a 174 company have u l t i m a t e and paramount power" have h e l d t h a t a r e q u e s t 175 t o the d i r e c t o r s i s n o t s u f f i c i e n t . C e r t a i n l y a demand on the s h a r e h o l d e r s i s n e c e s s a r y where they a r e n o t the same p e o p l e as the d i r e c t o r s b u t i t i s s u b m i t t e d t h a t i t i s wrong t o c i t e a case f o r 17g t h i s p r o p o s i t i o n as s u p p o r t f o r a g e n e r a l r e q u i r e m e n t o f demand on s h a r e h o l d e r s as was done i n t h e s e C a n adian ca yses. The b e t t e r ap-proach i s m e r e l y t o r e q u i r e t h a t a d e r i v a t i v e p l a i n t i f f e x h a u s t a l l h i s i n t r a c o r p o r a t e remedies b e f o r e commencing h i s a c t i o n and i f demand on d i r e c t o r s i s made t h a t w i l l be s u f f i c i e n t i f t h e y a r e a l s o c o n t r o l l i n g s h a r e h o l d e r s . I t s h o u l d be not e d t h a t the f a c t t h a t d i r e c t o r s a r e i n c o n t r o l and r e f u s i n g t o sue must n o t o n l y be proved a t t r i a l b u t a l s o a l l e g e d i n the p l e a d i n g s . ^ 7 7 The common law problems o f demand and r a t i f i c a t i o n w i l l s t i T l be r e l e v a n t under t h e O n t a r i o and F e d e r a l l e g i s l a t i o n and perhaps even 178 i n B r i t i s h Columbia d e s p i t e s e c t i o n 2 2 2 ( 7 ) . As one w r i t e r has s a i d o f t h e O n t a r i o p r o v i s i o n : [t]he determination of whether or not a breach i s r a t i f i a b l e may be the c r i t e r i o n of whether or not a d e r i v a t i v e a c t i o n i s permitted under s e c t i o n 99. ^ 7 4Plummer v. T e r r a M i n i n g and E x p l o r a t i o n L t d . [1974] 47 D.L.R. (3d) 268, 270 pe r M e r e d i t h J . 175 ) Plummer v. T e r r a M i n i n g and E x p l o r a t i o n L t d . , supra, note 174; Burrows v. Be c k e r (1967) 63 D.L.R. (2d) 100 a f f i r m e d (1968) 70 D.L.R. (2d) 433. -1 7 6 R o s e v. B r i t i s h Columbia R e f i n i n g Co. (1911) 16 B.C.R. 215. 1 7 7 B i r c h v. S u l l i v a n [1957] 1 W.L.R. 1247. 1 78 B u c k l e y , " R a t i f i c a t i o n and the D e r i v a t i v e A c t i o n Under t he O n t a r i o B u s i n e s s C o r p o r a t i o n s A c t " , (1976) 22 M c G i l l L . J . 167, 179. The vexed question of the d i s t i n c t i o n between r a t i f i a b l e and n o n - r a t i f i a b l e breaches would then have l o s t none of i t s importance. I f a l i b e r a l a pproach i s taken t o the c o u r t s ' new power i n B r i t i s h Columbia t o t r e a t , r a t i f i c a t i o n as a m a t t e r o f e v i d e n c e o n l y t h e ^ the d i s t i n c t i o n between d i f f e r e n t t y p e s o f b r e a c h e s w i l l be l e s s s i g n i f i c a n t . I f however, the common law p o s i t i o n i s used t o d e t e r m i n e when r a t i f i c a t i o n , as e v i d e n c e , w i l l p r e v e n t a d e r i v a t i v e a c t i o n , n o t h i n g w i l l have changed. Remedies One p o i n t o f s u b s t a n t i v e d i f f e r e n c e between p e r s o n a l and d e r i v a t i v e ( / a c t i o n s , and one w h i c h , u n l i k e those a l r e a d y m e n t i o n e d , has t r a d i t i o n a l l y made a d e r i v a t i v e c l a i m more a t t r a c t i v e , i s the d i f f e r e n t remedies which a r e a v a i l a b l e under the two a c t i o n s . P r o f e s s o r Gower,summerizes 179 the p r e s e n t p o s i t i o n w e l l when he s a y s : A d e r i v a t i v e a c t i o n may o f t e n l e a d to a monetary judgment i n favour of the company; a shareholder's personal a c t i o n based on the contract i n the memorandum and a r t i c l e s , can r a r e l y , i f ever, lead to a money judgment agVinst the company. The appropriate remedy w i l l be an i n j u n c t i o n or a d e c l a r a t i o n . I t i s p r o b a b l y t r u e t h a t a p e r s o n a l a c t i o n so based, t h a t i s on c o n t r a c t u a l p r i n c i p l e s , w i l l n o t i n v o l v e the r e c o v e r y o f damages and c e r t a i n l y n o t from the company. But what o f o t h e r p e r s o n a l a c t i o n s ? I t i s u n l i k e l y t h a t a c l a i m f o r the d i s t r i b u t i o n o f u n d e c l a r e d d i v i d e n d s would s u c c e e d i n the Commonwealth, w i t h the r e s u l t t h a t the company need n o t be c o n c e r n e d about a money judgment a g a i n s t i t i n a c l a i m o f t h i s n a t u r e . I f however, o t h e r forms o f b r e a c h e s o f f i d u c i a r y d u t y " b y d i r e c t o r s were e s t a b l i s h e d , t h e r e appears no t h e o r e t i c a l r e a s o n why damages would be a u t o m a t i c a l l y e x c l u d e d . I t w i l l be argued a t l e n g t h , l a t e r i n t h i s p a per, t h a t many o f the c a s e s i n v o l v i n g i mproper s h a r e s i s s u e s may i n l 7 % l o d e r n Company Law, op.ait., note 9, p. 595. f a c t be based on a brea c h o f f i d u c i a r y duty owed by d i r e c t o r s t o s h a r e h o l d e r s and a l t h o u g h none have y e t used damages as a remedy as they have n o t needed t o , such an award, based on the American expe-r i e n c e , would seem p o s s i b l e . C e r t a i n l y w i t h r e s p e c t t o i n s i d e r t r a d i n g c a s e s , whether a t common law o r under v a r i o u s s t a t u t o r y p r o v i s i o n s , damages c o u l d be g i v e n i n a p p r o p r i a t e c a s e s . For example 1 gQ a r e c e n t Supreme C o u r t o f New Z e a l a n d d e c i s i o n , Coleman v. Myers 1 g-| h e l d t h a t Vervioal v. Wright ought not t o be f o l l o w e d i n a p r i v a t e company s i t u a t i o n where t h e ^ i n s i d e r s knew the s h a r e h o l d e r s t h e y were d e a l i n g w i t h , but found t h a t t h e r e was no br e a c h o f d u t y on the f a c t s Damages were c l a i m e d and would have been the o n l y remedy s u i t a b l e had the p l a i n t i f f s won. F u r t h e r m o r e , t h e r e appear i n d i c a t i o n s i n r e c e n t Canadian d e c i s i o n s t h a t damages would be a remedy a c c e p t a b l e t o t h e c o u r t s i f c e r t a i n , novel ( a t l e a s t t o the Commonwealth) p e r -182 s o n a l causes o f a c t i o n were s u c c e s s f u l . I f t h i s were s o , i t would put p e r s o n a l a c t i o n s on a par w i t h d e r i v a t i v e ones w i t h r e s p e c t t o remedies and mean t h a t they have an advantage, o r a r e a t l e a s t e q u a l i n a l l r e g a r d s e x c e p t perhaps f o r c o s t s . S t a t u t o r y P e r s o n a l A c t i o n s B e f o r e l e a v i n g the comparison o f common law p e r s o n a l a c t i o n s and d e r i v a t i v e c l a i m s , whether a t ;common law o r by s t a t u t e , mention s h o u l d be made o f some s t a t u t o r y p r o v i s i o n s e x i s t i n g i n most Common-w e a l t h c o u n t r i e s which p r o v i d e f o r v a r i o u s o t h e r forms o f p e r s o n a l 1 gQ U n r e p o r t e d , May 1976, A u c k l a n d R e g i s t r y . 1 8 1 [1902] 2 Ch'. 421. 1 8 2 F a r n h a m v. F i n g o l d (1973) 33 D.L.R. (3d) 156; W i n c h e l l v. Del Z o t t o [1977] 1 C.P.C. 338. See comments on t h e s e cases., i n f r a , p. 182. ' -- 7 2 -a c t i o n . The most common o f t h e s e a r e - t h e r i g h t t o seek t h e w i n d i n g up o f the company i f i n t h e c o u r t ' s o p i n i o n i t i s " j u s t and e q u i t a b l e " 183 t o do so and the power t o seek r e l i e f from t h e c o u r t where t he company's a f f a i r s a r e b e i n g c o n d u c t e d i n a manner which i s " o p p r e s s i v e " t o t h e p l a i n t i f f and would, b u t f o r t h e p r e j u d i c e caused t o the members, 184 j u s t i f y an o r d e r f o r w i n d i n g up. The f i r s t has been c a l l e d "a 185 s i n g u l a r l y clumsy method o f e n d i n g o p p r e s s i o n " and because o f j u d i c i a l i n t e r p r e t a t i o n has a l i m i t e d a p p l i c a t i o n ; enough has been s a i d e l s e -186 where about t h i s p r o v i s i o n so no u s e f u l purpose would be s e r v e d i n c o n s i d e r i n g i t a g a i n h e r e . The same a p p l i e s t o the second p r o v i s i o n which has become known as the o p p r e s s i o n remedy a l t h o u g h , here p e r h a p s , 1 gy the i n t e r p r e t a t i o n o f the s e c t i o n i s even more r e s t r i c t i v e . I t i s i n t e r e s t i n g t o note t h a t few such p r o v i s i o n s e x i s t i n the U n i t e d S t a t e s a l t h o u g h t h e i r i n t r o d u c t i o n has been recommended o r commented on p e r i o d i c a l l y . The o p p r e s s i o n remedy has r e c e n t l y been m o d i f i e d i n some j u r i s d i c t i o n s 1 8 3 S . 2 2 2 ( f ) , U . K . Companies A c t , 1948; s. 2 1 7 ( f ) , New Z e a l a n d Companies A c t , 1955. S. 210, U.K. Companies A c t , 1948; s. 209, New Z e a l a n d Companies A c t , 1955. 185 Gower, Modern Company Law, op. cit., note 9, p. 598. 1 8 6 M c P h e r s o n , (1964) 27 M.L.R. 282; Chesterman, "The ' J u s t and E q u i t a b l e 1 Winding up o f Small Companies", (1973).36 M.L.R. 129; P r e n t i c e , "Winding up on the J u s t and E q u i t a b l e Ground: The P a r t n e r -s h i p A n a l o g y " , (1973) 89 L.Q.R. 107; T r e b i l c o c k , "A New Concern f o r th e M i n o r i t y S h a r e h o l d e r " , (1973) 19 M c G i l l L . J . 106; E l d e r , " S t a t u t o r y Remedies o f M i n o r i t y S h a r e h o l d e r s i n C l o s e C o r p o r a t i o n s " , (1966) 2 U.B.C. L. Rev. 440. Gower, Modern Company Law, op. cit., note 9, pp. 598-604; Wedder-bu r n , [1957] C . L . J . 194 and [1958] C.J.J,. 93; McPherson, (1961) 24 M.L.R. 368; Wedderburn, " O p p r e s s i o n o f M i n o r i t y S h a r e h o l d e r s " , (1966) 29 M.L.R. 321; Rajak, "The O p p r e s s i o n o f M i n o r i t y S h a r e h o l d e r s " , (1972) 35 M.L.R. 156; S e a l y [1972] Camb. L.- J . 42. "I Q O O'Neal, O p p r e s s i o n o f M i n o r i t y S h a r e h o l d e r s , C a l l a g h a n , 1975; Emerson, "The Comparative P o s i t i o n o f M i n o r i t y S h a r e h o l d e r i n S e l e c t e d C o u n t r i e s " , (1957) 3 Howard L . J . 86: Gower, "Some C o n t r a s t s Between B r i t i s h and American C o r p o r a t i o n Law", 69 Harv. L. Rev. 1369. - 7 3 -189 i n Canada, a l t h o u g h O n t a r i o i s c o n s p i c u o u s by i t s l a c k o f such a p r o v i s i o n i n any form. The main a f f e c t o f the changes i s t o remove the need t o prove c i r c u m s t a n c e s j u s t i f y i n g a w i n d i n g up and t o e x t e n d t h e remedy from m e r e l y o p p r e s s i o n t o an a c t o r a c t s which a r e " u n f a i r l y p r e j u d i c i a l " t o , o r i n t h e c a s e o f the f e d e r a l A c t , " u n f a i r l y d i s r e g a r d s the i n t e r e s t s o f " the a p p l i c a n t . A t l e a s t i n t h e c a s e o f s e c t i o n 2 2 1 ( l ) ( b ) i n B r i t i s h C olumbia, t h a t i s , t h e " u n f a i r l y p r e j u d i c i a l " p r o v i s i o n , i t i s no l o n g e r n e c e s s a r y t o prove a c o u r s e o f e v e n t s which has t h i s r e s u l t ; one such a c t , completed o r t h r e a t e n e d , i s s u f f i c i e n t . The f i r s t r e p o r t e d c a s e under the new s e c t i o n i n B r i t i s h C o l u m b i a , Be Peterson and Kanata 190 Investments Ltd. was o f l i t t l e a s s i s t a n c e i n d e f i n i n g the scope o f the amendment. There the a p p l i c a t i o n was s u c c e s s f u l both under the " o p p r e s s i o n " and " u n f a i r l y p r e j u d i c i a l " heads i n r e s p e c t o f a c o n t r o l l i n g s h a r e h o l d e r i n a company a c t i n g t o h i s own advantage but t h e r e was no d i s c u s s i o n o f the d i f f e r e n c e , i f any, between t h e s e r e m e d i e s . T h i s came i n the l a t e r c a s e o f Diligent: v. RWMD Operations Kelowna Ltd. 191 et al. where " u n f a i r l y p r e j u d i c i a l " was g i v e n a v e r y l i b e r a l i n t e r -p r e t a t i o n and th e t r a d i t i o n a l problem o f p r o v i n g an i n j u r y "qua member" overcome t o some e x t e n t . However, t h i s "qua member" r e q u i r e m e n t has no t been removed a l t o g e t h e r d e s p i t e a f u r t h e r l e g i s l a t i v e amendment which was e n a c t e d a f t e r the D i l i g e n t i c a s e . S e c t i o n 221 was changed i n the 1976 companies Amendment A c t by th e a d d i t i o n o f s u b s e c t i o n (b) which reads as f o l l o w s : 189 S. 221, B r i t i s h Columbia Companies A c t , 1973, c.18; s. 234, Canada B u s i n e s s C o r p o r a t i o n s A c t . 1 9 0 ( 1 9 7 6 ) 60 D.L.R. 527. 191 (1976) 1 B.C.L.R. 36. See the comment on t h i s c a s e by S l u t s k y , "The O p p r e s s i o n Remedy R e v i t a l i z e d , U.B.C. L. Rev. 1977 V o l . 2. - 74 -(b) For the purposes of t h i s s e c t i o n a member in c l u d e s (a) a b e n e f i c i a l owner of a share i n the company, and (b) any other person who, i n the d i s c r e t i o n of the Court, i s a proper person to make an a p p l i c a t i o n under t h i s s e c t i o n . I t would appear t h a t an a p p l i c a n t who i s a s h a r e h o l d e r i n the company, whether l e g a l o r e q u i t a b l e , would s t i l l have t o show t h a t he had been i n j u r e d as a s h a r e h o l d e r because presumably, as a s h a r e h o l d e r - h e w i l l be p r e c l u d e d from a p p l y i n g t o the c o u r t under c l a u s e (b) o f s u b s e c t i o n (6) f o r the r i g h t t o b r i n g an a c t i o n . T h e r e f o r e , a s h a r e h o l d e r w i l l b r i n g h i s a c t i o n as such even i f he i s a l s o a d i r e c t o r o r an employee and s t i l l be bound by the e x i s t i n g common law i n t e r p r e t a t i o n s o f such , p r o v i s i o n s . T h i s argument i s s u p p o r t e d by th e f a c t t h a t the amendment appear s t o be an attempt t o widen the scope o f t h o s e , o t h e r than s h a r e h o l d e r s , who can use the remedy to more than j u s t "an i n s p e c t o r under s e c t i o n 230" ( t h e o l d p r o v i s i o n ) r a t h e r than an a l t e r a t i o n o f what has t o be pro v e d t o make the c l a i m s u c c e s s f u l . In o t h e r 192 words, B r i t i s h Columbia has not y e t gone as f a r as the f e d e r a l A c t which i m p l i e s t h a t the c o m p l a i n a n t can g e t a remedy f o r an i n j u r y a f f e c t i n g him i n h i s c a p a c i t y as a " s e c u r i t y h o l d e r , c r e d i t o r , d i r e c t o r , o r o f f i c e r . " One o t h e r p r o v i s i o n which i n v a r i o u s forms has been i n t r o d u c e d i n B r i t i s h Columbia and O n t a r i o c o u l d a l l o w a p e r s o n a l a c t i o n f o r c e r t a i n t y p e s o f non-compliance w i t h t h e A c t , the a r t i c l e s and the memorandum o f th e company. These a r e s e c t i o n s 227 i n B r i t i s h Columbia and 261 i n O n t a r i o which a l l o w the c o u r t t o " r e c t i f y . . . n e g a t i v e o r m o d i f y . . . o r v a l i d a t e " t h e n on-compliance o r t o "make such o r d e r . . . *i as [ i t ] t h i n k s f i t " r e s p e c t i v e l y . The p r o v i s i o n s appear s i m i l a r i n 1 9 2 S . 234 ( 2 ) . t h e i r i n t e n t a l t h o u g h t h e y have been e x p r e s s e d d i f f e r e n t l y and the O n t a r i o c o u r t s g i v e n w i d e r powers than t h o s e i n B.C. The scope o f the O n t a r i o s e c t i o n has been r e c e n t l y i n t e r p r e t e d i n Re Goldhar and 193 Quebec Manitou Mines< Ltd. where the c o u r t l i m i t e d i t t o "t h e r e c t i f i c a t i o n o f s i m p l e ' m e c h a n i c a l ' o m i s s i o n s o f a ty p e t h a t l e n d 194 t h e m s e l v e s t o summary d i s p o s i t i o n . " What the c o u r t s a i d i t does n o t want t o do i s t o use t h i s summary p r o c e d u r e t o d e t e r m i n e c o m p l i n c a t e d m a t t e r s o f law. The p l a i n t i f f s i n t h i s c a s e were s e e k i n g a d e c l a r a t i o n a v o i d i n g c e r t a i n a c t i o n s o f the d i r e c t o r s * c l a i m i n g that-t h e s e a c t i o n s were not i n the b e s t i n t e r e s t s o f the company and were t h e r e f o r e a b r e a c h o f s e c t i o n 144 ( t h e e q u i v a l e n t o f s e c t i o n 140 B.C.C.A.) which s e t s o u t a s t a t u t o r y s t a n d a r d o f d u t y . Such a b r e a c h , t h e c o u r t s a i d , was a b r e a c h o f dut y owed t o the company, n o t the s h a r e h o l d e r s , and t h e r e f o r e any c o m p l a i n t about i t must be b r o u g h t as a d e r i v a t i v e a c t i o n . S e c t i o n 261 i s n o t t o be used t o a v o i d t h e r e q u i r e m e n t s o f s e c t i o n 99 ( s e c t i o n 222 i n B r i t i s h C o l u m b i a ) , and i n -deed i s l i m i t e d t o p e r s o n a l c l a i m s . " I t can be f a i r l y s a i d t h e r e f o r e , t h a t s.261 appears t o have no r e l e v a n c e t o d e r i v a t i v e r i g h t s and was 195 n e v e r i n t e n d e d as a v e h i c l e f o r t h e i r e n f o r c e m e n t . " I t i s sub-m i t t e d , w i t h r e s p e c t , t h a t such an a n a l y s i s i s c o r r e c t both w i t h r e g a r d t o the r e l a t i o n s h i p o f s e c t i o n 261 t o the d e r i v a t i v e p r o v i s i o n and t o the l i m i t a t i o n o f the s e c t i o n t o " m e c h a n i c a l " wrongdoings. A l t h o u g h t h e w o r d i n g i s d i f f e r e n t i n B r i t i s h Columbia i t would seem l i k e l y t h a t the Goldhar c a s e w i l l be f o l l o w e d t h e r e , as i t s p r o v i s i o n i s even c l e a r e r i n s t a t i n g t h a t i t c o v e r s "any o m i s s i o n , 1 9 3 ( 1 9 7 6 ) 61 D.L.R. (3d) 612. 194 *Ibid. , p. 615. ' ^Ibid. , p. 617. d e f e c t , e r r o r o r i r r e g u l a r i t y [ w h i c h ] has o c c u r r e d i n the c o n d u c t o f t h e b u s i n e s s o r a f f a i r s o f the company."; t h e s e a r e a l l a c t s o f non-c o m p l i a n c e o f a m e c h a n i c a l n a t u r e . The Goldhar c a s e i t s e l f g i v e s some i n d i c a t i o n o f the t y p e o f wrongs which may f a l l w i t h i n t h i s d e s c r i p t i o n . I t r e f e r s t o the r e q u i r e m e n t t h a t p r o x i e s be s e n t o u t t o s h a r e h o l d e r s and the o b l i g a t i o n t h a t d i r e c t o r s m i ght have t o f i l e an i n s i d e r ' s r e p o r t . But what o f m i s l e a d i n g ^ i n f o r m a t i o n o r a proxy form which has been s e n t but d o e s n ' t c o n t a i n the i n f o r m a t i o n r e q u i r e d 196 197 by the Companies A c t o r t h e S e c u r i t i e s A c t ? U n t r u e o r m i s l e a d i n g i n f o r m a t i o n i n perhaps a l l documents s e n t o u t by companies w i l l now 198 g i v e r i s e t o a p e r s o n a l a c t i o n a t common law b u t i f a mere o m i s s i o n i s n o t c o n s i d e r e d " m i s l e a d i n g , " s e c t i o n 227 may s t i l l g i v e an i n d i v i -dual s h a r e h o l d e r a remedy. I t s h o u l d be noted however, t h a t t h i s s e c t i o n does n o t have an e q u i v a l e n t - i n the S e c u r i t i e s A c t , 1967 and i. i t c o u l d be argued t h a t as no such s t a t u t o r y remedy e x i s t s t h e r e , one s h o u l d not be found t o e x i s t i n the Companies A c t because a p a r t from j u r i s d i c t i o n a l d i f f e r e n c e s , the two A c t s have the same p h i l o s o p h y i n t h i s a r e a . I n . o t h e r words, why s h o u l d a p l a i n t i f f under the Companies 1 9 6 S . 180, S.B.C. c.18. 197 ' , y / S . 102, S.B.C. c.45. l 3 ° G o l d e x Mines L t d . v. R e v i l l (1974) 54 D.L.R. (3d) 672, T h i s c a s e h o l d s t h a t s e n d i n g i n f o r m a t i o n which i s m i s l e a d i n g i s a b r e a c h o f d i r e c t o r s ' d u t i e s t o s h a r e h o l d e r s but i t does not e x p r e s s i v e l y c o v e r an o m i s s i o n t o send documents a l t o g e t h e r . I t does n o t r e f e r t o Babiic v . M i l i n k o v i c (1971) 22 D.L.R. (3d) 732 which h e l d i n an a p p a r e n t l y p e r s o n a l a c t i o n , t h a t s e n d i n g no i n f o r m a t i o n , c i r c u l a r w i t h a proxy made the s h a r e h o l d e r s m e e t i n g and the d e c i s i o n s a t i t n u l l i t i e s . T h i s , f i n d i n g was made on the b a s i s o f non-compliance w i t h t h e B.C. Companies A c t r e q u i r e m e n t s r a t h e r than as a b r e a c h o f d i r e c t o r s d u t i e s but i t s h o u l d not be a d i f f i c u l t s t e p f o r c o u r t s t o h o l d t h a t a complete o m i s s i o n t o send documents, a t l e a s t t h o s e r e q u i r e d by law, i s a l s o a b r e a c h o f d u t y . What i s n o t so c l e a r , i s the p o s i t i o n o f n o n - d i r e c t o r s who choose t o send o u t p r o x y i n f o r m a t i o n c i r c u l a r s . The Goldex c a s e would s u g g e s t t h a t the s e n d e r s o f m i s l e a d i n g i n f o r m a t i o n a r e l i a b l e , whoever t h e y a r e , but see a c r i t i c i s m o f t h i s by S l u t s k y , " S h a r e h o l d e r s ' P e r s o n a l A c t i o n s - New H o r i z o n s " op. ait., n o t e 156. A c t have a s t a t u t o r y r i g h t t o f o r c e c o m p l i a n c e w i t h t h e A c t whereas h i s S e c u r i t i e s A c t c o u n t e r p a r t has t o r e l y on t h e common law? However, on t h e f a c e o f s e c t i o n 227 i t would appear t o c o v e r any " o m i s s i o n , d e f e c t , e r r o r , o r i r r e g u l a r i t y , " i n c l u d i n g t h o s e i n p r o x i e s , annual r e p o r t s o r o t h e r documents which have t o be g i v e n t o s h a r e h o l d e r s so t h a t , i n d e e d t h e r e i s an advantage i n b r i n g i n g t h e a c t i o n under t h e Companies A c t . Of c o u r s e , t h e s t a t u t o r y remedy may n o t be so a t t r a c t i v e i f , as appears l i k e l y , damages can be awarded f o r a common law b r e a c h because s e c t i o n 227 seems t o limits the s t a t u t o r y remedy t o d e c l a r a t i o n s 1 9 Q o r i n j u n c t i o n s . A l t h o u g h t h e c o u r t i n Goldex Mines Ltd. v. R e v i l l speaks o f "an a c t i o n a t t a c k i n g [an annual r e p o r t ] , s e e k i n g a declaration o r an injunction"^®® and c o u l d be seen t o p r e c l u d e damages, i t i s s u b m i t t e d t h a t no argument was p r e s e n t e d on whether o r n o t damages would be a v a i l a b l e i n such an a c t i o n . C e r t a i n l y i n t h e ca s e o f an o m i s s i o n t o g i v e i n f o r m a t i o n , an i n j u n c t i o n o r d e c l a r a t i o n would n o r m a l l y be a s u f f i c i e n t remedy b ut where t he e f f e c t o f any c o m p l i a n c e was t o m i s l e a d t h e p l a i n t i f f , damages would s e e m ' p o s s i b l e ; i f t h e y were, th e y c o u l d d e f i n i t e l y be r e c o v e r e d from t h e d i r e c t o r s b u t r e c o v e r y from t h e company would seem more u n c e r t a i n ^ ^ D a m a g e s have been a l l o w e d 202 f o r a br e a c h o f s t a t u t o r y r e q u i r e m e n t s i n the U n i t e d S t a t e s and al t h o u g h t h e d e c i s i o n t h e r e l a r g e l y c o n c e r n e d j u r i s d i c t i o n a l p r o b l e m s , t h e p o l i c y o f a l l o w i n g damages f o r t h e b e t t e r p r o t e c t i o n o f members would a l so secern'appl i c a b l e i n the Commonwealth. I f damages were t o 199 Supra, note 198. 2 0 0 ( 1 9 7 4 ) 54 D.L.R. (3d) 672 Houldsworth v. C i t y o f Glasgow Bank (1880) 5 App. Cas. 317. And see t h e d i s c u s s i o n on t h i s c a s e infra, p.183. 2 0 2 U . I . Case Co. v. Borak, (1964) 377 U.S. 426. - 7 8 -be awarded and i f the common law a c t i o n was h e l d t o c o v e r complete o m i s s i o n s , i t would make t h i s a c t i o n more a t t r a c t i v e than the s t a t u t o r y remedy. Problems would then a r i s e as t o whether the s t a t u t e i s t o p r e v a i l and no doubt t he same d i f f i c u l t i e s as a r o s e w i t h s e c t i o n 222 would have t o be f a c e d . Such an a n a l y s i s o f the a p p l i c a b i l i t y f o s e c t i o n 227 i s however n o t r e l e v a n t i n r e l a t i o n t o s e c t i o n 152 o f the B.C. Companies A c t which r e v e r s e s the common law p o s i t i o n on i n s i d e r t r a d i n g l a i d down 203 by Pervioal v. Wright. T h i s s e c t i o n now c l e a r l y s e t s o u t a p e r s o n a l r i g h t o f a c t i o n t o sue'an i n s i d e r o r a f f i l i a t e o f an i n s i d e r " i n r e s p e c t o f "any d i r e c t l o s s s u f f e r e d " by the p l a i n t i f f . No l o n g e r a r e " s p e c i a l f a c t s " , o r the Commonwealth e q u i v a l e n t s e t o u t i n 204 Allen v. Hyatt, r e q u i r e d f o r the p l a i n t i f f ' s s u c c e s s ; i n s t e a d , new o b s t a c l e s o f p r o v i n g inter a l i a "use o f any s p e c i f i c c o n f i d e n t i a l 205 i n f o r m a t i o n " have t o be overcome.. A g a i n , t h i s s e c t i o n has i t s 206 e q u i v a l e n t i n the B.C. S e c u r i t i e s A c t a l t h o u g h t h e r e a r e d i f f e r e n t d e f i n i t i o n s o f " i n s i d e r " and o f the c o r p o r a t i o n s which a r e a f f e c t e d by the p r o v i s i o n s i n the two A c t s . F o r example, the S e c u r i t i e s A c t does n o t c o v e r c l o s e c o r p o r a t i o n s which have n o t made an i s s u e t o the p u b l i c o r whose s h a r e s a r e n o t l i s t e d , whereas the Companies A c t does. ' F i n a l l y , b r i e f mention s h o u l d be made o f the p o t e n t i a l forms o f r e d r e s s open t o s h a r e h o l d e r s through the Board o f T r a d e i n E n g l a n d 2 0 3 [ 1 9 0 2 ] 2 Ch. 421. 2 0 4 ( 1 9 1 4 ) 30 T.L.R. 444. 2 0 5 S e e Green v. C h a r t e r h o u s e , Canada L t d . (1976) 12 O.R. (2d) 280 which i s a d e c i s i o n on a s i m i l a r s e c t i o n on the O n t a r i o S e c u r i t i e s A c t , R.S.O. c.426. 2 0 6 S . 111. - 79;-207 and an i n s p e c t o r a p p o i n t e d by the c o u r t i n B r i t i s h Columbia. Both t h e Board o f Tra d e i n s p e c t o r and one a p p o i n t e d under the B r i t i s h Columbia p r o v i s i o n have the power t o i n v e s t i g a t e the a f f a i r s and management o f the company and t o send a r e p o r t t o the Board and the c o u r t r e s p e c t i v e l y . In th e c a s e o f the Board, t h i s r e p o r t may be p u b l i s h e d which might i n i t s e l f cause the company t o r e c t i f y the wrong c o m p l a i n e d o f , o r i t may be used as e v i d e n c e i n c i v i l o r c r i m i n a l p r o c e e d i n g s . V a r i o u s p r o v i s i o n s e x i s t i n E n g l a n d c o n c e r n i n g 7 the a p pointment o f i n s p e c t o r s w i t h the most generous o f them a l l o w i n g 208 any a p p l i c a n t , n o t o n l y members, t o seek t h e a p pointment o f one. The a b i l i t y o f s h a r e h o l d e r s t o have an i n s p e c t o r a p p o i n t e d i n B r i t i s h Columbia i s more l i m i t e d because, a p a r t from the u n l i k e l y e v e n t t h a t 209 t h e r e i s s p e c i a l r e s o l u t i o n o f the company a p p o i n t i n g one, t h e r e . i s a r e q u i r e m e n t t h a t members h o l d i n g twenty p e r c e n t o f the i s s u e d s h a r e s o f any c l a s s must make the a p p l i c a t i o n . Even t h i s i s a r e c e n t 210 amendment f o l l o w i n g the d e c i s i o n i n Re Peterson and Kanata Invest-211 ments Ltd. which h e l d t h a t the o r i g i n a l p r o v i s i o n r e q u i r e d a s i n g l e member h o l d i n g twenty p e r c e n t t o a p p l y . D e s p i t e t h e s e l i m i t a t i o n s , t h e s e p r o v i s i o n s a r e p o t e n t i a l l y v e r y u s e f u l i n an a t t a c k on any a l l e g e d o p p r e s s i o n . 207 S. 230, B.C. Companies A c t . 208 See Gower, Modern Company Law, op. cit., note :9, pp. 604-613 f o r a f u l l d i s ' c u s s i o n o f Board o f T r a d e i n v e s t i g a t i o n s . ?0Q Under s. 231, B.C. Companies A c t . 2 1 0 S . 48, 1976 Companies Amendment A c t . 2 1 1 ( 1 9 7 6 ) 60 D.L.R. (3d) 527. - 80 -CHAPTER II DUTIES OWED BY DIRECTORS AND MAJORITY SHAREHOLDERS A. UNITED STATES C o n s i d e r a b l e r e f e r e n c e has a l r e a d y been made t o the f a c t t h a t , i n the U n i t e d S t a t e s , d i r e c t o r s , and perhaps m a j o r i t y s h a r e h o l d e r s , may owe d u t i e s t o the i n d i v i d u a l s h a r e h o l d e r s i n the company as w e l l as to the company i t s e l f . Indeed t h i s d u t y has been the b a s i s o f some o f t he p e r s o n a l a c t i o n s which have been d i s c u s s e d e a r l i e r ; f o r example, d i r e c t o r s have a duty t o c o n s i d e r t he s h a r e h o l d e r s and n o t t o a c t t o t h e i r own advantage, o r even a r b i t r a r i l y , when d e t e r m i n i n g a d i v i d e n d p o l i c y o r when redeeming s h a r e s i n t h e company. I t i s n o t the purpose o f t h i s paper t o d i s c u s s t he du t y owed t o the company t o any e x t e n t , a l t h o u g h s i t u a t i o n s i n which a br e a c h o f the du t y t o the company has o c c u r r e d may a l s o i n v o l v e a br e a c h t o the s h a r e h o l d e r s . However, because some c o u r t s t r e a t m a j o r i t y s h a r e h o l d e r s who have c o n t r o l o v e r t he d i r e c t o r s as h a v i n g t he same r e s p o n s i b i l i t i e s as t h o s e d i r e c t o r s , i t i s i m p o r t a n t t o u n d e r s t a n d the n a t u r e o f the d i r e c t o r s ' d u t i e s i n o r d e r t o u n d e r s t a n d f u l l y t h o s e o f the m a j o r i t y s h a r e h o l d e r s . Because o f t h i s c o n t r o l -and f o r o t h e r r e a s o n s which w i l l be c o n s i d e r e d s h o r t l y , m a j o r i t y s h a r e h o l d e r s a r e sometimes c a l l e d " t r u s t e e s " o r " f i d u c i a r i e s " t h e m s e l v e s , d e s p i t e the f a c t t h a t t h e i r s h a r e s a r e c o n s i d e r e d p e r s o n a l p r o p e r t y and t h a t they a r e n o r m a l l y a l l o w e d t o v o t e t h e s e s h a r e s as t h e y t h i n k f i t . C o n f l i c t i n g a u t h o r i t y has made i t d i f f i c u l t t o d e f i n e a c c u r a t e l y the n a t u r e o f the duty owed by the m a j o r i t y but some o f the s a l i e n t f e a t u r e s w i l l be examined i n t h i s c h a p t e r . When c o n s i d e r i n g the v o t i n g o f m a j o r i t y s h a r e h o l d e r s i t i s , o f c o u r s e , i m p o r t a n t t o d i s t i n g u i s h between the s i t u a t i o n s where the - 81 -s h a r e h o l d e r s t h e m s e l v e s have the power t o make d e c i s i o n s a f f e c t i n g the company, and t h o s e where the s h a r e h o l d e r s ' meeting i s d o i n g n o t h i n g more than r a t i f y i n g o r r e j e c t i n g d e c i s i o n s a l r e a d y taken by the d i r e c t o r s . The e x t e n t o f r a t i f i c a t i o n i t s e l f w i l l a l s o be d i s c u s s e d . B u s i n e s s Judgment Rule B e f o r e l o o k i n g a t the n a t u r e o f the d u t i e s owed by d i r e c t o r s and m a j o r i t y s h a r e h o l d e r s , i t i s i m p o r t a n t t o c o n s i d e r the so c a l l e d " b u s i n e s s judgment r u l e " under which d i r e c t o r s operate.- T h i s i s the r u l e t h a t says the d e c i s i o n s o f the d i r e c t o r s w i l l n o t be i n t e r -f e r e d w i t h as l o n g as they a r e made r e a s o n a b l y and i n good f a i t h v w i t h no b i a s o r o t h e r b r e a c h o f dut y . In o t h e r words, s h a r e h o l d e r s , both m a j o r i t y and m i n o r i t y , c a n n o t c o m p l a i n o f a c t i o n s which a r e done i n "good f a i t h , " a term as l o o s e l y d e f i n e d i n the U n i t e d S t a t e s as i t i s i n the Commonwealth. Developed m a i n l y as a means o f a l l o w i n g b u s i n e s s men t o make d e c i s i o n s w i t h o u t i n t e r r u p t i o n by s h a r e h o l d e r s o r the c o u r t , the r u l e may a l s o p r e v e n t l e n g t h y t r i a l s on the m e r i t s o f c a s e s even i f they do ge t t o c o u r t J For example, i n a d e r i v a t i v e a c t i o n c l a i m i n g " n e g l i g e n c e waste and i m p r o v i d e n c e " because o f an a d v e r t i s i n g campaign u s i n g the w i f e o f a d i r e c t o r when the company a l r e a d y had more work than i t c o u l d cope w i t h , the c o u r t s a i d : Had the w i f e of the president of the c o r p o r a t i o n not been i n v o l v e d , the a d v e r t i s i n g cause of a c t i o n could have been disposed of summarily. The c o n f l i c t s i t u a t i o n which a r o s e i n t h i s case meant t h a t the c o u r t ^ a s s o n v. Bosman 45 A. 2d 807 (1946). 2 B a y e r v. Beran 49 N.Y.S. 2d 2, 7 (1944). And see "The C o n t i n u i n g V i a b i l i t y o f the B u s i n e s s Judgment Rule as a Guide f o r J u d i c i a l R e s t r a i n t " , 35 Geo. Wash. L.R. 562 (1967). had t o c o n s i d e r the m e r i t s o f the d i r e c t o r s ' a c t i o n . Indeed, v e r y o f t e n combined w i t h a c l a i m o f mismanagement i s a l s o one o f c o n f l i c t o f i n t e r e s t o r b i a s so t h a t the c o u r t w i l l have t o examine tHe c l a i m t o see whether a.'breach o f duty has o c c u r r e d . Even n o n - f e a s a n c e \ni 11 be c o n s i d e r e d , as t h i s o f t e n s u g g e s t s t h a t d i r e c t o r s d i d n ' t c o n s i d e r the m a t t e r a t a l l . I f a b r e a c h o f duty i s e s t a b l i s h e d , then the r u l e no l o n g e r o p e r a t e s and the normal consequences f o r such a b r e a c h f o l l o w . A l t h o u g h the b u s i n e s s judgment r u l e does n o t d e t e r m i n e whether the duty was owed to the company o n l y , o r t o s h a r e h o l d e r s as w e l l , and g i v e s l i t t l e i n d i c a t i o n o f what a c t i o n s might amount to a b r e a c h , i t i s i m p o r t a n t t o remember i t s e x i s t e n c e as i t p r e c l u d e s c e r -t a i n a c t i o n s by d i r e c t o r s from b e i n g l o o k e d a t a t a l l , whether on b e h a l f o f the vcompany o r the s h a r e h o l d e r s . D i v i s i o n o f Powers The a b i l i t y o f the d i r e c t o r s t o work l a r g e l y u n i n t e r r u p t e d under the above r u l e , r a i s e s the q u e s t i o n o f the e x t e n t o f the d i r e c t o r s ' powers and what s a y , i f any, the s h a r e h o l d e r s have i n the company. The r e l a t i o n s h i p between the two groups w i l l be d e t e r -mined by the a r t i c l e s o r by laws o f the company, o r the s t a t u t e under 3 which i t was i n c o r p o r a t e d , which w i l l d e f i n e t h o s e powers which have been d e l e g a t e d t o the d i r e c t o r s and l e a v e the fces.t.for the s h a r e h o l d e r s However, once the d i r e c t o r s have been g i v e n c e r t a i n powers, i s t h e r e any room f o r the s h a r e h o l d e r s t o e x e r c i s e t h o s e same powers assuming t h e d i r e c t o r s have n o t t r a n s g r e s s e d t h e i r a u t h o r i t y and a r e s t i l l c a p a b l e o f making the d e c i s i o n s t h e m s e l v e s ? The answer i s " g e n e r a l l y no a l t h o u g h , on the o t h e r hand, the powers which a r e o f t e n r e t a i n e d by 3 See d i s c u s s i o n on t h i s infra, page 84. s h a r e h o l d e r s , such as the r i g h t t o change the by-laws o r t o s e l l the whole u n d e r t a k i n g o f the company, a r e o n l y a b l e t o be e x e r c i s e d by them. A l t h o u g h the argument f o r n o t a l l o w i n g s h a r e h o l d e r s t o usurp the d i r e c t o r s ' powers i s n o t u s u a l l y p r e d i c a t e d on the b a s i s o f a c o n t r a c t i n the a r t i c l e s o f a s s o c i a t i o n between the company and i t s -4 members as i t i s i n the Commonwealth, the same r e s u l t i s a c h i e v e d . T h i s c o n t r a c t argument i s i m p l i c i t i n some o f the c a s e s which d i s c u s s s h a r e h o l d e r s ' powers " i f i t i s r e a l i z e d t h a t i n the S t a t e s , the c o n t r a c t between the company and i t s members i s made up n o t j u s t o f the a r t i c l e s and by-laws ( t h e e q u i v a l e n t o f the commonwealth memorandum and a r t i c l e s o f a s s o c i a t i o n r e s p e c t i v e l y ) but a l s o o f the i n c o r p o r a t i o n a c t under which the company was formed. These documents a r e c o l l e c t i v e l y 5 6 r e f e r r e d t o as " t h e c h a r t e r " and have been d e s c r i b e d as f o l l o w s : I t i s t r u e . . . t h a t the c h a r t e r has been j u d i c i a l l y considered to be a c o n t r a c t i n s o f a r as i t grants r i g h t s , p r o p e r t i e s , p r i v i l e g e s and f r a n c h i s e s . D e s p i t e t h i s j u d i c i a l r e c o g n i t i o n , the c o n c e p t o f a c o n t r a c t i s not o f t e n g i v e n as the r e a s o n f o r the c o u r t s ' d e c i s i o n s ; o t h e r more g e n e r a l , e x p l a n a t i o n s a r e more commonly used. F o r example, where s h a r e h o l d e r s have been r e s t r a i n e d from d o i n g t h i n g s o u t s i d e t he c h a r t e r , o r have used as a d e f e n c e the f a c t t h a t t he c h a r t e r d i d a l l o w them t o do the a c t i o n which i s b e i n g impugned, the c o u r t s have o f t e n d e c i d e d the c a s e on the e x i s t a n c e o r o t h e r w i s e o f c e r t a i n p r o v i s i o n s i n the c h a r t e r , b ut u s u a l l y w i t h o u t r e f e r e n c e t o the f a c t t h a t t he whole -A u t o m a t i c S e l f - C l e a n s i n g F i l t e r S y n d i c a t e v. Cunninghame [1906] 2 Ch. 34. , 5 B a l l a n t i n e , C o r p o r a t i o n s , C a l l a g h a n & Co., 1946 a t p. 61. H e l v e r i n g v. Northwest S t e e l R o l l i n g M i l l s I n c . , 311 U.S. 46, 50 (1940). c h a r t e r forms a c o n t r a c t g o v e r n i n g t h e p a r t i e s a c t i v i t i e s . 