Tuesday 13 December 2016

UK: England and Wales: LLPs and derivative claims

Last week, in Harris v Microfusion 2003-2 LLP [2016] EWCA Civ 1212, the Court of Appeal gave judgment in a case concerning a derivative claim brought by a member of a limited liability partnership. The judgment is noteworthy for a couple of reasons: (1) the discussion of the fourth exception ("fraud on the minority") to the rule in Foss v Harbottle (1843) 2 Hare 461; (2) the endorsement it provides of several first instance authorities in this field including Abouraya v Sigmund & Ors [2014] EWHC 277 (Ch). With regard to the fourth exception, Lord Justice McCombe observed (para. [33]):
.... people are free to join as members of corporate entities upon whatever terms they choose, formulated in articles of association, partnership deeds for LLPs or shareholders' agreements. They are bound by such arrangements and if majority rule is provided for, the minority is bound by the wishes of the majority. The majority can choose to excuse breaches of duty by directors, provided that the majority have not used their voting powers to confer benefits upon themselves in breach of duty and are not using the self-same powers to prevent the company from recovering the loss caused to it, in effect expropriating the minority in the process. The constraints imposed by equity make an exception to the rule in Foss v Harbottle in cases where the controlling members are precluded from ratifying the relevant breach by exercise of their majority votes. Thus, the "fraud on the minority" exception prevents directors from improperly benefitting themselves at the expense of the company".

No comments: