Prudential Assurance Co Ltd v Newman Industries Ltd

[COURT OF APPEAL]
A
PRUDENTIAL ASSURANCE CO. LTD. v. NEWMAN INDUSTRIES
LTD. AND OTHERS (No. 2)

[1976 P. No. 112]

1981 March 23, 24,25, 26, 27, 30, 31; Cumming-Bruce, B
April 1, 2, 3, 6, 7, 8, 9, 13, 14, 15, 28, 29, 30; Templeman and
May 1, 5, 6, 11, 12, 13, 14, 15, 18, 19, 20, 21, 22; Brightman LJJ.
June 2, 3, 4, 5, 10, 11, 22;
July 27, 28, 30, 31;
Oct. 5
Company — Shareholder — Rights against company directors— C
Minority shareholder's action—Directors advising acquisition
of another company's assets—Majority of shareholders voting
to acquire assets—Directors having no control over voting
rights—Whether minority shareholder entitled to bring action
on behalf of itself, company and other shareholders suffering
damage — Whether right to bring derivative action to be
determined as preliminary issue
D
The plaintiffs, P Ltd., held 3-2 per cent, of the issued
ordinary shares in N Ltd., the first defendant. B, the second
defendant, was at the material time the chairman and chief
executive of N Ltd. and the third defendant, L, was a non-
executive director and its vice-chairman. B was also the
non-executive chairman of the fourth defendant, T.P.G., and
L its vice-chairman and chief executive.
Between 1972 and the end of 1974, T.P.G. acquired the E
assets of S Ltd. whose shares were beneficially owned by B
and L and which owned 35 per cent, of T.P.G.'s shares and
some of N Ltd.'s shares. T.P.G. increased its holding in N
Ltd. to 25 per cent, and also acquired shares in various other
companies which it financed by the issue of its own shares
and bank loans. By January 1975, T.P.G. was in serious
financial difficulties and the " January agreements" were
entered into whereby, undisclosed to the board of N Ltd., N F
Ltd. agreed to buy T.P.G.'s holdings in two companies for
£85,000 and £146,000 respectively, and under the agreement,
unbeknown to the board, N Ltd. paid £215,950.
B then prepared a memorandum ("the strategy docu-
ment ") which recommended that the board of N Ltd. should
purchase from T.P.G. all its assets, except its shareholding
in N Ltd. and a loan from S Ltd. of £100,000, in considera-
tion of N Ltd. assuming T.P.G.'s liabilities and paying T.P.G. "
the sum of £350,000. At a board meeting all the directors
except M agreed to accept the proposals in principle. On M's
suggestion a report was obtained from N Ltd.'s auditors.
The January agreements were concealed from the auditors
who valued the assets as £325,000 and the board of N Ltd.
accepted that valuation as a basis of negotiation.
On June 3, 1975, B signed the agreement on behalf of N „
Ltd. (" the June agreement") for the purchase of the assets
of T.P.G. for £325,000 which was conditional, as required by
Stock Exchange regulations, on the approval of the share-
holders of N Ltd. and T.P.G. Extraordinary general meetings