7 One case l i m i t e d the power o f the s h a r e h o l d e r s on the b a s i s t h a t i t would be u n r e a s o n a b l e t o p l a c e t h e r e s p o n s i b i l i t y f o r management a c t i o n s on the d i r e c t o r s a l o n e i f the s h a r e h o l d e r s c o u l d a l s o manage 8 the company as they saw f i t . I t has a l s o been s u g g e s t e d t h a t s h a r e h o l d e r s have no g r e a t e r power t o a c t than t h a t g i v e n t o them by the c h a r t e r ; i n o t h e r words, they have no i n h e r e n t power t o run the company but a r e s u b j e c t t o th o s e powers which t h e y have d e l e g a t e d 1 c to o t h e r s . T h i s was e x p l a i n e d i n Continental Securities Co. v. Belmont' t h u s : [The shareholders] are not by any s t a t u t e i n t h i s s t a t e given general power of i n i t i a t i v e i n corporate a f f a i r s . Any a c t i o n by them r e l a t i n g to the d e t a i l s of the corporate business i s n e c e s s a r i l y i n the form of any assent, request or recommendation. Recommendations by the body of stockholders can only be enforced through the board of d i r e c t o r s , and i n d i r e c t l y by the a u t h o r i t y of the stockholders to change the personnel of the d i r e c t o r s a t a meeting f o r the e l e c t i o n of d i r e c t o r s . P r o b a b l y the b e t t e r view i s t h a t s h a r e h o l d e r s do have " t r a d i t i o n a l , i n h e r e n t p o w e r s " ^ 0 t o do c e r t a i n t h i n g s so t h a t t h e i r a b i l i t y t o f u n c t i o n i s n o t e n t i r e l y dependent on s t a t u t e s . Indeed, i n h e r e n t powers and i n c i d e n c e s o f ownership have sometimes been g i v e n as t h e 11 12 a u t h o r i t y f o r h a v i n g c l a i m s f o r v o t e s , d i v i d e n d s and pr e - e m p t i v e 13 r i g h t s e n f o r c e d . H o r w i t z v. B a l a b a n , 112 F. Supp. 99 (1953) , ( r e q u i r e m e n t i n s t a t u t e o f s p e c i a l r e s o l u t i o n h e l d m a n d a t o r y ) ; Maddock v. V o r c l o v e C o r p o r a t i o n , 147 A. 225 (1929) , ( a l t e r a t i o n o f r i g h t s o f s h a r e s a u t h o r i z e d by s t a t u t e ) . 8 C h a r l e s t o w n Boot & Shoe Co. v. Dunsmore, 60 N.H. 85 (1880). 9 9 9 N.E. 138, 141 (1912). 1 0 R e Amer v. D r e s s e l , 118 N.E. 2d 590 (1954). 1 ] R e i f s n y d e r v. P i t t s b u r g h Outdoor A d v e r t i s i n g Co, 173 A. 2d 319 (1961), 1 2 K n a p p v. Bankers S e c u r i t i e s Corp., 230 F. 2d 717 (1956 ) . 1 3 W i t h e r b e e v. Bowles, 95 N.E. 27 (1911). - 85; -One o t h e r r e a s o n t h a t the c o n t r a c t argument i s n o t o f t e n used i n s u p p o r t i n g a p l a i n t i f f ' s c l a i m i s t h a t the c o u r t s i n the U n i t e d S t a t e s have d e v e l o p e d a s t r o n g s ense o f f i d u c i a r y d u t y owed by d i r e c t o r s and perhaps m a j o r i t y s h a r e h o l d e r s t o o t h e r s h a r e h o l d e r s . Where r i g h t s have been i n f r i n g e d , i t has f r e q u e n t l y been p o s s i b l e t o base the a c t i o n on a b r e a c h o f t h i s d u t y r a t h e r than on a b r e a c h o f c o n t r a c t . For example, the r i g h t t o v o t e which some see as the b a s i s f o r a s u i t c o m p l a i n i n g o f ah improper s h a r e i s s u e , i s u s u a l l y i subsumed i n the more g e n e r a l e q u i t a b l e arguments o f f a i r n e s s and 14 bona f i d e s . However i l l - d e f i n e d o r i n f r e q u e n t l y used the i d e a o f a c o n t r a c t u a l r e l a t i o n s h i p m i ght be, a c o m b i n a t i o n o f t h i s and the use o f e q u i t y whenever the s i t u a t i o n demands has l e d t o a wide a r r a y o f p e r s o n a l a c t i o n s . D i r e c t o r s ' D u t i e s I m p l i c i t i n the d i s c u s s i o n on the b u s i n e s s judgment r u l e i s the i d e a t h a t d i r e c t o r s owe c e r t a i n d u t i e s t o the company. As i n the 15 Commonwealth, t h e y have been c a l l e d v a r i o u s t h i n g s from a g e n t t o 16 t r u s t e e , b u t perhaps a more a c c u r a t e d e s c r i p t i o n i s t h a t t h e y a r e f i d u c i a r i e s . Of c o u r s e , as f i d u c i a r i e s t o the company, any b r e a c h o f t h e i r duty would l e a d t o a c o r p o r a t e o r d e r i v a t i v e a c t i o n o n l y and n o t h e l p i n d i v i d u a l s h a r e h o l d e r s d i r e c t l y . To t h i s end, the duty i s u s u a l l y seen as b e i n g owed to s h a r e h o l d e r s as w e l l so t h a t any breach a f f e c t i n g them p e r s o n a l l y w i l l g i v e r i s e t o a p e r s o n a l a c t i o n . As we saw when d i s c u s s i n g the development o f the d e r i v a t i v e a c t i o n , ^ 7 1 4 C o n d e c Corp. v. Lunkenheimer Co., 230 A. 2d 769 ( 1 9 6 7 ) . 15 C h a r l e s t o w n Boot &' Shoe Co. v. Dunsmore, supra, n o t e 8. ^ 6 G a i n e s v. Long M a n u f a c t u r i n g Co, 67 S.E. 2d 350; B e r l e , " C o r p o r a t e Powers as Powers i n T r u s t " 44 Harv. L.R. 1049 ( 1 9 3 1 ) . Supra, p. I I . - 86 -i t a ppears i n f a c t as though the duty t o i n d i v i d u a l s may have e x i s t e d b e f o r e i t was a c c e p t e d t h a t some b r e a c h e s were r e a l l y wrongs t o the company o n l y . N e v e r t h e l e s s , i t remains a r g u a b l e t h a t t h e r e i s now no duty owed t o anybody b u t the company, a l t h o u g h the w i d e r view 18 t h a t i t i s a l s o owed to s h a r e h o l d e r s p r e v a i l s . The scope o f t h i s d uty t o the members was seen when p e r s o n a l a c t i o n s were d i s c u s s e d above and w i l l be examined a g a i n l a t e r i n the a n a l y s i s o f c l a i m s concern-; i n g the maintenance o f a p r o p o r t i o n a t e i n t e r e s t i n the company. What i s r e q u i r e d i s t h a t d i r e c t o r s a c t n o t o n l y i n the b e s t i n t e r e s t s o f the company but a l s o f a i r l y towards the s h a r e h o l d e r s , t a k i n g them i n t o a c c o u n t when making d e c i s i o n s f o r the company so t h a t no b i a s between groups o f s h a r e h o l d e r s i s e v i d e n t o r so t h a t the d i r e c t o r s ' s e l f i n t e -r e s t i s n o t put t o the f o r e . What i s c l e a r i s t h a t the c o u r t s i n the U n i t e d S t a t e s have n o t f e l t c o n s t r a i n e d t o l i m i t the e x t e n t o f the duty t o the company o n l y by the c o n c e p t s o f the d e r i v a t i v e a c t i o n o r the a c c e p t e d t h e o r y o f d i v i s i o n s o f powers between d i r e c t o r s and s h a r e h o l d e r s . In o t h e r words, the f a c t t h a t c e r t a i n a c t i o n s a r e wrongs to the company o n l y and t h a t once d i r e c t o r s have been g i v e n power t o do t h i n g s by s t a t u t e o r by ,the s h a r e h o l d e r s t h a t power i s l a r g e l y removed from the s h a r e -h o l d e r s , does n o t mean t h a t the d i r e c t o r s can o n l y owe t h e i r d u t i e s t o the company. There i s no c o n c e p t u a l r e a s o n why d i r e c t o r s s h o u l d be r e s p o n s i b l e o n l y t o the company, n o t w i t h s t a n d i n g the a c c e p t e d d i s t i n c t i o n between the company and the body o f s h a r e h o l d e r s as b e i n g s e p a r a t e l e g a l e n t i t i e s . Nor i s i t n e c e s s a r y t o l i f t t h e c o r p o r a t e v e i l i n o r d e r t o e x t e n d the d u t i e s beyond the company. A l t h o u g h the 1 8 S e e F l e t c h e r , Cyc. Corp. P a r a s . 848, 1168.1 and 1168.2. - 87 -e a r l y d e c i s i o n s which drew on the t r u s t c o n c e p t t o e x p l a i n the r e l a t i o n -s h i p between d i r e c t o r s and s h a r e h o l d e r s d i d so o u t o f a sense o f urgency i n o r d e r t o r e d r e s s an ob v i o u s wrong which had no o t h e r form o f sa n c -: t i o n , t h e a n a l o g y was s u i t a b l y a p t to form t he b a s i s o f t o d a y ' s f i d u -c i a r y d u t y . Because i t was r e c o g n i z e d t h a t i n r e a l i t y t h e d i r e c t o r s ' a c t i o n s were a f f e c t i n g t h e s h a r e h o l d e r s as w e l l as the company the e q u i t a b l e i d e a t h a t t h o s e who s t a n d i n a p o s i t i o n o f c o n t r o l a r e f i d u -c i a r i e s was e a s i l y a s s i m i l a t e d i n t o a company law c o n t e x t . Even though the c o n c e p t s have been r e f i n e d , the u n d e r l y i n g t e n e t t h a t e q u i t y w i l l g i v e remedies where no o t h e r s a r e a v a i l a b l e remains t he b a s i s of'many o f the a c t i o n s a r i s i n g i n a s h a r e h o l d e r / s h a r e h o l d e r o r s h a r e h o l d e r / d i r e c t o r r e l a t i o n s h i p . Today however, t h e r e a p p e a r s t o be no need to r e t u r n t o f i r s t p r i n c i p l e s because i t seems g e n e r a l l y a c c e p t e d t h a t > d i r e c t o r s do owe t h e i r d u t i e s t o the s h a r e h o l d e r s as w e l l as to the company. What i s perhaps more i m p o r t a n t i s the r e p e a t e d i n s i s t e n c e t h a t d i r e c t o r s ' powers, f o r whose e v e r b e n e f i t they a r e used, a r e a l l sub-j e c t t o e q u i t a b l e l i m i t a t i o n s . J u d i c i a l and academic comments t o t h i s e f f e c t a r e common; f o r example, i n a c a s e i n which the p l a i n t i f f 19 s o u g h t the payment o f a d i v i d e n d , the c o u r t s a i d : I t i s enough to say, perhaps, that the court of e q u i t y i s at a l l times open to complaining shareholders having a j u s t grievance. B e r l e , w r i t i n g i n 1931 what has pro v e d t o be a t o u c h s t o n e a r t i c l e , . 2 0 began: Dodge v. For d Motor Co, 170 N.W. 668 (1919). " C o r p o r a t e Powers as Powers i n T r u s t " , supra, note 16. - 8!8. -I t i s the t h e s i s of t h i s essay that a l l powers granted to a c o r p o r a t i o n or to the management of a c o r p o r a t i o n , or to any group w i t h i n the c o r p o r a t i o n , whether derived from s t a t u t e or cha r t e r or both, are n e c e s s a r i l y and at a l l times e x e r c i s a b l e only f o r r a t a b l e b e n e f i t of a l l the shareholders as t h e i r i n t e r e s t appears. That, i n conse-quence, the use of the power i s subject to e q u i t a b l e l i m i -t a t i o n when the power has been e x e r c i s e d to the detriment of such i n t e r e s t , however absolute the grant of power may be i n terms, and however c o r r e c t the t e c h n i c a l e x e r c i s e of i t may have been. Perhaps t h i s i s l i t t l e more than a r e s t a t e m e n t o f the f i d u c i a r y duty p r i n c i p l e b u t i t i s s u b m i t t e d t h a t the more g e n e r a l , o v e r s e e i n g i n f l u e n c e o f e q u i t y has been i m p o r t a n t i n d e v e l o p i n g m i n o r i t y s h a r e -h o l d e r s ' r i g h t s . I t s h o u l d be not e d t h a t B e r l e does n o t l i m i t h i s r e s t r i c t i o n s t o management; i t i s the o t h e r main c o n t r o l l i n g group w i t h i n the company, t he m a j o r i t y s h a r e h o l d e r s , t o whom we now t u r n . M a j o r i t y S h a r e h o l d e r s ' D u t i e s C o n s i d e r a b l y more d i f f i c u l t than t h e q u e s t i o n d i r e c t o r s ' d u t i e s i s the a c c u r a t e d e t e r m i n a t i o n o f what d u t i e s , i f any, a r e owed by the m a j o r i t y s h a r e h o l d e r s . F o r i n s t a n c e , do s h a r e h o l d e r s , when v o t i n g as s h a r e h o l d e r s , have t o take i n t o a c c o u n t t h e i n t e r e s t s o f the company o r o f o t h e r s h a r e h o l d e r s , and i f s o , i n what c i r c u m s t a n c e s ? I t appears t h a t r a t h e r than h a v i n g one r u l e which can be a p p l i e d i n a l l c a s e s , t h e p a r t i c u l a r f a c t s i t u a t i o n w i l l d e t e r m i n e how s h a r e h o l d e r s can v o t e . T h i s can be broken down i n t o two f u r t h e r c a t e g o r i e s depending on whether t he s h a r e h o l d e r s a r e v o t i n g m e r e l y t o r a t i f y what the d i r e c -t o r s have done o r whether they a r e v o t i n g on a m a t t e r which i s w i t h i n t h e i r own o r i g i n a l power. A t f i r s t g l a n c e , the m a j o r i t y o f the c a s e s would s u g g e s t t h a t whether v o t i n g t o r a t i f y o r v o t i n g on t h e i r own b e h a l f , m a j o r i t y - 89 " s h a r e h o l d e r s owe a f i d u c i a r y duty both, t o the company and t o the m i n o r i t y s h a r e h o l d e r s . T h i s a p p e a r s t o be so d e s p i t e a r e c o g n i t i o n t h a t t h e r e i s a c o r r e s p o n d i n g g e n e r a l r u l e t h a t s h a r e h o l d e r s may 21 v o t e as they p l e a s e a l t h o u g h t h e t r u e scope o f the second r u l e w i l l be examined s h o r t l y . Many o f the t e x t b o o k s s t a t e the f i d u c i a r y p r i n c i p l e w i t h a p p a r e n t l y u n q u a l i f i e d a c c e p t a n c e . B a l l a n t i n e , f o r 22 example, s a y s : In the e x e r c i s e of power, c o n t r o l l i n g shareholders whether m a j o r i t y or m i n o r i t y , are held to come under c e r t a i n f i d u c i a r y d u t i e s to the c o r p o r a t i o n or to other shareholders. 23 One o f the, l e a d i n g , e n c y c l o p a e d i a s on American law puts i t t h u s : The d e v o l u t i o n of u n l i m i t e d power imposes on the holders of the m a j o r i t y of the stock a c o r r e l a t i v e duty, the duty of a f i d u c i a r y or agent, to the holders of the m i n o r i t y of the stock, who can act only through them - the duty to e x e r c i s e good f a i t h , c are, and d i l i g e n c e to make the property of the cor-p o r a t i o n produce the l a r g e s t p o s s i b l e amount, to pr o t e c t the i n t e r e s t s of the holders of the m i n o r i t y of the stock, and to secure and pay over to them t h e i r j u s t p r o p o r t i o n of the income and of the pro-ceeds of the corporate property. The above s t a t e m e n t s a r e based on s i m i l a r comments by j u d g e s i n cas e s d e a l i n g w i t h t h i s problem. One o f the most f r e q u e n t l y r e f e r r e d -x 24 to i s t h a t o f Mr. J u s t i c e Bran dels. ;:J i n Southern Pacific Co. v. Bogert 25 where he s a i d : The m a j o r i t y has the r i g h t to c o n t r o l , but when i t does so, i t occupies a f i d u c i a r y r e l a t i o n towards the m i n o r i t y , as much so as the c o r p o r a t i o n i t s e l f , or i t s o f f i c e r s and d i r e c t o r s . Northwest T r a n s p o r t a t i o n Co. v. B e a t t y (1887) 12 App. Cas. 589, f o l l o w i n g i n America by Gamble v. The Queens County Water Co, 25 N.E. 201 (1 8 9 0 ) . 22 Law o f C o r p o r a t i o n s , op. cit., note 5, p. 62. ' 2 3 1 8 Am. J u r . 2d, p a r a . 497, p. 991. 2 4 2 5 0 U.S. 483 (1919 ) . 25Ibid., pp. 487-489. - 90 -Two r e a s o n s have been advanced f o r c a l l i n g t h e m a j o r i t y s h a r e -pc 1 h o l d e r s . f i d u c i a r i e s . , ' The f i r s t i s the " d i r e c t " o r " e q u i t a b l e " approach which i s analog o u s t o the one used f o r d i r e c t o r s and says t h a t because the m a j o r i t y a r e i n a p o s i t i o n o f c o n t r o l , t h ey a r e i n a f i d u c i a r y p o s i t i o n t o th o s e o v e r whom they wie'ld t h i s c o n t r o l . The second approach i s c a l l e d the " i n d i r e c t " approach and i s based on the f a c t t h a t because t h e m a j o r i t y s h a r e h o l d e r s have the a b i l i t y t o v o t e d i r e c t o r s i n o r out o f o f f i c e , t h e y have s u f f i c i e n t c o n t r o l o v e r management t o assume the same f i d u c i a r y o b l i g a t i o n s as the d i r e c t o r s have. These t h e o r i e s , e s p e c i a l l y the se c o n d , a r e borne out by f r e q u e n t comments t o t h i s e f f e c t i n the c a s e s . F o r example, 27 the c o u r t i n Seventeen Stove Corp. v., General Telephone ' s a i d : the m a j o r i t y stockholder who e x e r c i s e s a dominating i n f l u e n c e over i t s c o r p o r a t i o n has a duty of f a i t h to the company and to i t s m i n o r i t y stockholders. 28 S i m i l a r l y , i n Perlman v. Feldmann, a f t e r d e s c r i b i n g the d e f e n d a n t d i r e c t o r s r e s p o n s i b i l i t y as a d i r e c t o r , the c o u r t s a i d the same r u l e s " s h o u l d a p p l y t o h i s f i d u c i a r y d u t i e s as m a j o r i t y s t o c k h o l d e r , f o r i n t h a t c a p a c i t y he chooses and c o n t r o l s t h e d i r e c t o r s an'd thus i s h e l d t o have assumed t h e i r l i a b i l i t y . " T h i s j u d i c i a l a c c e p t a n c e o f the r e a l i t i e s o f the common c o r p o -r a t e s t r u c t u r e i s i m p o r t a n t i n the development o f r i g h t s f o r m i n o r i t y s h a r e h o l d e r s . U n f o r t u n a t e l y , when the case f a c t s i t u a t i o n s a r e examined, i t i s found t h a t i n many, t h e s e g e n e r a l s t a t e m e n t s may amount t o no more than p r o h i b i t i o n s a g a i n s t f r a u d , a wrong which can See Comment "The F i d u c i a r y R e l a t i o n o f the Dominant S h a r e h o l d e r t o the M i n o r i t y S h a r e h o l d e r s " , (1958) 9 H a s t i n g s L . J . 306, and Henn, Law o f C o r p o r a t i o n s , West P u b l i s h i n g - C o , 1970, p. 477. 2 7 2 0 4 F. Supp. 885 (1962). 2 8 2 1 9 F. 2d 173 (1955). See a l s o Zahn v. T r a n s a m e r i c a Corp. 162 F. 2d 36 where the c o u r t s a i d the d i r e c t o r s and the c o n t r o l l i n g s h a r e -h o l d e r were i n a "p u p p e t - p u p p e t e e r r e l a t i o n s h i p . " be r e c t i f i e d w i t h o u t r e c o u r s e t o c o n c e p t s o f f i d u c i a r y d u t y . Very o f t e n , the wrong which i s b e i n g c o m p l a i n e d o f i n v o l v e s the company's a s s e t s a l t h o u g h the e f f e c t o f the wrongdoing i s t h a t t he m a j o r i t y s h a r e h o l d e r s have s e c u r e d f o r t h e m s e l v e s a s s e t s i n which the m i n o r i t y s h a r e h o l d e r had some p o t e n t i a l s h a r e . W ithout e x p r e s s l y d o i n g s o , the c o u r t appears t o l o o k b e h i n d the c o r p o r a t e v e i l and t h e f a c t t h a t t h e s h a r e h o l d e r s would n o r m a l l y have no s h a r e i n the company's a s s e t s u n t i l l i q u i d a t i o n , and t o l a b e l the f r a u d as a br e a c h o f the m i n o r i t y ' s r i g h t s . 29 In Jones v. Missouri-Edison Electric Co. a c o n s o l i d a t i o n o f two companies r e s u l t e d i n a d r a m a t i c r e a r r a n g e m e n t o f the p r o p o r t i o n a t e i n t e r e s t s o f the m a j o r i t y and m i n o r i t y s h a r e h o l d e r s i n c i r c u m s t a n c e s which the c o u r t fou n d t o be f r a u d u l e n t . The e f f e c t o f the t r a n s a c t i o n was t h a t the second company which was owned by the m a j o r i t y s h a r e h o l d e i n the f i r s t , a c q u i r e d most o f the a s s e t s o f the f i r s t . T h i s i s a t y p i c a l f r a u d on the f i r s t company b ut a l t h o u g h the c o u r t t a l k e d a bout f r a u d they were r e f e r r i n g t o a bre a c h o f t r u s t by the m a j o r i t y s h a r e h o l d e r s t o the m i n o r i t y . A t r u e p e r s o n a l c l a i m was j o i n e d t o the main a c t i o n i n t h i s c a s e but a f t e r d i s t i n g u i s h i n g t h e two, t he c o u r t s t i l l s a i d o f the f r a u d on the company t h a t the gravamen o f the b i l l . . . i s the l o s s o f the c o m p l a i n a n t and the o t h e r m i n o r i t y s t o c k h o l d e r s 30 ca u s e d by the a c t s o f the m a j o r i t y , " a l t h o u g h i t a l l o w e d a p r a y e r f o r r e c o v e r y by the company. A s i m i l a r f a c t s i t u a t i o n a r o s e i n Hyams 31 v. Calunet & Eelcd Mining Co., but the c o u r t a g a i n saw the problem as one o f m i n o r i t y / m a j o r i t y r i g h t s . On t h i s o c c a s i o n the remedy was one 2 9 1 4 4 F. 765 (1906). 30Ibid., p. 774. 3 1 2 2 1 F. 529 (1915). which today might seem h a r s h ; the m a j o r i t y s h a r e h o l d e r s i n the second company were p r e v e n t e d from u s i n g t h e i r v o t e s t o , e l e c t a s y m p a t h e t i c b o a r d o f d i r e c t o r s so t h a t t h i s company would have a chance t o make an i n d e p e n d e n t d e c i s i o n about the merger. 32 O Southern.Pacific ,Co. v. Bogert, from which the q u o t a t i o n above about the f i d u c i a r y o b l i g a t i o n s o f the m a j o r i t y was t a k e n , i n -v o l v e d a r e c o n s t r u c t i o n o f a company i n such a way t h a t gave the e x i s t i n g m i n o r i t y no s h a r e s i n the new company. The c o u r t r e c o g n i z e d t h a t t h i s was, i n e f f e c t , the s a l e o f a c o r p o r a t e a s s e t b u t s a i d t h a t i t was n o t a d e r i v a t i v e a c t i o n ; i t was p u r e l y a c l a i m by one group o f s h a r e h o l d e r s a g a i n s t a n o t h e r . From an a n a l y t i c a l p o i n t o f view, t h e r e s u l t i s a case which p r o b a b l y c o u l d have been r e s o l v e d w i t h a t r u e c o r p o r a t e a c t i o n a n d ' y e t i t e s t a b l i s h e s what a r e now a c c e p t e d as f i d u c i a r y o b l i g a t i o n s on m a j o r i t y s h a r e h o l d e r s . S i m i l a r arguments can be made about o t h e r c a s e s , both p e r s o n a l and d e r i v a t i v e , i n which the wrong i s p r i m a r i l y t o the company b ut which a r e d e a l t 33 w i t h i n terms o f f i d u c i a r y d u t i e s . N e v e r t h e l e s s , t h e r e a r e a l s o a s i g n i f i c a n t number o f c a s e s i n which the n o t i o n o f f i d u c i a r y d u t i e s owed by m a j o r i t y s h a r e h o l d e r s , both t o the company and o t h e r s h a r e h o l d e r s has been expounded where the p r o p e r t y o r advantage g a i n e d by the m a j o r i t y has b e l o n g e d t o the m i n o r i t y r a t h e r than to the company. However, even h e r e , f r a u d can be seen as a s u i t a b l e e x p l a n a t i o n f o r some o f the c a s e s w i t h o u t the need t o r e s o r t t o a f i d u c i a r y duty c o n c e p t . In Pepper v. Litton, 32 Supra, note 24. 3 3 S e a g r a v e Corp. v. Mount, 212 F. 2d 389 (1954); U n i t e d Funds Inc C a r t e r P r o d u c t s I n c . , C.C.H. Fed. Sec. L. Rep. p a r a . 91, 288; L e b o l d v I n l a n d S t e e l Co. 125 F. 2d 369 (1941). 3 4 3 0 8 U.S. 295. - 93 -an o t h e r o f the main c a s e s i n t h i s a r e a , the scheme, which i n v o l v e d a t t e m p t i n g t o d e f e a t the c l a i m o f a n o t h e r s h a r e h o l d e r as a c r e d i t o r o f the company, was s a i d t o be " p l a n n e d and f r a u d u l e n t . " In t h i s c a s e however, t he f r a u d may have been more o f a " c o n s t r u c t i v e " f r a u d than an a c t u a l fraud;, f o r i t must n o t be f o r g o t t e n t h a t the American c o u r t s seem v e r y much q u i c k e r t o l a b e l : something as " f r a u d " than t h e i r 35 Commonwealth c o u n t e r p a r t s . The c o u r t here a g a i n i n v o k e d a g e n e r a l 36 p r i n c i p l e o f e q u i t y t o r e d r e s s the wrong and s a i d : [The m a j o r i t y stockholder] cannot use h i s power f o r h i s personal advantage and to the detriment of the stockholders and c r e d i t o r s no matter how meticulous he i s to s a t i s f y t e c h n i c a l r e q u i r e m e n t s . w h e r e there i s a v i o l a t i o n of [ t h i s ] p r i n c i p l e , e q uity w i l l undo the wrong or intervene to prevent i t s consummation. However, i n t h i s a r e a t h e r e a r e a l s o c a s e s which do n o t - i n v o l v e f r a u d , and i t i s t h e s e which most, c l e a r l y e s t a b l i s h a f i d u c i a r y d u t y by m a j o r i t y s h a r e h o l d e r s . T h i s i s so , even though the a u t h o r i t i e s most f r e q u e n t l y used i n s u p p o r t o f t h i s p r o p o s i t i o n by t h e s e c a s e s 37 38 i n c l u d e Southern Pacific Co. v. Bogert and Pepper v. L i t t o n , both o f which we have seen t o i n v o l v e f r a u d u l e n t a c t i v i t i e s . In.:Gaines v. 39 Long Manufacturing Co. Inc. 'for example, the Southern Pacific Co. c a s e , iter alia, was used t o e s t a b l i s h l i a b i l i t y on m a j o r i t y s h a r e -h o l d e r s who, as d i r e c t o r s wanted t o i s s u e new s h a r e s which would have r e s u l t e d i n a d r a s t i c r e d u c t i o n i n v a l u e o f the p l a i n t i f f ' s h o l d i n g . 35 See S eagrave Corp. v. Mount, supra, note 33; B e r l e , " C o r p o r a t e Powers as Powers i n T r u s t " , op. cit., note 16, p. 1069. 36Ibid., p. 311. 37 Supra, note 24. 38 Supra, note 34 39 16. - 94 -Fraud was n o t i n i s s u e and a permanent i n j u n c t i o n a g a i n s t t h e new sh a r e s o r d e r e d . I t i s i n t e r e s t i n g t o note t h a t the a c t i o n was based p r i m a r i l y on a brea c h o f dut y by m a j o r i t y s h a r e h o l d e r s , a l t h o u g h a f o r t i o r i the d i r e c t o r s had a l s o broken t h e i r d u t y t o the m i n o r i t y . 40 In the more r e c e n t c a s e s o f Jones v. H.F. Ahmanson & Co. 41 and Zahn v. Transamerica Corp. b r e a c h e s o f f i d u c i a r y d u t i e s owed by m a j o r i t y s h a r e h o l d e r s were a g a i n the main cause o f a c t i o n . Here t o o , t h e r e were no a l l e g a t i o n s o f f r a u d but me r e l y o f t r a n s a c t i o n s which were u n f a i r t o the p l a i n t i f f s . However, i n the Zahn v. Transamerica Corp. c a s e , o t h e r problems a r i s e . Here the c o u r t j u x t a p o s e d i t s comments on f i d u c i a r y d u t i e s w i t h r e f e r e n c e s t o c a s e s which s u p p o r t the b a l d p r o p o s i t i o n t h a t s h a r e h o l d e r s may v o t e as they 42 p l e a s e . I t p o i n t e d o u t t h a t : there i s a r a d i c a l d i f f e r e n c e when a stockholder i s v o t i n g as a d i r e c t o r ; that when v o t i n g as a stockholder he may have the l e g a l r i g h t to vote w i t h a view of h i s own b e n e f i t s and to represent himself only; but when he votes as a d i r e c t o r he represents a l l the stockholders i n the c a p a c i t y of a t r u s t e e f o r them and cannot use h i s o f f i c e as a d i r e c t o r f o r h i s personal b e n e f i t at the > expense of the stockholders. D e s p i t e t h i s s t a t e m e n t , t h e c o u r t was a b l e t o f i n d t h e m a j o r i t y i n brea c h o f t h e i r d u t y as s h a r e h o l d e r s ; p e r h a p s , as the t h e o r y f o r t h i s l i a b i l i t y would s u g g e s t , the r u l e s change when a "puppet-- 43 p u p p e t t e e r r e l a t i o n s h i p " e x i s t s . 4 0 4 6 0 P . 2d 464 (1969 ) . 41 Supra, note 28. , 4? Ibid. , p. 45. 43 See a d i s c u s s i o n i n f r a , p. 99 on ca s e s which do s u p p o r t a " v o t e as you p l e a s e " ' i d o c t r i n e . F i n a l l y , the case o f Perlman v. Feldmann which i n v o l v e d a c o r -p o r a t e wrong ( a l t h o u g h i t a l l o w e d an i n d i v i d u a l r e c o v e r y o f the p r e -mium g a i n e d on t h e s a l e o f c o n t r o l ) , can a l s o be used as an example o f d u t i e s owed by m a j o r i t y s h a r e h o l d e r s i n a n o n - f r a u d u l e n t s i t u a t i o n . P r i m a r i l y t h e du t y b r e a c h e d i n t h i s c a s e was t h a t t o the company a l t h o u g h the c o u r t s a i d t h a t "both as a d i r e c t o r and as dominant s h a r e h o l d e r , [ t h e d e f e n d a n t ] s t o o d i n a f i d u c i a r y r e l a t i o n s h i p t o the 45 c o r p o r a t i o n and to the minority stockholders as beneficiaries thereof" (emphasis a d d e d ) . A l t h o u g h t h i s and o t h e r r e f e r e n c e s t o the duty owed t o m i n o r i t y s t o c k h o l d e r s a r e obiter, t h e y appear t o be made d e l i b e r a t e l y i n an attempt t o d e f i n e the scope o f t h e d u t y as b e i n g one which i s owed t o more than the company a l o n e . Moreover, the c o u r t i s c l e a r i n i t s s t a t e m e n t t h a t f r a u d i s not n e c e s s a r y f o r such a duty t o a r i s e as i t s a y s , "we have here no f r a u d , no misuse o f con-f i d e n t i a l i n f o r m a t i o n , no o u t r i g h t l o o t i n g o f a h e l p l e s s c o r p o r a t i o n . " The most l i k e l y s i t u a t i o n i n which m a j o r i t y s h a r e h o l d e r s a r e a c t i n g on t h e i r own i n i t i a t i v e ( o r more c o r r e c t l y , have r e t a i n e d the power t o a c t w i t h o r i g i n a l a u t h o r i t y ) i s the a l t e r a t i o n o f the a r t i c l e s o r by-laws o f the company. Even h e r e , where e x i s t i n g r i g h t s need n o t be removed ( a l t h o u g h they f r e q u e n t l y a r e ) a d u t y o f f a i r n e s s i s imposed on the m a j o r i t y s h a r e h o l d e r s . B e r l e s u g g e s t s t h a t t h i s d u t y i s n o t s i g n i f i c a n t l y d i f f e r e n t from t h a t g o v e r n i n g d i r e c t o r s and t h a t no " p r o p o s i t i o n t h a t an a b s o l u t e r i g h t t o amend the c h a r t e r has e v e r been r e c o g n i z e d d e s p i t e the p l a i n power g r a n t e d by s t a t u t e and c a r r i e d f o r w a r d by a p p r o p r i a t e p r o v i s i o n i n the c e r t i f i c a t e o f i n c o r p o -r a t i o n . " These comments a r e i n a c c o r d w i t h t h o s e made by o t h e r 44 Supra, note 28. ^Ibid., p. 175. 46 " C o r p o r a t e Powers as Powers i n T r u s t " , op. cit. note 16, p. 1069. - 96/ -47 aca d e m i c s . In s h o r t , a l t h o u g h many o f the c a s e s p u r p o r t i n g t o e s t a b l i s h a f i d u c i a r y duty by m a j o r i t y s h a r e h o l d e r s a r e based on the p r e v e n t i o n o f f r a u d u l e n t a c t i v i t i e s , i t would appear t h a t t h e r e i s a growing body o f more r e c e n t c a s e s which would a p p l y t h e r u l e t o a l l c a s e s . The f o l -l o w i n g comments by P r o f e s s o r Gower a r e a p p o s i t e t o t h i s d i s c u s s i o n . He 48 says t h a t : In [America and B r i t a i n ] l i p s e r v i c e i s paid to the a l l e g e d r u l e that m a j o r i t y stockholders must e x e r c i s e t h e i r powers as f i d u c i a r i e s . But i n n e i t h e r country do the d e c i s i o n s appear r e a l l y to support t h i s . , In both the true r u l e seems to be that the m a j o r i t y must not e x p r o p r i a t e the property of the company, or the m i n o r i t y . . . . However, w i t h r e g a r d t o t h e American c a s e s , i f " e x p r o p r i a t i o n " o n l y r e f e r s t o f r a u d u l e n t s i t u a t i o n s , t h i s summary i s to o . n a r r o w . I f , on the o t h e r hand, " e x p r o p r i a t i o n " i m p l i e s m e r e l y some s o r t o f u n f a i r n e s s , then t h e s e s t a t e m e n t s a r e c o r r e c t , a l t h o u g h even t h i s may be an ex p a n s i o n on t h e 49 common law p o s i t i o n i n the Commonwealth. Assuming f o r t h e moment t h a t some s o r t o f f i d u c i a r y d u t y does e x i s t , i t i s perhaps s t i l l not c l e a r who t h e s e d u t i e s a r e owed t o and what d i f f e r e n c e t h e r e i s , i f any, between m a j o r i t y s h a r e h o l d e r s ' d u t i e s and d i r e c t o r s ' d u t i e s . Some o f the c a s e s r e f e r r e d t o above were d e r i v a t i v e 50 c l a i m s , and a l t h o u g h t h e y s u p p o r t a dut y t o the company, any comments r e l a t i n g t o the m a j o r i t y ' s d u t y t o t h e m i n o r i t y i n t h e s e c a s e s a r e o n l y obiter. However, when one r e a l i z e s t h a t t h e c o u r t s o f t e n t r e a t a c o r p o r a t e 47 B a l l a n t i n e on C o r p o r a t i o n s , op. cit., note 5, p. 655; Henn, Law o f C o r p o r a t i o n s , op. cit., n o t e 26, p. 712. 48 "Some C o n t r a s t s B r i t i s h and American C o r p o r a t i o n Law", 69 Harv. L.R. 1369, 1383 (1956). 49 i See the d i s c u s s i o n l a t e r i n t h i s c h a p t e r on t h e Commonwealth p o s i t i o n . 50 Se a g r a v e Corp. v. Mount, supra, note 33; U n i t e d Funds I n c . v. C a r t e r P r o d u c t s I n c . , supra, note 33; Perlman v. Feldmann, supra, n o t e 28. - 9 7 -x 51 wrong as r e a l l y a f f e c t i n g t h e s h a r e h o l d e r s d i r e c t l y , such comments,are o f more g e n e r a l a p p l i c a t i o n . These d e r i v a t i v e c a s e s , t o g e t h e r w i t h t h o s e p e r s o n a l a c t i o n s which s u p p o r t a dut y owed d i r e c t l y t o th e m i n o r i t y , wduld s u g g e s t t h a t the d u t i e s owed by m a j o r i t y s h a r e h o l d e r s a r e owed both t o th e company and t h e m i n o r i t y . The o t h e r problem o f d i f f e r e n t i a t i n g between d i r e c t o r s ' and m a j o r i t y s h a r e h o l d e r s ' d u t i e s was r a i s e d i n the d i s s e n t i n g judgment i n t h e Perlman c a s e , i t s e l f a d e r i v a t i v e a c t i o n 52 where Swan C. J . s a i d : My b r o t h e r s ' opinion does not s p e c i f y p r e c i s e l y what f i d u c i a r y duty (the defendant) i s . h e l d to have v i o l a t e d of whether i t was a duty imposed upon him as the domi-nant shareholder or as a d i r e c t o r of (the defendant company). Without such s p e c i f i c i a t i o n I t h i n k that both the l e g a l p r o f e s s i o n and the business world w i l l f i n d the d e c i s i o n confusing.... Perhaps t h i s c r i t i c i s m was answered by the m a j o r i t y j u d g e s t h e m s e l v e s who s a i d t h a t "we a r e u n w i l l i n g t o ; s f y , and a r e n o t t o be u n d e r s t o o d as s a y i n g , t h a t we s h o u l d a c c e p t a l e s s e r o b l i g a t i o n f o r any one o f (t h e d e f e n d a n t ' s ) r o l e s a l o n e . " ( t h a t i s , e i t h e r as d i r e c t o r o r m a j o r i t y s h a r e h o l d e r ) . However, t h e s e comments c o n c e r n e d a ca s e i n ' which the s h a r e h o l d e r s were a c t i n g on t h e i r own i n i t i a t i v e r a t h e r than m e r e l y a s s e n t i n g t o , o r r e j e c t i n g , what t h e d i r e c t o r s ' had a l r e a d y done. The problem i s t h e o r e t i c a l l y somewhat more complex when the m a j o r i t y a r e c a l l e d on to r a t i f y d i r e c t o r s ' a c t i o n s . I f what d i r e c t o r s have done i s a br e a c h o f t h e i r d u t y because i t i s n o t bona f i d e i n t h e i n t e r e s t s o f the company, o r th e s h a r e h o l d e r s , how can such an a c t i o n e v e r be r a t i f i e d i f the m a j o r i t y s h a r e h o l d e r s owe e x a c t l y t h e same du t y t o both p a r t i e s ? P a r t o f the answer i s t h a t i n many c a s e s i t c a n n o t be 51 As i n Jones v. M i s s o u r i E d i s o n E l e c t r i c Co, supra, note 29, and Hyams v. C a l u n e t & H e l c a M i n i n g Co., supra, note 31. 5 2 2 1 9 F. 2d 173. I - 98 ! -un l e s s perhaps t he m a j o r i t y a r e d i s i n t e r e s t e d . Even where i n t e r e s t e d r a t i f i c a t i o n has been a l l o w e d , i t has o f t e n been on the ground t h a t d i r e c t o r s were i n a c o n f l i c t s i t u a t i o n which had t o be r e f e r r e d t o the g e n e r a l m e e t i n g as a m a t t e r o f c o u r s e , whether a br e a c h o f d u t y had 53 o c c u r r e d o r no t . Such c a s e s do no t t h e r e f o r e h e l p t o r e s o l v e t h i s problem. In f a c t , i t appears as though t h e r e i s no complete s o l u t i o n as y e t ; moreover, none w i l l be a c h i e v e d u n l e s s obiter comments s i m i l a r t o t h a t i n the Perlman c a s e a r e made c o n c e r n i n g the r e s p o n s i b i l i t y o f s h a r e h o l d e r s and d i r e c t o r s i n t h e i r v a r i o u s c a p a c i t i e s . What i s c l e a r i n r e s p e c t o f f i d u c i a r y d u t i e s , owed both by t h e d i r e c t o r s and the m a j o r i t y s h a r e h o l d e r s , i s t h a t t h e onus o f p r o v i n g n o t o n l y " t h e good f i a t h o f the t r a n s a c t i o n b u t a l s o . . . i t s i n h e r e n t f a i r n e s s . f r o m t h e v i e w p o i n t o f t h e c o r p o r a t i o n and th o s e i n t e r e s t e d 54 t h e r e i n " i s on t h e d e f e n d a n t s . T h i s p r o p o s i t i o n has been r e p e a t e d l y 55 r e f e r r e d t o a l t h o u g h i t would appear t h a t where r a t i f i c a t i o n i s i n i s s u e , the burden on d i r e c t o r s may be red u c e d t o showing t h a t t h e i r 56 d e c i s i o n was made w i t h sound b u s i n e s s judgment. As has been i n i t i m a t e d s e v e r a l times a l r e a d y , t h e r e i s a l s o a u t h o r i t y f o r t h e p r o p o s i t i o n t h a t s h a r e h o l d e r s have no r e s t r a i n t s a t a l l on t h e i r a b i l i t y t o v o t e as th e y t h i n k f i t , and i f th e y w i s h , e n t i r e l y i n t h e i r own i n t e r e s t s . Some c o u r t s have made c a t e g o r i c a l s t a t e m e n t s a g a i n s t t h e i d e a o f s h a r e h o l d e r s b e i n g t r u s t e e s o r f i d u c i a r i e s f o r one a n o t h e r ; 57 58 f o r example, i n Gamble v. The Queens County Water Co., t h e c o u r t s a i d : 53 See t h e d i s c u s s i o n on r a t i f i c a t i o n , infra, p. 101. 54 Pepper v. L i t t o n , supra, note 34, r e f e r i n g t o Geddes v. Anaconda Copper M i n i n g Co., 254 U.S. 590. 55 Zahn v. T r a n s a m e r i c a C o rp., supra, n o t e 28; Perlman v. Feldmann, supra, n o t e 28. 5 6 A l c o t t v. Hyman, 208 A. 2d 501 (1965). 5 7 2 5 N.E. 201 (1890). 58Ibid., p. 202. -'99. A shareholder has a l e g a l r i g h t at a meeting of the share-holders to vote upon a measure, even though he has a personal i n t e r e s t therein separate from other shareholders. In such a meeting each shareholder represents himself and his own i n t e r e s t s s o l e l y , and i n no sense acts as a trustee or representative of others. 59 60 S i m i l a r l y , i n Du Pont v. DuPPont the c o u r t s a i d : [The defendants'] r e l a t i o n as a stockholder to other i n d i v i d u a l stockholders and to the body of the stock-holders i s not a f i d u c i a r y one. A l t h o u g h t h e s e s t a t e m e n t s would a t f i r s t g l a n c e a p p e a r t o be i r r e c o n -c i l i a b l e w i t h t h o s e s u p p o r t i n g a f i d u c i a r y r e l a t i o n s h i p , i t has been s u g g e s t e d i n an e x c e l l e n t a r t i c l e by Sneed t h a t a s h a r e h o l d e r may vo t e as he wishes o n l y when the t r a n s a c t i o n i s f a i r and does n o t i n v o l v e f r a u d . ^ He s a y s : [ i ] t appears that the stockholder may vote as he pleases provided e i t h e r or both of these conditions e x i s t s (1) That the i n t e r e s t s of the holder whose vote i s challenged coincide with the i n t e r e s t s of the corporation to the extent that the action i s f a i r or, at l e a s t , i s s u f f i c i e n t l y within the realm of f a i r n e s s , that reasonable men, f u l l y informed and acting i n good f a i t h might d i f f e r , or (2) That the challenged vote i s not the d e c i s i v e vote i n the corporate d e c i s i o n . T h i s second p r o v i s o r e l a t e s to the s i t u a t i o n where t h e r e a r e s u f f i c i e n t v o t e s i n f a v o u r o f the d e c i s i o n w i t h o u t n e e d i n g t o c o u n t t h o s e o f the 'd e f e n d a n t , even i f c a s t . I t i s s u b m i t t e d t h a t thi:s a n a l y s i s i s a v a l i d one and a l l o w s the c o n f l i c t i n g i n t e r e s t s o f m a j o r i t y r u l e and p r o t e c t i o n o f m i n o r i t y r i g h t s t o c o e x i s t . A l t h o u g h a t e s t o f " f a i r n e s s " i s a nebul o u s one, i t i s no more so than one o f good f a i t h , o r f o r t h a t 5 9 2 5 1 F. 937 (1918)'. 60Ibid., p. 944. 61 "The S t o c k h o l d e r May Vote as He P l e a s e s : T h e o r y and F a c t , " 22 U. P i t t . L.R. 23 (1960). - 100 -m a t t e r , o f f r a u d . What does make the m i n o r i t y ' s t a s k more d i f f i c u l t i s t he a p p a r e n t a s s u m p t i o n , by some o f the c o u r t s which u p h o l d the r i g h t t o v o t e f r e e l y , t h a t the a c t i o n o f the m a j o r i t y i s f a i r . T h i s i s i n marked c o n t r a s t t o the r u l e c o n c e r n i n g the onus o f p r o o f where a b r e a c h o f f i d u c i a r y duty i s a l l e g e d ; i t seems t h a t an a l l e -g a t i o n o f u n f a i r n e s s i s r e q u i r e d i n o r d e r t o t i p the s c a l e s i n the p l a i n t i f f ' s f a v o u r . R a t i f i c a t i o n The d i s c u s s i o n about the a b i l i t y o f s h a r e h o l d e r s t o v o t e as they p l e a s e l e a d s i n e v i t a b l y t o the a s s o c i a t e d problem o f r a t i f i c a t i o n . A t t h i s s t a g e we become e n t i r e l y c o n c e r n e d w i t h the d e r i v a t i v e a c t i o n s , but as r a t i f i c a t i o n o r the p o s s i b i l i t y o f i t , may be the most s i g n i -f i c a n t d i f f e r e n c e between d e r i v a t i v e and p e r s o n a l a c t i o n s , i t i s n e c e s s a r y t o u n d e r s t a n d i t s l i m i t s . In the d i s c u s s i o n so f a r on ^ f i d u c i a r y d u t i e s , we have been a b l e t o a v o i d an a n a l y s i s o f r a t i f i -c a t i o n p a r t l y because we have been d e a l i n g w i t h some c a s e s i n which the m a j o r i t y was a c t i n g under i t s own, r e t a i n e d powers, and p a r t l y because the c o u r t s have sometimes a n a l y z e d what would n o r m a l l y have been a d e r i v a t i v e a c t i o n as though i t was the m i n o r i t y which was p r i m a r i l y a f f e c t e d . A l l c o u r t s have n o t a d o p t e d t h i s approach so we have to t u r n t o the r u l e s o f r a t i f i c a t i o n i f c e r t a i n wrongdoings to the company a r e t o be remedied. The problem s i m p l y comes down t o t h i s . In what c i r c u m s t a n c e s w i l l r a t i f i c a t i o n be p o s s i b l e , and who i s a b l e t o r a t i f y t he d i r e c t o r s ' a c t i o n s i f i t i s p o s s i b l e ? Most o f the c a s e s which have a l l o w e d the s h a r e h o l d e r s t o v o t e as 6 2 H o d g e v. U n i t e d S t a t e s S t e e l Corp., 54 A. 1 ( 1 9 0 3 ) ; Porges v. Vadsco S a l e s Corp. 32 A. 2d 148 (1943). - 101 -the y p l e a s e have i n f a c t been examples o f a l l o w a b l e r a t i f i c a t i o n . Here, the s h a r e h o l d e r s have been p e r m i t t e d t o r a t i f y t h e d e c i s i o n s made by the m s e l v e s as d i r e c t o r s even though t h e y may be m o t i v a t e d by s e l f i n t e r e s t . In o t h e r words, m e r e l y because t h e r e i s a con-f l i c t o f i n t e r e s t o r they a r e now v o t i n g on something which they had j u s t done i n a n o t h e r c a p a c i t y , s h a r e h o l d e r s w i l l n o t be d i s e n -f r a n c h i s e d . T h i s r u l e however, s t i l l remains s u b j e c t t o the r e q u i r e -ment o f f a i r n e s s . One case which s e t s o u t a summary o f the approach 63 taken t o r a t i f i c a t i o n i s Kerbs v. C a l i f o r n i a Eastern Airways. Here the d i r e c t o r s , i n c l u d i n g t h o s e i n t e r e s t e d i n the arrangement, v o t e d f o r a p r o f i t s h a r i n g scheme and a s t o c k o p t i o n p l a n . Because o f r u l e s about d i s i n t e r e s t e d d i r e c t o r s o n l y making up a quorum, the d i r e c t o r s ' r e s o l u t i o n s were i n s u f f i c i e n t by t h e m s e l v e s . They were t h e r e f o r e r a t i f i e d by the g e n e r a l m e e t i n g a l t h o u g h the r e p o r t g i v e s no i n d i c a t i o n o f the make-up o f t h a t m e e t i n g . A l t h o u g h the d i r e c t o r s ' a c t i o n was l a b e l l e d as " i l l e g a l " t h i s d i d n o t mean i t was 64 v o i d as was e x p l a i n e d by the c o u r t when t h e y - s a i d : However, i l l e g a l a c t i o n of a Board of D i r e c t o r s i s a b s o l u t e l y v o i d only when that a c t i o n i s u l t r a vires, a g i f t of corporate assets to d i r e c t o r s , i l l e g a l i n purpose, or f r a u d u l e n t . If. i t does not f a l l w i t h i n any of these p r o h i b i t e d c l a s s i f i c a t i o n s the d i r e c t o r s ' a c t i o n i s v o i d a b l e only and thus subject to r a t i f i c a t i o n by stockholders. The o n l y r e q u i r e m e n t s l a i d down by the c o u r t as t o the f o r m a l i t i e s o f r a t i f i c a t i o n were t h a t n o t i c e be s e n t t o the s h a r e h o l d e r s b e f o r e t h e meeting and t h a t i t a d e q u a t e l y d i s c l o s e the n a t u r e o f t h e t r a n s a c t i o n s t o be d i s c u s s e d ; no mention was made o f the need f o r a d i s i n t e r e s t e d m a j o r i t y . I t s h o u l d be not e d however i n p a s s i n g , t h a t t h e r e i s con-f l i c t i n g a u t h o r i t y about the n a t u r e o f a r e s o l u t i o n p a s s e d by d i r e c t o r s 6 3 9 0 A. 2d 652 (1952). ^Ibid., p. 659. - 102 -when they a r e p r e v e n t e d from b e i n g c o u n t e d i n a quorum because o f c t h e i r i n t e r e s t . I t appears t o depend on an i n t e r p r e t a t i o n o f the p r o v i s i o n (whether s t a t u t o r y o r ' o t h e r w i s e ) which r e q u i r e s a d i s -i n t e r e s t e d quorum. In Martin Foundation, Inc. v. North America Rayon 65 Corp., the c o u r t h e l d t h a t the p a r t i c u l a r c l a u s e i n q u e s t i o n was a ^ p r o h i b i t i v e c l a u s e making d i r e c t o r s ' a c t i o n s v o i d , n o t v o i d a b l e i f t h e y d i d not comply w i t h i t ; the d e c i s i o n was based on an i n t e r -p r e t a t i o n o f the p a r t i c u l a r c l a u s e , r a t h e r than any, more g e n e r a l c o n c e p t o f a c o n t r a c t between the company and the s h a r e h o l d e r s . The a b i l i t y t o r a t i f y i s seen i n many o t h e r c a s e s , not a l l o f which i n v o l v e d i r e c t o r s ' b e i n g r e s t r i c t e d by quorum p r o v i s i o n s . These i n c l u d e s h a r e h o l d e r s v o t i n g t o de t e r m i n e a d e a d l o c k between d i r e c t o r s , the r a t i f i c a t i o n o f n e g l i g e n c e by d i r e c t o r s , the a p p r o v a l o f pu r c h a s e s made by the company from t h e d i r e c t o r s / s h a r e ^ . , h o l d e r s t h e m s e l v e s and the c o n f i r m a t i o n o f s a l a r i e s p a i d by d i r e c t o r s 69 t o t h e m s e l v e s . I t i s i n t e r e s t i n g t o note t h a t none o f t h e s e s i t u -a t i o n s , a l t h o u g h the l i s t i s by no means e x h a u s t i v e , i n v o l v e wrongs done t o s h a r e h o l d e r s i n d i v i d u a l l y f o r which t h e y c o u l d b r i n g a p e r s o n a l a c t i o n . A l l o f t h e s e c a s e s r e a f f i r m the p r i n c i p l e t h a t n o t o n l y i s r a t i f i c a t i o n a l l o w e d but i t i s a l s o p o s s i b l e w i t h t h o s e i n t e r -e s t e d s h a r e h o l d e r s b e i n g c o u n t e d i n the v o t i n g . They a l s o c o n f i r m 65 68 A. 2d' 313. See a l s o Campbell v. Loew's I n c o r p o r a t e d , 134 A 2d 565, which d i d not a l l o w r a t i f i c a t i o n o f a d i r e c t o r ' s r e s o l u t i o n made i n b r e a c h o f the quorum r e q u i r e m e n t s . r 6 6 B o s s v. Boss, 200 A. 2d 231 (1964). 6 7 S m i t h v. Brown-Borhek Co., 200 A. 2d 398 (1964). 6 8 B j o r n g a a r d v. Goodhue County Bank, 52 N.W. 48 (18 9 2 ) ; Gamble v. Queens County Water Co, supra, note 57. fiQ D 3 R u s s e l l v. Henry C. P a t e r s o n Co, 81 A. 136. - 103; -the h y p o t h e s i s t h a t such r a t i f i c a t i o n i s o n l y p o s s i b l e where t he a c t i o n o f the d i r e c t o r s is' f a i r . F o r example, i n Russell v. Henry C. Patterson Co., the c o u r t h e l d t h a t the d i r e c t o r s c o u l d v o t e as s h a r e h o l d e r s , s u b j e c t to ythe f o l l o w i n g : 7 ^ The m a j o r i t y stockholder may not, as against the c o r p o r a t i o n and m i n o r i t y stockholder, d i s s i p a t e or waste i t s funds or f r a u d u l e n t l y dispose of them i n any way, e i t h e r by r a t i f y i n g the a c t i o n of the board of d i r e c t o r s i n v o t i n g themselves i l l e g a l s a l a r i e s or by any other a c t . T h i s p r o v i s o was adopte d by the c o u r t i n Lowman v. Harvey R. Pieroe CoJ^ where r a t i f i c a t i o n was d i s a l l o w e d as the s a l a r i e s v o t e d by the d i r e c t o r s t o themsel v e s were m a n i f e s t l y e x c e s s i v e . T h i s c a s e i s a l s o i n t e r e s t i n g f o r i t s comments on the e f f e c t o f a proxy v o t e n o t made i n good f a i t h . A l t h o u g h n o r m a l l y the e x e r c i s e o f the proxy would be b i n d i n g on the p r i n c i p a l , t h a t p r i n c i p a l w i l l n o t be e s t o p p e d from c o m p l a i n i n g where i t i s n o t e x e r c i s e d i n good f a i t h . The same r e s t r i c t i o n on the use o f r a t i f i c a t i o n t o bypass a 72 f r a u d was f o r m u l a t e d i n Klein v. Independent Brewing Association where i n a f a c t s i t u a t i o n s i m i l a r t o t h a t i n Bjomgaard v. Goodhue' 73 County Bank ( t h a t i s , d i r e c t o r s s e l l i n g t h e i r pwn l a n d t o the company) r a t i f i c a t i o n was h e l d n o t t o s u b s t a n t i a t e the d i r e c t o r s ' a c t i o n as i n t h i s i n s t a n c e , t h e p r i c e was e x c e s s i v e . The r u l i n g s i n the Lowman,and Klein c a s e s would s u g g e s t t h a t a s i m p l e d i s t i n c t i o n c o u l d be drawn between c a s e s o f f r a u d and th o s e 74 i n v o l v i n g f a i r t r a n s a c t i o n s i n d e t e r m i n i n g whether r a t i f i c a t i o n 70Ibid., p. 140. 7 1 1 2 0 A. 404 (1923). 7 2 8 3 N.E. 434 (1908). 73 Supra, note 68. 74 Always b e a r i n g i n mind, o f c o u r s e , the d i f f i c u l t y o f d e t e r m i n i n g j u s t what amounts t o f r a u d . See a d i s c u s s i o n on t h i s problem i n Note 61 Harv. L.R. 335 (1948). . - 104 - 1 i s p o s s i b l e o r n o t . However, a t t h i s s t a g e a f u r t h e r c o m p l i c a t i o n i s added. There i s one l i n e o f a u t h o r i t y which says t h a t r a t i f i -c a t i o n o f f r a u d u l e n t a c t i v i t i e s i s p o s s i b l e , i f t h o s e r a t i f y i n g a r e a l l d i s i n t e r e s t e d s h a r e h o l d e r s . In o t h e r words, f r a u d w i l l s e r v e to d i s e n f r a n c h i s e those i n v o l v e d o r i n t e r e s t e d i n i t s r e s u l t s b u t does n o t remove the power o f th o s e d i s i n t e r e s t e d s h a r e h o l d e r s t o approve o f the f r a u d i f they so w i s h . T h i s has been c a l l e d the 75 " b u s i n e s s judgment" r u l e b u t i t i s n o t t o be c o n f u s e d w i t h the r u l e o f the same name g o v e r n i n g d i r e c t o r s a c t i o n s which was d i s c u s s e d e a r l i e r . In the p r e s e n t c o n t e x t , the r u l e i s so named because i t r e f e r s t o the a b i l i t y o f the s h a r e h o l d e r s to d e c i d e whether o r n o t to p r o s e c u t e an a c t i o n a g a i n s t the wrongdoers, which i s as w i l l be argued s h o r t l y , the same as r a t i f i c a t i o n . T h i s r u l e , and i t s c o n v e r s e , the New-York o r " n o n - r a t i f i c a t i o n " r u l e both a r o s e o u t o f the s t r i c t adhereence t o the r e q u i r e m e n t o f 76 demand i n d e r i v a t i v e a c t i o n s . As we have s e e n , demand on d i r e c t o r s i s mandatory u n l e s s t o do so would-be f u t i l e but not so c l e a r i s the p o s i t i o n on demand on the s h a r e h o l d e r s . The l e a d i n g c a s e under the n o n - r a t i f i c a t i o n r u l e i s Continental Securities Co. v. Belmont^^ which h e l d t h a t r a t i f i c a t i o n o f f r a u d was not p o s s i b l e and t h e r e f o r e demand on the s h a r e h o l d e r s was not n e c e s s a r y . The d e c i s i o n was based p r i -m a r i l y on the f a c t t h a t the power t o b r i n g a. s u i t i s v e s t e d i n the d i r e c t o r s o n l y and c a n ' t be i n t e r f e r e d w i t h by the s h a r e h o l d e r s 75 Comment " S h a r e h o l d e r V a l i d a t i o n o f D i r e c t o r s ' F r a u d s : The N o n - R a t i f i c a t i o n Rule v. The B u s i n e s s Judgment Rule",(1964) 58 Nor t h w e s t e r n U.L.R. 807. 76 Supra, p.39 and f o l l o w i n g . 7 7 9 9 N.E. 138 (1912). ^ s u b j e c t to an e x c e p t i o n where the a l l e g e d l y w r o n g f u l a c t i s r a t i f i a b l e . 78 T h i s e x c e p t i o n was based on Foss v. Harbottle but was h e l d n o t t o 79 e x t e n d to a f r a u d s i t u a t i o n where, q u o t i n g from a n o t h e r E n g l i s h c a s e , i t was s a i d t h a t "a s i n g l e d i s s e n t i n g v o i c e would f r u s t r a t e the w i s h e s o f the m a j o r i t y . " In the Belmont c a s e , the b o ard o f d i r e c t o r s was n o t d i s q u a l i f i e d from a c t i n g so t h a t i t r e t a i n e d i t s power t o the e x c l u s i o n o f t h e . s h a r e h o l d e r s . The c a s e d i d n o t c l e a r l y answer the q u e s t i o n o f what would happen where the b o ard was so d i s q u a l i f i e d e i t h e r because o f quorum r e q u i r e m e n t s o r because o f a dual r e l a t i o n s h i p which might p r e v e n t a u n p r e j u d i c e d e x e r c i s e o f jugdment. Mayer v. Adams would s u g g e s t t h a t t h i s makes no d i f f e r e n c e and t h a t , because o f f r a u d , r a t i f i c a t i o n i s s t i l l n o t p o s s i b l e a l t h o u g h t h i s a p p r oach has 81 ' \ 82 been c r i t i c i z e d and i s i n c o n s i s t e n t w i t h some e a r l i e r d e c i s i o n s . Even though the Belmont c a s e was d e c i d e d on the q u e s t i o n o f the d i v i -s i o n o f power w i t h i n the company i t has been ta k e n ; a s a more d e f i n i t i v e s t a t e m e n t t h a t r a t i f i c a t i o n o f f r a u d u l e n t a c t s i s n o t p o s s i b l e , how-83 e v e r d i s i n t e r e s t e d the m a j o r i t y m i ght be. T h i s s t r i c t e r a pproach 84 i s a l s o based on e a r l i e r a u t h o r i t i e s which c o n s i d e r e d the m a t t e r 7 8 2 Hare 461. 79 Bagshaw v. E a s t e r n Union R l y Co. 7 Hare 114 which d e a l t w i t h a t h r e a t e n e d u l t r a v i r e s a c t r a t h e r than a t r u e f r a u d . 8 0 1 4 1 A. 2d 458 (1958). 81 Comment " S h a r e h o l d e r V a l i d a t i o n o f D i r e c t o r s ' F r a u d s " op. ait., note 75, p. 817. op U n i t e d Copper S e c u r i t i e s Co. v. Amalgated Copper Co., 244 U.S. 261 (1917) which c o n c e r n e d demand but d i d n o t d i s c u s s d i s i n t e r e s t e d s h a r e h o l d e r s ; American L i f e I n s u r a n c e Co. v. Powe'Tl 80 S. 2d 487 (1954). Claman v. R o b e r t s o n , 128 N.E. 2d 429, 434; C a r y , Cases and M a t e r i a l s on C o r p o r a t i o n s , 4th ed. U n i v e r s i t y Casebook S e r i e s , a t p. 591 8 4 V o n Arnim v. American Tube Works, 74 N.E. 680 ( 1 905); Brewer v. Boston T h e a t r e , 104 Mass. 378 (1870); K l e i n v. Independent Brewing A s s o c i a t i o n , supra, note 72. - 106 -not so much from the d i v i s i o n o f powers a s p e c t as from t he b e l i e f t h a t the f r a u d u l e n t n a t u r e o f the t r a n s a c t i o n i t s e l f ( r a t h e r than any f r a u d i n the r a t i f i c a t i o n ) p r e v e n t e d a s u c c e s s f u l r a t i f i c a t i o n . The n o n - r a t i f i c a t i o n r u l e was e x p r e s s l y r e j e c t e d by the m a j o r i t y 85 o f t h e c o u r t i n Claman v. Robertson who found "both on re a s o n and a u t h o r i t y , t h a t a d i s i n t e r e s t e d m a j o r i t y o f the s h a r e h o l d e r s o f a c o r p o r a t i o n have the power t o r a t i f y d i r e c t o r s ' f r a u d s p r o v i d e d t h e r e i s no a c t u a l f r a u d i n e i t h e r i n d u c i n g o r e f f e c t i n g such r a t i -f i c a t i o n . " The d i v i s i o n o f powers q u e s t i o n was n o t r a i s e d and the m a t t e r d e c i d e d on p o l i c y grounds i n s t e a d . The c o u r t a c c e p t e d the 87 c r i t i c i s m o f s e v e r a l academics who s u g g e s t e d t h a t t h e n o n - r a t i f i c a t i o n r u l e was too r e s t r i c t i v e on the powers o f m a j o r i t y and was l a r g e l y based on cas e s i n which a d i s i n t e r e s t e d r a t i f i c a t i o n would n o t have been p o s s i b l e i n any e v e n t . I t was then assumed t h a t a d i s i n t e r e s t e d m a j o r i t y had the power t o r a t i f y because w i t h o u t such power, companies and c o u r t s would be pl a g u e d w i t h s t r i k e s u i t s and d i s s e n t i n g m i n o r i t y s h a r e h o l d e r s c o u l d p r e v e n t a m a j o r i t y making an ho n e s t d e c i s i o n about the v a l u e o f the s u i t i n s i t u a t i o n s where i t may w e l l be b e t t e r t o a f f i r m than t o r e s c i n d the t r a n s a c t i o n . In e f f e c t , t h i s r e t u r n s the power t o d e c i d e whether t o sue o r n o t t o the s h a r e h o l d e r s i n th o s e c a s e s where t h e r e has been a f r a u d committed. N e v e r t h e l e s s , i t must be s t r e s s e d t h a t i t i s o n l y a d i s i n t e r e s t e d group o f s h a r e h o l d e r s which g a i n s t h i s r i g h t . Y e t a t h i r d approach was s u g g e s t e d i n S. Solomont & Sons Trust Inc. i 85 Supra, note 83. 86Ibid., p. 436. 8 7 N o t e , 4 U.CHI. L.R. 495 (1937); Note, 53 Harv. L.R. 1368 (1940); Landstrom, " R a t i f i c a t i o n by M a j o r i t y S t o c k h o l d e r s - A Problem i n C o r p o r a t e Democracy" 31 B.U.L.R. 165 (1 9 5 1 ) . - 10!?; -^ 88 v. New England Theatres Operating Corp. where the c o u r t d e c l i n e d 89 t o be drawn on the c a s e s s u p p o r t i n g the n o n - r a t i f i c a t i o n r u l e b u t h e l d i n s t e a d t h a t a d i s i n t e r e s t e d m a j o r i t y have the power t o d e c i d e whether o r not to sue. I t made a d i s t i n c t i o n between r a t i f i c a t i o n 90 and d e c i d i n g whether t o sue when i t s a i d : The question whether i t i s good judgment to sue i s q u i t e apart from the question of r a t i f i c a t i o n . This i s a d i s t i n c t i o n of substance and not of form. 91 T h i s d i s t i n c t i o n was f o l l o w e d i n Claman v. Robertson but i t i s s u b m i t t e d t h a t t h e r e i s no v a l i d d i f f e r e n c e i n a t t e m p t i n g t o p r e v e n t the wrongdoers b e i n g sued by r e s o l v i n g n o t t o t a k e a c t i o n a g a i n s t 92 them, r a t h e r than v a l i d a t i n g t h e i r a c t i o n s by r a t i f i c a t i o n . A g a i n t h e r e was no d i s c u s s i o n on the d i v i s i o n o f powers because t h i s time the c o u r t f o u n d t h a t the power t o d e c i d e such m a t t e r s o f b u s i n e s s p o l i c y as the d e s i r a b i l i t y o f s u i n g wrongdoers i s h e l d by both the d i r e c t o r s and the s h a r e h o l d e r s . I f i n d e e d the d i s t i n c t i o n between r a t i f i c a t i o n and a d e c i s i o n t o sue o r not i s n o t sound, then the Solomont c a s e m e r e l y adds one more s t r i n g t o the bow o f the " b u s i n e s s judgment" r u l e on r a t i f i c a t i o n . ' I t does n e v e r t h e l e s s , g i v e a good i n d i c a t i o n o f what s o r t o f a c t i o n i s r e q u i r e d i n o r d e r f o r a 8 8 9 3 N.E. 2d 241 (1950). 89 A l t h o u g h i t d i d s u g g e s t t h a t Brewer V. Boston T h e a t r e , supra, note 84 and-Von Arnim v. American Tube Works, supra, note 84 d i d n o t go so f o r as t o p r o h i b i t r a t i f i c a t i o n where t h e m a j o r i t y was d i s i n t e r e s t e d . 9 0 9 3 N.E. 2d 241, 247. 91 Supra, note 83. 92 See B a l l a n t i n e o r C o r p o r a t i o n s , op. cit., note 5, p. 347, r e f e r r i n g t o an e a r l i e r d e c i s i o n a l o n g the same l i n e s as the Solomont c a s e , Com-ment, " S h a r e h o l d e r V a l i d a t i o n o f D i r e c t o r s ' F r a u d s " , op. cit., note 75, p. 819, and Landstrom, " R a t i f i c a t i o n by M a j o r i t y S t o c k h o l d e r s - A Pr o -blem i n C o r p o r a t e Democracy", op. cit., note 87, p. 171, a l l o f which a t t a c k t h i s d i s t i n c t i o n . T h e r e i s however, p o s s i b l y one v a l i d d i f f e r e n c e between the two ap p r o a c h e s . I f the m a j o r i t y o n l y d e c i d e n o t t o sue i t does n o t c o r r e c t the w r o n g f u l a c t as r a t i f i c a t i o n does, and ymay a l l o w a l a t e r m a j o r i t y t o d e c i d e t o sue a f t e r a l l . - 10 8 -d i s i n t e r e s t e d r a t i f i c a t i o n t o be s u c c e s s f u l . F u l l d i s c l o s u r e o f a l l r e l e v a n t i n f o r m a t i o n c o n c e r n i n g t h e d i r e c t o r s ' a c t i o n s was made to the g e n e r a l meeting so t h a t the m e e t i n g c o u l d make a r e a s o n a b l e d e c i s i o n on whether to sue o r not. The t e s t s u g g e s t e d by the c o u r t 93 was. [Could an] independent d i s i n t e r e s t e d m a j o r i t y of ,the shareholders a c t i n g reasonably and i n good f a i t h vote that i n t h e i r judgment i t i s not i n the best i n t e r e s t of the c o r p o r a t i o n to a s s e r t on i t s j b e h a l f c e r t a i n claims against i t s p r i n c i p a l executives and others? A l t h o u g h i t i s n o t c l e a r from the c a s e , i t would seem t h a t t h e i n f o r -mation to be put b e f o r e the s h a r e h o l d e r s need o n l y s e t o u t the n a t u r e o f the " a l l e g e d wrongs r a t h e r than s p e l l i n g o u t t h a t the m e e t i n g was • i c a l l e d to r a t i f y them o r , i n t h i s c a s e , t o d e c i d e whether t o sue > 94 because o f them. What does seem c l e a r i s t h a t the m a j o r i t y v o t i n g on the m a t t e r must v o t e i n the b e s t i n t e r e s t s o f the company; i n o t h e r words, they do n o t have the r i g h t t o v o t e e n t i r e l y as th e y p l e a s e even though they have no p e r s o n a l i n t e r e s t i n the outcome o f t h e i r d e c i s i o n . Of c o u r s e , i t i s because o f t h i s l a c k o f i n t e r e s t t h a t a duty s i m i l a r t o t h a t imposed on d i r e c t o r s can be r e q u i r e d o f m a j o r i t y s h a r e h o l d e r s . T h e r e i s then no t h e o r e t i c a l c o n f l i c t i n one group d e c i d i n g something i s i n the b e s t i n t e r e s t s o f the company when the o n l y r e a s o n t h e y a r e r e q u i r e d t o v o t e a t a l l , i s because the same a c t i o n s were n o t i n the b e s t i n t e r e s t s o f the company when done by a n o t h e r group. The p o l i c y r e a s o n s b e h i n d the b u s i n e s s judgment r u l e appear t o 9 3 9 3 N.E. 2d 241, a t 241. 94 T h i s second r e q u i r e m e n t , which appears t o be an a r t i f i c i a l d i s t i n c -t i o n , was u p h e l d i n a r e c e n t A u s t r a l i a n c a s e , Winthrop v. Winns, CCH A u s t r a l i a n C o r p o r a t e A f f a i r s R e p o r t e r p. 28,400. 109- -be sound. A l t h o u g h s t r i k e s u i t s may n o t now be the problem they once were because o f more s t r i n g e n t p r e - r e q u i s i t e s t o b r i n g i n g d e r i v a t i v e a c t i o n s , the o t h e r advantages t o the r u l e seem w o r t h --while. Not o n l y might t he number o f s u i t s be r e d u c e d i f an i m p a r t i a l d e c i s i o n has been made t o r a t i f y the w r o n g f u l a c t i o n b ut even i f the c l a i m does come t o C o u r t , i t can be d e a l t w i t h e a s i l y by d e t e r m i n i n g whether the i n f o r m a t i o n g i v e n t o the m e e t i n g was s u f f i c i e n t and the r a t i f i c a t i o n r e a s o n a b l e . In f a c t , i n the Solomont c a s e , the d e f e n c e made d i d n o t i n c l u d e a d e n i a l o f the f r a u d c h a r g e s ; r a t h e r , i t was i n the form o f a p l e a t h a t the a c t i o n o f the d i s i n -t e r e s t e d m a j o r i t y was r e a s o n a b l e and t h a t t h e r e f o r e t he c l a i m s h o u l d be s t r u c k o u t . C e r t a i n l y t h e r e w i l l have t o be a h e a r i n g on the s u f f i c i e n c y o f the i n f o r m a t i o n g i v e n t o the s h a r e h o l d e r s and on t he c i r c u m s t a n c e s s u r r o u n d i n g t h e i r vo£ing but t h i s can be h e l d on the assumption t h a t t he s u b s t a n t i v e c h a r g e s have m e r i t . W h i l e e x p e d i t i n g the s e t t i n g o f d i s p u t e s through t he c o n t r o l and a t the wish o f the m a j o r i t y s h a r e h o l d e r s , the m i n o r i t y s h o u l d be a d e q u a t e l y , p r o t e c t e d i f the c o u r t s a r e i n s i s t e n t on the r e q u i r e m e n t o f a v o t e , ^ i n good f a i t h and i n the b e s t i n t e r e s t s o f the company by a d i s i n t e -r e s t e d m a j o r i t y . To summerize, the American c o u r t s have d e v e l o p e d a f i d u c i a r y o b l i g a t i o n by s h a r e h o l d e r s , p r o b a b l y t o both the company and o t h e r s h a r e h o l d e r s , even though i t i s a r g u a b l e t h a t such a du t y i s l i t t l e more than a p r o h i b i t i o n o f f r a u d u l e n t e x p r o p r i a t i o n o f p r o p e r t y by the m a j o r i t y . The d u t i e s owed a r e s a i d t o c o e x i s t w i t h the r i g h t o f s h a r e h o l d e r s t o v o t e as they p l e a s e a l t h o u g h t h i s r i g h t i s l i m i t e d t o t h o s e s i t u a t i o n s which a r e e m i n e n t l y f a i r t o the other, s h a r e h o l d e r s - 110 -o r t o the company. I f f r a u d i s i n v o l v e d , then the freedom t o v o t e i s r e s t r i c t e d , e i t h e r e n t i r e l y i f one adopts the n o n - r a t i f i c a t i o n r u l e , o r t o t h o s e s h a r e h o l d e r s who a r e n o t i n t e r e s t e d i n the wrongdoing. I t s h o u l d be n o t e d t h a t the c o n c e p t o f a l l o w i n g o n l y d i s i n t e r e s t e d s h a r e h o l d e r s t o v o t e a p p l i e s o n l y t o f r a u d c a s e s ; i f f r a u d i s n o t a l l e g e d , then s h a r e h o l d e r s may v o t e as t h e y l i k e n o t w i t h s t a n d i n g t h e i r s e l f i n t e r e s t . - 11], -B. COMMONWEALTH D i r e c t o r s ' D u t i e s In the Commonwealth, t he t r a d i t i o n a l a p p roach t o f i d u c i a r y d u t i e s i n the company law c o n t e x t has been t h a t d i r e c t o r s owe d u t i e s t o the company o n l y and t h a t s h a r e h o l d e r s owe no f i d u c i a r y o b l i g a t i o n s a t a l l , s h o r t o f r e f r a i n i n g from f r a u d u l e n t l y e x p r o -p r i a t i n g the p r o p e r t y o f o t h e r s . The p o s i t i o n o f both groups w i l l be examined s e p a r a t e l y , a l t h o u g h o n l y i n g e n e r a l terms a t t h i s s t a g e . A d e t a i l e d a n a l y s i s o f a t l e a s t d i r e c t o r s ' d u t i e s w i l l be made i n the d i s c u s s i o n o f the maintenance o f s h a r e h o l d e r s ' p r o p o r -t i o n a t e i n t e r s t s which f o l l o w s . However, i t s h o u l d be c l e a r l y s t a t e d a t the b e g i n n i n g t h a t i t i s s u b m i t t e d t h a t the t r a d i t i o n a l a pproach i s too narrow from a p o l i c y p o i n t o f view and t h a t , i n f a c t , many o f the ca s e s s u p p o r t an e x t e n s i o n o f f i d u c i a r y c o n c e p t s . A modern r e s t a t e m e n t o f the t r a d i t i o n a l approach i s found i n 95 Re Goldhav and Quebec Manitou Mines Ltd. , a ca s e c o n c e r n i n g the s t a t u t o r y c o d i f i c a t i o n o f the n a t u r e o f d i r e c t o r ' s d u t i e s i n O n t a r i o . 96 A l t h o u g h the A c t does n o t make i t c l e a r t h a t t h e s e d u t i e s a r e owed o n l y t o the company and n o t t o the s h a r e h o l d e r s , v t h e c o u r t r e e m p h a s i s e s t h a t p o i n t by s a y i n g : D i r e c t o r s m u s t a c t " i n t h e b e s t i n t e r e s t s o f t h e c o r p o r a t i o n " , n o t t h e s h a r e h o l d e r s . The c a s e most f r e q u e n t l y used as a u t h o r i t y f o r t h i s p r o p o s i t i o n i s 97 Pervical v.. Wright which c o n s i d e r e d t h e p o s i t i o n o f d i r e c t o r s • v i s - a - v i s s h a r e h o l d e r s from whom they had bough,t s h a r e s . Even t he 9 5 ( 1 9 7 6 ) 61 D.L.R. (3d) 612. 96 S. 144, O n t a r i o B u s i n e s s C o r p o r a t i o n s A c t . 9 7 [ 1 9 0 2 ] 2 Ch. 421. ^ - 112 - r p l a i n t i f f s t h e r e a d m i t t e d t h a t t h e r e was no f i d u c i a r y r e s p o n s i b i l i t y on d i r e c t o r s t o s h a r e h o l d e r s i n most c i r c u m s t a n c e s , b u t d i d c l a i m t h a t where the d i r e c t o r s e n t e r e d n e g o t i a t i o n s w i t h s h a r e h o l d e r s f o r the p u r c h a s e o f the T a t t e r ' s s h a r e s , a duty was then e s t a b l i s h e d . T h i s c o n t e n t i o n was r e j e c t e d by the c o u r t , p r i m a r i l y on the grounds - t h a t t o f o r c e d i r e c t o r s t o d i s c l o s e c o n f i d e n t i a l i n f o r m a t i o n would put them i n "a most i n v i d i o u s p o s i t i o n " and may be " a g a i n s t t h e b e s t i n t e r e s t s o f the company." A t t h a t t i m e , i t was n o t c o n s i d e r e d a p o s s i b i l i t y t h a t d i r e c t o r s w i t h i n s i d e knowledge might be p r e v e n t e d from t r a d i n g a t a l l i f t h e y were u n w i l l i n g , o r una b l e t o d i v u l g e ' t h i s i n f o r m a t i o n . The d i f f i c u l t y w i t h Percival v. Wright i s t h a t even i f i t , i s argued t h a t i t i s wrong, we a r e s t i l l l e f t w i t h d i r e c t o r s owing no d u t i e s t o s h a r e h o l d e r s i n a l l c i r c u m s t a n c e s o t h e r than an i n s i d e r t r a d i n g s i t u a t i o n . In o t h e r words, j u s t by d i s c l a i m i n g the p a r t i c u l a r d e c i s i o n i n t h a t c a s e , we ca n n o t a c h i e v e an e x t e n s i o n o f t h e d u t i e s owed by d i r e c t o r s . T h i s l a s t p o i n t was made v e r y c l e a r i n a r e c e n t New Z e a l a n d Supreme C o u r t d e c i s i o n which d i d i n f a c t h o l d t h a t Percival v. Wright was w r o n g l y d e c i d e d and ought n o t t o be f o l l o w e d . In Coleman v. 98 Myers, s e v e r a l m a j o r i t y s h a r e h o l d e r s , who were a l s o d i r e c t o r s , bought o u t the h o l d i n g s o f the o t h e r s h a r e h o l d e r s a t what was l a t e r 99 a l l e g e d t o be an u n f a i r l y low p r i c e . The c o u r t h e l d t h a t " t h e r e i s i n h e r e n t i n the p r o c e s s o f n e g o t i a t i o n f o r s a l e a f i d u c i a r y d u t y owing by the d i r e c t o r t o d i s c l o s e t o the p u r c h a s e r ( s i c ) ( v e n d o r ? ) U n r e p o r t e d , May 1976, A u c k l a n d R e g i s t r y , A. 774/74. " i b i d . , p. 98. - 113; -any f a c t , o f which he knows the s h a r e h o l d e r t o be i g n o r a n t , which might r e a s o n a b l y and o b j e c t i v e l y c o n t r o l o r i n f l u e n c e t he judgment o f the s h a r e h o l d e r i n f o r m i n g h i s d e c i s i o n i n r e l a t i o n t o the o f f e r . " However, i t a l s o s a i d t h a t : ^ In every o r d i n a r y aspect of the a d m i n i s t r a t i o n of a l i m i t e d company i t i s e s s e n t i a l that the d i r e c t o r s be the f i d u c i a r y agents of the company alone. The concept of corporate management would c o l l a p s e i f there were any general r u l e that the d i r e c t o r s were a l s o the f i c u c i a r y agents of the shareholders. The c o u r t f o r e w a r n e d l e g i s l a t o r s o f the need f o r c a r e i n a l t e r i n g the b a s i s o f Percival v. Wright, a p p a r e n t l y ' n o t c o g n i s a n t o f t h e changes which had a l r e a d y taken p l a c e i n B r i t i s h Columbia and O n t a r i o . I t i s s u b m i t t e d , w i t h r e s p e c t , t h a t : t he f e a r e x p r e s s e d by Mr. J u s t i c e Mahon o f a c o l l a p s e o f c o r p o r a t e management i f the d i r e c t o r s ' duty was expanded t o i n c l u d e s h a r e h o l d e r s , i s unfounded. No such c o l l a p s e h a s - t a k e n p l a c e i n the U n i t e d S t a t e s where, as we have s e e n , ^ d i r e c t o r s may have owed f i d u c i a r y d u t i e s t o s h a r e h o l d e r s even b e f o r e i t was r e c o g n i z e d t h a t they owed them t o t h e company. There i s a l s o no c o n c e p t u a l r e a s o n why d i r e c t o r s c o u l d n o t owe d u t i e s t o two groups a t once, even though the company i s a s e p a r a t e l e g a l e n t i t y and may have i n t e r e s t s which do no t always c o i n c i d e w i t h t h o s e o f i t s members. I f d i r e c t o r s a r e seen n o t so much as t r u s t e e s o r agents i n any s t r i c t sense b u t r a t h e r as f i d u c i a r i e s because o f t h e i r p o s i t i o n o f a u t h o r i t y and c o n t r o l , then i t i s n o t u n r e a s o n a b l e t o r e q u i r e o f them an adherence t o t h o s e d u t i e s which ^00Ibid.3 p. 88, per Mahon J . ""^Supra, p. 11 . s u r r o u n d a l l f i d u c i a r i e s . T h i s w i l l i n c l u d e a d u t y t o s h a r e h o l d e r s because i n r e a l i t y , i t i s t h e i r i n t e r e s t s which a r e o f t e n d i r e c t l y a f f e c t e d by d i r e c t o r s ' a c t i o n s . I t i s not s u g g e s t e d t h a t d i r e c t o r s owe a duty t o s h a r e h o l d e r s as w e l l as t o the company i n a l l c i r c u m -s t a n c e s . T h e r e w i l l be some i n s t a n c e s o f d i r e c t o r s ' a c t i o n s , such as t r a n s a c t i o n s d e a l i n g w i t h the company's a s s e t s , whether they c o n c e r n t h i r d p a r t i e s o t h e r than s h a r e h o l d e r s o r o n l y the d i r e c t o r s , which do n o t d i r e c t l y c o n c e r n the members o f the company a t a l l . I f any t r a n s a c t i o n o f t h i s k i n d i s e n t e r e d i n t o f o r any r e a s o n o t h e r than the b e s t i n t e r e s t s o f the company, i t w i l l be the company, r a t h e r than the s h a r e h o l d e r s , which has been wronged. There w i l l however, be s i t u a t i o n s i n which d i r e c t o r s e x e r c i s e j t h e powers g i v e n to them by the company i n such a way as t o d i r e c t l y a f f e c t s h a r e -h o l d e r s . I t i s s u b m i t t e d t h a t i f t h e r e i s any b r e a c h o f the normal s t a n d a r d o f f i d u c i a r y o b l i g a t i o n i n t h e s e s i t u a t i o n s , such as an a c t i o n m o t i v a t e d by b i a s o r s e l f i n t e r e s t , then t h o s e members who a r e i n d i v i d u a l l y a f f e c t e d s h o u l d be e n t i t l e d t o c o m p l a i n . T h i s s h o u l d be s o , n o t w i t h s t a n d i n g the s a n c t i o n o f the d i r e c t o r s ' a c t i o n by the m a j o r i t y o f the s h a r e h o l d e r s , because i t i s not the m a j o r i t y a l o n e , however d i s i n t e r e s t e d , who a r e owed these, f i d u c i a r y d u t i e s . , Such an approach w i l l n o t l e a d t o c o n f u s i o n o r d i f f i c u l t y i n t h e e x e r c i s e ^ by d i r e c t o r s o f t h e i r powers. The d i r e c t o r s prime d u t y i s t o the company, but whenever s h a r e h o l d e r s w i l l a l s o be d i r e c t l y a f f e c t e d by d i r e c t o r s ' a c t i o n s , ' s u c h as i n the i s s u a n c e o f new s h a r e s o r the redemption o f e x i s t i n g s t o c k , t h e y , the d i r e c t o r s , a l s o have a duty to a c t i n good f a i t h towards the s h a r e h o l d e r s . D e s p i t e the f a c t t h a t t h e r e s h o u l d be no t h e o r e t i c a l b a r s t o a f i n d i n g o f a f i d u c i a r y duty owed by d i r e c t o r s t o s h a r e h o l d e r s , most - 115' -Commonwealth c o u r t s have s t e a d f a s t l y r e f u s e d t o t a k e such a s t e p . I t i s s u b m i t t e d however, t h a t the a n a l y s i s o f c a s e s c o n c e r n i n g the y i s s u a n c e o f s h a r e s which f o l l o w s w i l l e s t a b l i s h t h a t i n t h i s a r e a , t h e r e has a l r e a d y been some j u d i c i a l r e c o g n i t i o n o f the f a c t t h a t a d u t y i s owed t o s h a r e h o l d e r s . In some o t h e r a r e a s i n which a dut y to s h a r e h o l d e r s has been e s t a b l i s h e d i n the S t a t e s the Commonwealth c o u r t s have n o t gone as f a r . For example, i n a c l a i m f o r t h e payment o f d i s c r e t i o n a r y d i v i d e n d s the c o u r t s have e x p r e s s l y r e j e c t e d any 102 e x t e n s i o n o f d u t y , and w i t h r e g a r d t o the redemption o r r e p u r c h a s e o f the company's own s h a r e s , have y e t t o f a c e the problem. In the case o f i n s i d e r t r a d i n g , t h e r e has been some l e g i s l a t i v e and now j u d i c i a l r e c o g n i t i o n o f a dut y owed by d i r e c t o r s t o s h a r e h o l d e r s i n c e r t a i n c i r c u m s t a n c e s . The l a s t e s t move i n t h i s d i r e c t i o n came 103 i n a n o t h e r a r e a ; i n Goldex Mines Ltd. v. R e v i l l , the O n t a r i o C o u r t o f Appeal h e l d t h a t i t was a br e a c h o f d u t y t o s h a r e h o l d e r s as w e l l as t o the company t o send o u t u n t r u e o r m i s l e a d i n g i n f o r m a t i o n . T h i s d u t y f a l l s on d i r e c t o r s whether t h e y a r e f o r c e d by s t a t u t e o r the company's a r t i c l e s t o send o u t the i n f o r m a t i o n , o r whether t h e y s i m p l y choose t o do so o f t h e i r own a c c o r d . Perhaps the c o u r t a l s o r e c o g n i z e d a more g e n e r a l d u t y because i t made p a s s i n g r e f e r e n c e t o 104 Jones v. H.F. Ahmanson & Co., an American c a s e which commented g e n e r a l l y on p e r s o n a l a c t i o n s and which d i d n o t c o n c e r n the promul-g a t i o n o f m i s l e a d i n g i n f o r m a t i o n . However, we w i l l have t o a w a i t f u t u r e d e c i s i o n s b e f o r e i t i s c l e a r how f a r the Commonwealth c o u r t s w i l l go i n e x t e n d i n g d i r e c t o r s ' d u t i e s . r 102 B u r l a n d v. E a r l e [1902] A.C. 83, ( P . C . ) . (1974) 54 D.L.R. (3d) 672. ( 1 9 6 9 ) , 460 P. 2d 464. 103 104 - 1 1 6 -M a j o r i t y S h a r e h o l d e r s ' D u t i e s J u s t as the p r e s e n t Commonwealth p o s i t i o n on d i r e c t o r s ' d u t i e s i s u n c e r t a i n , so too i s the p o s i t i o n o f m a j o r i t y s h a r e h o l d e r s i n t h e i r d e a l i n g s w i t h the company and o t h e r s h a r e h o l d e r s . I t has l o n g been the r u l e the s h a r e h o l d e r s , v o t i n g as, s h a r e h o l d e r s , may v o t e as t h e y p l e a s e s u b j e c t to t h e r e b e i n g a r e s t r i c t i o n a g a i n s t f r a u d u -105 l e n t a c t i v i t i e s . Perhaps t h i s r u l e i s p r i m a r i l y l i m i t e d t o s i t u -a t i o n s where s h a r e h o l d e r s a r e v o t i n g on a m a t t e r a l r e a d y d e a l t w i t h -by the d i r e c t o r s , because f o r a l m o s t the same l e n g t h o f time t h e r e has been a c o r r e s p o n d i n g r u l e l i m i t i n g t h e i r freedom when they a r e e x e r c i s i n g t h e i r ^ i n i t i a t i n g powers, such as c h a n g i n g t h e a r t i c l e s o f a s s o c i a t i o n . One o f the b e s t g e n e r a l f o r m u l a t i o n s o f t h i s r e s t r i c -106 t i o n i s f o u n d i n Allen v. Gold Reefs of West A f r i c a Ltd., a ca s e which has been r e f e r r e d t o i n most d e c i s i o n s i n t h i s a r e a s i n c e t h e n . , The c o u r t t h e r e s a i d : Wide, however, as the language of [a p r o v i s i o n a l l o w i n g a l t e r a t i o n of the a r t i c l e s ] i s , the power conferred by i t must, l i k e a l l other powers, be e x e r c i s e d subject to those general p r i n c i p l e s of law and e q u i t y which are a p p l i c a b l e to a l l powers conferred on m a j o r i t i e s and enabling them to bind m i n o r i t i e s . I t must be e x e r c i s e d , not only i n the manner required by law, but a l s o bona f i d e f o r the b e n e f i t of the company as a"-whole, and i t must not be exceeded. A more r e c e n t d e c i s i o n , Greenhalgh v. Arderne Cinemas Ltd. h e l d t h a t f o r the " b e n e f i t o f the company as a whole" meant "th e c o r p o r a t o r s 1 no as a g e n e r a l body" r a t h e r t h a n t h e company i t s e l f . A l t h o u g h t h e s e 1 0 5 N o r t h w e s t T r a n s p o r t a t i o n v. B e a t t y (1887) 12'App. Cas. 589. 1 0 6 [ 1 9 0 0 ] 1 Ch. 656. 1 0 7 [ 1 9 5 1 ] 1 Ch. 286. 1 Q O See a more e x t e n s i v e q u o t a t i o n from t h i s c a s e , infra, p.163. 109 p r i n c i p l e s have been r e f e r r e d t o i n numerous c a s e s , u n t i l r e c e n t l y r they were used p r i m a r i l y t o d e f e a t the a c t i o n o f the m a j o r i t y i n t h o s e c a s e s where t h e r e has been an e x p r o p r i a t i o n o f t h e s h a r e s o f the m i n o r i t y } ^ N e v e r t h e l e s s , i t i s s u b m i t t e d t h a t P r o f e s s o r Gower was c o r r e c t when he s a i d t h a t the c a s e s s u p p o r t a more g e n e r a l r e q u i r e m e n t o f v o t i n g i n good f a i t h , w i t h o u t the need t o prove f r a u d . ^ F o r 112 example, i n Gray v. lellowknife Gold Mines Ltd. (No. I), a ca s e 113 which was i n c o r r e c t l y c i t e d i n Goldex Mines Ltd. v. R e v i l l f o r the p r o p o s i t i o n t h a t m i n o r i t y s h a r e h o l d e r s c o u l d sue i n d i v i d u a l l y a t common law f o r an o p p r e s s i v e e x e r c i s e o f the m a j o r i t y powers, t h e r e were s e v e r a l r e f e r e n c e s t o the f a c t t h a t the m a j o r i t y s h a r e h o l d e r s 114 t h e r e were f i d u c i a r i e s t o the m i n o r i t y . However, the o n l y s u c c e s s -f u l c l a i m s i n t h a t c a s e were d e r i v a t i v e ones. The most r e c e n t c a s e i n t h i s a r e a and one which v e r y c l e a r l y e s t a b l i s h e s a g e n e r a l duty on s h a r e h o l d e r s v o t i n g w i t h o r i g i n a l 115 a u t h o r i t y i s Clemens v. Clemens Bros. Ltd. I t i s s u b m i t t e d t h a t 1DQ u S i d e b o t t o m v. Kershaw, Lease and Co. L t d . [1920] 1 Ch. 154: S h u t t l e w o r t h v. Cox B r o t h e r s and Co. (Maidenhead) L t d . [1927] 2 K.B. 9 R i g h t s and I s s u e s Investment T r u s t L t d . v. S t y l o Shoes L t d . [1964] 3 A l l E.R. 628; Peters, 1 American D e l i c a c y Co. L t d . v. Heath (1939) 61 C.L.R. 457 and t h o s e c a s e s i n f o o t n o t e 81. 1 1 0 B r o w n v. B r i t i s h A b r a s i v e Wheel Co. L t d . [1919] 1 Ch. 290; Dafen T i n p l a t e Co. L t d . v. L l a n e l l y S t e e l Co. (1907) L t d . [1920] 2 Ch. 124. But see a l s o A u s t r a l i a n F i x e d T r u s t s P t y L t d . v. C l y d e I n d u s t r i e s L t d . [1959] S.R. (N.S.W.) 33 and B r i t i s h America N i c k e l Corp. v. O ' B r i e n [1927] A.C. 369 (P.G.).which c o n c e r n e d r e s t r i c t i o n s on v o t i n g and a member who was " p a i d " t o v o t e a p a r t i c u l a r way r e s p e c t i v e l y . ^ M o d e r n Company Law, op. cit., note 9, p. 576. 1 1 2 1 9 4 7 O.R. 928. ^ 3 Supra, note 75. 1 1 4 1 9 4 7 O.R. 928, 961 and"965 p e r L a i d l a w J.A. 1 1 5 [ 1 9 7 6 ] 2 A l l E.R. 268. t h i s was a p e r s o n a l a c t i o n 116 c l a i m i n g o p p r e s s i o n i n e q u i t y ( t h a t i s , n o t under s e c t i o n 210, the E n g l i s h s t a t u t o r y o p p r e s s i o n remedy) and was b r o u g h t by a m i n o r i t y s h a r e h o l d e r a g a i n s t the company, t he d i r e c t o r s and t h e m a j o r i t y s h a r e h o l d e r who was a l s o a d i r e c t o r . The r e l i e f s o u g h t was a d e c l a r a t i o n t h a t c e r t a i n company r e s o l u t i o n s i n c r e a s i n g t h e c a p i t a l and i s s u i n g t h e new sh a r e s p a r t l y t o the d i r e c t o r s and p a r t l y t o a prop o s e d employees' s h a r e p u r c h a s e t r u s t were o p p r e s s i v e and s h o u l d be s e t a s i d e . The f i n d i n g o f the c o u r t was t h a t t h e r e s o l u t i o n s had been d e l i b e r a t e l y framed i n such a manner -as t o g i v e the m a j o r i t y s h a r e h o l d e r and h e r f e l l o w d i r e c t o r s complete c o n t r o l o f the company and t o deny the p l a i n t i f f h er power t o b l o c k a s p e c i a l r e s o l u t i o n . , The j u d g e f e l t u n a b l e t o d e f i n e a c c u r a t e l y a p r i n c i p l e by which the r i g h t o f m a j o r i t y s h a r e h o l d e r s t o v o t e a s ~ t h e y p l e a s e was l i m i t e d but n e v e r t h e l e s s f e l t t h a t some r e s t r i c t i o n was n e c e s s a r y . A f t e r q u o t i n g - t h e f r e q u e n t l y c i t e d d i c t a o f E v e r s h e d M.R. i n Gveerihalgh v. Avdevne Cinemas Ltd^7 and r e f e r r i n g a l s o t o d e f i n i t i o n s o f " o p p r e s s i v e " and " j u s t and e q u i t a b l e " which have been f o r m u l a t e d i n r e l a t i o n t o 118 s t a t u t o r y r e m e d i e s , F o s t e r J., t h o u g h t t h a t one t e s t was: Did [the defendant shareholder,] when v o t i n g f o r the r e s o l u t i o n s , honestly b e l i e v e that those r e s o l u t i o n s when passed, would be f o r the b e n e f i t of the p l a i n t i f f ? T h i s goes a l o n g way i n p r e v e n t i n g a s h a r e h o l d e r from v o t i n g j u s t as he p l e a s e s as was r e c o g n i s e d by the judge who c o n t i n u e d i n more 119 g e n e r a l terms as f o l l o w s : 116 However, once a g a i n no d i s t i n c t i o n between p e r s o n a l and d e r i v a t i v e a c t i o n s was drawn by the c o u r t . As the form o f the c l a i m was r e s p r e s e n -t a t i v e and the company was a d e f e n d a n t , i t c o u l d be argued t h a t i t was a d e r i v a t i v e s u i t . 117 Supra, n te 78. 118 '[1976] 'l A l l E.R. 268. ]Ibid. p. 119 [The defendant shareholder] i s not e n t i t l e d as of r i g h t to e x e r c i s e her votes as an ordinary shareholder i n any way she pleases. To use the phrase of Lord Wilberforce-^O that r i g h t i s " s u b j e c t . . . t o e q u i t a b l e c o n s i d e r a t i o n s . . . which may make i t u n j u s t . . . t o e x e r c i s e [ i t ] i n a p a r t i c u l a r way". He then p r o c e e d e d t o f i n d t h a t t h e d e f e n d a n t ' s a c t i o n was u n j u s t and c o u l d n o t have been t h o u g h t t o be f o r the p l a i n t i f f ' s b e n e f i t . The r e s o l u t i o n s were t h e r e f o r e s e t a s i d e . The c a s e i s s i g n i f i c a n t n o t o n l y because i t l i m i t s t h e power o f m a j o r i t y s h a r e h o l d e r s t o v o t e qua s h a r e h o l d e r s e n t i r e l y as t h e y l i k e , even when t h e y a r e p e r f o r m i n g p e r f e c t l y " l e g a l " company t a s k s , b u t i n the w a y y i n which such a l i m i t a t i o n a r o s e . T h i s was not a c l a i m under any s t a t u t o r y p r o v i s i o n and t h e r e f o r e n o t s u b j e c t t o the j u d i c i a l r e s t r a i n t s which have been d e v e l o p e d t o s u r r o u n d t h o s e p r o v i s i o n s . The r e s u l t may a l l o w s u c c e s s f u l c o m p l a i n t s i n t h e f u t u r e , n o t o n l y about improper s h a r e i s s u e s b u t a l s o o t h e r forms o f u n f a i r t r e a t m e n t by m a j o r i t i e s i n the same way t h a t a c t i o n s a g a i n s t d i r e c t o r s f o r bre a c h e s o f du t y may d e v e l o p . What i s i m p o r t a n t i s t h a t t h e p r e c i s e l i m i t s o f the remedy have n o t been d e f i n e d , as t h i s w i l l a l l o w i t t o d e v e l o p and expand as p o l i c y r e q u i r e s . More than e v e r b e f o r e , a f l e x i b l e use o f e q u i t y t o d i r e c t l y r e d r e s s a'wrong i s a p p a r e n t ; t h i s , c o u p l e d w i t h an e x p a n s i o n by the c o u r t s o f t h o s e s i t u a t i o n s t h ey c o n s i d e r t o be wrongs, i s a g r e a t s t e p f o r w a r d f o r m i n o r i t y r i g h t s i n p e r s o n a l a c t i o n s . A l t h o u g h t h e Clemens c a s e was b r o u g h t a t law r a t h e r than under any s t a t u t o r y p r o v i s i o n , t h e r e a r e a l s o i n d i c a t i o n s t h a t t h e r e i s a ' ^ u I n E b r a h i m i v. Westbourne C a l l e r i e s L t d . [1972] 2 A l l E.R. 492, 500. T h i s was a case d e a l i n g w i t h s. 2 2 2 ( f ) - the ' j u s t and e q u i t a b l e 1 w i n d i n g u p p n o v l s i i o n i n the E n g l i s h Companies A c t . - 120 -ge n e r a l f r e e i n g - u p o f both the j u s t and e q u i t a b l e and o p p r e s s i o n remedies f o u n d i n most Commonwealth j u r i s d i c t i o n s . Indeed, the more 122 l i b e r a l approach i n the Ebrahimi v. Westbourne Galleries Ltd. d e c i s i o n on j u s t and e q u i t a b l e w i n d i n g up was p a r t o f the b a s i s f o r Clemens v. Clemens Bros. Ltd. i t s e l f . The s p i r i t o f the Ebrahimi 123 c a s e has been adopted i n Canada i n some r e c e n t d e c i s i o n s , 124 a l t h o u g h i t i s ' s u b m i t t e d t h a t i n . o n e , too narrow an i n t e r p r e t a t i o n was p l a c e d on L o r d W i l b e r f o r c e ' s g u i d e l i n e s . F u r t h e r m o r e , we have 125 a l r e a d y seen t h a t the new o p p r e s s i o n remedy i n B r i t i s h Columbia which has been ext e n d e d t o i n c l u d e " u n f a i r l y p r e j u d i c i a l " a c t i v i t i e s , has been g i v e n a wide meaning by the c o u r t s . T h i s t o o was based p r i m a r i l y on the e q u i t a b l e c o n s i d e r a t i o n s h e l d t o be paramount i n Ebrahimi. I t i s i n t e r e s t i n g t o note i n p a s s i n g the d i f f e r e n t approach t a k e n i n the U n i t e d S t a t e s and the Commonwealth t o ca s e s i n v o l v i n g f r a u d and m a j o r i t y s h a r e h o l d e r s . When d i s c u s s i n g the d u t i e s owed 12g by m a j o r i t y s h a r e h o l d e r s t o m i n o r i t i e s i n A m e r i c a , we saw t h a t the c o u r t s t h e r e o f t e n c o n s t r u e d what might n o r m a l l y be seen as an e x p r o p r i a t i o n o f the company's p r o p e r t y , as a br e a c h o f dut y by the m a j o r i t y because they were i n e f f e c t d e n y i n g the m i n o r i t y t h e i r r i g h t s t o t h i s p r o p e r t y . T h i s view o f the problem a l l o w e d a n o t i o n o f f i d u c i a r y r e s p o n s i b i l i t y t o d e v e l o p . Moreover, some o f the e a r l y 12? Supra, note 120: 1 2 3 R e Rogers and A g i n c o u r t H o l d i n g s L t d . (1976) 12 O.R. (2d) 386; Re C h e t a l E n t e r p r i s e s L t d . (1974) 39 D.L.R. (3d) 116. - 124 Re C h e t a l E n t e r p r i s e s L t d . , supra, note 123. " ' Supra, p. 74. 1 26 „ o'i Supra, p. 9 I . ' - 121 -127 128 c a s e s , used the E n g l i s h c a s e o f Menier v. Hoopers' Telegraph Works as a u t h o r i t y f o r t h a t p r o p o s i t i o n . The Menier d e c i s i o n has t r a d i t i o n a l l y been seen i n the Commonwealth as an example o f a d e r i v a t i v e c l a i m under the f r a u d e x c e p t i o n t o the r u l e i n Foss v. Harbottle, and w h i l e i t c o u l d be c o n s t r u e d as a p e r s o n a l c l a i m by the m i n o r i t y s h a r e h o l d e r s , t h e r e appears t o be l i t t l e advantage i n a l t e r i n g the c l a s s i f i c a t i o n o f t h i s c a s e . R a t i f i c a t i o n No a n a l y s i s o f the m a j o r i t y s h a r e h o l d e r s ' r e s p o n s i b i l i t y would be complete w i t h o u t some r e f e r e n c e t o the q u e s t i o n o f r a t i f i c a t i o n . The most fundamental i s s u e o f d e c i d i n g which t r a n s a c t i o n s can be r a t i f i e d a t a l l l a r g e l y c o n c e r n s d e r i v a t i v e c l a i m s and i s o u t s i d e the ambit o f t h i s t h e s i s . , Moreover, as has been emphasized t h r o u g h o u t t h i s t h e s i s ' , r a t i f i c a t i o n s h o u l d n o t t h e o r e t i c a l l y be an i s s u e i n J p e r s o n a l a c t i o n s a t a l l . However, d i f f i c u l t y a r i s e s because o f some i n c o n s i s t e n c y i n the c o u r t s where c l a i m s a l l o w e d as p e r s o n a l ones have n e v e r t h e l e s s been d e f e a t e d by r a t i f i c a t i o n . Two e a r l y examples • . . 1 2 9 o f t h i s - a r e seen i n Grant v. United Kingdom Switohbaak Railways Co. 130 and Irvine v. Union Bank of A u s t r a l i a . The f i r s t i n v o l v e d the r a t i f i c a t i o n by an o r d i n a r y m a j o r i t y o f a t r a n s a c t i o n i n which the d i r e c t o r s , a l t h o u g h i n t e r e s t e d and t h e r e f o r e e x p r e s s l y p r o h i b i t e d by the company's a r t i c l e s from v o t i n g , had v o t e d n e v e r t h e l e s s . T h i s ^ the c o u r t s a i d was not the same t h i n g as a l t e r i n g t h e a r t i c l e s , something 127 E.g. S o u t h e r n P a c i f i c Co. v. B o g e r t , 250 U.S; 483 (1919 ) . (1873) L.R. Ch. App. 350. (1888) 40 Ch. D. 135. '(1877) 2 App. Cas. 366 ( P . C . ) . 128 129 130 - 122 -which r e q u i r e d a s p e c i a l r e s o l u t i o n . "To g i v e t h e d i r e c t o r s power t o do t h i n g s i n f u t u r e which t h e a r t i c l e s d i d n o t a u t h o r i z e them t o do, would be an a l t e r a t i o n o f the a r t i c l e s , b u t i t i s no a l t e r a t i o n t o 131 r a t i f y a c o n t r a c t which has been made w i t h o u t a u t h o r i t y . " S i m i l a r comments had been made i n the e a r l i e r c a s e o f Irvine which c o n c e r n e d d i r e c t o r s b o r r o w i n g amounts i n e x c e s s o f th o s e p e r m i t t e d by the company's a r t i c l e s . A l t h o u g h t h e s e c a s e s appear t o have been a c c e p t e d as b e i n g c o r r e c t , i t i s s u b m i t t e d t h a t t h e y s h o u l d no l o n g e r be f o l l o w e d , i f any c o n s i s -t e n c y i n the p e r s o n a l r i g h t s o f s h a r e h o l d e r s i s t o be a c h i e v e d . The cas e s t h e m s e l v e s seem t o r e c o g n i z e t h a t non-compliance w i t h t h e a r t i c l e s i s something which can be co m p l a i n e d o f by i n d i v i d u a l s h a r e h o l d e r s , but p r e v e n t the c o m p l a i n t s u c c e e d i n g because o f an o r d i n a r y r e s o l u t i o n . 133 T h i s i s g o i n g f u r t h e r than the " i n t e r n a l i r r e g u l a r i t y " c a s e s which p r e v e n t the c l a i m s t h e r e a l t o g e t h e r because t h e y do not f a l l w i t h i n an e x c e p t i o n t o the r u l e i n Foss v. Harbottle. I f a p e r s o n a l a c t i o n f r e e o f r a t i f i c a t i o n i s p o s s i b l e f o r a br e a c h o f the c o n t r a c t between the company and i t s members, i t i s d i f f i c u l t t o see why the r u l e s h o u l d have been any d i f f e r e n t i n the Grant and Irvine c a s e s . T h i s , o f c o u r s e , i s s u b j e c t t o the e x c e p t i o n o f the i n t e r n a l i r r e g u l a r i t y c a s e s , them-s e l v e s a nomolies w h i c h , as P r o f e s s o r Wedderburn s u g g e s t s , s h o u l d be 134 l i m i t e d t o t h e i r own f a c t s i t u a t i o n s . I t i s i l l o g i c a l t o say t h a t d i r e c t o r s can b r e a c h the a r t i c l e s i f they g e t su b s e q u e n t s h a r e h o l d e r 1 3 1 ( 1 8 8 8 ) 40 Ch. D. 135, 138 p e r C o t t o n L . J . 132 Gower, Modern Company Law, op. cit., note 9, pp. 138, 563, and 566; Bamford v. Bamford [1969] 1 A l l E.R. 969. 1 3 3 Mozley v. A l s t o n (1847) 1 Ph. 790; MacDougall v. G a r d i n e r (1875) 1 Ch. D. 13. 1 3 4 " S h a r e h o l d e r s ' R i g h t s and the Rule i n Foss v. H a r b o t t l e " , [1957] C . L . J . 194, 214-215. - 123 -r a t i f i c a t i o n , b ut c a n n o t do so i f t h e y g e t o n l y p r e v i o u s a u t h o r i z a t i o n which does n o t amount t o a s p e c i a l r e s o l u t i o n . T h i s makes d i r e c t o r s ' a c t i o n s r e l i a n t f a r t oo much on p r e c i s e t i m i n g and would, i f t h e y were so minded, e n a b l e d i r e c t o r s t o c o n s i s t e n t l y f l o u t t h e a r t i c l e s as lo n g as they c o n t r o l l e d , o r had the s u p p o r t o f , the m a j o r i t y s h a r e -h o l d e r s . Nor, i t i s s u b m i t t e d , i s i t any answer t o say t h a t what was done was w i t h i n the g e n e r a l powers o f the d i r e c t o r s b u t o u t s i d e the p r e c i s e l i m i t s o f t h o s e powers, o r i t was done i n the b e s t i n t e r e s t s o f the company. I f m i n o r i t i e s a r e to. be p r o t e c t e d , t h e y s h o u l d a t l e a s t be e n t i t l e d t o r e l y on th e c o n t r a c t which t h e y have made, and t o 135 f o r c e adherence to i t i n a l l r e s p e c t s . C r i t i c i s m can a l s o be l e v e l l e d a t t h o s e more r e c e n t c a s e s which have a l l o w e d r a t i f i c a t i o n where a p e r s o n a l a c t i o n has been b r o u g h t ; 1gg 127 t h e s e i n c l u d e Bamford v.. Bamford, Hogg v., Cramphorn and 138 Winthrop v. Winns. Those opposed t o an e x t e n s i o n o f d i r e c t o r s ' d u t i e s might argue t h a t t h e s e c a s e s s h o u l d not have been p e r s o n a l i n any e v e n t . However, i t i s s u b m i t t e d and w i l l be more f u l l y a r g u ed l a t e r t h a t , i f as appears l i k e l y a p e r s o n a l a c t i o n i s p o s s i b l e f o r a b r e a c h o f d i r e c t o r s ' d u t i e s t o i n d i v i d u a l s h a r e h o l d e r s i n a wr o n g f u l s h a r e i s s u e s i t u a t i o n , then r a t i f i c a t i o n s h o u l d n o t be p o s s i b l e . C e r t a i n l y , no a u t h o r i t y s h o u l d be g a i n e d from the Grant and Irvine 135 See s u p p o r t f o r t h i s argument i n the a r t i c l e by Beck on "The S h a r e h o l d e r s ' D e r i v a t i v e A c t i o n " 1974 Can. Bar Rev. 159, 191, 1 gg Supra, note 132. 1 3 7 [ 1 9 6 7 ] Ch. 254. C.C.H. A u s t r a l i a n C o r p o r a t e A f f a i r s R e p o r t e r , p. 28, 400 (1976) . - 124 -cas e s f o r the p o s s i b i l i t y o f r a t i f i c a t i o n , because w h i l e t h e y c o n c e r n e d a b r e a c h o f the a r t i c l e s , t he Bamford v. Bamford l i n e o f c a s e s d e a l t w i t h a common law wrong, i n no way governed by the c o n t r a c t . P e r h a p s , as w i l l a l s o be s u g g e s t e d a g a i n l a t e r , an i n t e r m e d i a t e approach which a l l o w s f l e x i b i l i t y f o r both the m a j o r i t y and the m i n o r i t y s h o u l d be adopt e d . T h i s would be to t r e a t r a t i f i c a t i o n , n o t as a f i n a l b a r o r something which can be i g n o r e d a l t o g e t h e r , but as a m a t t e r o f e v i d e n c e o n l y . Types o f P e r s o n a l A c t i o n The most common approach t o p e r s o n a l a c t i o n s i n the Commonwealth i s t o see them as l i m i t e d t o c o m p l a i n t s about b r e a c h e s o f the a r t i c l e s , o r perhaps more g e n e r a l l y , the c o n t r a c t between the company and t h e members as a whole. T h i s , o f c o u r s e , i s s u b j e c t t o the l i m i t a t i o n s 139 imposed by the i n t e r n a l i r r e g u l a r i t y c a s e s which need cause no 140 ' f u r t h e r c o n c e r n i f they a r e l i m i t e d t o t h e i r f a c t s i t u a t i o n s . Even c a s e s c o n c e r n i n g an a l t e r a t i o n o f the a r t i c l e s which a r e governed by e q u i t a b l e p r i n c i p l e s r a t h e r t h a n a n y t h i n g w i t h i n the a r t i c l e s t h e m s e l v e s can be seen as examples o f r i g h t s governed by the c o n t r a c t because the r e s u l t o f a change i n one . o r more a r t i c l e s - i s an a l t e r a t i o n o f the e x i s t i n g c o n t r a c t between the p a r t i e s . N e e d l e s s t o s a y , a s h a r e -h o l d e r w i l l a l s o have a p e r s o n a l r i g h t t o sue where t h i s i s g i v e n t o 139 See note 133, supra. 140 A r e c e n t New Z e a l a n d d e c i s i o n , K e r r v. K e r r and TimarU: H e r a l d Co. L t d . , u n r e p o r t e d , but see Recent Law, V o l . 2, No. 9 (1976) 263, where the f a c t s were s i m i l a r t o t h o s e i n MacDougall v. G a r d i n e r , supra, note 133, f o l l o w e d the l a t t e r c a s e d i r e c t l y . See a l s o a r e c e n t a r t i c l e a t t e m p t i n g t o d i s t i n g u i s h between t h o s e s i t u a t i o n s i n which a p e r s o n a l a c t i o n i s a l l o w e d and t h o s e i n which i t i s n o t — B a s t i n , "The E n f o r c e m e n t o f a Member's R i g h t s 1977 J o u r n a l o f B u s i n e s s Law 17. I t i s s u b m i t t e d t h a t the a u t h o r t h e r e does no more than beg the e x i s t i n g q u e s t i o n when he says a t page 24: " T h e r e f o r e the s o l u t i o n to the problem i s t o be found i n a s c e r t a i n i n g whether the" m a t t e r i s one which may be d e t e r m i n e d by the m a j o r i t y g o i n g t h r o u g h the p r o p e r p r o c e s s . " - 125 -141 him by s t a t u t e o r t h r o u g h the j u d i c i a l i n t e r p r e t a t i o n o f a s t a t u t o r y . . 142 p r o v i s i o n . I t i s emphasized a g a i n however, t h a t i t i s the c l a i m o f t h i s p a p er t h a t t h e s e a r e n o t t h e o n l y p e r s o n a l r i g h t s a s h a r e h o l d e r has. 143 We have seen a l r e a d y some r e c e n t j u d i c i a l r e c o g n i t i o n o f d u t i e s owed by m a j o r i t y s h a r e h o l d e r s t o m i n o r i t i e s which w i l l a l l o w a p e r -s o n a l c l a i m . I t i s s u b m i t t e d t h a t d u t i e s a r e owed no t o n l y by m a j o r i t y s h a r e h o l d e r s but a l s o by d i r e c t o r s , and a l t h o u g h d i f f i c u l t t o d e f i n e , s h o u l d a l l o w a p e r s o n a l a c t i o n where a s h a r e h o l d e r has been d i r e c t l y a f f e c t e d by the a c t i o n s o f whoever i s c o n t r o l l i n g him. The r e s t o f the paper i s c o n c e r n e d w i t h p r o v i n g t h i s p r o p o s i t i o n i n r e l a t i o n t o one group o f a c t i o n s . b y d i r e c t o r s . o r m a j o r i t i e s which a f f e c t m i n o r i t i e s d i r e c t l y , r a t h e r than j u s t i n p a s s i n g because o f t h e i r s h a r e h o l d i n g i n the company. T h a t i s , t h o s e a c t i o n s which a f f e c t a member's p r o -p o r t i o n a t e i n t e r e s t i n the company. E.g. the " j u s t and e q u i t a b l e " w i n d i n g up and " o p p r e s s i o n " remedies f o u n d i n v a r i o u s forms t h r o u g h o u t the Commonwealth. See t h o s e d i s c u s s e d b r i e f l y above a t p. 72 and f o l l o w i n g . 142 The r i g h t t o c o m p l a i n f o r an o b v i o u s misuse o f a s t a t u t o r y p r i v i l e g e g i v e n t o take o v e r b i d d e r s - Re B u g l e P r e s s L t d . [1961] Ch. 270. 