Glynn v Owen
| Jurisdiction | Ireland |
| Judge | O'Donnell J. |
| Judgment Date | 23 February 2012 |
| Neutral Citation | [2012] IESC 15 |
| Court | Supreme Court |
| Docket Number | [2005 No. 3238 P] & [S.C. No. 49 of 2008] |
| Date | 23 February 2012 |
[2012] IESC 15
THE SUPREME COURT
Finnegan J.
McKechnie J.
O'Donnell J.
and
FOSS v HARBOTTLE 1843 2 HARE 461
COMPANIES ACT 1963 S205
COMPANIES ACT 1963 S213
WALLERSTEINER v MOIR (NO 2) 1975 QB 373
KEANE COMPANY LAW 3ED DUBLIN 2000 26.48
COMPANY LAW
Derivative action
Rule in Foss v Harbottle - Control - Whether fraud on minority - Personal defendants majority shareholders and directors of company - Whether plaintiffs could institute proceedings on behalf of company - Whether wrongdoers in control of company - Definition of control of company - Whether exceptions to rule to be expanded - Costs - Costs follow event - Derivative action - Whether shareholders entitled to indemnity from company - Whether minority shareholder had reasonable grounds to bring derivative action - Foss v Harbottle (1843) 2 Hare 461 applied - Appeal dismissed (49/2008 - SC - 23/2/2012) [2012] IESC 15
Glynn v Owen
Facts: The plaintiffs appealed against the decision of the High Court that the claims made by them against the first and second named defendants could not be pursued since they were derivative claims, to which the rule in Foss v. Harbottle (1843) 2 Hare 461 applied. The plaintiffs argued that they came within the exception to that rule, where their claims involved a fraud on the minority in circumstances where the alleged wrongdoers were in control of the company. There had been a dispute between the parties about the direction and strategies of the company and its expansion. The High Court had ruled that the exception to the rule in Foss v. Harbottle did not apply. The sole question remained as to whether the Owens could be said to be control of the companies so as to enable the plaintiffs to sue. The plaintiffs and defendants represented themselves on appeal.
Held by O' Donnell J. (Finnegan, McKechnie JJ. concurring) that the appeal would be dismissed and the order of the High Court affirmed in the circumstances. The only argument in favour of permitting the plaintiffs to proceed with the derivative claim on the ground that the interests of justice required it was the very fact that they were unrepresented and not familiar with the legal system. The plaintiffs had not been able to address the substance of their complaint against the Owens.
Reporter: E.F.
JUDGMENT delivered the 23rd day of February, 2012, by O'Donnell J.
Judgment delivered by O'Donnell J. [nem diss]
1 The plaintiffs in this case, Mr. Glynn and Mr. McCabe, appeal against the decision of Finlay Geoghegan J. that the claims made by them against the first and second named defendants Jonathan Owen and Allan Owen, cannot be pursued, since they are derivative claims made on behalf of the fourth and fifth named defendants, to which the rule in Foss v Harbottle (1843) 2 Hare 461 applies so that such claims can only be brought by the company. The plaintiffs had argued that they came within the exception to that rule, where their claims involve a fraud on the minority in circumstances where the alleged wrongdoers are in control of the company. They also argued that there was a further wider exception to the rule, where it was required by the interest of justice. Finlay Geoghegan J. held that the fraud on the minority exception did not apply, and that if there was a wider exception in the interests of justice, that too did not apply.
2 The background to the proceedings has been set out with great clarity in the judgment of the trial judge. It is however necessary to repeat it here in some detail in order to identify the issues which arise on this appeal.