1 Ch. Prudential Assurance v. Newman Industries (C.A.)
of both companies were convened. The notice which convened
A the extraordinary general meeting of N Ltd. contained a
letter signed by B, with documents annexed (" the circular ")
which recommended shareholders to vote in favour of the
proposal and which referred to a payment of £216,000 by
N Ltd. as being an advance payment for the purchase of
T.P.G.'s assets. All the members of a committee of the board
approved the letter apart from M. The extraordinary general
meeting was postponed as a result of the pressure by M, the
" plaintiffs and other institutional investors in order that a
report be prepared by a merchant bank, but before the report
was ready, the meeting was held on July 29, 1975, and a
resolution passed approving the purchase of T.P.G.'s assets
by N Ltd.
By an amended writ and statement of claim, the plaintiffs
claimed, inter alia, declaratory relief and as against B, L and
p T.P.G. damages on behalf of the plaintiffs, N Ltd. and all the
c
shareholders of N Ltd. on July 29, 1975, who like the plaintiffs
had suffered damage and were entitled to relief. The plaintiffs
were claiming in a direct capacity, in a derivative action on
behalf of N Ltd. and in a representative capacity on behalf
of the shareholders.
By a summons of May 10, 1979, the defendants applied
to have heard as a preliminary issue whether the plaintiffs
■Q as a minority shareholder in N Ltd. were entitled to maintain
the claim against them. On June 18, 1979, Vinelott J. refused
the application and dismissed the summons.
On the hearing of the action in February 1980, Vinelott J.
held, inter alia, that B and L, in order to benefit T.P.G. had
conspired to injure N Ltd. and indirectly its shareholders
whereby the shareholders had suffered damage and that, on
the evidence, the interests of justice required that the plain-
E tiffs as a minority shareholder in N Ltd. should be permitted
to prosecute an action on behalf of the company.
On appeal by B and L: —
Held, allowing the appeal in part, (1) that on the evidence
the serious findings against B and L of conspiracy and fraudu-
lent conduct were not substantiated other than that they
dishonestly concealed the January agreements and payments
thereunder from the directors and shareholders of N Ltd. in
F order to facilitate the acceptance of the proposals in the
strategy document; and that the dishonest concealment in-
volved and included a misleading statement in the circular of
the origin and purpose of the payment by N Ltd. of £216,000
to T.P.G. whereby the assets purchased by N Ltd. were over-
valued by £45,000, thereby causing damage to N Ltd. by that
amount (post, pp. 232B-D, 234D-E).
-, (2) That where fraud was practised on a company, it was
^* the company that prima facie should bring the action and
it was only in circumstances where the board of the company
was under the control of the fraudsters that a derivative action
should be brought; that the question whether a company was
under the control of those practising an alleged fraud on it
should be determined before a derivative action was heard
and, accordingly, the judge erred in not determining as a
TT preliminary issue whether the plaintiffs should be allowed to
proceed in their derivative action (post, pp. 211A, B, 221A-B);
but that, since the action had been heard and N Ltd.
had indicated that it would, as a party to the action, take
the benefit of an order made in its favour, the question

Prudential Assurance v. Newman Industries (C.A.) [1982]
whether the plaintiffs had status to bring the derivative action A
did not arise for determination (post, p. 220C-F).
Per curiam. It is doubtful whether it is a practical test
of an exception to the rule in Foss v. Harbottle (1843) 2 Hare
461 that the justice of the case requires the bringing of a deri-
vative action (post, pp. 221F—222B). The right to bring a
derivative action should not be determined as a preliminary
issue on the hypothesis that all the allegations in the statement
of claim of " fraud " and " control" are facts. Whatever may B
be the properly defined boundaries of the exception to the rule,
the plaintiff before proceeding with his action ought at least to
be required to establish a prima facie case that the company is
entitled to the relief claimed and the action falls within the
proper boundaries of the exception to the rule in Foss v.
Harbottle (post, pp. 221F—222B).
(3) That the plaintiffs' personal action, to which the repre-
sentative action was linked, was an action to recover damages C
on the basis that the company in which the plaintiffs were
interested had suffered damage; that, since the plaintiffs'
right as holders of shares was merely a right of participation
in the company on the terms of the articles of association,
any damage done to the company had not affected that right
and, accordingly, the action was misconceived (post, pp. 2 2 2 F —
223B).
Order of Vinelott J. [1981] Ch. 257; [1980] 3 W.L.R. 543; D
[1980] 2 All E.R. 841 varied in part.