143 Supra, p. 119. - 126 -CHAPTER I I I MAINTENANCE OF PROPORTIONATE INTERESTS  I n t r o d u c t i o n Both i n the U n i t e d S t a t e s and i n the Commonwealth one o f t h e most common forms o f o p p r e s s i o n o r m a n i p u l a t i o n o f t h o s e n o t i n c o n t r o l i s t h e i s s u a n c e o f f u r t h e r s h a r e s w i t h the r e s u l t t h a t the p r o p o r t i o n a t e i n t e r e s t o f the s h a r e h o l d i n g s i n the company i s changed t o the c o n t r o l l e r s ' advantage. For example, d i r e c t o r s who a r e i n c o n t r o l and have the power t o i s s u e new s h a r e s may f e e l t h e i r c o n t r o l t h r e a t e n e d by a r i v a l f a c t i o n o r an incoming s h a r e h o l d e r . To r e t a i n c o n t r o l they may i s s u e new s h a r e s t o t h e m s e l v e s t h e i r f r i e n d s o r t h e i r s y m p a t h i z e r s t o the e x c l u s i o n o f the t h r e a t e n i n g body o f s h a r e -h o l d e r s and t h e r e b y "water-down" the l a t t e r ' s i n f l u e n c e . In many c a s e s , t h i s i s c a l l e d " f r e e z i n g - o u t " the m i n o r i t y , ^ s i n c e the e f f e c t i s o f t e n t o r e d u c e p e r m a n e n t l y the v o t i n g power o f the m i n o r i t y who a r e thus i n d u c e d t o s e l l o u t o r n o t t o p r o c e e d i n t h e i r o p p o s i t i o n t o t he c o n t r o l l e r s . I t i s d i f f i c u l t t o l a b e l a c c u r a t e l y the c o n t r o l l e r s as always b e i n g the same group w i t h i n a company as t h e y can c o n s i s t i n a n y t h i n g from the m a j o r i t y s h a r e h o l d e r s t o m e r e l y the m a j o r i t y o f t h e ^ d i r e c t o r s . As m a j o r i t y d i r e c t o r s t h e y may w e l l be opposed by both t h e o t h e r d i r e c t o r s and the m a j o r i t y o f t h e s h a r e h o l d e r s and y e t have s u f f i c i e n t c o n t r o l t o i s s u e new s h a r e s t o s t r e n g t h e n t h e i r p o s i t i o n . The p o s i t i o n o f t h o s e who have t h e i r r i g h t s a l t e r e d ( s i m i l a r l y d i f f i c u l t t o d e f i n e as any one group i n a l l c a s e s ) by a s h a r e i s s u e ^ e e : Note " F r e e z i n g Out M i n o r i t y S h a r e h o l d e r s " 74 Harv. L. Rev. 1630 (1961); Condec Corp. v. Lunkenheimer Co., 230 A. 2d 769. - 127 -w i l l be e x a m i n e d . f i r s t by l o o k i n g a t t h e U n i t e d S t a t e s ' law and s e c o n d l y by l o o k i n g a t the Commonwealth s i t u a t i o n . S u f f i c e i t t o say a t t h i s s t a g e t h a t the p r o t e c t i o n o f the m i n o r i t y , i n the U n i t e d S t a t e s i s more thorough than i n the Commonwealth. C l e a r r i g h t s o f p r e - e m p t i o n — t h a t i s , t h e r i g h t t o o b t a i n a p r o - r a t a p e r c e n t a g e o f any new s h a r e s i s s u e d i n p r o p o r t i o n t o a member's e x i s t i n g s h a r e -h o l d i n g — e x i s t a t common law i n the S t a t e s whereas they a r e t h o u g h t 2 not t o e x i s t a t a l l a t common law i n the Commonwealth. S i m i l a r l y , a c l e a r e r r i g h t t o co m p l a i n about an a l l e g e d l y improper s h a r e i s s u e because o f a b r e a c h o f good f a i t h by the d i r e c t o r s e x i s t s i n t h e S t a t e s as i t i s t h e r e g e n e r a l l y a c c e p t e d t h a t both d i r e c t o r s and m a j o r i t y s h a r e h o l d e r s owe a du t y t o m i n o r i t y s h a r e h o l d e r s . Many ca s e s do e x i s t i n the Commonwealth o f s u c c e s s f u l c o m p l a i n t s about s h a r e i s s u e s which have the a f f e c t o f removing c o n t r o l from m i n o r i t i e s o r p r e v e n t i n g them from e v e r o b t a i n i n g i t but the t r u e b a s i s o f many such a c t i o n s i s f a r from c l e a r . A. UNITED STATES (1) PRE-EMPTION Common Law R i g h t s o f Pre-emption P r e - e m p t i o n , w h i c h , s i m p l y s t a t e d a g a i n , means the r i g h t o f s h a r e -h o l d e r s t o m a i n t a i n a p r o p o r t i o n a t e i n t e r e s t i n a company by b e i n g e n t i t l e d t o t a k e up the same p r o p o r t i o n o f new s h a r e s as t h e i r e x i s t i n g h o l d i n g bears t o the t o t a l i s s u e d c a p i t a l o f the company b e f o r e t he 3 i s s u e , has e x i s t e d a t common law s i n c e t he e a r l y e i g h t e e n t h c e n t u r y . 2 S l u t s k y , "Canadian R e j e c t i o n o f the Hogg v. Cramphorn'Improper Pur p o s e s ' P r i n c i p l e " , (1974) 37 M.L.R.. 457, p. 460. .... 3 G r a y v. P o r t l a n d Bank 3 Am. Dec. 156 (1807). - 128 -4 A l t h o u g h some modern c a s e s s t a t e t h e r i g h t f a i r l y b a l d l y , the o r i g i n a l v. 5 b a s i s f o r t h e a c t i o n was t w o f o l d . In. Gray v. Portland, the c o u r t i n M a s s a c h e u s e t t s saw the company f i r s t l y as b e i n g a k i n t o a p a r t n e r s h i p i n which t he power t o i n c r e a s e t he number o f p a r t n e r s o r t o change the r e l a t i o n s h i p o f the p a r t n e r s inter se c o u l d o n l y be e x e r c i s e d w i t h t he c o n s e n t o f each p a r t n e r . T h e r e f o r e , i n a company the r i g h t t o admit o u t s i d e r s i b y i s s u i n g new s h a r e s t o . t h e m . i s r e s t r i c t e d , u n l e s s waived by the e x i s t i n g s h a r e h o l d e r s . S e c o n d l y , t he c o u r t saw the company i n a t r u s t s i t u a t i o n where the company i t s e l f ( n o t the d i r e c t o r s ) was a t r u s t e e f o r the s h a r e h o l d e r b e n e f i c i a r i e s and was p r e v e n t e d from a l l o w i n g o t h e r b e n e f i c i a r i e s (new s h a r e h o l d e r s ) from j o i n i n g o r i n c r e a s i n g t he t r u s t i n o t h e r than equal p r o p o r t i o n s w i t h o u t t h e c o n s e n t o f a l l t he b e n e f i c i a r i e s . W hile i t may no t be s t r i c t l y a c c u r a t e today t o d e s c r i b e t he company as a t r u s t e e f o r the s h a r e h o l d e r s , i t i s s u b m i t t e d t h a t the p o l i c y approach b e h i n d t h i s d e c i s i o n i s sound. I t i s a l s o i m p o r t a n t t o note t h a t t h i s c a s e i n v o l v e d a t r u l y p e r s o n a l a c t i o n by one s h a r e h o l d e r a g a i n s t the company, the d i r e c t o r s and the o t h e r s h a r e h o l d e r s . L a t e r c a s e s which have e n d o r s e d t h e p r e - e m p t i v e r i g h t s have a l l a l l o w e d p e r s o n a l a c t i o n s t o be br o u g h t a l t h o u g h i n some i n s t a n c e s t he f a c t s may have g i v e n r i s e t o what c o u l d have been a d e r i v a t i v e a c t i o n ft as w e l l . In Witherbeev. Bowles, the r e p o r t o f the f a c t s i s not v e r y c l e a r b ut s u g g e s t s t h a t somehow the m i n o r i t y : a c q u i r e d t he m a j o r i t y ' s s h a r e s and t h e n , f e a r i n g t h a t t h a t a c q u i s i t i o n might be s e t a s i d e , 4 " T h e p r e - e m p t i v e r i g h t i s r e g a r d e d as i n h e r e n t i n the s t o c k h o l d e r ' s s t a t u s , i s a p p u r t e n a n t t o the s t o c k , b e l o n g s t o the owner, and i t s e x i s t e n c e i s n o t dependent on the a r t i c l e s o f i n c o r p o r a t i o n . " F u l l e r v. Krogh 113 N.W. 2d 25, 32 Hall o w s J , (1962). ^Supra, n o t e 3. 6 9 5 N.E. 27 (1911 ) . - 129 -cause d the company t o i s s u e a l a r g e amount o f new s t o c k t o one o f the m i n o r i t y i n payment f o r a p i e c e o f l a n d o f s m a l l v a l u e . T h e r e t h e c o u r t s a i d : 7 I t i s not questioned that these a c t s might be made the b a s i s of an a c t i o n by or on behalf of the c o r p o r a t i o n to remedy the i n j u r y i n f l i c t e d upon i t and through i t upon a l l of the stockholders i n common. [Presumably on the b a s i s of excess c o n s i d e r a t i o n f o r the land.] But these same acts performed f o r the purpose and w i t h the e f f e c t s t a t e d [ g i v i n g c o n t r o l to the m i n o r i t y ] worked an i n j u r y to r i g h t s belonging to the p l a i n t i f f s i n d i v i -d u a l l y as between them and the c o r p o r a t i o n and i t s other s t o c k h o l d e r s , and not common to the l a t t e r . The p l a i n t i f f s , i n t h i s c a s e were t he o u s t e d m a j o r i t y who sought a r e t u r n to t h e i r o r i g i n a l p o s i t i o n . The c o u r t went on t o h o l d t h a t because t h e i s s u e was f r a u d u l e n t and made e x p r e s s l y t o d e p r i v e t h e p l a i n t i f f s ; . o f t h e i r r e l a t i v e p o s i t i o n as s t o c k h o l d e r s they had a c l e a r r i g h t t o a v o i d the i s s u e . The c a s e i s a l s o i n t e r e s t i n g f o r two f u r t h e r , p r o p o s i t i o n s e x p r e s s e d i n d i c t a : t h e f i r s t i s t h a t a l t h o u g h t h e r e were elements o f a d e r i v a t i v e a c t i o n i n c o r p o r a t e d i n t o . t h e p l e a d i n g s which were i n a p p r o p r i a t e i n a p e r s o n a l a c t i o n , t h e y were n o t o f s u f -f i c i e n t w e i g h t t o change the whole n a t u r e o f the a c t i o n and c o u l d be d i s r e g a r d e d f o r t he pro p o s e s o f the c u r r e n t c a s e ; t h e second i s t h a t t h e r e i s no need t o j o i n d i r e c t o r s as n e c e s s a r y p a r t i e s t o the a c t i o n s i m p l y because they were d i r e c t o r s a t the time t he i n c r e a s e i n c a p i t a l was made, u n l e s s t h e y , h a d been a l l o t t e d some o f the new sha r e s and an o r d e r c o m p e l l i n g them t o g i v e them up was sought a g a i n s t them p e r s o n a l l y . The witherbee c a s e r e f e r s t o a New York C o u r t o f A p p e a l s d e c i s i o n , 8 Stokes v. Continental Trust Co. i n which t h e r e i s an e x c e l l e n t summary 9 o f t h e p o s i t i o n o f the pr e - e m p t i v e r i g h t : ^Ibid., p. 28 per H i s c o c k , J . 8 7 8 N.E. 1090 (1906). 9Ibid., p. 1094, p e r Vann, J . - 130 -They [the majority] cannot...dispose of i t [new stock] to strangers against the p r o t e s t of any stockholder who i n s i s t s that he has a r i g h t to h i s p r o p o r t i o n . Otherwise the m a j o r i t y could deprive the m i n o r i t y of t h e i r p r o p o r t i o n a t e power i n the e l e c t i o n of d i r e c t o r s and t h e i r p r o portionate r i g h t to share i n the s u r p l u s , each of which i s an inherent, pre-emptive, and vested r i g h t of property. I t i s i n v i o l a b l e , and can n e i t h e r be taken away nor lessened without consent, or a waiver implying consent.... We are not d i s c u s s i n g e q u i t i e s , but l e g a l r i g h t s , f o r t h i s i s an a c t i o n at law, and the p l a i n t i f f was deprived of a s t r i c t l e g a l r i g h t . S e v e r a l i n t e r e s t i n g f e a t u r e s emerge from t h i s p a s s a g e . One i s t h a t t h e r e i s a s u g g e s t i o n t h a t t h e p r e - e m p t i v e r i g h t i s t o some e x t e n t based on the r i g h t t o v o t e which w i l l be d i s c u s s e d more f u l l y l a t e r . T h i s i s made q u i t e c l e a r i n an. e a r l i e r p a s s a g e i n t h e c a s e where Vann J . s a y s : ^ ... the power of the i n d i v i d u a l stockholder to vote i n proportion, to the number of h i s shares i s v i t a l and cannot be cut o f f or c u r t a i l e d by the a c t i o n of a l l the other stockholders even w i t h the co-operation of the d i r e c t o r s and o f f i c e r s . I t i s a c c e p t e d t h a t a l l v o t i n g s h a r e s , whether common o r p r e f e r e n c e a r e e n t i t l e d t o p r e - e m p t i v e r i g h t s ^ b u t what i s the p o s i t i o n o f non-\ v o t i n g s h a r e s ? In t h e o r y , as l o n g as the s h a r e s were p a r t i c i p a t i n g they s h o u l d a l s o be e n t i t l e d t o such r i g h t s , as pre-e m p t i o n m a i n t a i n s not o n l y t h e i r v o t i n g p o s i t i o n , b u t a l s o t h e i r c a p i t a l p a r t i c i p a t i o n . However, i t has been a p p l i e d t o n o n - v o t i n g s h a r e s o n l y t o a v e r y 12 l i m i t e d e x t e n t . A n o t h e r p o i n t t o be no t e d from t h e g e n e r a l s t a t e m e n t above i s t h a t t h e p r e - e m p t i v e r i g h t i s a l e g a l r i g h t and n o t an e q u i t a b l e one a l t h o u g h i t s o r i g i n a l c o n c e p t u a l b a s i s a p p e a r s t o have been i n ]0Ibid. , p. 1093. ^ T h e p o s i t i o n o f an i s s u e o f one c l a s s o f s h a r e s o n l y and the r i g h t s o f s h a r e h o l d e r s o f o t h e r c l a s s e s i s however, f a r from c l e a r . See g e n e r a l l y F l e t c h e r Cyc. Corp. V o l . 11 Para 5136.3, p. 183. 1 2 S e e F l e t c h e r Cyc. Corp. V o l . 11, P a r a . 5135, p. 167. - 131 -e q u i t y . The a b i l i t y t o c l a i m p r e - e m p t i o n i s s a i d t o be a r i g h t o f p r o p e r t y a l t h o u g h i t i s not c l e a r from the c a s e s what g i v e s i t t h i s s t a t u s . The i d e a o f a c o n t r a c t between the members and the company based on the i n c o r p o r a t i o n : documents and the s t a t u t e has a l r e a d y 13 been d i s c u s s e d but i s n o t r e l e v a n t here because we a r e so f a r .j d i s c u s s i n g the common law p r e - e m p t i v e p r o v i s i o n s o n l y . The r i g h t o f -p r e - e m p t i o n i s t h e r e f o r e something which i s i n h e r e n t i n the s h a r e h o l d e r , n o t because o f a n y t h i n g l i k e a c o n t r a c t , but because o f the g e n e r a l law s u r r o u n d i n g h i s p o s i t i o n . The f a c t s and the r e s u l t o f the Stokes c a s e a r e a l s o o f g e n e r a l i m p o r t a n c e . A p u b l i c company had i n c r e a s e d i t s c a p i t a l and s o l d a l l o f the new s h a r e s t o a bank which had f i r s t s u g g e s t e d , t h e i n c r e a s e t o i t . The p l a i n t i f f , an i n d i v i d u a l m i n o r i t y s h a r e h o l d e r , c o m p l a i n e d t h a t a t a l l times he had wanted h i s pro r a t a s h a r e o f the new i s s u e i but as t h i s had been d e n i e d by the company he' no_w s o u g h t h i s f a i r p r o p o r t i o n t h r o u g h the c o u r t s , o r , i f t h a t was not p o s s i b l e , damages. I t s h o u l d be not e d a t t h i s p o i n t t h a t a l t h o u g h the remedy i n a p e r -s o n a l a c t i o n i s n o t o f t e n damages i t i s q u i t e c l e a r t h a t such a remedy e x i s t s . The t r a d i t i o n a l commonwealth view t h a t damages can o n l y be r e c o v e r e d i n a d e r i v a t i v e a c t i o n i s i n a p p l i c a b l e i n the S t a t e s . A c c e p t i n g w i t h o u t q u e s t i o n t h a t an i n d i v i d u a l can c l a i m damages, Cary says a t page .1167 t h a t "where t h e p l a i n t i f f i s s e e k i n g t o r e c o v e r damages from the c o r p o r a t i o n , as i n the Stokes c a s e , he i s n e c e s s a r i l y s u i n g / o n an i n d i v i d u a l r a t h e r than a c o r p o r a t e c a u s e o f a c t i o n . " A l t h o u g h a c l a i m f o r damages i s p o s s i b l e , i t w i l l be 13 Supra, p. 107. - 132 -unusual c i r c u m s t a n c e s i n which they w i l l be awarded.. In the p r e s e n t c a s e the s h a r e s had r i s e n i n v a l u e c o n s i d e r a b l y between the d a t e t h e i s s u e p r i c e was announced and the a c t u a l d a t e o f i s s u e so t h a t q u i t e a p r o f i t c o u l d have been made by b u y i n g a t the i s s u e p r i c e and s e l l i n g a g a i n t h e same day. The measure o f damages here was i n f a c t the d i f f e r e n c e between the i s s u e p r i c e and the market v a l u e on the d a t e o f i s s u e , and w h i l e t h i s d i d n o t t a k e i n t o a c c o u n t any x s u b s e q u e n t i n c r e a s e i n v a l u e such an i n c r e a s e was p r o b a b l y beyond the bounds o f f b r e s e e a b i l . i t y . L i m i t a t i o n s on P r e - e m p t i o n A l t h o u g h pre-emption remains a u s e f u l weapon f o r m i n o r i t i e s i t has become s u b j e c t t o many r e s t r i c t i o n s , both a t common law and by s t a t u t e . Today, v e r y few p u b l i c companies have r e t a i n e d the r i g h t because o f the u n c e r t a i n t y as t o i t s a p p l i c a t i o n t o s h a r e i s s u e s o f d i f f e r e n t c l a s s e s and because o f the a d m i n i s t r a t i v e d i f f i c u l t l y o f c o n t a c t i n g t h e many w i d e s p r e a d s h a r e h o l d e r s t o o f f e r them t h e i r p r o p o r t i o n o f new s h a r e s . Even i n p r i v a t e companies where the e x i s t e n c e o f t h e r i g h t c o u l d be e x t r e m e l y i m p o r t a n t i n p r e v e n t i n g an u n f a i r a l l o t m e n t , i t has been m o d i f i e d and sometimes removed by s t a t u t e . F o r example, i n C a l i f o r n i a , as w e l l as i n s e v e r a l o t h e r S t a t e s , p r e - e m p t i v e p r o v i s i o n s t o do not a p p l y u n l e s s s p e c i f i c a l l y included i n t h e a r t i c l e s 14 o f i n c o r p o r a t i o n o r the bylaws. A l t h o u g h the q u o t a t i o n from Fuller 15 v. Krogh says t h a t t h e r i g h t o f p r e - e m p t i o n i s n o t dependent on the 1 4 C a l . Corp. Code s. 1106. 15 ' See note 4, supra. J - 133 -a r t i c l e s , t he c a s e does' go on t o say t h a t t h e a r t i c l e s may s p e c i f i c a l l y e x c l u d e t h a t r i g h t . The r e s u l t i s t h a t i n many i n s t a n c e s the m i n o r i t i e s ' 16 r i g h t s a r e now dependent e n t i r e l y on c o n t r a c t ; ~a~s even t h e common law r e s t r i c t i o n s d i s c u s s e d below have i n some c a s e s been put i n t o s t a t u t e s ^ 7 i s t h e r e f o r e no l o n g e r p o s s i b l e t o a u t o m a t i c a l l y a s s e r t p r e - e m p t i v e r i g h t s u n t i l t he s t a t u t e s and c h a r t e r o f the company have been s e a r c h e d . I t i s perhaps a p p o s i t e a t t h i s p o i n t t o d i s c u s s b r i e f l y t he l i m i t s o f the company's a b i l i t y t o d r a f t a r t i c l e s o r by-laws which r e s t r i c t t h e . p r e - e m p t i v e r i g h t s . No s p e c i a l r u l e s a p p l y t o p r e -emptive p r o v i s i o n s but they a r e s u b j e c t t o the g e n e r a l r e q u i r e m e n t o f r e a s o n a b l e n e s s . M o s t o f the c a s e s c o n c e r n r e s t r i c t i o n s on the a l i e n a t i o n o f s h a r e s and, a g a i n based on p a r t n e r s h i p p r i n c i p l e s , i t a p p e a r s t h e r e i s no g r e a t o b j e c t i o n t o b e i n g a b l e t o choose one's f e l l o w s h a r e h o l d e r s . Even a p r o v i s i o n a l l o w i n g the compulsory p u r c h a s e by o t h e r s h a r e h o l d e r s f o l l o w i n g a u n a n i m o u s ^ d e c i s i o n o f the board has been u p h e l d because i t had been a g r e e d upon a t the time 19 o f i n c o r p o r a t i o n and was e x e r c i s e d i n good f a i t h . R e s t r i c t i o n s imposed on r i g h t s by the a r t i c l e s w i l l n o r m a l l y be i n t e r p r e t e d s t r i c t l y b u t , as i n a l l m a t t e r s o f c o n s t r u c t i o n , 16 See, f o r example, H o r n i t z v. Balabam 112 F. Supp. ,99 (1953) where the p r e - e m p t i v e r i g h t s o f the p l a i n t i f f had been removed but he was s t i l l a b l e t o s u c c e e d i n p r e v e n t i n g a c o n v e r s i o n o f n o t e s i n t o s h a r e s because the s t a t u t o r y r e q u i r e m e n t s o f such a c o n v e r s i o n had n o t been c o m p l i e d w i t h . ^ S e e g e n e r a l l y Henn, S. 175, p. 323. 1 8 S e e Palmer v. Chamber!in 191 F. 2d 532 (1951) 1 9 L e w i s v. H. P. Hood & Sons, I n c . 121 N.E. 2d 850 (1954). N o t e " t h a t such a r e s t r i c t i o n would n o t be p o s s i b l e i n E n g l a n d . See Gower, 69 Harv. L. Rev. 1369, 1378. - 134 -r e a s o n a b l e n e s s w i l l depend on a l l o f the c i r c u m s t a n c e s . F o r example, the r e l a t i v e b a r g a i n i n g s t r e n g t h s o f the v a r i o u s s h a r e h o l d e r s when the a r t i c l e s o r by-laws were d r a f t e d may be o f c o n s i d e r a b l e i m p o r t a n c e . Not o n l y must the o r i g i n a l r u l e s o f t h e company i n t h i s a r e a be r e a s o n a b l e , but any changes i n the by-laws must a l s o be made i n 20 the company s b e s t i n t e r e s t s . In Tu-Vu Drive^In Corp. v. Ashkins a company changed i t s by-laws t o g i v e e x i s t i n g s h a r e h o l d e r s a r i g h t o f f i r s t r e f u s a l when any s h a r e h o l d e r w i s h e d t o s e l l h i s s h a r e s . A m i n o r i t y s h a r e h o l d e r c o m p l a i n e d t h a t he had t h e r e b y l o s t a s u b s t a n t i a l r i g h t t o f r e e l y t r a n s f e r h i s s h a r e s . The c o u r t h e l d t h a t a s h a r e h o l d e r buys h i s s h a r e s knowing the company has the power t o change i t s by-laws as i t must be a b l e t o l e g i t i m a t e l y p r o t e c t i t s e l f from r i v a l s . As l o n g as the s h a r e h o l d e r ' s r i g h t t o o b t a i n , t h e b e s t p r i c e f o r h i s s h a r e s i s n o t i m p a i r e d , such a change w i l l be u p h e l d . In a d d i t i o n t o the many and v a r i e d s t a t u t o r y changes t o the b a s i c p r e - e m p t i v e r i g h t , t h e r e a r e a l s o common law r e s t r i c t i o n s which have been d e v e l o p e d p a r t l y on a t h e o r e t i c a l ' : b a s i s b u t , more p r o b a b l y , f o r p r a c t i c a l r e a s o n s . The common ones a r e a p r o h i b i t i o n 21 i n s h a r i n g i n i s s u e s o f t r e a s u r y s h a r e s , o f s h a r e s i s s u e d f o r 22 c o n s i d e r a t i o n o t h e r than cash and o f s h a r e s a u t h o r i z e d b ut 23 p r e v i o u s l y u n i s s u e d . The r e s t r i c t i o n on an i s s u e o f t r e a s u r y s h a r e s , t h a t i s , s h a r e s i n the company owned by the company i t s e l f , i s based on the p r a c t i c a l r e a s o n t h a t t h e s e s h a r e s a r e u s u a l l y n o t i s s u e d . i n l a r g e amounts 20 391 P. 2d 828 (196 4 ) . Borg v. I n t e r n a t i o n a l S i l v e r Co., 11 F. 2d 147 (192 5 ) . Thorn v. B a l t i m o r e T r u s t Co., 148 A. 235 (1930). ! Y a s i k v. W a c h t e l , 17 A. 2d r 309 ( 1 9 4 1 ) . 21 22 23 - 135 -a t one time b u t a r e i s s u e d f o r s p e c i f i c p u r poses o f t e n not c o n n e c t e d w i t h a move t o i n c r e a s e t h e c a p i t a l o f the company. I t i s however, j u s t such s p e c i f i c p u r poses as " r e w a r d i n g " a d i r e c t o r , p a y i n g f o r a newly a c q u i r e d a s s e t o r p r e v e n t i n g c o n t r o l from b e i n g l o s t which the whole p r e - e m p t i v e r i g h t was d e s i g n e d t o s t o p . I t i s ha r d t o see any sound r a t i o n a l e b e h i n d t h i s r e s t r i c t i o n and t h e r e a r e i n f a c t some c a s e s which have s a i d p r e - e m p t i o n s h a l l a p p l y n o t w i t h -24 s t a n d i n g t h a t i t i s t r e a s u r y s h a r e s t h a t a r e b e i n g i s s u e d . A more s e r i o u s r e s t r i c t i o n and one which i s e q u a l l y i n e x p l i c a b l e i s t h a t which d i s a l l o w s p r e - e m p t i o n i n the case o f an i s s u e f o r o t h e r than c a s h . F o r example, i f new s h a r e s a r e i s s u e d i n payment o f a debt o r as c o n s i d e r a t i o n f o r an a s s e t o r s h a r e s i n a n o t h e r company, o r f o r s e r v i c e s t h e r i g h t i s s a i d n o t t o a p p l y . P r o b a b l y the most quoted passage i n s u p p o r t o f t h i s l i m i t a t i o n i s t h a t o f 25 26 U r n e r , J . i n Thorn v. Baltimore Trust Co., which i s as f o l l o w s : Where the purpose of an a d d i t i o n a l stock i s s u e i s to exchange i t f o r the stock of another c o r p o r a t i o n , the p r e f e r e n t i a l r i g h t of purchase does not belong to e x i s t i n g shareholders, s i n c e p a r t of the c o n s i d e r a t i o n f o r the t r a n s f e r of property by owners may be the advantage of sharing as stockholders i n p r o f i t s of the c o r p o r a t i o n . I t i s s u b m i t t e d t h a t w i t h r e s p e c t t o payment o f d e b t s t h i s r a t i o n a l e has no a p p l i c a t i o n and even w i t h r e s p e c t t o an a s s e t o r s h a r e p u r c h a s e i t i s s p e c i o u s and based more on a p r a g m a t i c a p p r o a c h , t h a n any con-c e p t u a l l e g a l a p p r o a c h . I f i t i s t r u e t h a t p a r t W the c o n s i d e r a t i o n i s t h e e x p e c t a t i o n o f p r o f i t s h a r i n g then t h i s c o u l d s t i l l be c a t e r e d f o r by i n c r e a s i n g the t o t a l number o f s h a r e s i s s u e d , some o f which 24 Dunn v. Acme Auto & Garage Co., 169 N.W. 297; Johnson v. Duensing (Mo), 351 S.W. 2d 27 (196 1 ) . 2 5 1 4 8 A. 234. 2^Ibid., p. 235. - 136 -c o u l d go t o the e x i s t i n g s h a r e h o l d e r s and the o t h e r s t o t h e t r a n s f e r e e . Of c o u r s e , i f t h e , s t r i c t p r e - e m p t i v e p r o v i s i o n s were a p p l i e d no o u t s i d e r s c o u l d e v e r be p a i d i n s h a r e s u n l e s s some o f the e x i s t i n g s h a r e h o l d e r s were p r e p a r e d t o waive t h e i r r i g h t s , b ut some s o r t o f compromise, p r e f e r a b l y worked o u t i n a d v a n c e ' i n t he a r t i c l e s o r the by-laws c o u l d be o b t a i n e d . I t i s a c c e p t e d t h a t s t r i c t a d herence t o the r u l e may unduly hamper the company i n i t s development. The l a s t r e s t r i c t i o n which w i l l be d i s c u s s e d here i s t h a t con-c e r n i n g the i s s u e o f a u t h o r i z e d b ut p r e v i o u s l y u n i s s u e d s h a r e s . I t has been held" t h a t as no r e p r e s e n t a t i o n s were made a t the time t he s h a r e h o l d e r a c q u i r e d h i s s h a r e s as t o t h e i s s u e o f u n i s s u e d s h a r e s , when t h e s e s h a r e s a r e i s s u e d t o the e x c l u s s i o n o f t h a t member he 27 has n o t been p r e j u d i c e d . The s h a r e s were s e t a s i d e a t the commence-ment o f the b u s i n e s s on the u n d e r s t a n d i n g t h a t t h e y c o u l d be i s s u e d t o r a i s e any n e c e s s a r y c a p i t a l i n c o n n e c t i o n w i t h t h e e a r l y development o f the company and were not n e c e s s a r i l y a v a i l a b l e t o e x i s t i n g s h a r e -h o l d e r s . Once a g a i n , t h e r e seems v e r y l i t t l e l o g i c t o t h i s r e s t r i c t i o n e s p e c i a l l y i n an age when i t i s common p r a c t i c e f o r companies t o commence b u s i n e s s w i t h a l a r g e a u t h o r i z e d b ut not n e c e s s a r i l y i s s u e d c a p i t a l . S i m i l a r l y , when the a u t h o r i z e d c a p i t a l i s i n c r e a s e d a t any s t a g e , i t i s n o t unusual f o r i t t o be r a i s e d a l e v e l g r e a t e r than i s n e c e s s a r y a t t h a t p a r t i c u l a r time w i t h the r e s u l t t h a t t h e r e a r e always u n i s s u e d s h a r e s i n r e s e r v e . C e r t a i n l y w i t h r e g a r d t o s h a r e s i s s u e d from c a p t i a l a u t h o r i z e d a f t e r t h e i n c o r p o r a t i o n o f t h e company t h e r e i s no f o u n d a t i o n t o the r e s t r i c t i o n on p r e - e m p t i o n . I t has been r e c o g n i z e d t h a t even an i s s u e o f p r e v i o u s l y u n i s s u e d ^ b u t o r i g i n a l l y 27 Y a s i k v. W a c h t e l , supra, note 23. - 137 -a u t h o r i z e d s h a r e s some time a f t e r the commencement, o f b u s i n e s s need 28 n o t be s u b j e c t t o t h i s l i m i t a t i o n . O t h e r g l o s s e s have from time t o time been d e v e l o p e d by th e c o u r t s but no g e n e r a l r u l e s emerge as i t depends on the p a r t i c u l a r f a c t s and the c o u r t s ' i n t e r p r e t a t i o n o f them as t o which way the c a s e w i l l go. I t i s a r g u a b l e t h a t i f a s h a r e h o l d e r i s o f f e r e d h i s pro r a t a s h a r e and d e c l i n e s t o a c c e p t i t e i t h e r because he c a n n o t a f f o r d t o o r he does n o t wish t o , he s h o u l d n o t be a b l e t o co m p l a i n about the i s s u e u n l e s s i t i s f r a u d u l e n t . However, i n some c a s e s the c o u r t s have a l l o w e d an a c t i o n , e i t h e r f o r pre-emption o r some o t h e r r i g h t even where such an o f f e r 29 has been made. In Gaines v. Long Manufacturing Co,, Inc., w h i c h , s t r i c t l y , i s c o n c e r n e d w i t h a b r e a c h o f f i d u c i a r y d u t y i n the i s s u a n c e o f s h a r e -rather than p r e - e m p t i v e r i g h t s , a m i n o r i t y s h a r e h o l d e r was i n f a c t o f f e r e d h i s pro r a t a s h a r e but c o u l d n o t a f f o r d t o t a k e i t up. Hi s r i g h t s t o the s h a r e s were t o be f o r f e i t e d i f n o t taken, up w i t h i n a g i v e n time l i m i t and th e e f f e c t , he c l a i m e d , would be t o re d u c e the v a l u e o f h i s h o l d i n g from $60,000.00 t o A $ 8 0 0 . 0 0 . He t h e r e f o r e s o u g h t an i n j u n c t i o n t o p r e v e n t the i s s u e , based on a br e a c h o f d u t y and th e C o u r t f o u n d t h a t h i s i n a b i l i t y t o t a k e up th e s h a r e s was e v i d e n c e o f the m a j o r i t y t r y i n g t o squeeze him ou t . 30 A n o t h e r , more r e c e n t c a s e s a i d t h a t a p r e - e m p t i v e r i g h t might be i l l u s o r y and s t i l l a c t i o n a b l e even though t h e p l a i n t i f f had been o f f e r e d some o f the new s h a r e s . A g a i n b a s i n g t h e a c t i o n on, e q u i t a b l e grounds, the p l a i n t i f f s o u g h t an i n j u n c t i o n t o p r e v e n t an i n s s u e a t 2 8Hammer v. Werner 265 N.Y.S. 172, 176 (1933). 2 9 6 7 S.E. 2d 350 (1919 ) . 3 0Tashman v. Tashman 174 N.Y.S. 2d 482. - 138 -w e l l below book v a l u e . The c o u r t q u o t e d e x t e n s i v e l y from an a r t i c l e i n 71 H a r v a r d Law Review 1135 which s a i d : However, the protection afforded by the r i g h t to subscribe to a prorata share of the new stock may prove i l l u s o r y i f the stockholder who does not wish to or i s unable to purchase h i s share of the new issue i s also unable to s e l l the r i g h t s . This w i l l often be the case when the stock i s to be issued by a c l o s e l y held corpo-r a t i o n . Even i f a buyer can be found, the forced nature of the sale may make the p r i c e received f o r the r i g h t s inadequate compensation f o r the d i l u t i o n . The stock-holder should be able to protect h i s equity without having to purchase a portion of the new issue. Other-wise, the d i r e c t o r s or c o n t r o l l i n g shareholders would be able to coerce minority stockholders to invest f u r -ther i n the corporation against t h e i r w i l l i f they are to protect t h e i r equity. Therefore, the o f f e r of r i g h t s which cannot r e a d i l y be sold should not j u s t i f y the issue of stock at an un f a i r p r i c e , whether or not the protesting stockholder i s able to r a i s e the money to purchase the new stock. I t a ppears t h a t where a t r u e a b i l i t y t o s e l l r i g h t s t o new s h a r e s e x i s t and where t h e r e i s no o u t s i d e m o t i v e i n t h e d i r e c t o r s f o r t h e i s s u e , t h e i n a b i l i t y o f t h e s h a r e h o l d e r t o take up the new s h a r e s w i l l b a r him from an a c t i o n c o m p l a i n i n g about a r e d u c t i o n i n h i s power. 31 For example, i n Greenbaum v.. American Metal Climax, Inc. t h e p l a i n t i f f was u n w i l l i n g t o i n v e s t any more money i n the e n t e r p r i s e and the r e s u l t i n g d i l u t i o n o f h i s i n t e r e s t i n the v o t i n g power was h e l d n o t t o be a c t i o n a b l e . The q u e s t i o n o f r a t i f i c a t i o n by the m a j o r i t y s h a r e h o l d e r s does n o t a r i s e a t a l l i n t h i s a r e a . As has been s a i d e a r l i e r , i t i s an i n h e r e n t r i g h t i n a l l s h a r e h o l d e r s ( u n l e s s changed by c o n t r a c t o r s t a t u t e ) t o c l a i m a p r o p o r t i o n o f a new sh a r e i s s u e and t h i s c a n n o t be: removed by 278 N.Y.S. 2d 123 (1967). - 139 -any m a j o r i t y v o t e u n l e s s a v a l i d change i n the by-laws i s made. T h i s a l s o u n d e r l i e s the b a s i c t h e o r y t h a t t h i s r i g h t i s a p e r s o n a l one, n o t something e n f o r c e d on b e h a l f o f the company and t h e r e f o r e r a t i f i c a t i o n s h o u l d n o t be i n i s s u e . The r i g h t o f pr e - e m p t i o n i s , t h e n , a p e r s o n a l , l e g a l r i g h t d e v e l o p e d by the common law but s u b j e c t t o a l t e r a t i o n by s t a t u t e o r more d i r e c t l y by t he c h a r t e r under which the company i s s e t up. I f a . . p l a i n t i f f 1 s c l a i m i s m a i n l y t h a t t h e r e has been o r w i l l be a r e d u c t i o n i n h i s p r o -p o r t i o n a t e i n t e r e s t i n the company f o r no s i n i s t e r r e a s o n then i t i s p r o p e r l y based on p r e - e m p t i o n . I f , however, h i s c h a r g e i s t h a t t h e r e has been an a t t e m p t t o redu c e h i s power o r t o a l t e r the e x i s t i n g c o n t r o l s t r u c t u r e i n the company, then any a c t i o n c l a i m i n g p r e - e m p t i v e r i g h t s s h o u l d be j o i n e d w i t h a c l a i m o f br e a c h o f f i d u c i a r y d u t y by the d i r e c t o r s o r c o n t r o l l i n g shareholders,. 1 (2) RIGHTS BASED ON A BREACH OF FIDUCIARY DUTY  The Legal, N a t u r e o f the R i g h t As a t o t a l l y s e p a r a t e r i g h t n o t dependent on any common law p r e -emptive p r o v i s i o n s , and based i n e q u i t y , not i n law, a s h a r e h o l d e r has a r i g h t i n c o n n e c t i o n w i t h an i s s u e o f s h a r e t o i n s i s t on c o m p l i a n c e w i t h t he duty owed t o t h a t s h a r e h o l d e r by the d i r e c t o r s and the o t h e r s h a r e h o l d e r s . T h i s f i d u c i a r y d u t y r e q u i r e s t h a t t h o s e i n c o n t r o l a c t f a i r l y and i n good f a i t h towards n o t o n l y the company but a l s o t h e . m i n o r i t y s h a r e h o l d e r s . Even where the a r t i c l e s o r a s t a t u t e p r e v e n t p r e - e m p t i v e r i g h t s , d i r e c t o r s a r e n o t a l l o w e d t o use t h e i r p o s i t i o n s f o r t h e i r own advantage o r t o d i s c r i m i n a t e between s h a r e h o l d e r s . A l t h o u g h t h e r e a r e - 140 -no p r e - e m p t i v e p r o v i s i o n s i n C a l i f o r n i a ( u n l e s s s p e c i f i c i a l l y i n c l u d e d 32 by t h e a r t i c l e s o r by-laws) the c o u r t i n Shepperd v. Wilcox q u o t i n g 33 . 