3 The two plaintiffs are businessmen who at the time of these proceedings were involved in the environmental technology industry. They met the second defendant, Allan Owen, who had invented a product which separated oil and water, and had a particular application in the food industry in removing liquids, greases, fats and oils from waste water prior to it going into the drainage system. The product was known as "Fatstrippa". The first named defendant Jonathan Owen is the son of the second named defendant, and was involved in business in the United Kingdom. The third named defendant Mr. Leyland, is a businessman from Northern Ireland who had dealt with the plaintiffs and who had been introduced by them to the first and second named defendants. Together the five men agreed to set up business to manufacture the Fatstrippa product. The fourth defendant, the holding company, was incorporated, and Allan Owen assigned to it his patent applications in six European countries in respect of the Fatstrippa product. The fifth named defendant was licensed to distribute and sell the product. For present purposes the division of function between the two companies is not material, and they will be referred to hereafter as "the company". The product was manufactured under licence in Donegal and was sold mainly in the United Kingdom through a distribution company BPET in which Jonathan Owen (the first named defendant) had an interest. The company had no employees. Each of the live men were directors of the company and held 20% of the shares each. Initially, the second named plaintiff Kevin McCabe was designated the chief executive officer, and the second named defendant Allan Owen was the chairman. The companies were incorporated in April 2001. At the same time, licence agreements were entered into between the two companies, the patent applications were assigned, and shareholder agreements were entered into between the shareholders to which the respective companies were parties. Those agreements contained provisions in relation to non competition with the business of the company and non disclosure of trade secrets and confidential information in relation to the company.
4 There appears to have been an ongoing difference of opinion between the two plaintiffs and the first and second named defendants as to the strategy to be followed by the company. The plaintiffs favoured a major expansion of the business funded by extensive borrowing, while the Owens favoured a more low key licensing approach. This undoubtedly was the source of tension between the parties. The particular source of the present dispute between the parties was. essentially, the activities of the first named defendant Jonathan Owen (and to a lesser extent his father) in the United Kingdom, and latterly and more importantly, in relation to the United States of America.
5 In early 2004 difficulties arose with the United Kingdom distributor BPET. It became insolvent. It was proposed to establish a new United Kingdom distributor "Fatstrippa U.K.". An accountant, Ms. Pamela Lewis, who was already an advisor to the first and second defendant was being proposed as a shareholder and director of Fatstrippa U.K. There was concern about the amount of outstanding debt from BPET to the company. In the autumn of 2004 the second plaintiff Mr. McCabe was informed of certain allegations in relation to the Fatstrippa business in the United Kingdom. He organised a subcommittee of the board to investigate the allegations. He also retained Paul O'Kelly, an accountant in O'Kelly Sutton, the company's accountants, to work with him. In the subsequent disputes, there is no doubt that Mr. O'Kelly was identified as being aligned with the plaintiffs, and Ms. Lewis with the first and second named defendants.
6 It became clear that there were two separate matters of concern. The first was the activities of the first named defendant in respect of BPET, its insolvency and the amount owed to the company. But it also appeared that both Jonathan Owen and his father had had dealings with persons in the United States and in China in respect of the Fatstrippa product which was of concern to the plaintiffs. The trial judge described these matters as follows:
"The second plaintiff appears to have learnt in the course of the investigations what he perceived as disturbing additional information surrounding the insolvency of BPET and the use to which monies earned by that company had been put. Alleged wrongdoing by the first defendant was central to those allegations."
He also learnt of significant ongoing contacts between the first defendant and a number of U.S. parties. He learnt of ongoing involvement of the second defendant with U.S. parties including, it was alleged, receiving them in London. He learnt of the manufacture in China of products allegedly using Fatstrippa technology, and the first defendant's involvement in China. He learnt of the proximate arrival of those products from China to the U.S.
The plaintiffs [Mr. Glynn and Mr. McCabe] and the third defendant [Mr. Leyland] were all unaware of any of this activity until the investigation. The first and second defendants [Jonathan and Allan Owen] acknowledged certain of the alleged activities and that these had been undertaken without disclosure to the remaining members of the board."
7 There is no doubt that these matters, certainly as perceived by the plaintiffs, could have been the source of litigation brought by the company against the first defendant Jonathan Owen in particular, but also against the second defendant, Allan Owen. But as the trial judge observed at page 29 of her judgment:
"It is a matter for the majority of the board of directors or shareholders to determine in an appropriate case whether litigation should be commenced by, and in the name of a company against an allegedly wrongdoing director or shareholder or directors or shareholders (at least where...
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