34 from Schwab v. Schwab-Wilson Machine Corp. Ltd. s a i d ...nevertheless, they [the shareholders] have the r i g h t to demand that the d i r e c t o r s and o f f i c e r s of the corpo-r a t i o n do not use t h e i r p o s i t i o n f o r t h e i r own personal advantage, or to d i s c r i m i n a t e between sto c k h o l d e r s , or to so cause stock to be issued as to make a p r o f i t f o r themselves or to o b t a i n or r e t a i n c o n t r o l of the c o r p o r a t i o n . r As has a l r e a d y been s t a t e d , t h e c o u r t s i n the U n i t e d S t a t e s a r e c l e a r i n t h e i r statements, t h a t i n r e s p e c t o f t h e i s s u a n c e o f s h a r e s d i r e c t o r s owe a . f i d u c i a r y d u t y t o t h e s h a r e h o l d e r s as w e l l as t o t h e company. So too do the m a j o r i t y s h a r e h o l d e r s as i s made c l e a r by 35 J u s t i c e B r a n d e i s i n Southern Pacific Co. v. Bogert where he s a i d : The r u l e of c o r p o r a t i o n law and of e q u i t y . . . i s w e l l s e t t l e d and has been o f t e n a p p l i e d . The m a j o r i t y has the r i g h t to c o n t r o l ; but when i t does so, i t occupies a f i d u c i a r y r e l a t i o n toward the m i n o r i t y , as much so as the c o r p o r a t i o n i t s e l f or i t s o f f i c e r s and d i r e c t o r s . I t i s n o t t h e r e f o r e so much o f a problem d e t e r m i n i n g t o whom the d u t y i s owed as i t i s d e c i d i n g the e x a c t n a t u r e o f the duty and i n what c i r c u m s t a n c e s a b r e a c h w i l l have o c c u r r e d . In r e l a t i o n t o t h e i r power t o i s s u e s h a r e , i t i s perhaps n o t p o s s i b l e t o do any more than t o s u g g e s t i n e v e r y g e n e r a l terms what d i r e c t o r s and m a j o r i t i e s must do and then t o e x p l a i n t h i s w i t h examples o f what t h e y a r e p r e -36 v e n t e d from d o i n g . " T h e i r p r i m a r y d u t y i s t o deal f a i r l y and j u s t l y " and, as has a l r e a d y been mentioned, t h i s p r e v e n t s them from making 3 2 2 6 C a l . R p t r . 412 (1962). 3 3 5 5 P. 2d 1268 (1936). MIbid., p. 1268. 3 5 2 5 0 U.S. 483 (1919). 36 .Yasik v. W a c h t e l , supra, note 23. - 141 -an i s s u e which d i s c r i m i n a t e s between s h a r e h o l d e r s , from a l l o w i n g them t o g a i n o r r e t a i n c o n t r o l o f the company i m p r o p e r l y o r from a p p l y i n g undue p r e s s u r e on some s h a r e h o l d e r s and perhaps f o r c i n g them o u t o f the company. I t i s i m p o r t a n t t o n o t e t h a t a c t u a l f r a u d i s n o t a n e c e s s a r y element o f u n f a i r n e s s o r bre a c h o f duty37 a l t h o u g h i n many cas e s i n the S t a t e s a c t s w h i c h would n o t amount t o f r a u d i n the Common-w e a l t h a r e s t i l l l a b e l l e d w i t h t h a t name. A l t h o u g h the r i g h t t o c o m p l a i n o f a br e a c h o f d u t y i n the i s s u a n c e o f s h a r e s i s unconnected w i t h any p r e - e m p t i v e r i g h t s , i t i s f r e q u e n t l y the same s o r t o f / f a c t s i t u a t i o n , though o f t e n w i t h an u n f a i r i n t e n t i o n on the p a r t o f the i s s u e r s , t h a t g i v e s r i s e t o both a c t i o n s . F o r 38 example, i n L.E. Fosgat'e Co. v. Boston Market Terminal Co. t h e o r i g i n a l s h a r e h o l d e r s had been o f f e r e d the r i g h t t o s u b s c r i b e f o r e x t r a s h a r e s when seen f i t by th e d i r e c t o r s , t h e m s e l v e s o r i g i n a l s h a r e -h o l d e r s . Some f i v e y e a r s a f t e r i n c o r p o r a t i o n when the company was do i n g w e l l , the d i r e c t o r s d e c i d e d t o b e n e f i t the o r i g i n a l s h a r e h o l d e r s t o the e x c l u s i o n o f the o t h e r s by a l l o w i n g t h o s e o r i g i n a l members t o e x e r c i s e t h i s r i g h t . The m i n o r i t y s h a r e h o l d e r s c o m p l a i n e d and g a i n e d 39 the i n j u n c t i o n t h e y sought. The c o u r t s a i d A necessary and obvious consequence of the issuance of the...additional shares to the individual defendents ...would have resulted in destroying the equality of stock ownership which had obtained since the organization of the corporation. "The r i g h t o f the p l a i n t i f f s t o p r e v e n t an i s s u e o f s t o c k by the d e f e n d a n t s t o the m s e l v e s f o r t h e i r own g a i n does n o t r e s t on f r a u d b u t on the f i d u c i a r y d u t y o f the d i r e c t o r s . " L.E. F o s g a t e Co. v. Boston Market T e r m i n a l Co. 175 N.E. 86 (.1.931). C o n t r a s t N o r t h w e s t I n d u s t r i e s , Inc. v. The B.F. G o o d r i c h Co. F. Supp. (N.D. I l l 1969) where the c o u r t s a i d " [ A s ] Northwest o f f e r e d no e v i d e n c e o f f r a u d o r i t s e q u i v a l e n t , [ t h e d i r e c t o r s ' ] judgment.;.as t o th e v a l u e o f the c o n s i d e r a t i o n r e c e i v e d f o r t h e . . . s h a r e s i s c o n c l u s i v e . " ( 38 Supra, note 37. 39Ibid. p. 90. - 142 -In o t h e r words, because the p r o p o r t i o n a t e i n t e r e s t o f the m i n o r i t y i n the company was b e i n g u p s e t , t h e y c o u l d c o m p l a i n , n o t because o f t h e i r p r e - e m p t i v e r i g h t s 1 which would not r e q u i r e any d i s c u s s i o n about the e x e r c i s e o f the d i r e c t o r s ' d i s c r e t i o n but because o f a b r e a c h o f d u t y . The d i s t i n c t i o n i s i m p o r t a n t not o n l y because p r e - e m p t i v e r i g h t s have been c u r t a i l e d so much by s t a t u t e and common law b u t a l s o because the two r i g h t s have v e r y d i f f e r e n t f o u n d a t i o n s . The r i g h t t o p r e -emption i s a l e g a l one'whereas, i t i s a c o u r t o f e q u i t y which w i l l d e t e r m i n e a b r e a c h o f . d u t y a c t i o n . T h i s means t h a t a l l the e q u i t a b l e p r i n c i p l e s a p p l y t o the l a t t e r and a t f i r s t s i g h t , i t would appear t h a t a s h a r e h o l d e r s h o u l d make demand w i t h i n the company and seek a remedy a t law b e f o r e b r i n g i n g an a c t i o n i n e q u i t y . 4 ^ However, the r e q u i r e m e n t o f demand i s n o t e n f o r c e d i n a c t i o n s c o n c e r n i n g a l l e g e d l y w r o n g f u l s h a r e i s s u e s . The q u e s t i o n o f r a t i f i c a t i o n by the m a j o r i t y s h a r e h o l d e r s o f x t h e d i r e c t o r s ' a c t i o n c o n c e r n i n g a s h a r e i s s u e w i l l be d i s c u s s e d l a t e r i n t h i s c h a p t e r . D e t e r m i n i n g the P r o p e r / P l a i n t i f f B e f o r e commencing .an a c t i o n c o m p l a i n i n g about a b r e a c h o f d u t y i t i s i m p o r t a n t t o d e t e r m i n e the p r o p e r p l a i n t i f f , and a g a i n the d i s t i n c t i o n between t h i s a c t i o n and a p r e - e m p t i v e s u i t i s r e l e v a n t . As we have se e n , i t .is a c c e p t e d a l m o s t w i t h o u t q u e s t i o n t h a t an i n d i v i d u a l s h a r e h o l d e r w i l l be a b l e t o b r i n g a p r e - e m p t i v e a c t i o n i n h i s own r i g h t a l t h o u g h sometimes the f a c t s w i l l g i v e r i s e t o a 40 " I t i s w e l l e s t a b l i s h e d t h a t c o u r t s o f e q u i t y w i l l e n t e r t a i n j u r i s d i c t i o n , a t the i n s t a n c e o f m i n o r i t y s t o c k h o l d e r s o f a p r i v a t e c o r p o r a t i o n who a r e u n a b l e t o o b t a i n r e d r e s s w i t h i n the c o r p o r a t i o n and have no adequate remedy a t law." Am. J u r . , C o r p o r a t i o n s s e c t i o n 423, p. 476. d e r i v a t i v e a c t i o n as w e l l . However, w i t h a c l a i m o f b r e a c h o f d u t y i t has been a r g u e d i n some c a s e s t h a t t he company s h o u l d be the p r o p e r p l a i n t i f f , o r i f t h a t i s n o t p o s s i b l e , t he s h a r e h o l d e r on b e h a l f o f t h e company. 4^ Where, i n o t h e r c a s e s the p l a i n t i f f has been a l l o w e d p e r s o n a l s t a n d i n g i t has sometimes been w i t h o u t q u e s t i o n and sometimes o n l y a f t e r e x p r e s s d i s c u s s i o n by the C o u r t . I t appea r s t h a t the n a t u r e o f the br e a c h and the damage c l a i m e d may d e t e r m i n e t he p r o p e r p l a i n t i f f , even though i t seems c l e a r from j u d i c i a l s t a t e m e n t s t h a t the duty i s owed both t o the company and the s h a r e h o l d e r s and t h a t , i n t h e o r y , e i t h e r one s h o u l d be a l l o w e d t o sue. The c l a i m s which a r e n o r m a l l y r e q u i r e d t o be d e r i v a t i v e i n v o l v e the r e t e n t i o n o f c o n t r o l by the d i r e c t o r s who have c a u s e d t he company to a c q u i r e i t s own s h a r e s . W i t h o u t l o o k i n g a t the m e r i t s o f such c a s e s a t the moment, i t appear s t h a t where the company's own money has been used t o p u r c h a s e i t s s h a r e s , t h e a c t i o n w i l l be d e r i v a t i v e n o t w i t h s t a n d i n g t h a t the s u b s t a n c e o f the c l a i m was t h a t t he s h a r e s had been bought o n l y t o s e c u r e t he d i r e c t o r s i n c o n t r o l . Because i t i s the company's money which has been used, i t i s t h e company which i s a l l o w e d t o c o m p l a i n a l t h o u g h i n some c a s e s t h e r e i s no d i s c u s s i o n o f t h i s i s s u e and s t r u c t u r a l l y , t h e a c t i o n c o u l d be e i t h e r p e r s o n a l o r 42 d e r i v a t i v e . In o t h e r such c a s e s , t h e c o u r t c l e a r l y h o l d s t h a t 43 the a c t i o n i s d e r i v a t i v e . Where the c l a i m does n o t c o n c e r n t he p u r c h a s e by the company o f i t s own s h a r e s b u t r a t h e r an i s s u e o f new s h a r e s a l l e g e d l y f o r c o n t r o l 4 1 9 C a l . R p t r . 204 (19 6 0 ) . 4 2 K o r s V. Carey 158 A. 2d 136 (196 0 ) , h e l d t o have been d e r i v a t i v e by Condec Corp. v. Lunkenheimer Co., supra, n o t e 1; B e n n e t t v. Propp. 187 A. 2d 405 (1962). 4 3 C h e f f v. Mathes 199 A. 2d 548 (1 9 6 4 ) ; The H e r a l d Company v. Seawell 472. F. 2d 1081 (19 7 2 ) . - 144 -pu r p o s e s , the a c t i o n can p r o p e r l y be br o u g h t as a p e r s o n a l one. As 44 V i c e C h a n c e l l o r Marvel says i n Condeo Corp. v. Lunkenheimer Co., "we a r e n o t here c o n c e r n e d w i t h t h e need o f p r o v i n g c o r p o r a t e i n j u r y as has been h e l d t o be the ca s e when a s t o c k h o l d e r a t t a c k s d e r i v a t i v e l y the s p e n d i n g o f c o r p o r a t e funds f o r t h e pu r c h a s e o f h i s c o r p o r a t i o n ' s own s t o c k . " D i g r e s s i n g b r i e f l y , i t i s i n t e r e s t i n g t o note t h e way i n which he c o n t i n u e s w i t h h i s e x p l a n a t i o n o f the b a s i s f o r a p e r s o n a l 45 a c t i o n f o r a b r e a c h o f dut y and s a y s : This [the a c t i o n ] r a t h e r i s a case of a stockholder w i t h the c o n t r a c t u a l r i g h t to a s s e r t v o t i n g c o n t r o l being deprived of such c o n t r o l by what i s v i r t u a l l y a corporate legerdermain. A l t h o u g h the Judge speaks o f a c o n t r a c t u a l r i g h t i n t h i s c o n t e x t , i t i s s u b m i t t e d t h a t he i s n o t i n t e n d i n g t o c r e a t e a new r i g h t , s e p a r a t e from t h e c l a i m i n e q u i t y . In o t h e r passages i n t h e same judgment he c l e a r l y r e f e r s t o the e q u i t a b l e r i g h t and the ca s e he uses i n 46 s u p p o r t o f the p r o p o s i t i o n q u o t e d above s a y s : ...majority v o t i n g c o n t r o l i s a r i g h t which a court of e q u i t y w i l l p r o t e c t under these circumstances. In s h o r t , i t a p p e a r s t h a t the r i g h t t o e n j o i n d i r e c t o r s from b r e a c h i n g t h e i r duty t o s h a r e h o l d e r s , which d u t y i n c l u d e s p r o t e c t i n g p r o p o r t i o n a t e i n t e r e s t s and c o n t r a c t u a l v o t i n g r i g h t s , i s a r i g h t based i n e q u i t y , n o t on a c o n t r a c t . I t may w e l l be t h a t a s h a r e h o l d e r has a s e p a r a t e r i g h t t o e n f o r c e h i s v o t i n g power b ut t h i s i s d i f f e r e n t from h i s a b i l i t y t o co m p l a i n about a b r e a c h o f dut y . I'-ll A Supra, note 1, p. 777. ^Ibid., p. 777. 4 6 C a n a d a S o u t h e r n O i l s v. Manabi E x p l o r a t i o n Co. 96 A. 2d 810, 814 p e r S e i t z C. - 145 -With r e s p e c t t o a new i s s u e o f s h a r e s , some c a s e s have h e l d t h a t o n l y t h o s e s h a r e h o l d e r s who a r e a f f e c t e d by the new c o n t r o l have a r i g h t t o a p e r s o n a l a c t i o n . In o t h e r words, o n l y t h o s e e x i s t i n g c o n t r o l l e r s who have been deposed by the i s s u e o r t h o s e would-be c o n t r o l l e r s who were about t o t a k e command can co m p l a i n i n t h e i r own 47 name. In Yasik v. Wachtel a m i n o r i t y member w i t h a v e r y s m a l l h o l d i n g c o m p l a i n e d , inter a l i a t h a t s h a r e s were i s s u e d t o w r e s t c o n t r o l from a f o r m e r m a j o r i t y s h a r e h o l d e r . The c o u r t h e l d t h a t t h e p l a i n t i f f had no s t a n d i n g t o c o m p l a i n o f a br e a c h o f dut y because he had had 48 no p r i o r i n t e r e s t i n the c o n t r o l . S i m i l a r l y , i n Shaw v. Empire the p l a i n t i f f was c o m p l a i n i n g m a i n l y because he had owned two and a h a l f p e r c e n t o f the s h a r e s b e f o r e the i s s u e and o n l y one and a h a l f p e r c e n t a f t e r i t . The d e f e n d a n t had a c q u i r e d c o n t r o l p r e v i o u s l y and b e f o r e i s s u i n g s h a r e s t o h i m s e l f had a l t e r e d t h e by-laws t o remove the pre - e m p t i v e r i g h t s . The c o u r t h e l d t h a t t h e p l a i n t i f f had a l l e g e d no a c c e p t a b l e cause o f a c t i o n and s a i d w i t h r e s p e c t t o the d i r e c t o r s ' 49 duty i n i s s u i n g s h a r e s : The only r e s t r a i n t s are those which (1) prevent the issuance of stock from being used to o b t a i n or r e t a i n c o n t r o l at the expense of the other s t o c k h o l d e r s , i n v o l v i n g a personal r i g h t of the stockholder thus ousted from control, or (2) the o b l i g a t i o n to o b t a i n f o r the c o r p o r a t i o n the l a r g e s t p o s s i b l e r e t u r n from the s a l e of i t s stock, i n v o l v i n g a corporate r i g h t a s e r t a b l e by the stockholder only i n the name of the c o r p o r a t i o n and f o r the b e n e f i t of a l l s t o c k h o l d e r s , (emphasis mine) N e i t h e r o f t h e s e r e s t r a i n t s were a l l e g e d t o have been v i o l a t e d here so the d e c l a r a t i o n , sought ( f o r a p r o - r a t a s h a r e i n the new i s s u e ) was 47Supra, note 23. 4 8 9 C a l . R p t r . 210. A9lbid./p. 210 p e r L i l l i e , J . (1 9 6 0 ) . - 146 -not a l l o w e d . The cause o f a c t i o n a s s e r t e d by the p l a i n t i f f was m e r e l y t h a t h i s i n t e r e s t had been d i l u t e d and t h a t , d e s p i t e the removal by s t a t u t e o f the p r e -emptive p r o v i s i o n s ( u n l e s s the by-laws s a i d o t h e r w i s e ) , d i r e c t o r s c o u l d n o t do t h i s t o s u i t t h e m s e l v e s . F o r two r e a s o n s the c o u r t h e l d t h a t such an a c t i o n was n o t p o s s i b l e as a p e r s o n a l a c t i o n . F i r s t l y , t h e y s a i d t h a t i f t h i s was a wrong i t was done t o a l l o f the m i n o r i t y s h a r e h o l d e r s and t h a t o n l y a t r u e c l a s s a c t i o n c o u l d be br o u g h t . In s u p p o r t o f t h i s t he C o u r t c i t e d c a s e s which s t a t e d t h a t t o m a i n t a i n a p e r s o n a l a c t i o n , the p l a i n t i f f had t o a l l e g e an i n j u r y a r i s i n g o u t o f c i r c u m s t a n c e s i n d e p e n d e n t o f h i s s t a t u s as a s h a r e h o l d e r . I t i s not c l e a r what i s meant by "in d e p e n d e n t o f h i s s t a t u s as a s h a r e h o l d e r " b u t s u d d e n l y the c o u r t seems t o a c c e p t t h a t perhaps a d e p r e c i a t i o n i n t he v a l u e o f a s h a r e h o l d e r ' s i n t e r e s t does a r i s e t h i s way but as i t a f f e c t s a l l s h a r e h o l d e r s , t h e y must a l l have a r i g h t t o sue. The 50 case Anderson v. Derrick used t o s u p p o r t t h i s p r o p o s i t i o n does n o t however say t h a t a c l a s s a c t i o n ' i s mandatory, j u s t t h a t a l l a f f e c t e d s h a r e h o l d e r s can sue. S e c o n d l y , the C o u r t c i t e s a New York c a s e , Coronado Development 51 Corp. v. M i l l i k i n which says t h a t d e p r e c i a t i o n i n v a l u e o f s h a r e s r e s u l t i n g from a r e d u c t i o n i n the v a l u e o f the c o r p o r a t e a s s e t s o r i n t e r f e r e n c e w i t h the company's b u s i n e s s can be r e d r e s s e d by a d e r i v a t i v e s u i t o n l y . T h i s c a s e , which c o n c e r n e d a c o n s p i r a c y t o put f a l s e i n f o r m a t i o n on the market t o r e d u c e the v a l u e o f the company's s h a r e s appears p e r f e c t l y w e l l d e c i d e d but i t i s s u b m i t t e d t h a t i t 5 0 3 2 P. 2d 1078. 5 1 2 2 N.Y.S. 2d 670. t - 147 -does n o t s u p p o r t the p r o p o s i t i o n i t i s s a i d t o i n the Shaw c a s e . T h e r e i s an e s s e n t i a l d i f f e r e n c e between the v a l u e o f the company as a whole b e i n g reduced and the v a l u e o f one group o f s h a r e s b e i n g d i l u t e d w h i l e the company worth remains t he same. With r e s p e c t , Shaw v. Empire a p p e a r s w r o n g l y d e c i d e d and an a c t i o n by an i n d i v i d u a l , n o n - c o n t r o l l i n g s h a r e h o l d e r c o m p l a i n i n g o f the d i l u t i o n o f h i s s h a r e s s h o u l d be he a r d 52 by the c o u r t . In f a c t , a s i m i l a r c l a i m i n Gaines 'v. Long Manufaotu-53 ring Co. Inc. l e a d s u c c e s s f u l l y t o a permanent i n j u n c t i o n a g a i n s t a p r o p o s e d i s s u e which would have r e d u c e d the v a l u e o f the p l a i n t i f f ' s s h a r e s from $60,000 t o $800. The p l a i n t i f f had n o t had a say i n the c o n t r o l o f the company a t any s t a g e and h i s a c t i o n was m e r e l y t o p r e -v e n t d i l u t i o n i n the v a l u e o f h i s s h a r e s . As i n the Shaw c a s e (where Gaines was n o t c i t e d ) t h e r e was a l s o an a l l e g a t i o n o f i n a d e q u a t e con-s i d e r a t i o n f o r the i s s u e b ut the c o u r t ' s o r d e r was based m a i n l y on the bre a c h o f the d i r e c t o r s ' d u t y cto the m i n o r i t y i n r e s p e c t o f the damage t o the s h a r e s . Whether o r n o t a m i n o r i t y s h a r e h o l d e r who i s n o t i n c o n t e n t i o n f o r c o n t r o l can m a i n t a i n a p e r s o n a l a c t i o n f o r damage t o h i s s h a r e s by a new i s s u e , and i t i s s u b m i t t e d t h a t he c a n , i t i s u n q u e s t i o n a b l e t h a t a p a r t y l o s i n g o r b e i n g p r e v e n t e d from o b t a i n i n g c o n t r o l can do so. T h i s i s a c c e p t e d i n the Shaw c a s e i t s e l f and i s the f o u n d a t i o n o f t h e 54 c l a i m s i n the Condeo c a s e and Wilcox. 52 T h i s i s s u p p o r t e d by Jones v. H.F. Ahamnson & Co. e t a l . , 460 P.2d 464, 470, c i t e d w i t h a p p r o v a l i n Goldex Mines L t d . v. R e v i l l , (1974) 7 O.R. (2d) 216, 222 and W i n c h e l l v. Del Z o t t o [1977] 1 C.P.C. 338, 344. 53 Supra, note 29. 54 Supra, note 32. - 148 -I t appears t h a t i n some c i r c u m s t a n c e s , what would n o r m a l l y amount to a f r a u d on the company may a l s o a f f e c t an i n d i v i d u a l ' s s h a r e s , a t l e a s t i n the c o u r t ' s e y e s , and g i v e r i s e t o a p e r s o n a l a c t i o n . T h i s i s where i t i s c l a i m e d t h a t the s h a r e s have been i s s u e d f o r an i n a d e q u a t e c o n s i d e r a t i o n , an i s s u e which has a r i s e n p e r i p h e r a l l y i n many o f t h e 55 c a s e s a l r e a d y d i s c u s s e d . In Robinson v. Malhew Publishing Co. 56 K i l k e n n y D.J. summed up the n a t u r e o f the a c t i o n when he s a i d : [The] p l a i n t i f f s , ; shareholders i n Malheur P u b l i s h i n g Co....here challenge, as minority shareholders, the issuance of 10,000 shares of the c a p i t a l stock of the c o r p o r a t i o n , on the ground that the c o n s i d e r a t i o n was so g r o s s l y inadequate as to amount to a fr a u d , (emphasis added) The s h a r e s had been i s s u e d t o the p r e s i d e n t o f J:he company i n payment o f the company's i n d e b t e d n e s s t o him. T h e r e was no d i s c u s s i o n o f a d e r i v a t i v e a c t i o n , o r f o r t h a t m a t t e r , o f any harm t o t h e p l a i n t i f f and y e t the p e r s o n a l a c t i o n was a l l o w e d . However, the p l a i n t i f f l o s t on the m e r i t s , so i t c a n n o t be s a i d t h a t the c o u r t was b e n d i n g o v e r backwards to g r a n t a remedy and t h e r e b y i g n o r i n g the d i s t i n c t i o n b e t -57 ween the two t y p e s o f a c t i o n . On t h e o r e t i c a l grounds, i t would appear more l o g i c a l t o c o n s i d e r such c a s e s as b e i n g d e r i v a t i v e o n l y , e s p e c i a l l y where no harm to the i n d i v i d u a l p l a i n t i f f i s argued. The M e r i t s o f the C o m p l a i n t H a v i n g d e c i d e d t h a t the p a r t i c u l a r c o m p l a i n a n t i s i n d e e d the p r o p e r p l a i n t i f f i t then becomes n e c e s s a r y t o d e t e r m i n e whether h i s a c t i o n 5 5 2 7 2 F. Supp. 57 (1967) 56Ibid., p. 58. 57 As c o u l d be argued o f Gwatney v. A l l i e d Companies o f A r k a n s a s , 385 S.W. 2d 940 where, a l t h o u g h the c o u r t was m i n d f u l o f the d i s t i n c t i o n i t ^ a l l o w e d a p e r s o n a l a c t i o n c o m p l a i n i n g o f a compl e t e d u l t r a vires i s s u e . - 149 -has any f o u n d a t i o n . T h i s r e q u i r e s a b a l a n c i n g o f the du t y owed by d i r e c t o r s t o the company and s h a r e h o l d e r s w i t h any advantages a c c r u i n g t o t h e m s e l v e s by t h e i r a c t i o n . The main q u e s t i o n f o r r e s o l u t i o n by the c o u r t i s whether the i s s u e o r p u r c h a s e o f s h a r e s was made t o p r o t e c t the b u s i n e s s o f the company o r whether i n f a c t i t was p r i -m a r i l y t o s e c u r e the d i r e c t o r s i n t h e i r p o s i t i o n . The problem o f what was the main purpose o f the i s s u e and what was c o l l a t e r a l o r i n c i -d e n t a l t o t h a t purpose w i l l depend on the f a c t s i n each c a s e and r e q u i r e the c o u r t t o a n a l y s e - c l o s e l y the m o t i v e o f the d i r e c t o r s and the r e a s o n -a b l e n e s s o f t h e i r b u s i n e s s d e c i s i o n . W h i l e t he t e s t a p p l i e d seems 58 t o be a s u b j e c t i v e - o n e , t h e c o u r t s can i n t e r f e r and d e c i d e t h a t on 59 the f a c t s the d i r e c t o r s ' a c t i o n was not j u s t i f i e d . I t i s not e v e r y i s s u e i n which d i r e c t o r s p a r t i c i p a t e t h a t w i l l be a v o i d e d as i s made c l e a r by V i c e C h a n c e l l o r Marvel i n the Condec c a s e where he s a y s : ^ T h i s d o e s n o t m e a n t h a t s t o c k i s s u e d t o r a i s e m o n e y t o e l i m i n a t e a d e f i c i t i s t o b e i n v a l i d a t e d m e r e l y b e c a u s e d e f e n d a n t d i r e c t o r s t h e r e b y a v a i l t h e m s e l v e s o f a n o p p o r t u n i t y t o a c q u i r e a d d i t i o n a l s h a r e s t o f o r t i f y t h e i r n a t u r a l d e s i r e t o r e m a i n i n c o n t r o l . However i f the purpose o f c o n t r o l i s as i m p o r t a n t as the b u s i n e s s j u s t i f i c a t i o n " i t has been h e l d t o be a mockery t o s u g g e s t t h a t t h e ' c o n t r o l ' e f e c t o f an agreement i n l i t i g a t i o n i s m e r e l y i n c i d e n t a l 61 t o i t s p r i m a r y b u s i n e s s o b j e c t i v e . " -The f a c t s i n the Condec c a s e were as f o l l o w s . The p l a i n t i f f , 58 C f . C h e f f v. Mathes, supra, note 43. " I t i s i m p o r t a n t t o remember t h a t d i r e c t o r s s a t i s f y t h e i r burden by showing good f a i t h and r e a s o n a b l e i n v e s t i g a t i o n ; t h e d i r e c t o r s w i l l n o t be p e n a l i z e d f o r an ho n e s t m i s t a k e o f judgment, i f the judgment appeared r e a s o n a b l e a t the time t he d e c i s i o n was made." 59 Condec Corp. v. Lunkenheimer Co., supra, note 1. ; 60Ibid., p. 776. ^Ibid.j p. 776 r e f e r r i n g t o Re Semi n o l e O i l and Gas C o r p o r a t i o n , 150 A. 2d 20 (1959). - 150 -Condec Corp. had a c q u i r e d some s h a r e s i n the d e f e n d a n t company and had made an o f f e r t o buy .'a c o n t r o l l i n g p e r c e n t a g e o f the r e m a i n d e r . The de f e n d a n t d i r e c t o r s f e l t t h a t a t a k e o v e r by Condec Corp. would s i g n i -f i c a n t l y a l t e r t h e b u s i n e s s p r a c t i c e s o f Lunkernheimer Co. so th e y a t t e m p t e d t o thw a r t the, o f f e r by t r y i n g t o s e l l t h e b u s i n e s s t o s e v e r a l o t h e r companies. When Condec Corp. had a c h i e v e d s u c c e s s i n i t s o f f e r and a c q u i r e d the b e n e f i c i a l i n t e r e s t i n the m a j o r i t y o f s h a r e s i n t h e d e f e n d a n t company, the d i r e c t o r s o f t h a t company a g r e e d on a sh a r e swap w i t h a n o t h e r company which would i n c r e a s e t he number o f i s s u e d s h a r e s , r e d u c e the p l a i n t i f f ' s h o l d i n g t o below a m a j o r i t y and a l l o w t h e r e c i p i e n t o f the newly i s s u e d s h a r e s ( o r a c o n n e c t e d company) t o make a s u c c e s s f u l o f f e r f o r t h e c o n t r o l l i n g i n t e r e s t i n Lunkenheimer. The d e f e n d e n t d i r e c t o r s had s h a r e o p t i o n s w i t h Lunkenheimer which the r e c i p i e n t company would honour b ut which Condec had s a i d i t would n o t , so t h e r e was some p e r s o n a l m o t i v a t i o n f o r the d i r e c t o r s i n a c t i n g as th e y d i d . On t h e s e f a c t s , t h e c o u r t f o u n d t h a t the i s s u e was made p r i m a r i l y t o re d u c e Condec's h o l d i n g i n Lunkenheimer t o below a m a j o r i t y , t h a t i t was no t c o n n e c t e d w i t h any o t h e r p r o p e r c o r p o r a t e purpose and t h a t t h e r e f o r e an i n j u n c t i o n would l i e . I t i s i n t e r e s t i n g t o note the d i f f e r e n t a p p roach o f a n o t h e r c o u r t i n a ca s e d e c i d e d s e v e r a l y e a r s e a r l i e r b u t which a g a i n i n v o l v e d a s h a r e swap. In Cunmings v. United A r t i s t s Theatre Circuit, en Inc. the m a j o r i t y o f the c o u r t h e l d t h a t " t h e f a c t t h a t t h e consummation o f such t r a n s a c t i o n [ t h e s h a r e swap] may have some e f f e c t on the c o n t r o l o f the c o r p o r a t i o n i s i m m a t e r i a l and the agreement 63 w i l l s t a n d o r f a l l d e p e n d i n g on whether i t i s f a i r t o the c o r p o r a t i o n . " 6 2 2 0 4 A. 2d 795 (1964). 63Ibid., p. 806. I t i s s u b m i t t e d t h a t t h i s a p p roach i s too s u b j e c t i v e and i g n o r e s t h e d u t y t o the s h a r e h o l d e r s and t h a t the comments o f the j u d g e i n Condec 64 a r e more r e p r e s e n t a t i v e o f the n a t u r e o f t h e s e a c t i o n s . He s a y s : As a s t a r t i n g p o i n t i t must be conceded that a c t i o n by m a j o r i t y stockholders having as i t s primary pur-pose the " f r e e z i n g out" of a m i n o r i t y i n t e r e s t i s a c t i o n a b l e without regard to the f a i r n e s s of the p r i c e . 65 and c i t e s Bennett v. Breuil Petroleum Corp. and s e v e r a l o t h e r c a s e s i n s u p p o r t o f t h i s p r o p o s i t i o n . I t i s beyond q u e s t i o n t h a t d i r e c t o r s do have t o c o n s i d e r the cc worth o f a t a k e o v e r b i d but u n l e s s they can make a t o t a l l y d i s -i n t e r e s t e d d e c i s i o n t h e i r judgment may be q u e s t i o n e d . In Kors v. Carey, a pu r c h a s e by the company o f i t s own s h a r e s t o e l i m i n a t e a c l e a r t h r e a t t o the b u s i n e s s posed by a t a k e - o v e r b i d d e r who had v e r y d i f f e r e n t c o n c e p t s o f a d m i n i s t r a t i o n , was u p h e l d . In 1960 a t the time o f t h a t d e c i s i o n the onus was on the p l a i n t i f f s t o overcome the prima facie presumption t h a t the d i r e c t o r s form t h e i r judgment i n CO good f a i t h . In Bennett v. Propp, d e c i d e d o n l y two y e a r s l a t e r , the onus o f p r o v i n g t h a t the i s s u e o r pu r c h a s e was n o t m a i n l y f o r c o n t r o l purposes had moved t o the d e f e n d a n t d i r e c t o r s . T h i s was a g a i n made 69 c l e a r i n Cheff v. Mathes where one s t a n d a r d o f p r o o f was p l a c e d on 6 4 2 3 0 A. 2d 769, 776. ; 6 5 9 9 A. 2d 236 (1953). See C a r y , p. 695 where he says when commenting on Northwest I n d u s t r i e s I n c . v. The B.F. "Goodrich Co., supra, note 37. "Management has the r e s p o n -s i b i l i t y t o oppose o f f e r s w h i c h , i n i t s b e s t judgment, a r e d e t r i m e n t a l t o the company o r i t s s t o c k h o l d e r s . In a r r i v i n g a t such a judgment, management s h o u l d be s c r u p u l o u s l y f a i r i n c o n s i d e r i n g the m e r i t s o f any p r o p o s a l sub-m i t t e d t o i t s s t o c k h o l d e r s . " 67 Supra, note 42. ^' Supra, n o t e 42. 69 v Supra, note 43. - 152 -tho s e i n t e r e s t e d d i r e c t o r s who were p a i d s a l a r i e s by the company and a n o t h e r , l o w e r s t a n d a r d on t h o s e n o n - e x e c u t i v e d i r e c t o r s . In t h i s c a s e the c o u r t a g a i n u p h e l d t h e board's d e c i s i o n t o pu r c h a s e i t s own s h a r e s because r e a s o n a b l e i n v e s t i g a t i o n s had shown the t a k e - o v e r b i d d e r t o be an a s s e t s t r i p p e r and a l i q u i d a t o r o f companies. Remedies In t h o s e c a s e s where the p l a i n t i f f ' s c l a i m o f an improper s h a r e i s s u e has been u p h e l d v a r i o u s remedies have been used by the c o u r t s . F r e q u e n t l y , t h e r e w i l l not be much c h o i c e d epending on whether the a c t i o n has been b r o u g h t b e f o r e the i s s u e has been c o m p l e t e d o r a f t e r i t . In the f i r s t s i t u a t i o n , an i n j u n c t i o n p r e v e n t i n g the a l l o t m e n t o f the s h a r e s w i l l n o r m a l l y be g i v e n . ^ T h i s i s an i n j u n c t i o n a g a i n s t the i s s u e i t s e l f r a t h e r than a p r o h i b i t i o n o f a-meeting c a l l e d t o r a t i f y the i s s u e as such m e e t i n g s , i f h e l d , a r e r a r e l y d i s c u s s e d i n the c a s e s . I f the c o m p l a i n t i s made a f t e r t h e i s s u e the most f r e q u e n t l y used remedy w i l l be an o r d e r d e c l a r i n g the i s s u e v o i d and c a n c e l l i n g t h e 71 a l l o t m e n t . In some i n s t a n c e s however, the c o u r t may not w i s h t o u p s e t the i s s u e but p r e f e r t o b a l a n c e the i n t e r e s t s o f the s h a r e h o l d e r s ; 72 f o r example i n Shepperd v. wiloox a c o n s t r u c t i v e t r u s t was c r e a t e d i n f a v o u r o f th o s e s h a r e h o l d e r s c l a i m i n g a p r o p o r t i o n a t e s h a r e i n the new s t o c k even though the c l a i m was based on a b r e a c h o f d u t y r a t h e r than any pr e - e m p t i v e p r o v i s i o n s . Where t h i r d p a r t y a l l o t t e e s a r e i n v o l v e d , the c o u r t w i l l l o o k a t t h e i r p a r t i n the t r a n s a c t i o n and u n l e s s they were bona f i d e p u r c h a s e r s f o r v a l u e o f t h e , s h a r e s the ^ G a i n e s v. Long M a n u f a c t u r i n g Co., I n c . , supra, n o t e 29. ^ C o n d e c C o r p . v. Lunkenheimer Co., supra, note 1. 72 Supra, note 32. \ - 153 -73 c a n c e l l a t i o n o r d e r w i l l be d i r e c t e d a t them a l s o . I t appears t h a t damages a r e g e n e r a l l y n o t awarded t o i n d i v i d u a l p l a i n t i f f s who b r i n g c l a i m s o f br e a c h o f du t y . T h e r e i s no r u l e a g a i n s t such an award i n the a p p r o p r i a t e c i r c u m s t a n c e s but as was p o i n t e d o u t i n r e l a t i o n t o pr e - e m p t i v e r i g h t s , the c a s e s w i l l be r a r e . Even where the c l a i m i s based on i n a d e q u a t e c o n s i d e r a t i o n b e i n g r e c e i v e d f o r the s h a r e s , and the a c t i o n i s d e r i v a t i v e , , the most us u a l o r d e r w i l l be f o r the c a n c e l l a t i o n o f the s h a r e s r a t h e r than damages b e i n g p a i d t o the company t o r e i m b u r s e i t f o r the i s s u e . The q u e s t i o n o f r a t i f i c a t i o n by the m a j o r i t y s h a r e h o l d e r s o f a p o t e n t i a l l y improper s h a r e i s s u e by the d i r e c t o r s does n o t appear t o be d i s c u s s e d i n the c a s e s . Whether o r n o t t h i s i s because o f a r e c o g n i t i o n o f th e f a c t t h a t the a c t i o n s can p r o p e r l y be b r o u g h t by i n d i v i d u a l m i n o r i t y s h a r e h o l d e r s as p e r s o n a l a c t i o n s and a r e t h e r e f o r e n o t s t r i c t l y r a t i f i a b l e i s not c l e a r . Even i n c a s e s where t h e i s s u e amounts t o a f r a u d , and under o t h e r c i r c u m s t a n c e s the q u e s t i o n o f i n t e r e s t e d and d i s i n t e r e s t e d m a j o r i t i e s would be r a i s e d , t h e r e i s no q u e s t i o n o f r a t i f i c a t i o n . I t i s u n l i k e l y t h a t the n o n - r a t i f i c a t i o n r u l e would be a c c e p t e d w i t h o u t q u e s t i o n i n t h i s a r e a o f the law w h i l e i t i s s t i l l d e b a t ed i n o t h e r s and y e t i t i s never mentioned. Condec Corp. v. Lunkenheimer Co., supra, note 1; Gwatney v. A l l i e d Companies o f A r k a n s a s , supra, note 57. - 154 -B. COMMONWEALTH (1) PRE-EMPTION U n l i k e i n th e U n i t e d S t a t e s t h e r e do not appear t o be any common law p r o v i s i o n s e s t a b l i s h i n g p r e - e m p t i v e r i g h t s t o new s h a r e s i n the Commonwealth. In f a c t , a t l e a s t i n Canada, t h e r e a r e c l e a r d i c t a , 74 a g a i n s t such a r i g h t ; i n Bonisteel v. Collis. Leather Co. Ltd. which c o n c e r n s a c o m p l a i n t by a m a j o r i t y s h a r e h o l d e r who was r e f u s e d h i s p r o -75 r a t a p r o p o r t i o n o f a new s h a r e i s s u e t h e O n t a r i o High C o u r t s a i d : No one would t h i n k of saying that d i r e c t o r s may never a l l o t shares of an authorized issue without f i r s t o f f e r i n g to the e x i s t i n g shareholders the shares which they propose to a l l o t . However, i n s l i g h t c o n t r a d i c i t i o n o f t h i s , t he C o u r t does go on t o imp l y t h a t s h a r e h o l d e r s have a p r o p o r t i o n a t e i n t e r e s t i n the a s s e t s o f the company and t h a t " t o do something which would a l t e r t h e s e p r o p o r t i o n s , t o do i t w i t h o u t g i v i n g t o each s h a r e h o l d e r an o p p o r t u n i t y o f p r o t e c t i n g h i s i n t e r e s t , and t o do i t , n o t i n the usua l c o u r s e o f the company's b u s i n e s s , b u t f o r the purpose o f s h i f t i n g from one body o f s h a r e h o l d e r s t o a n o t h e r the power o f e l e c t i n g d i r e c t o r s and , so c o n t r o l l i n g the company's p o l i c y , [ i s ] , I t h i n k , beyond t h e powers 76 o f the d i r e c t o r s . " In a n a l y z i n g an i s s u e made p u r e l y f o r c o n t r o l p u r p o s e s , t h i s comes c l o s e t o b a s i n g t h e p l a i n t i f f ' s r i g h t t o co m p l a i n on something v e r y a k i n t o pr e - e m p t i v e p r o v i s i o n s . The p l a i n t i f f here was a m a j o r i t y s h a r e h o l d e r a l t h o u g h he d i d n o t have c o n t r o l o f the board b u t i t i s s u b m i t t e d t h a t h i s a c t i o n was a p e r s o n a l one and on 7 4 ( 1 9 1 9 ) 45 O.L.R. 195. 75Ibid., p. 200, per Rose, J . 76Ibid., p. 200. - 155 -the s t r e n g t h o f the p r o p o r t i o n a t e i n t e r e s t argument quoted above c o u l d e q u a l l y have been b r o u g h t by a m i n o r i t y s h a r e h o l d e r . In a n o t h e r e a r l y C a n adian c a s e , Smith and Tatchell v. Hanson Tire & Supply Company Ltd.V Turgeon, J.A. r e f e r s t o American a u t h o r i t i e s f o r the p r o p o s i t i o n t h a t d i r e c t o r s owe a duty t o s h a r e -h o l d e r s (an i d e a which w i l l be e x p l o r e d more f u l l y l a t e r i n t h i s 78 paper) and i n c l u d e d i s the c a s e o f Stokes v. Continental Trust Co., one o f the l e a d i n g a u t h o r i t i e s on pr e - e m p t i v e r i g h t s . However, a p a r t from t h i s d i c t a , some o f which i s c o n f l i c t i n g , t h e r e appears t o be no a u t h o r i t y f o r p r e - e m p t i o n a t common law. N e v e r t h e l e s s , most o f the Commonwealth j u r i s d i c t i o n s have c r e a t e d such a r i g h t by s t a t u t e a l t h o u g h t h i s i s a b l e t o be removed by com-p a n i e s i n a l l c o u n t r i e s e x c e p t i n B r i t i s h Columbia, i n Canada. The most common way i n which p r e - e m p t i v e r i g h t s a r e g i v e n i s i n the model a r t i c l e s a t t a c h e d t o most Companies A c t s . F o r example, A r t i c l e 45 o f the T h i r d S c h e d u l e o f T a b l e A o f the New Z e a l a n d Companies A c t , 1968 b e g i n s as f o l l o w s : Subject to any d i r e c t i o n to the contrary that may be given by the company i n general meeting, a l l new shares s h a l l , before i s s u e , be o f f e r e d to such persons as at the date of the o f f e r are e n t i t l e d to r e c e i v e n o t i c e s from the company of general meetings i n p r o p o r t i o n , as n e a r l y as the circumstances admit, to the amount of the e x i s t i n g shares to which they are e n t i t l e d . . . . S i m i l a r p r o v i s i o n s a r e r e p e a t e d i n most o t h e r Commonwealth j u r i s d i c t i o n s " [ 1 9 2 7 ] 2 W.W.R. 529 (Sask. C.A.). 78 Supra, note 8. 7 9 A r t i c l e 41, 4th Sched;, T a b l e A, N.S.W. Companies A c t , 1961; A r t . 41, 4th Sched., T a b l e A, V i c t o r i a Companies A c t , 1961; A r t . 41, 4th Sched. T a b l e A, South A u s t r a l i a Companies A c t , 1962; A r t . 40, 4th Sched. T a b l e A, Queensland Companies A c t , 1961; A r t . 2.1, 1 s t Sched. T a b l e A, B.C. -Companies A c t , 1973. - 156 -a l t h o u g h a p p a r e n t l y n o t i n B r i t a i n . They can be o f l i t t l e s o l a c e t o a g g r i e v e d s h a r e h o l d e r s however, i f they have been e x c l u d e d from t h e company's a r t i c l e s o f a s s o c i a t i o n a l t o g e t h e r , o r i f the company i n g e n e r a l m e e t i n g e x e r c i s e s i t s power t o remove t he r i g h t t o p r e -emption i n r e s p e c t o f any p a r t i c u l a r i s s u e . Once a g a i n , i t i s t he m a j o r i t y r u l e which p r e v a i l s . In the B r i t i s h Columbia Companies A c t , 1973 s e c t i o n 40(1) p r o v i d e s a s t a t u t o r y r u l e o f pre-emption i n n o n - r e p o r t i n g companies as f o l l o w s : The d i r e c t o r s of every company that i s not a r e p o r t i n g , company s h a l l , before a l l o t i n g any shares, o f f e r those shares pro r a t a to the members; but where there are c l a s s e s of shares, the d i r e c t o r s s h a l l f i r s t o f f e r the shares to be a l l o t t e d pro r a t a to the members h o l d i n g shares of the c l a s s proposed to be a l l o t t e d and, i f any shares remain, the d i r e c t o r s s h a l l then o f f e r the remaining shares pro r a t a to the other members. T h i s p r o v i s i o n i s n o t s u b s t a n t i a l l y d i f f e r e n t from t h o s e i n o t h e r j u r i s d i c t i o n s but when i t i s r e a d i n c o n j u n c t i o n w i t h s e c t i o n 40(4) i t becomes s i g n i f i c a n t l y more u s e f u l t o m i n o r i t i e s . T h a t s u b s e c t i o n s a y s : A member may not waive g e n e r a l l y h i s r i g h t to be ' o f f e r e d shares r e f e r e d to i n subsection (1), but a member may, i n w r i t i n g , waive h i s r i g h t to be o f f e r e d a s p e c i f i e d allotment of shares. In o t h e r words, the a r t i c l e s o f the company c a n n o t f u l l y e x c l u d e t h e pre - e m p t i v e r i g h t s , nor can a s h a r e h o l d e r be pers u a d e d t o g i v e them up c o m p l e t e l y . He may however waive' h i s r i g h t t o be o f f e r e d them f o r a " s p e c i f i e d " a l l o t m e n t a l t h o u g h i t i s n o t c l e a r what i s meant by " s p e c i f i e d . " C e r t a i n l y the w a i v e r must be b e f o r e t h e o f f e r i s made because a w a i v e r o f h i s s h a r e a f t e r t h e o f f e r would always be - 157 -p o s s i b l e under s e c t i o n 4 0 ( 1 ) , w i t h o u t the need f o r s u b s e c t i o n ( 4 ) . Presumably i t i s the s h a r e h o l d e r n o t the d i r e c t o r s who s p e c i f i e s t h e a l l o t m e n t t o be waived but i n any e v e n t such a w a i v e r a p p e a r s t o be a p e r s o n a l r i g h t which c a n n o t be o v e r r u l e d by a m a j o r i t y i n g e n e r a l m e e t i n g . The p r e - e m p t i v e p r o v i s i o n s made mandatory f o r non-r e p o r t i n g companies a r e o p t i o n a l f o r r e p o r t i n g companies as t h e y have been r e p e a t e d , w i t h o u t the r e s t r i c t i o n s as t o w a i v e r , i n A r t i c l e 2.1 o f T a b l e A o f the F i r s t S c h e d u l e . The New Z e a l a n d l e g i s l a t i o n i n t h i s a r e a a p p e a r s t o be unique i n the Commonwealth. As i n most j u r i s d i c t i o n s an i n c r e a s e i n c a p i t a l ort i s by o r d i n a r y r e s o l u t i o n but i n New Z e a l a n d , a p r i v a t e company i s a l s o p r e v e n t e d from i n c r e a s i n g i t s c a p i t a l beyond the p r e s e n t 81 i s s u e d c a p i t a l u n l e s s the new i s s u e i s f u l l y s u b s c r i b e d f o r . The r e s u l t i s t h a t f o r p r i v a t e companies, t h e r e can be no a u t h o r i z e d but u n i s s u e d c a p i t a l so t h a t no i s s u e i s e n t i r e l y i n the hands o f the d i r e c t o r s ; i n o t h e r words, a g e n e r a l m e e t i n g must be c a l l e d t o a u t h o r i z e any new i s s u e so t h a t i n each c a s e the s h a r e h o l d e r s have some c o n t r o l o v e r i t . These, and t h e o t h e r l e g i s l a t i v e p r o v i s i o n s i n most j u r i s d i c t i o n s go some way t o h e l p i n g s h a r e h o l d e r s t o m a i n t a i n v. t h e i r p r o p o r t i o n a t e i n t e r e s t i n a company, but a p a r t from t h o s e i n B r i t i s h Columbia and New Z e a l a n d , do n o t g e n e r a l l y go f a r enough. 80s. 81s. 7 0 ( 1 ) ( a ) Companies A c t , 1968. 3 6 1 ( 1 ) ( a ) Companies A c t , 1968. - 158 -(2) OTHER REMEDIES AGAINST IMPROPER SHARE ISSUES I n t r o d u c t i o n The r i g h t s o f m i n o r i t y s h a r e h o l d e r s i n the Commonwealth a r e much more l i m i t e d than t h o s e i n the S t a t e s i n r e s p e c t o f the a c t i o n s a v a i l a b l e t o them t o r e d r e s s a s h a r e i s s u e which has been made f o r 82 improper p u r p o s e s . The c o u r t s s i n c e Fraser v. Whalley i n 1864 have r e c o g n i z e d an a c t i o n c o m p l a i n i n g o f an i s s u e made f o r c o n t r o l o r o t h e r a l l e g e d l y i mproper r e a s o n s but o n l y r a r e l y has the q u e s t i o n o f the t r u e b a s i s o f t h e ^ a c t i o n a r i s e n . F o r example, i s the c l a i m a p e r s o n a l one, o r d e r i v a t i v e o r a r e both p o s s i b l e ? Is s u c c e s s f o r the p l a i n t i f f dependant on a brea c h o f dut y by the d i r e c t o r s , and i f so t o whom i s t h a t duty owed, o r does i t depend on a br e a c h o f the a r t i c l e s o r a common law (and l a t e r s t a t u t o r y ) r i g h t o f r e c t i f i c a t i o n ? I t i s s u g g e s t e d t h a t a l l o f t h e s e p o s s i b i l i t i e s a r e a v a i l a b l e , i n c l u d i n g a d u t y owed by d i r e c t o r s t o s h a r e h o l d e r s , and the purpose o f the f o l -l o w i n g p a r t o f t h i s paper i s t o e x p l o r e each i n turn, a l t h o u g h t h e emphasis w i l l be on the b r e a c h o f d u t y . , B r e a c h o f Duty by Pi r e c t o r s v 83 The Fraser v. Whalley d e c i s i o n i s the one most f r e q u e n t l y used as a u t h o r i t y f o r a cause o f a c t i o n i n t h i s a r e a . In t h a t c a s e , when the d i r e c t o r s were t o l d by a s e v e n t y - f i v e p e r c e n t m a j o r i t y s h a r e h o l d e r t h a t they were about t o l o s e t h e i r o f f i c e s t h e y s u d d e n l y r e s o l v e d t o i s s u e new s h a r e s t o keep t h e m s e l v e s i n c o n t r o l u s i n g an o u t d a t e d mandate g i v e n t o them s e v e r a l y e a r s e a r l i e r . T he p l a i n t i f f , who had 8 2 2 H & M 10, 71 E.R. 361. Supra, note 82. - 159 -i n t e r e s t s i n o t h e r companies as w e l l , s o u g h t an i n j u n c t i o n t o p r e v e n t the i s s u e . The d i r e c t o r s c l a i m e d t h e y f e a r e d n o t o n l y f o r t h e i r own p o s i t i o n s but a l s o f o r t h e w e l f a r e o f the company as S a v i n , the p l a i n t i f f , f a v o u r e d c o n n e c t i o n s w i t h companies o t h e r than t h o s e s u p p o r t e d by t h e m s e l v e s . The c o u r t , which passed o v e r the q u e s t i o n 84 ' o f whose i n t e r e s t s would b e s t be s e r v e d , f o u n d t h a t t h e i s s u e 85 had been made p u r e l y t o p r e s e r v e t h e d i r e c t o r s ' c o n t r o l and s a i d : I cannot look upon these d i r e c t o r s otherwise than as tr u s t e e s f o r a p u b l i c company.... I have no doubt that the Court w i l l i n t e r f e r e t o prevent so gross a breach of t r u s t . . . . I f the d i r e c t o r s can c l a n d e s t i n e l y and at the l a s t moment use a staH-.e r e s o l u t i o n f o r the express purpose of preventing the f r e e a c t i o n of the shareholders, t h i s Court w i l l take care t h a t , when the Company cannot i n t e r f e r e , the Court w i l l do so. J The main q u e s t i o n which remains i s whether the c o u r t saw the p l a i n t i f f as h a v i n g a p e r s o n a l r i g h t o r whether he was s u i n g d e r i -v a t i v e l y . I t i s s u b m i t t e d t h a t t h e l a t t e r appears more l i k e l y as the b r e a c h o f t r u s t spoken o f can o n l y be a br e a c h o f t h a t t r u s t owed t o the company. Moreover, the ju d g e speaks o f the company b e i n g unable t o i n t e r f e r e and the C o u r t t h e r e f o r e d o i n g so on i t s b e h a l f . A l t h o u g h the r u l e i n Foss v.- Harbottle was d i s t i n g u i s h e d i t i s d i f f i c u l t t o see where t h i s c a s e f i t s i n t o the e x c e p t i o n s t o 87 t h a t r u l e ; t h e r e was no f i n d i n g o f f r a u d i n the normal sense 84 The Judge c l e a r l y u p h e l d the i d e a o f i n t e r n a l management and, u n w i l l i n g t o g e t i n v o l v e d w i t h the m e r i t s o f the d i r e c t o r s ' d e c i s i o n s a i d a t page 369 i n a passage r e f e r i n g t o Foss v. H a r b o t t l e (1843) 2 Hare 461 "I say n o t h i n g on the q u e s t i o n whether the p o l i c y a d v o c a t e d by the d i r e c t o r s , o r t h a t which I am t o l d i s t o be purs u e d by [ t h e P l a i n t i f f ] i s the more f o r the i n t e r e s t o f the company. T h a t i s a ma t t e r w h o l l y f o r the s h a r e h o l d e r s . " 8 5 7 1 E.R. 361, 368, 369 p e r S i r W. Page Wood, V.C. 86 Supra, note 84. 87 See Wedderburn, " S h a r e h o l d e r s ' R i g h t s and t h e Rule i n Foss v. H a r b o t t l e " , [1957] Camb. L . J . 194, [1958] Camb. L. J . 93. - 160 -"a l t h o u g h a " g r o s s b r e a c h o f t r u s t " perhaps comes c l o s e t o an expanded meaning o f " f r a u d . " The u n c e r t a i n t y o f the b a s i s o f t h i s a c t i o n d i d n o t appear t o c o n c e r n the c o u r t s i n two l a t e r c a s e s which f o l l o w e d i t d i r e c t l y . 88 89 In both Punt v. Symons & Co. Ltd. and Pieroy v. S. Mills & Co. Ltd. where m a j o r i t y s h a r e h o l d e r s were a g a i n s u i n g because o f an i s s u e made a l l e g e d l y f o r c o n t r o l purposes t h e c o u r t s used Fraser v. Whalley and t h e d i c t a t h a t , where the company c o u l d n o t i n t e r f e r e , the c o u r t would do so t o s u p p o r t the c l a i m . T h i s would s u p p o r t an argument. t h a t the a c t i o n was a d e r i v a t i v e one. I t i s i n t e r e s t i n g t o note t h a t i n Punt v. Symons the c o u r t a p p a r e n t l y l e f t the m a t t e r o f a v o i d i n g the i s s u e up to the c o m p a n y — i t m e r e l y a l l o w e d an i n j u n c t i o n p r e v e n t i n g 90 a c o n f i r m a t o r y s h a r e h o l d e r s m e e t i n g from b e i n g h e l d . In Pieroy v. S. M i l l s , on the o t h e r hand, t h e i s s u e was a v o i d e d d i r e c t l y by the , C o u r t . Here, the C o u r t i n d i c a t e s i n p a s s i n g t h a t as w e l l as b e i n g a b l e t o p r e v e n t the d i r e c t o r s from d o i n g something o u t s i d e t h e i r power, s h a r e h o l d e r s ( o r a t l e a s t a m a j o r i t y o f them) have a p o s i t i v e r i g h t t o a s s e r t t h e i r m a j o r i t y p o s i t i o n . P e t e r s o n J , i n r e f e r e n c e 91 to the m a j o r i t y ' s power t o r e p l a c e d i r e c t o r s , s a y s : they [the m a j o r i t y ] were e n t i t l e d . . . to have t h e i r views p r e v a i l i n accordance w i t h the r e g u l a t i o n s of the company. T h i s view comes c l o s e t o b a s i n g t h e a c t i o n on a br e a c h o f the a r t i c l e s , 8 8 [ 1 9 0 3 ] 2 Ch. 506. 8 9 [ 1 9 2 0 ] 1 Ch. 77. 90 Presumably the c o u r t would have a l l o w e d the new s h a r e s t o be v o t e d a t t h i s m e e t i n g i f i t had p e r m i t t e d the m e e t i n g t o p r o c e e d because, w i t h -o u t such an a l l o w a n c e the p l a i n t i f f as m a j o r i t y s h a r e h o l d e r c o u l d have p r o v i d e d the i s s u e and the i n j u n c t i o n would n o t have been n e c e s s a r y . 91 [1920]' 1 Ch. 77, 84. - 161 -an a c c e p t e d p e r s o n a l r i g h t e x c e p t i o n t o the r u l e i n Foss v. Harbottle, but t h e ju d g e c o n c l u d e s by coming back t o the d i r e c t o r s ' b r e a c h o f the f i d u c i a r y powers r a t h e r than a b r e a c h o f the company's c o n s t i t u t i o n . The d i f f i c u l t y o f a c c u r a t e l y c l a s s i f y i n g t h e s e c a s e s i s r e f l e c t e d i n t h e comments o f s e v e r a l l e a d i n g w r i t e r s . S.M. Beck argues t h a t they a r e p e r s o n a l a c t i o n s because t h e r e i s no r e f e r e n c e i n them t o 92 the normal p r o c e d u r a l r e q u i r e m e n t s o f a d e r i v a t i v e a c t i o n . P r o f e s s o r Gower on the o t h e r hand, c i t e s them n o t o n l y i n h i s d i s c u s s i o n o f p e r s o n a l r i g h t s b u t a l s o when he i s r e f e r i n g t o the f r a u d e x c e p t i o n y 93 t o t h e r u l e i n Foss v. Harbottle.' I t i s s u b m i t t e d t h a t t h e b e t t e r view i s t h a t t h e y a r e d e r i v a t i v e a c t i o n s ; t h i s appears t o be the c l e a r f o u n d a t i o n o f Fraser v. Whalley and t h a t c a s e was a c c e p t e d w i t h o u t d i s c u s s i o n i n the l a t e r d e c i s i o n s . Whatever the t r u e n a t u r e o f the a c t i o n i n the Fraser, Punt and Pieroy c a s e s might be (and perhaps i t i s u n f a i r t o a t t r i b u t e e i t h e r a p e r s o n a l o r a d e r i v a t i v e l a b e l t o them as the m a t t e r was n o t r a i s e d .94 by the c o u n s e l o r the c o u r t ) l a t e r c a s e s u s i n g the same c o n c e p t s t o e n j o i n ( o r a t l e a s t q u e s t i o n ) c e r t a i n s h a r e i s s u e s have c l e a r l y s u p p o r t e d a p e r s o n a l a c t i o n . A d m i t t e d l y i s some, o t h e r causes o f a c t i o n such as the s t a t u t o r y power; o f r e c t i f i c a t i o n have a l s o been a r g u e d , but p r i m a r i l y t h e bases o f the c l a i m s have been a b r e a c h o f S.M. Beck, "The S h a r e h o l d e r s ' D e r i v a t i v e A c t i o n , " (1974) Can. Bar Rev. 159, 1973. 93 L Gower, The P r i n c i p l e s o f Modern Company Law, S t e v e n s ( 3 r d e d ) , pp. 589, 593. 94 O t h e r c a s e s i n which t h e i s s u e o f whether the a c t i o n was p e r s o n a l o r d e r i v a t i v e was n o t c o n s i d e r e d and which f>do ,hot c l e a r l y f a v o u r one o r the o t h e r i n c l u d e : Spooner v. Spooner O i l s L t d e t a l [1936] 1 W.W.R. 561; Smith and T a t c h e l l v. Hanson T i r e & S u p p l y Company L t d . , supra, note 77; B o n i s t e e l v. C o T l i s L e a t h e r Co. L t d . , supra, note 74; P e t e r s American D e l i c a c y Co. v. Heath (1939) 61 C.L.R. 457; M i l l s v. M i l l s (1938) 60 C.L.R. 150. -- 162 -the d i r e c t o r s ' duty i n i s s u i n g t h e s h a r e s . Such o t h e r c auses o f a c t i o n w i l l be c o n s i d e r e d s e p a r a t e l y l a t e r i n t h i s paper. F o r the moment, l e t us c o n s i d e r t h e n a t u r e o f the d i r e c t o r s ' d u t i e s . I f , as so o f t e n has been s a i d , " i t i s t r i t e law t h a t d i r e c t o r s owe t h e i r duty n o t t o 95 the s h a r e h o l d e r s b u t t o the company a l o n e " how have s h a r e h o l d e r s been a l l o w e d t o b r i n g p e r s o n a l a c t i o n s t o co m p l a i n o f a.'wrongful s h a r e i s s u e ? One o f the l e a d i n g A u s t r a l i a n c a s e s i n which such an a c t i o n was 96 b r o u g h t was Ngurli Ltd. v. MaCann. Here, the same f a c t s a p p l i e d t o s e v e r a l r e l a t e d companies. The g o v e r n i n g d i r e c t o r o f the d e f e n d a n t company, c o r r e c t l y t h i n k i n g t h a t t h e r i g h t s i n c i d e n t a l t o the s h a r e he h e l d had been r e d u c e d on the death o f the f o u n d i n g member o f the company, i s s u e d new s h a r e s t o t h a t member's e s t a t e and t o h i m s e l f , a l l e g e d l y t o pay o f f a debt owed by the company. The p l a i n t i f f s who were m i n o r i t y s h a r e h o l d e r s ( t h e y were t he s i s t e r and n i e c e o f the f o u n d i n g member) sought a d e c l a r a t i o n t h a t t h e i s s u e was i n v a l i d because i t had been made t o b e n e f i t t h e g o v e r n i n g d i r e c t o r a t the expense o f t h e m s e l v e s . The c o u r t , r e c o g n i z i n g t h a t d i r e c t o r s have a f i d u c i a r y d u t y when 97 i s s u i n g new s h a r e s , r e f e r r e d t o the d e c i s i o n o f M i l l s v. M i l l s f o r the p r o p o s i t i o n t h a t t h e s h a r e s c a n n o t be i s s u e d t o b e n e f i t t h e d i r e c t o r s o r t h e i r f r i e n d s a t the expense o f o r t o w r e s t c o n t r o l from o t h e r o t h e r s h a r e h o l d e r s . The Mills c a s e i t s e l f r e l i e s on the Punt and Pieroy 95 K.W. Wedderburn i n h i s a r t i c l e , "Going t he whole Hogg v. Cramphorn?" (1968) 31 M.L.R. 688. 9 6 ( 1 9 5 4 ) 90 C.L.R. 425 (Hi g h C o u r t ) . 97 Supra, note 94. " " - 163 -d e c i s i o n s as a u t h o r i t y . In d i s c u s s i n g the dut y o f d i r e c t o r s , t h e c o u r t s a y s : 9 8 . . . p o w e r s c o n f e r r e d o n d i r e c t o r s b y t h e a r t i c l e s o f a s s o c i a t i o n o f c o m p a n i e s m u s t b e u s e d b o n a f i d e f o r t h e b e n e f i t o f t h e c o m p a n y a s a w h o l e . I n Greenhalgh v. Arderne Cinemas Ltd. ( [ 1 9 5 1 ] C h . 2 8 6 . ) , E v e r s h e d M . R . , i n a c a s e r e l a t i n g , t o a s p e c i a l r e s o l u t i o n a l t e r i n g t h e a r t i c l e s o f a s s o c i a t i o n , s a i d : " i n t h e f i r s t p l a c e , I t h i n k i t i s n o w p l a i n t h a t ' b o n a f i d e f o r t h e b e n e f i t o f t h e c o m p a n y a s a w h o l e ' m e a n s n o t t w o t h i n g s b u t o n e t h i n g . I t m e a n s t h a t t h e s h a r e h o l d e r m u s t 1 p r o c e e d u p o n w h a t , i n h i s h o n e s t o p i n i o n , i s f o r t h e b e n e -f i t o f t h e c o m p a n y a s a w h o l e . T h e s e c o n d t h i n g i s t h a t t h e p h r a s e , ' t h e c o m p a n y a s a w h o l e , ' d o e s n o t ( a t a n y • r a t e i n s u c h a c a s e a s t h e p r e s e n t ) m e a n t h e c o m p a n y a s a c o m m e r c i a l e n t i t y d i s t i n c t f r o m t h e c o r p o r a t o r s : it means the corporators as a general body. T h a t ' ' i s t o s a y t h e c a s e m a y b e t a k e n o f a n i n d i v i d u a l h y p o t h e t i c a l m e m b e r a n d i t m a y b e a s k e d w h e t h e r w h a t i s p r o p o s e d i s , i n t h e h o n e s t o p i n i o n o f t h o s e w h o v o t e d i n i t s f a v o u r , f o r t h a t p e r s o n ' s b e n e f i t . " ( e m p h a s i s a d d e d ) ^ While i t i s r e c o g n i z e d t h a t t h i s d i c t a from &reenhdlgh.:r v. Arderne Cinemas Ltd. i s r e f e r i n g t o the dut y o f m a j o r i t y s h a r e h o l d e r s t o o t h e r s , i t i s here used by the High C o u r t t o d e s c r i b e t he d i r e c t o r s ' d u t i e s and i m p l i e s t h a t such d u t i e s a r e owed t o the s h a r e h o l d e r s as a group. I f t h i s i s s o , then t he a c t i o n was p r o p e r l y b r o u g h t as a pe r s o n a l one. U n f o r t u n a t e l y , t h e c o u r t goes on t o r e f e r t o a f r a u d u l e n t use o f v o t i n g power and the e x p r o p r i a t i o n o f the company's p r o p e r t y ; 99 i n s u p p o r t o f t h i s i t c i t e s Cook v. Leeks, a cas e which does a l l o w a m i n o r i t y a c t i o n b u t o n l y when b r o u g h t on b e h a l f o f t h e company. 1 T h a t the High C o u r t a l l o w e d a t r u e p e r s o n a l a c t i o n i n t h i s c a s e , d e s p i t e i t s c o n f u s i o n i n a u t h o r i t i e s , i s a p p a r e n t f o r two r e a s o n s . 'ibid., a t p. 438. '(1916) 1 A.C. 554. - 164 -F i r s t , i t s a i d as much a t page 447: In these circumstances [the f a i l u r e of the defendant to consider the company as a whole] the p l a i n t i f f s have a c l e a r r i g h t to sue i n t h e i r own names to remedy the breach of t r u s t . One o f the i m p o r t a n t f i n d i n g s o f f a c t was t h a t the d e f e n d a n t had n o t c o n s i d e r e d t h e i n t e r e s t o f th e p l a i n t i f f s a t a l l b e f o r e making t h e i s s u e . Second, i t a l l o w e d t h e a c t i o n t o p r o c e e d d e s p i t e the f i n d i n g by Mr. J u s t i c e Mayo i n the lower c o u r t t h a t t h e wrong was t o the company a l o n e and as i t c o u l d be remedied i n g e n e r a l m e e t i n g a p e r s o n a l a c t i o n was not p o s s i b l e . The wrong which had been concen-t r a t e d on by th e lower c o u r t was the f a c t t h a t t h e s h a r e s had been i s s u e d f o r an i n a d e q u a t e c o n s i d e r a t i o n - c l e a r l y a c o r p o r a t e wrong. However, t h i s a r e a o f the ca s e was o n l y r e f e r r e d t o i n p a s s i n g by the High C o u r t which was more c o n c e r n e d w i t h the c o n t r o l a s p e c t s , of the i s s u e and the i n j u r y t o the p l a i n t i f f s . I t i s s u b m i t t e d t h a t a p e r s o n a l a c t i o n was p r o p e r l y a l l o w e d because o f th e expanded n a t u r e o f the d u t y o f d i r e c t o r s t o s h a r e h o l d e r s as w e l l as t o the company, a l t h o u g h i t i s r e c o g n i z e d t h a t the c o n f u s e d r e a s o n i n g o f the c o u r t makes the c a s e o f du b i o u s a u t h o r i t y . In Grant- v. John Grant & Sons Pty. Ltd.]®® a n o t h e r A u s t r a l i a n c a s e d e c i d e d t h r e e y e a r s b e f o r e the NgurK c a s e and a g a i n c o n c e r n i n g an a l l e g e d l y w r o n g f u l s h a r e i s s u e , t h e High C o u r t o f A u s t r a l i a a l l o w e d a p e r s o n a l a c t i o n p r i m a r i l y on the s t a t u t o r y power o f r e c t i f i c a t i o n (an i s s u e which w i l l be taken up a g a i n l a t e r ) . However, W i l l i a m s J , a f t e r s a y i n g t h a t the s t a t u t e gave " e v e r y s h a r e h o l d e r an 1 0 0 ( 1 9 5 0 ) 82 C.L.R. 1. - 165 -i n d i v i d u a l remedy," went on t o s a y : ^ F u r t h e r , the power to a l l o t shares conferred on the d i r e c t o r s by a r t . 4. i s a f i d u c i a r y power to be ex e r c i s e d bona f i d e f o r the company as a whole. 102 T h i s was b e f o r e the Greenhalgh v. Ardeme Cinemas Ltd. d e c i s i o n b u t i t i s s u b m i t t e d t h a t r e a s o n i n g o f the c o u r t i s based on s i m i l a r g rounds: t h a t i s , t h a t d i r e c t o r s must c o n s i d e r i n d i v i d u a l s h a r e -h o l d e r s i n making a new i s s u e and f o r f a i l i n g t o do so a p e r s o n a l a c t i o n w i l l be a l l o w e d . A g a i n the c o u r t c i t e s t he Punt and Piercy d e c i s i o n s b ut i t g i v e s no i n d i c a t i o n o f whether i t c o n s i d e r e d the t r u e n a t u r e o f t h o s e a c t i o n s o r n o t . An. e a r l i e r A u s t r a l i a n d e c i s i o n d e a l i n g w i t h a d e b e n t u r e i s s u e , r a t h e r than one o f s h a r e s , a l s o i n c l u d e s a c l e a r s t a t e m e n t by the c o u r t o f the n a t u r e o f d i r e c t o r s ' d u t i e s . Dixon J . s a i d i n 103 Richard Brady Franks Ltd. v. Price: In c o n s i d e r i n g [whether an i s s u e of debentures i s i n the company's best i n t e r e s t s ] i t i s important to a s c e r t a i n what are the purposes f o r which the powers are given and to remember that the f i d u c i a r y duty of the d i r e c t o r s i s to the company and the shareholders (emphasis a d d e d ) . The onus o f p r o v i n g t h a t what was done was n o t i n the company's i n t e r e s t was on the p l a i n t i f f , and a l t h o u g h such an onus makes a m i n o r i t y s h a r e h o l d e r ' s t a s k i n r e d r e s s i n g wrongs done t o him more d i f f i c u l t , i t i s s u b m i t t e d t h a t t h i s i s a t r u e s t a t e m e n t on the Commonwealth 104 p o s i t i o n . ^®^Ibid., p. 32. 1 0 2 [ 1 9 5 1 ] Ch. 286. 1 0 3 ( 1 9 3 7 ) 58 C.L.R. 112, 143. 104 T h a t the onus i s on the p l a i n t i f f was emphasized i n G r a n t v. John G r a n t & Sons P t y . L t d . , supra, note 100, and A s h b u r t o n O i l N.L. v. A l p h a M i n e r a l s N.L. (1971) 45 A.L.J.Q. 162. Compare Madden v. Diamond (1906) 12 B.C.R. 80 where the onus was on the d e f e n d a n t d i r e c t o r s and was s a i d t o be beyond a r e a s o n a b l e doubt. See a l s o the Comments by I a c o b u c c i , "The E x e r c i s e o f D i r e c t o r s ' Powers: The B a t t l e o f A f t o n M i n es", (1973) 11 Osgoode H a l l L . J . 353, 370. - 166 -Perhaps the c l e a r e s t s t a t e m e n t s by t h e A u s t r a l i a n c o u r t s o f the expanded n a t u r e o f d i r e c t o r s ' d u t i e s come i n Provident International p a i d s h a r e s was made by t h e d e f e n d a n t company t o an a s s o c i a t e d company i n o r d e r t o make the l a t t e r l o o k more s e c u r e t o i t s c r e d i t o r s . T h e r e i s c o n s i d e r a b l e d i s c u s s i o n by the c o u r t ( t h e Supreme C o u r t o f Mew South Wales) about the br e a c h o f du t y and the s t a t u t o r y power o f r e c t i f i c a t i o n , both o f which gave r i s e t o the t r u e p e r s o n a l a c t i o n a l l o w e d h e r e . The c o u r t d i d n o t c o n f u s e the two r i g h t s and f o l l o w i n g the Ngurli d e c i s i o n d i s t i n g u i s h e d t h e r u l e i n Foss v. Harbottle. I t i s worth q u o t i n g a t some l e n g t h from t h e judgment o f Helsham J . because i t i s s u b m i t t e d t h a t P r o f e s s o r Beck i n h i s a r t i c l e on "The S h a r e h o l d e r ' s D e r i v a t i v e A c t i o n " ^ u n d e r s t a t e d the i n t e n t i o n o f the j u d g e . Helsham J . s a y s : ^ 7 The reason why the r u l e i n Foss V. Harbottle does not apply i n a case of fraud on a power such as the present no doubt r e s i d e s i n the f i d u c i a r y nature of the duty owed and the f a c t that i t i s owed to a l l the corporators of the company. A breach of duty owed to an i n d i v i d u a l shareholder could not be r a t i f i e d by a m a j o r i t y of shareholders; any attempt by a m a j o r i t y to r a t i f y a breach of a f i d u c i a r y duty by d i r e c t o r s would be no l e s s a fraud qua that shareholder than was the case i n the acts of the d i r e c t o r s . I t i s p o s s i b l e that a l l the corporators might confirm the a c t i o n s of the d i r e c t o r s but t h i s i s not the question here; i t i s p o s s i b l e that a general meeting might r e q u i r e the d i r e c t o r s to use t h e i r powers i n a x c e r t a i n way, and t h i s would no doubt be strong evidence that the powers when e x e r c i s e d were being used by them bona f i d e i n the best i n t e r e s t s of the company. But ex hypothesi i n a case such as the present, there has been an abuse of power, and I do not think that a general meeting can re s o l v e that the d i r e c t o r s should act i n abuse of t h e i r powers or that such an abuse can be r a t i f i e d where i t has r e s u l t e d i n , a breach of a duty of a f i d u c i a r y Corp. v. International Leasing Corp. Ltd. 105 where an i s s u e o f f u l l y 105 '(1969) 89 W.N. (Pt . l ) ( N . S . W . ) 370. 'Op. oit., no t e 92. (1969) 89 W.N. ( P t . 1) (N.S.W.) 370, 381. 106 107, r - 167 -nature'owed to some person not a party to the r e s o l u t i o n to r a t i f y . In the j u d g e ' s e y e s , f r a u d need c o n s i s t "of no d i s h o n e s t y b u t a mere at t e m p t t o use the power f o r purposes o t h e r than t h a t f o r which n o t p o s s i b l e because i t i s n o t w i t h i n the domain o f the m a j o r i t y t o waive wrongs done by the d i r e c t o r s which c o n c e r n o t h e r s h a r e h o l d e r s p e r s o n a l l y , as w e l l as t h e m s e l v e s . T h i s i s s u p p o r t e d by the r e f e r e n c e t o c o n f i r m a t i o n by " a l l " o f the s h a r e h o l d e r s ; i f a l l t h o s e c o n c e r n e d r a t i f i e d the d i r e c t o r s ' ; a c t i o n t h e r e would e i t h e r be no a c t i o n a t a l l o r t h e d e f e n c e o f w a i v e r o r e s t o p p e l would a p p l y . I t i s r e c o g n i z e d t h a t t h e language used i n t h i s passage c o u l d a l s o s u p p o r t a d e r i v a t i v e a c t i o n . R a t i f i c a t i o n by a m a j o r i t y would n o t be p o s s i b l e even i f the d i r e c t o r s ' d u t y was owed o n l y t o the company i f t o do so would p e r p e t r a t e a f r a u d ; here the f r a u d e x c e p t i o n to the r u l e i n Foss v. Harbottle a p p l i e s . The judge's, l a t e r r e f e r e n c e t o a passage i n t h e Second E d i t i o n o f P r o f e s s o r Gower's Company law t e x t would s u g g e s t t h a t he i s perhaps r e f e r i n g t o a d e r i v a t i v e a c t i o n b u t i t i s n e v e r t h e l e s s s u b m i t t e d t h a t the s t a t e m e n t about the duty owed t o s h a r e h o l d e r s i s u n e q u i v o c a l and i n t e n t i o n a l . T h i s view i s s u p p o r t e d by an e a r l i e r passage i n the judgment where, a f t e r r e f e r i n g t o the s t a t e m e n t i n the Ngurli c a s e t h a t t h e p l a i n t i f f s 109 have a c l e a r r i g h t t o sue i n t h e i r own names, he s a y s : I do not t h i n k that t h i s statement.[the one i n Ngurli] i s d i r e c t e d to any r i g h t of r e c t i f i c a t i o n of a share r e g i s t e r given by s t a t u t e . . . o r to any question of fraud upon a m i n o r i t y of shareholders by a m a j o r i t y who hold and c o n t r o l the m a j o r i t y of share and who w i l l not permit an a c t i o n to be brought i n the name of the company. i t i s g i v e n ! ,108 The passage quoted s u g g e s t s t h a t r a t i f i c a t i o n i s 108 Ibid., p. 381. ^Ibid. 109 - 168 -He a l s o r e f e r s t o the Harlowe's Nominees Pty. Ltd. v. Woodside (Lakes Entrance) Oil Co. E.L.^® d e c i s i o n , i t s e l f a p e r s o n a l a c t i o n i n which the p l a i n t i f f sued t h e d e f e n d a n t company on b e h a l f o f i t s e l f o n l y . T h e r e , no o t h e r s h a r e h o l d e r s were j o i n e d as p l a i n t i f f s , nor were the d i r e c t o r s as d e f e n d a n t s . F i n a l l y , t h e opening.remarks o f the ju d g e i n a n o t h e r passage d i s c u s s i n g the dut y owed t o s h a r e h o l d e r s would s u g g e s t t h a t he f u l l y meant t o base the p l a i n t i f f ' s r i g h t on an expanded f i d u c i a r y d u t y c o n c e p t . He r e f e r s t o the Greenhalgh v. Arderne Cinemas Ltd. 112 c a s e and the Richard Brady Franks Ltd. v. Price d e c i s i o n , both d i s c u s s e d e a r l i e r i n t h i s p a p e r . He c o n c l u d e s t h e s e remarks by 113 s a y i n g : In my view a f a i l u r e to consider the general body of shareholders at a l l would enable a purported e x e r c i s e of the power to be challenged by share-holders . I t i s i n d e e d u n f o r t u n a t e t h a t the r e f e r e n c e s t o an e x p a n s i o n o f the d i r e c t o r s ' d u t i e s a r e marred,by some i n c o n s i s t e n c y i n the l o g i c c o n c e r n i n g r a t i f i c a t i o n . <. The most r e c e n t A u s t r a l i a n c a s e t o d i s c u s s a w r o n g f u l i s s u e o f / o f 114 sh a r e s i n terms o f a br e a c h d i r e c t o r s ' d u t i e s i s Winthrop v. Winns (The A u s t r a l i a n s seem more p r o l i f i c than any o t h e r Commonwealth c o u n t r y i n t h e i r l i t i g a t i o n o f d i s p u t e s i n t h i s a r e a . ) Once a g a i n , t h e d i r e c t o r s o f a company made a new s h a r e i s s u e i n o r d e r t o th w a r t a t a k e o v e r b i d by the p l a i n t i f f . An e x t r a o r d i n a r y g e n e r a l m e e t i n g 1 1 0 ( 1 9 6 8 ) 42 A.L.J.R. 123. VSupra, note 102. 112 Supra, n o t e 103. 1 1 3 ( 1 9 6 9 ) 89 W.N. ( P t . 1)'(N.S.W.) 370, 377. 114 U n r e p o r t e d but see CCH A u s t r a l i a n C o r p o r a t e A f f a i r s R e p o r t e r p. 28,400 (1976). - 169 -was then c a l l e d t o approve t h e i s s u a n c e o f the s h a r e s . The p l a i n t i f f , a s h a r e h o l d e r i n t h e d e f e n d a n t company, sought a d e c l a r a t i o n t h a t the r a t i f i c a t i o n o f the i s s u e was n o t v a l i d as the purpose ( a c c e p t e d by both s i d e s ) o f the new sh a r e s was t o d e f e a t t h e t a k e o v e r . In d e c i d i n g t h e main i s s u e b e f o r e t h e c o u r t , t h a t i s , whether such an i s s u e c o u l d be r a t i f i e d by a m a j o r i t y i n g e n e r a l m e e t i n g , the New South Wales C o u r t o f Appeal had t o dea l w i t h t h e argument t h a t r a t i f i c a t i o n was n o t p o s s i b l e a t a l l ( o r a t l e a s t w h i l e t h e r e a r e any d i s s e n t o r s ) because t h e dut y broken by the d i r e c t o r s was owed t o the i n d i v i d u a l s h a r e h o l d e r s as w e l l as t o the company. A l l i t h r e j u d g e s d i s m i s s e d t h e argument and u p h e l d t h e d e c i s i o n i n 115 Bamford v. Bamford a f t e r c o n s i d e r i n g the Grant v. John Grant & Sons Pty. Ltd.\^^ Ngurli Ltd. v. McCann^^^ and Harlowe's Nominees 118 ' Ltd. v. Woodside (Lake Entrance) Oil Co. N.L. d e c i s i o n s . They y d i d n o t however c o n s i d e r the Provident International Corp. v. International 119 Leasing Corp. Ltd. c a s e which c o n t a i n s t h e ; c l e a r e s t A u s t r a l i a n s t a t e -ments about a dut y t o s h a r e h o l d e r s . Both o f the m a j o r i t y j u d g e s d e a l t a t some l e n g t h w i t h the Grant and Ngurli c a s e s . They d i s t i n g u i s h e d the Grant d e c i s i o n p r i m a r i l y on the grounds t h a t what was b e i n g a t t a c k e d i n t h a t c a s e was a brea c h o f the a r t i c l e s c o n c e r n i n g the appointment o f d i r e c t o r s and p r e - e m p t i v e p r o v i s i o n s i n the t r a n s f e r o f e x i s t i n g s h a r e s . I t must be remembered however, t h a t a l t h o u g h the d i r e c t o r s were g i v e n t h e power t o i s s u e s h a r e s by a p a r t i c u l a r 1 1 5 [ 1 9 7 0 ] 1 Ch. 212. ^Supra, note .100. 'Supra, note 96. 118 Supra, note 110. 119 Supra, note 105. - 170 -a r t i c l e , i t was a l s o t h e e x e r c i s e o f t h a t power and the common law l i m i t a t i o n s p l a c e d on i t t h a t were b e i n g c o n s i d e r e d . The a r t i c l e c o v e r i n g p re-emption d i d not a f f e c t the power t o i s s u e new s h a r e s . I t i s n o t a bre a c h o f the a r t i c l e s t o i s s u e s h a r e s f o r an improper purpose ( u n l e s s t h e r e a r e s p e c i f i c a r t i c l e s d e f i n i n g t h e purposes o f a l l i s s u e s ) but r a t h e r a br e a c h o f f i d u c i a r y d u t y . As has been s u g g e s t e d e a r l i e r , t h e C o u r t i n the Grant c a s e appears t o have r e c o g n i z e d t h e a c t i o n a l s o on the b a s i s o f a br e a c h o f dut y which must have been t o the i n d i v i d u a l p l a i n t i f f s . I t i s n o t s u f f i c i e n t t o e x c l u d e t h e i d e a o f an expanded f i d u c i a r y d u t y s i m p l y by s a y i n g t h a t t h e c a s e was m a i n l y c o n c e r n e d w i t h a br e a c h o f the a r t i c l e s . A f u r t h e r and q u i t e s e p a r a t e i s s u e was a l s o d i s c u s s e d i n Grant &x\d.\Ngurli and c o n s i d e r e d a t l e n g t h by the c o u r t i n winthrop v. 119 Winns. T h i s was whether t h e s t a t u t o r y power o f r e c t i f i c a t i o n d i d i n f a c t g i v e r i s e t o a p e r s o n a l r i g h t t o sue as the e a r l i e r c a s e s would s u g g e s t . Whatever t he t r u e n a t u r e o f the s t a t u t o r y r i g h t ( t h a t i s , whether i t a l l o w s a p e r s o n a l o r o n l y a d e r i v a t i v e a c t i o n ) i t does n o t a l t e r t h e common law p o s i t i o n o f the d i r e c t o r s ' d u t i e s . To d i s t i n g u i s h both t h e Grant and Ngurli d e c i s i o n s on t h e b a s i s t h a t they do not s u p p o r t an i n d i v i d u a l r i g h t t o r e c t i f i c a t i o n does n o t , o f n e c e s s i t y , p r e v e n t a d i r e c t c l a i m f o r a br e a c h o f d i r e c t o r s ' d u t y , a w h o l l y s e p a r a t e cause o f a c t i o n . I t i s c l e a r t h a t t h e c o u r t d i d not a g r e e w i t h an e x t e n s i o n o f d i r e c t o r s ' d u t i e s and by f o l l o w i n g 120 Bamford v. Bamford have i m p l i e d l y r e f u s e d t o do so b u t i t i s 119 Supra, note 114. 120 Supra, note 115. , - 171 -s u b m i t t e d t h a t i t s r e j e c t i o n o f the c a s e s s u p p o r t i n g * such an e x t e n s i o n i s f a r from c o n v i n c i n g . In o t h e r Commonwealth j u r i s d i c t i o n s t h e r e have a l s o been s t a t e -ments s u g g e s t i n g t h a t d i r e c t o r s owe a dut y t o s h a r e h o l d e r s as w e l l 121 as t o the company. In Nash v. Lanaegaye Safety Glass (Ireland) Ltd. the High C o u r t had the f o l l o w i n g t o say i n r e f e r e n c e t o the r u l e i n 122 Foss v. Harbottle: I t , [Foss if. Harbottle] and the cases which have, followed and a p p l i e d i t , were concerned w i t h wrongs a l l e g e d to be done to the company as a whole and i n respect of which i t was, t h e r e f o r e , f o r the company, as such to complain or not.... In the present case, p a r t i c u l a r wrong has been done to i n d i v i d u a l shareholders, i n c l u d i n g the p l a i n t i f f , by the l a c k of good f a i t h on the p a r t of the d i r e c t o r s i n the purported e x e r c i s e of t h e i r d i s c r e t i o n a r y powers. Budd, J., d e l i v e r i n g the judgment, went on t o r e f e r t o Clark v. Workman 124 and Piercy v. S. Mills & Co. Ltd. . a l t h o u g h , as has been a r g u e d , the Piercy c a s e may have been a d e r i v a t i v e a c t i o n . The i n s t a n t c a s e was d e f i n i t e l y a p e r s o n a l a c t i o n ; t h i s i s e v i d e n c e both by the comments o f the judge r e f e r r e d t o above and by the f a c t t h a t t h e p l a i n t i f f , a s u b s t a n t i a l a l t h o u g h n o t m a j o r i t y s h a r e h o l d e r , d i d n o t j o i n t h e non - d e f e n d a n t s h a r e h o l d e r s w i t h him i n a r e p r e s e n t a t i v e a c t i o n . The c a s e i s a l s o i n t e r e s t i n g f o r i t s comments on r a t i f i c a t i o n . I t i s one o f the few i n s t a n c e s where t h e c o u r t c l e a r l y r e c o g n i z e s n o t o n l y the q u e s t i o n o f whether r a t i f i c a t i o n i s p o s s i b l e b u t a l s o 123 1 2 1 ( 1 9 5 8 ) 92 I1L.T.R. 11. 122 Ibid. , p. 25. 1 2 3 [ 1 9 2 0 ] 1 I'.R. 107. 124 Supra, note 89. - 172 -the fundamental i s s u e o f whether the newly i s s u e d s h a r e s ( t h e s u b j e c t o f the a c t i o n ) c o u l d be v o t e d a t any v a l i d a t i n g m e e t i n g . The j u d g e does n o t s p e c i f i c a l l y s ay so but the t e n o r o f h i s argument i s t h a t t h e s e s h a r e s c o u l d n o t be v o t e d . However he does not have t o answer the q u e s t i o n because, i n l i n e w i t h h i s g e n e r a l c o n c e p t o f the d i r e c t o r s ' d u t y , r a t i f i c a t i o n would n o t be p o s s i b l e to d e f e a t 125 an i n d i v i d u a l member's c l a i m i n any e v e n t . He s a y s : On the other hand, a m a j o r i t y at the meeting could have approved, i f so minded, of what had been done but t h i s would leave the question undetermined and s t i l l outstanding whether the d i r e c t o r s had acted i n y bad f a i t h to the p r e j u d i c e of i n d i v i d u a l shareholders. I t seems c l e a r t h a t t h e c o u r t here a c c e p t e d the i d e a o f an expanded duty by d i r e c t o r s and based i t s d e c i s i o n on i t . U n l i k e s e v e r a l o f the o t h e r c a s e s c i t e d i n s u p p o r t o f such an e x p a n s i o n the comments o f the c o u r t i n Nash were n o t i n c i d e n t a l t o any o t h e r cause o f a c t i o n b r o u g h t by the p l a i n t i f f . Two more r e c e n t c a s e s have a p p a r e n t l y a l l o w e d p e r s o n a l a c t i o n s 1 og c o m p l a i n i n g o f an a l l e g e d l y w r o n g f u l i s s u e o f s h a r e s , a l t h o u g h i t i s n o t c l e a r from e i t h e r o f them what i s the t r u e b a s i s o f t h e a c t i o n . The form o f the a c t i o n , t h a t i s whether i t i s p e r s o n a l o r d e r i v a t i v e , i s c e r t a i n l y a r g u a b l e because i n both, the p l a i n t i f f sued i n a r e p r e s e n t a t i v e form on b e h a l f o f h i m s e l f and a l l o t h e r s h a r e h o l d e r s ; such a p r o c e d u r e i s o f c o u r s e mandatory f o r a common law d e r i v a t i v e a c t i o n b u t i s a l s o p o s s i b l e i n a p e r s o n a l c l a i m . * 1 2 5 ( 1 9 5 8 ) 92 I.L.T.R. 11, 26. 1 2 6 H o g g v. Cramphorn L t d , [1967] Ch. 254; Bamford v. Bamford, supra, note 115 a f f i r m i n g [1968] 2 A l l E.R. 655 oh s l i g h t l y d i f f e r e n t grounds. - 173 -127 D e s p i t e comments t o t h e c o n t r a r y , i t i s s u b m i t t e d t h a t both were i n f a c t b r ought as p e r s o n a l a c t i o n s a t f i r s t i n s t a n c e a l t h o u g h t h e 128 C o u r t o f Appeal i n Bamford v. Bamford seems t o have a p p r o a c h e d 129 the c a s e as a d e r i v a t i v e one. In Hogg v. Cramphorn c o u n s e l f o r the d e f e n d a n t company argued t h a t the a c t i o n was wr o n g l y b r o u g h t as a p e r s o n a l one, "e x c e p t so f a r as the i s s u e o f the 5,707 s h a r e s 130 [was] c o n c e r n e d . " No reas o n was g i v e n f o r n o t c o n t e s t i n g t h e v a l i d i t y o f the share i s s u e c l a i m , b u t the ju d g e made i t c l e a r t h a t a l l o f the t r a n s a c t i o n ' s i n v o l v e d i n the scheme, i n c l u d i n g t h e i s s u a n c e o f s h a r e s , c o u l d be co m p l a i n e d o f by the p l a i n t i f f " s u i n g .+ 131 i n a r e p r e s e n t a t i v e c a p a c i t y . A t f i r s t s i g h t i t might appear t h a t t h e a c t i o n i n Hogg v. Cramphorn s h o u l d have been b r o u g h t as a c l a i m on b e h a l f o f the company. I f , as was a c c e p t e d by both s i d e s , t h e main purpose o f the i s s u e was t o d e f e a t a t a k e - o v e r b i d by an o u t s i d e r r a t h e r than an e x i s t i n g s h a r e h o l d e r then the p l a i n t i f f , a f r i e n d o f the o u t s i d e r ' s , had s u f f e r e d no d i r e c t wrong o n : w h i c h t o base a p e r s o n a l c l a i m . C e r t a i n l y i n the m a j o r i t y o f s h a r e i s s u e c a s e s which have a l l o w e d a p e r s o n a l a c t i o n the p l a i n t i f f has been the sha r e h o l d e r ' w h o has been d i r e c t l y a f f e c t e d by the i s s u e e i t h e r by l o s i n g a c t u a l o r 127 See K.W. Wedderburn i n s e v e r a l a r t i c l e s where he su g g e s t s t h a t Hogg v. Cramphorn, supra note 126, i s a d e r i v a t i v e a c t i o n , (1967) 30 M.L.R. 77; (1968) 31 M.L.R. 688; (1968) 32 M.L.R. 563. 128 > Supra, note 115. 129 "Supra, note 126. 1 30 Ibid., p. 271, p e r B u c k l e y , J . 1 31 Ibid., p. 271. In the same s e n t e n c e he makes i t c l e a r t h a t t h i s i s a p e r s o n a l r e p r e s e n t a t i v e a c t i o n as he speaks o f o t h e r wrongs f o r which the company would be t h e p r o p e r p l a i n t i f f . - 174 -p o t e n t i a l c o n t r o l o r by b e i n g u n f a i r l y treated/. However, i n some c a s e s , both b e f o r e and a f t e r t h e Hogg v. Cramphorn d e c i s i o n , s h a r e h o l d e r s n o t d i r e c t l y i n v o l v e d have been a l l o w e d t o c o m p l a i n ; f u r t h e r m o r e , i t seems t o make no d i f f e r e n c e what c o n c e p t o f d i r e c t o r s ' d u t i e s i s a p p l i e d . In Provident. International Corp. v. International 1 34 Leasing Corp. Ltd. where one o f t h e main bases f o r t h e a c t i o n was a br e a c h o f f i d u c i a r y d u t y owed t o i n d i v i d u a l s h a r e h o l d e r s , t h e p l a i n t i f f d i d not even become a s h a r e h o l d e r i n the d e f e n d a n t company 135 u n t i l some two y e a r s a f t e r the w r o n g f u l s h a r e i s s u e was made. 135 A g a i n i n Bamford v. Bamford t h e p l a i n t i f f was s i m p l y a s h a r e h o l d e r i n f a v o u r o f the pro p o s e d t a k e o v e r b i d r a t h e r than t h e t h w a r t e d p a r t y h i m s e l f . The q u e s t i o n was t o some e x t e n t s i d e s t e p p e d i n Hogg v. Cramphorn i t s e l f because t h e p l a i n t i f f was a l l o w e d t o b r i n g a p e r s o n a l a c t i o n , n o t because o f any br e a c h o f d u t y a f f e c t i n g him p e r s o n a l l y b u t a p p a r e n t l y because o f the f a c t t h a t h i s p o s i t i o n would have been s u b s t a n t i a l l y a l t e r e d i f the i s s u e had been a l l o w e d 137 t o p r o c e e d as pl a n n e d w i t h t en v o t e s a t t a c h i n g t o each new s h a r e . 132 Cf. N g u r l i L t d . v. McCann, supra note 96, Nash v. Lancegaye S a f e t y G l a s s ( I r e l a n d ) L t d . , supra note 121, Howard Smith L t d . v. Ampol P e t r o l e u m L t d . , [1974] 1 A l l E.R. 1126, Teck Corp. v. M i l l a r . (1972) 33 D.L.R. (3rd) 288. Clamp v. Fa i r w a y I n v e s t m e n t s , C.C.H. A u s t r a l i a n C o r p o r a t e A f f a i r s R e p o r t e r , p. 27599. 1 3 3 C f . Lewis v. R i v e r t o n P u b l i c G o l f Course P t y . L t d . , [1971] W.A.R. 75; T.V. New Eng l a n d v. Nth. R i v e r s T.V., C.C.H. A u s t r a l i a n C o r p o r a t e A f f a i r s R e p o r t e r , p. 27128; C a r o v a l e v. L u d o w i c i , C.C.H. A u s t r a l i a n C o r p o r a t e A f f a i r s R e p o r t e r , p. 27119. ~^3^Supra, note 105. 1 35 T h i s appears t o have been because t h e p l a i n t i f f a l s o based i t s c l a i m on a s t a t u t o r y r i g h t which was h e l d t o a p p l y t o a l l s h a r e h o l d e r s , whether members a t the time o f the bre a c h o r no t . •J OC Supra, note 115. Cf . Hogg v. Cramphorn, supra, note 126, a t p. 271. - 175 -J f p e r s o n a l a c t i o n s a r e t o be a l l o w e d , some c o n s i d e r a t i o n s h o u l d be g i v e n t o the wrong s u f f e r e d by the i n d i v i d u a l p l a i n t i f f , o r the c l a s s he r e p r e s e n t s . W hile i t may be c o n c e p t u a l l y c o n s i s t e n t t o a l l o w any s h a r e h o l d e r t o b r i n g an a c t i o n when t h e r e has been a b r e a c h o f d u t y , whether he i s d i r e c t l y a f f e c t e d o r n o t , t h i s may w e l l l e a d t o a m u l t i p l i c i t y o f s t r i k e s u i t s . The a p p roach 1 OO V i n Jones v. H.F. Ahmanson & Co. which was commented on i n 139 Goldex Mines Ltd. v. R e v i l l r e s t r i c t i n g the a c t i o n t o an i n d i v i -dual d i r e c t l y i n j u r e d by the b r e a c h i s t o be recommended. The Bamford v. Bamford d e c i s i o n i s s i m i l a r l y d i f f i c u l t t o e x p l a i n . A l t h o u g h the c l a i m seems t o be based on an a p p a r e n t 140 b r e a c h o f the a r t i c l e s i t would have been b e t t e r t o have approached i t from the more g e n e r a l p o i n t o f view o f d e c i d i n g whether r a t i f i -c a t i o n was p o s s i b l e a t a l l when t h e r e has been a c o n t r o l i s s u e . As has a l r e a d y been argued i n t h i s p a p e r , the a r t i c l e s c o n c e r n i n g the i s s u a n c e o f s h a r e s do not u s u a l l y d i c t a t e the c i r c u m s t a n c e s i n which s h a r e s may o r may n o t be a l l o t t e d ; t h e y s i m p l y d e l e g a t e t o one body i n a company the g e n e r a l power o f i s s u a n c e . T h i s i s p r o b a b l y so d e s p i t e the a r g u m e n t ^ s u g g e s t i n g t h a t a l l o f t h e a r t i c l e 1 3 8 4 6 0 P. 2d 464 (1969). 1 3 9 ( 1 9 7 4 ) 54 D.L.R. (3d) 672. 140 The argument i n the lower c o u r t was t h a t as the d i r e c t o r s had been g i v e n the power^to i s s u e s h a r e s , t h e y a l o n e c o u l d , d o so and t o a l l o w the company i n g e n e r a l m e e t i n g t o approve what was a l l e g e d t o be a wro n g f u l i s s u e would i n e f f e c t r e t u r n t o the company p a r t o f the i s s u i n g power. T h i s would r e q u i r e a s p e c i a l r e s o l u t i o n as i t amounted t o a change i n the a r t i c l e s . Such a argument appe a r s t o have been n e c e s s a r y because o f the f o r m u l a t i o n o f t h e s t a t e d c a s e . 141 Gower, Modern Company Law, op. cit., note 93, a t pp. 264-5. 176 i n c l u d i n g the powers g i v e n t h e r e b y , c o n s t i t u t e a c o n t r a c t t h e s p i r i t o f which the members have a r i g h t t o seek c o m p l i a n c e w i t h . 142 L o r d J u s t i c e R u s s e l l seems t o have r e c o g n i z e d t h i s when he s a i d : In t r u t h the allotment of sharessby d i r e c t o r s not bona f i d e i n the i n t e r e s t s of the company i s not an act outside the a r t i c l e s : i t i s an act w i t h i n the a r t i c l e s but i n breach of the general duty l a i d on them by t h e i r o f f i c e as d i r e c t o r s to act i n a l l matters committed to them bona f i d e i n the i n t e r e s t s of the company. The q u e s t i o n then remains as t o whom the d u t y i s owed, o r more s p e c i f i c a l l y , as t o who can c o m p l a i n when t h e r e has been such a br e a c h . The C o u r t o f Appeal f o l l o w e d the t r a d i t i o n a l approach and s a i d t h a t the wrong was t o the company a l o n e and y e t t h e y a l l o w e d what was c l e a r l y a p e r s o n a l a c t i o n t o c o n t i n u e . A b e t t e r approach f o r f u t u r e c a s e s o f t h i s t y p e would be t o t r e a t the d u t y as owed t o i n d i v i d u a l s h a r e h o l d e r s as w e l l as t o the company so t h a t m i n o r i t y members c o u l d c o m p l a i n o f a wro n g f u l i s s u e i f t h e y have been d i r e c t l y a f f e c t e d . The f u r t h e r problem o f r a t i f i c a t i o n has a l r e a d y been d i s c u s s e d 1 t o some e x t e n t . Indeed, w i t h r e g a r d t o the a r e a o f s h a r e h o l d e r s m a i n t a i n i n g t h e i r r e l a t i v e p o s i t i o n s i n the company, r a t i f i c a t i o n 143 was i n f a c t the main i s s u e i n s e v e r a l c a s e s mentioned above. I f the d i r e c t o r s ' d u t i e s a r e owed t o the s h a r e h o l d e r s , w i l l any brea c h o f t h i s duty i n r e l a t i o n t o the i s s u a n c e o f s h a r e s g i v e r i s e t o a p e r s o n a l a c t i o n ? In o t h e r words, w i l l t h e r e s t i l l be s i t u a t i o n s i n which a m a j o r i t y o f the s h a r e h o l d e r s w i l l be a b l e t o deny a 1 4 2 [ 1 9 7 0 ] 1 Ch. 212, 242. 143 Hogg v. Cramphorn, supra, note 126; Bamford v. Bamford, supra, note 115; Winthrop v. Winns, supra, note 114. - 177 -v remedy t o the m i n o r i t y by r a t i f y i n g t he d i r e c t o r s ' a c t i o n ? I t i s s u b m i t t e d t h a t from a t h e o r e t i c a l p o i n t o f view r a t i f i c a t i o n s h o u l d n o t be an i s s u e a t a l l i n t h i s a r e a ; t h a t would be con-s i s t e n t w i t h the i d e a t h a t the m a j o r i t y c a n n o t u n i l a t e r a l l y v a l i d a t e a wrong i n which t h e y a r e n o t the o n l y p a r t i e s i n j u r e d . However, t h i s approach may cause as much i n j u s t i c e i n some c a s e s as i t seeks t o a v o i d . The g r e a t m a j o r i t y o f the company c o u l d be p r e j u d i c e d by the c o m p l a i n t o f a s i n g l e s h a r e h o l d e r i f any b r e a c h , ' however s m a l l , would a u t o m a t i c a l l y a s s u r e the p l a i n t i f f ' s s u c c e s s . On.the o t h e r hand, r a t i f i c a t i o n s h o u l d n o t be an a u t o m a t i c b a r t o a p e r s o n a l a c t i o n ; i f i t was r e l e g a t e d t o a m a t t e r o f e v i d e n c e as 144 i t has been i n c o n n e c t i o n w i t h some s t a t u t o r y d e r i v a t i v e a c t i o n s , then the c o u r t would be a l l o w e d more f l e x i b i l i t y i n e v a l u a t i n g the e q u i t i e s and f a i r n e s s o f any p a r t i c u l a r t r a n s a c t i o n . A l t h o u g h the r u l e i n Foss v. Harbottle w i l l have then been l a r g e l y done away w i t h , i t i s d o u b t f u l . whether a f l o o d o f unwarranted l i t i g a t i o n , which was the f e a r b e h i n d t h a t c a s e , w i l l e v e n t u a t e . The c o s t and d i f f i c u l t y o f b r i n g i n g a p e r s o n a l s u i t w i l l o f t e n d e t e r a s h a r e h o l d e r , e s p e c i a l l y i n a w i d e l y h e l d c o r p o r a t i o n ; 1 , i n a s m a l l , p r i v a t e company / the m i n o r i t y s h a r e h o l d e r c l a i m i n g u n f a i r t r e a t m e n t s h o u l d n o t n o r m a l l y be d e p r i v e d o f h i s day i n c o u r t i n any e v e n t . T h i s seems t o have been the e x p e r i e n c e o f t h e American c o u r t s which a r e n o t c o n c e r n e d w i t h r a t i f i c a t i o n i n s h a r e i s s u e c a s e s . The use o f r a t i f i c a t i o n p u r e l y as an e v i d e n t i a r y m a t t e r l i m i t s i t s a p p l i c a t i o n t o b e i n g an a i d t o d e t e r m i n i n g whether t h e r e has 1 4 4 S . 2 3 5 ( 1 ) Canada B u s i n e s s C o r p o r a t i o n s A c t , S.C., 1974-75, c.33; s.222(7) B.C. Companies A c t , 1973, c.18. - 178 -been a br e a c h o r n o t . I f a br e a c h has taken p l a c e , then a p e r s o n a l a c t i o n i s p e r m i t t e d , b u t the f a c t o f r a t i f i c a t i o n may l i m i t the s i t u a t i o n s i n w h i c h , t h e c o u r t w i l l f i n d a b r e a c h . One o t h e r j u d i c i a l a p proach which may a m e l i o r a t e t h e p o t e n t i a l r e s t r i c t i o n s on a company caused by a l l o w i n g m i n o r i t y s h a r e h o l d e r s t o s u e , i s t h a t 145 taken i n Teck Corp. v. Millar.. T h e r e the c o u r t was c o n c e r n e d w i t h the c o r r e c t n e s s o f a d e c i s i o n by the d i r e c t o r s o f A f t o n Mines L t d . t o e n t e r i n t o a c o n t r a c t w i t h Canadian E x p l o r a t i o n L t d . under which a l a r g e number o f new s h a r e s would be i s s u e d t o t h e H a t t e r i n the e v e n t o f i t s p u t t i n g a c e r t a i n m i n i n g p r o p e r t y i n t o p r o -d u c t i o n . The p l a i n t i f f , Teck C o r p o r a t i o n L t d . , had j u s t a c q u i r e d a m a j o r i t y o f the e x i s t i n g c a p i t a l i n A f t o n when the c o n t r a c t was made; i n f a c t the d e a l w i t h Canex was e n t e r e d i n t o s p e c i f i c a l l y t o d e f e a t Teck's t a k e o v e r b i d because t he d i r e c t o r s o f A f t o n b e l i e v e d t h a t t h e m i n i n g p r o p e r t y would n o t be d e v e l o p e d e f f i c i e n t l y f o r t h e b e n e f i t o f the A f t o n s h a r e h o l d e r s i f Teck got c o n t r o l o f i t . Was such a c t i o n a l l o w a b l e even i f t h e i r b e l i e f was j u s t i f i e d ? .146 A c c o r d i n g t o the Hogg v. Cramphorn d e c i s i o n i t would n o t be, as an i s s u e p u r e l y f o r c o n t r o l was an improper e x e r c i s e o f the d i r e c t o r s ' power and t h e r e f o r e v o i d a b l e . However, Mr. J u s t i c e , 147 Be r g e r r e f u s e d t o f o l l o w Hogg v. Cramphorn and s a i d : My own view i s that d i r e c t o r s ought to be allowed to consider who i s seeking c o n t r o l and why. I f they , b e l i e v e that there w i l l be s u b s t a n t i a l damage to the 145 Supra, note 132. See the comments on t h i s ca s e by I a c o b u c c i , "The e x e r c i s e o f D i r e c t o r s ' Powers: The B a t t l e o f A f t o n M i nes", op. cit. note 104; and S l u t s k y , "Canadian R e j e c t i o n o f the Hogg v. Cramphorn 'Improper P u r p o s e s ' P r i n c i p l e " , op. cit.} n o t e 2. Supra, note 126. 1 4 7 3 3 D.L.R. (3rd) 288, 315. r - 179 -company's i n t e r e s t s i f the company i s ' t a k e n over, then the e x e r c i s e of t h e i r powers to defeat those seeking a m a j o r i t y w i l l not n e c e s s a r i l y be c a t e g o r i z e d as improper. I t i s s u b m i t t e d t h a t t h i s more f l e x i b l e a p p roach i s the b e t t e r and a l t h o u g h i t w i l l n o t reduce the number o f c l a i m s by m i n o r i t i e s ( o r i n d e e d m a j o r i t i e s as i n the Teak c a s e ) i t b a l a n c e s t h e d i s c r e t i o n o f the d i r e c t o r s more r e a l i s t i c a l l y w i t h the p r o t e c t i o n o f t h e m i n o r i t y . While the Teak c a s e i s c e r t a i n l y n ot a u t h o r i t y f o r t h e p r o p o s i t i o n t h a t d i r e c t o r s ' d u t i e s a r e owed t o s h a r e h o l d e r s as w e l l as t o the company, c e r t a i n o t h e r Canadian d e c i s i o n s do s u p p o r t t h i s propo-148 s i t i o n . The " d e l i c a t e f l i r t a t i o n " w i t h t h i s i d e a by the C o u r t 149 o f Appeal i n Goldex Mines Ltd. v. R e v i l l has been mentioned e a r l i e r i n t h i s p aper. S t r o n g e r comments can be found i n the judgment o f Turgeon, J.A. i n Smith and Tatohell v. Hanson Tire Co. Ltd.]5.° He s a y s : 1 5 1 [T]he d i r e c t o r s of a company occupy a p o s i t i o n of t r u s t towards a l l the shareholders, r e g a r d l e s s of groups or f a c t i o n s , and i n performing t h e i r d u t i e s and e x e r c i s i n g t h e i r powers i n a l l matters, i n c l u d i n g the a l l o t t i n g of shares, they must act w i t h the utmost good f a i t h towards a l l p a r t i e s . U n f o r t u n a t e l y , he r e f e r s t o t h e t r a d i t i o n a l c a s e s o f Fraser v. 152 153 154 Whalley, Punt v. Symons and Martin v. Gibson which c e r t a i n l y 148 B u c k l e y , " R a t i f i c a t i o n and the D e r i v a t i v e A c t i o n " , (1976) 22 M c G i l l L . J . 167, 171. 149 Supra, note 139. 1 5 0 o . Supra, note 77. 1 5 1 l 2>£d., p. 530. 152 Supra, note 82. 153 Supra, note 88. 1 5 4 ( 1 9 0 7 ) 15 O.L.R. 623. - 180 -s u g g e s t t h a t i t i s a b r e a c h o f d u t y t o i s s u e s h a r e s f o r c o n t r o l but do n o t make i t c l e a r t o whom such d u t y i s owed. He then c i t e s American a u t h o r i t y d e a l i n g w i t h the s e p a r a t e r i g h t o f p r e - e m p t i o n but a g a i n t h i s i s o f l i t t l e use i n s u p p o r t i n g h i s main c o n t e n t i o n . N e v e r t h e l e s s , i t i s c l e a r t h a t he meant what he s a i d r e g a r d i n g d i r e c t o r s ' d u t i e s as he d i d n o t q u e s t i o n the p e r s o n a l f o r m a t o f the p l a i n t i f f ' s a c t i o n . A more r e c e n t Canadian c a s e which s u p p o r t s by i m p l i c a t i o n the 155 A i d e a o f an expanded duty i s Caufield v. Sunland B i s c u i t Co. T h e r e , an i n j u n c t i o n p r e v e n t i n g the h o l d i n g o f a s h a r e h o l d e r s m e e t i n g a t which the impugned new s h a r e s would have been v o t e d i n f a v o u r o f t h e i r i s s u e and a l l o t m e n t was a l l o w e d a t the b e h e s t o f a m i n o r i t y s h a r e h o l d e r b r i n g i n g a personal a c t i o n . The i s s u e r s were d i r e c t o r s o f the company and the i n j u n c t i o n a l l o w e d b e c a u s e . o f an a n a l o g y w i t h 156 Cook v. Deeks a l t h o u g h i t was n o t s u g g e s t e d t h a t i t was the company's p r o p e r t y which had been e x p r o p r i a t e d ; r a t h e r , i t was the o p p r e s s i v e n a t u r e o f the t r a n s a c t i o n towards the i n d i v i d u a l s h a r e h o l d e r s which a l l o w e d the p l a i n t i f f t o s u c c e e d . Advantages o f b r i n g i n g a P e r s o n a l A c t i o n I f i t were a c c e p t e d by c o u r t s t h a t w i t h r e s p e c t t o a wro n g f u l i s s u e o f s h a r e s the d i r e c t o r s owed a d u t y t o s h a r e h o l d e r s as w e l l as t o the company, the q u e s t i o n o f what.type o f a c t i o n s h o u l d b e s t be b r o u g h t would s t i l l have t o be answered. In o t h e r words, as a d e r i v a t i v e a c t i o n has always been p o s s i b l e f o r an a l l e g e d b r e a c h o f duty by d i r e c t o r s , i s a m i n o r i t y p l a i n t i f f now any b e t t e r o f f b e i n g 1 5 5 [ 1 9 4 1 ] 4 D.L.R. 714 Supra, note'99. - 181 -a b l e t o b r i n g a p e r s o n a l c l a i m ? C e r t a i n l y because o f the p r o c e d u r a l d i f f i c u l t i e s f a c i n g a p l a i n t i f f w a n t i n g t o b r i n g a d e r i v a t i v e a c t i o n 157 i n some Commonwealth j u r i s d i c t i o n s , t h e r e i s an immediate advantage i n i n s t e a d b r i n g i n g a p e r s o n a l a c t i o n , as y e t f r e e from l e g i s l a t i v e c o n t r o l . C o n v e r s e l y , once l e a v e t o b r i n g a d e r i v a t i v e a c t i o n has been o b t a i n e d c e r t a i n advantages f l o w w i t h r e s p e c t t o the c o s t s o f the a c t i o n which can be passed on t o the company i n the c a s e o f a ' , , . 158 s u c c e s s f u l c l a i m . The t r a d i t i o n a l remedies which a s h a r e h o l d e r b r i n g i n g a p e r s o n a l a c t i o n has been a b l e t o o b t a i n have been l i m i t e d t o i n j u n c t i o n s and d e c l a r a t i o n s . In most i n s t a n c e s o f improper s h a r e i s s u e s t h i s r e l i e f would be s u f f i c i e n t t o r e d r e s s the wrong do^e as the p o s i t i o n b e f o r e the i s s u e would e i t h e r be m a i n t a i n e d by an i n j u n c t i o n o r r e s t o r e d by a o r d e r a v o i d i n g the a l l o t m e n t . I t would seem t o make no d i f f e r e n c e whether the p l a i n t i f f i n t h e s e c a s e s was a p p e a r i n g f o r h i m s e l f o r on b e h a l f o f the company as the c o u r t ' s o r d e r s a r e d i r e c t e d o n l y a t the company i n any e v e n t . However, d i f f i c u l t y a r i s e s when the i s s u e s i n v o l v e t h i r d p a r t i e s o t h e r than d i r e c t o r s o r p r e s e n t s h a r e h o l d e r s . I f , as seems e m i n e n t l y r e a s o n a b l e , i t i s a c c e p t e d t h a t an a l l o t m e n t t o bona f i d e t h i r d p a r t y p u r c h a s e r s f o r v a l u e c a n n o t be impeached then the s t a t u s quo may n o t be r e s t o r e d by a s i m p l e d e c l a r a t i o n o r i n j u n c t i o n . Very few o f the. Commonwealth c a s e s a r e c o n c e r n e d w i t h such a problem and most o f t h o s e t h a t a r e 157 C f . s. 222 B.C. Companies A c t , s. 99 B u s i n e s s C o r p o r a t i o n s A c t , R.S.O., 1970, c. 53; S. 229 Canada B u s i n e s s C o r p o r a t i o n s A c t . 1 5 8 S . 2 2 2 ( 5 ) ( a ) B.C. Companies A c t . See a g e n e r a l d i s c u s s i o n on p r o c e d u r a l d i f f e r e n c e s , supra, p. 4 8 f f . N - 182 -have been d e c i d e d i n f a v o u r o f the d e f e n d a n t company i n any e v e n t w i t h the e f f e c t t h a t the q u e s t i o n o f r e c o v e r i n g damages from 159 d i r e c t o r s has n o t a r i s e n . In Howard Smith Ltd. v. Ampol Petroleum 160 Ltd. a t h i r d p a r t y was i n v o l v e d but i t had been p r i v y t o the d e c i s i o n by the d e f e n d a n t company t o i s s u e the s h a r e s and knew why th e y were b e i n g i s s u e d so an o r d e r o f c a n c e l l a t i o n and r e c t i f i c a t i o n was a g a i n a l l t h a t was n e c e s s a r y . One c a s e i n which damages were c l a i m e d by m i n o r i t y s h a r e h o l d e r s from the m a j o r i t y but which d i d not c o n c e r n the i s s u e o f s h a r e s was 161 Farnham v. Fingold; the O n t a r i o C o u r t o f Appeal i n d e t e r m i n i n g o n l y p r o c e d u r a l r e q u i r e m e n t s s a i d t h a t "the c l a i m s made i n the s t a t e m e n t o f c l a i m a r e c o m p l e t e l y n o v e l , " but as- the s u b s t a n t i v e m e r i t s of. the case d i d n o t g e t heard any gu i d a n c e on the q u e s t i o n o f damages can be c o n s i d e r e d as d i c t a o n l y . N e v e r t h e l e s s , i t i s s i g n i f i c a n t t h a t the c o u r t c o n c l u d e d t h a t a p e r s o n a l r e p r e s e n t a t i v e a c t i o n f o r damages would n o t be s t r u c k o u t summarily on th e f a c t s p r e s e n t e d as the i n d i v i d u a l e n t i t l e m e n t o f members was s i m p l y t o a pro r a t a s h a r e o f the premium and no s e p a r a t e c a l c u l a t i o n was'needed. Leave was g i v e n 162 f o r a new w r i t t o be f i l e d ; t h i s was seen as a g r e a t s t e p f o r w a r d i n . c l a s s a c t i o n s under which damages were p r e v i o u s l y n o t a b l e t o be 159 Harlowe's Nominees P t y . L t d . v. Woodside (Lakes E n t r a n c e ) O i l Co. N.L., supra, note 110; Teck Corp. L t d . v. M i l l a r , supra, note 131. In both c a s e s the p l a i n t i f f a r g u ed t h a t the a l l o t t e e o f th e new s h a r e s was aware o f th e f a c t s making the i s s u e w r o n g f u l but t h i s q u e s t i o n d i d n o t have t o be d e c i d e d . 16C]Supra, note 132. 1 6 1 ( 1 9 7 3 ) 33 D.L.R. (3d) 156. 1 6 2 K a z a n j i a n , " C l a s s A c t i o n s i n Canada," (1973) 11 Osgoode H a l l L . J . 397, 434; W i l l i a m s , " Consumer C l a s s A c t i o n s i n Canada - Some P r o p o s a l s f o r - R e f o r m , " (1975) 13 Osgoode H a l l L . J . 1, 33. A l s o see t h e s e a r t i c l e s f o r t h e i r g e n e r a l d i s c u s s i o n on the "problems, o f c l a s s a c t i o n s . - 183 -c l a i m e d . I t f f i a s j a l s o s i n c e been f o l l o w e d by the Supreme C o u r t o f 1 go O n t a r i o i n Winchell v. Del lotto where l e a v e was g i v e n f o r a p e r s o n a l a c t i o n c o m p l a i n i n g o f a c o n s p i r a c y t o reduce the v a l u e o f th e p l a i n t i f f ' s s h a r e s . In the U n i t e d S t a t e s some more f l e x i b i l i t y i n the c o u r t s ' a p p r o a c h , even i n s h a r e i s s u e c a s e s , has g i v e n r i s e t o w i d e r remedies than j u s t i n j u n c t i o n s and d e c l a r a t i o n s . A c o n s t r u c t i v e t r u s t i n f a v o u r o f tho s e s h a r e h o l d e r s c l a i m i n g a p r o p o r t i o n a t e i n t e r e s t i n the new s h a r e s 164 has been o r d e r e d and i n c a s e s c o n c e r n i n g p r e - e m p t i v e r i g h t s damages have been a w a r d e d 1 ^ 5 o r taken i n t o a c c o u n t as a p o t e n t i a l r e m e d y . ^ N e v e r t h e l e s s , i t seems t h a t the most common remedy, even i n the S t a t e s , i s the i n j u n c t i o n o r d e c l a r a t i o n because i n t h e m a j o r i t y o f cas.es t h e s e o r d e r s a d e q u a t e l y r e d r e s s any wrongdoing. I t i s sub-m i t t e d however, t h a t where damage can be shown e i t h e r by an i n d i v i d u a l o r by a c l a s s ( s u b j e c t t o the d i f f i c u l t r u l e s c o n c e r n i n g c l a s s r e c o v e r i e s ) monetary r e c o v e r y s h o u l d be p o s s i b l e even i f the a c t i o n has been b r o u g h t as a p e r s o n a l one. I f the r e c o v e r y i s from t h e d i r e c t o r s r a t h e r than the company, the c a s e o f Houldsworth v. City of 167 Glasgow Bank w i l l not be r e l e v a n t .