The following cases are referred to in the judgment:
Atwool v. Merryweather (1867) L.R. 5 Eq. 464; 37 L.J.Ch. 35.
Baillie v. Oriental Telephone and Electric Co. Ltd. [1915] 1 Ch. 503, C.A.
Clinch v. Financial Corporation (1868) L.R. 5 Eq. 450.
Cotter v. National Union of Seamen [1929] 2 Ch. 58, C.A.
B
East Pant Du United Lead Mining Co. Ltd. v. Merryweather (1864) 2
Hem. & M. 254.
Edwards v. Halliwell [1950] 2 All E.R. 1064, C.A.
Foss v. Harbottle (1843) 2 Hare 461.
Gray v. Lewis (1873) L.R. 8 Ch.App. 1035.
Heyting v. Dupont [1963] 1 W.L.R. 1192; [1963] 3 All E.R. 97; [1964] 1 p
W.L.R. 843; [1964] 2 AU E.R. 273, C.A.
Russell v. Wakefield Waterworks Co. (1875) L.R. 20 Eq. 474.

The following additional cases were cited in argument:
Cockburn v. Thompson (1809) 16 Ves.Jun. 321.
Wallworth v. Holt (1841) 4 Myl. & Cr. 619.
Q
APPEAL from Vinelott J.
The plaintiffs, Prudential Assurance Co. Ltd., held 3-2 per cent, of the
issued ordinary shares of the first defendant, Newman Industries Ltd.
The second defendant, Alan Frank Bartlett, was at the material time the
chairman and chief executive of Newman and the third defendant, John
Knox Laughton, was a non-executive director and its vice-chairman. Mr. H
Bartlett was also the non-executive chairman of the fourth defendant,
Thomas Poole & Gladstone China Ltd. (T.P.G.) and Mr. Laughton its
vice-chairman and chief executive.

207.
1 Ch. Prudential Assurance v. Newman Industries (C.A.)
. Between 1972 and the end of 1974, T.P.G. acquired interests in various
companies including the assets of Strongpoint Ltd., whose shares were
beneficially owned by Mr. Bartlett and Mr. Laughton and which owned
35 per cent, of the shares of T.P.G. and a number of Newman shares.
T.P.G. also increased its holding in Newman to 25 per cent, and acquired
shares in Alfred Clough Ltd., S. Newman Ltd. (a private company), Dover
Engineering Ltd., Metropole Industries Ltd. and Agar Cross Ltd. T.P.G.
B also formed a new company, Smithamcote Ltd., to acquire shares in two
other companies in exchange for shares in Smithamcote. T.P.G. took 49
per cent, of voting shares of Smithamcote and sold to Smithamcote for
£100,000 (which remained outstanding as a debt due from Smithamcote)
shares of an investment company into which had been put T.P.G.'s
minority holding of shares of S. Newman Ltd. T.P.G.'s acquisitions were
Q financed by the issue of its own shares and loans from banks. By January
1975 it was in serious financial difficulty and, in those circumstances, the
" January agreements " were entered into by which, undisclosed to the
Newman board, Newman agreed to buy T.P.G.'s shareholdings in Metro-
pole and Dover for £85,000 and £146,000 respectively. The amount was
above the value of those shares on the Stock Exchange and, under the
agreements, Newman paid £215,950 unknown to the Newman board,
D although the sum mentioned in the circular referred to below was £216,000.
Mr. Bartlett then prepared a memorandum (" the strategy document"),
which made a recommendation to the Newman board, inter alia, that
Newman should purchase from T.P.G. all its assets, except its shareholding
in Newman and a loan from Strongpoint of £100,000, in consideration for
Newman assuming T.P.G.'s liabilities and paying to T.P.G. the sum of
E £350,000. At a board meeting all the directors, except Mr. Angus Murray,
agreed to accept the recommendation in principle and, on Mr. Murray's
suggestion, a report was to be obtained from Newman's auditors, Deloitte
& Co. Mr. Cooper of Deloitte made a valuation of the net assets to be
acquired by Newman but, in making that valuation, the January agreements
were concealed from him, and, after speaking to Mr. Laughton, he increased
p his provisional assessment of the assets from £235,000 to £325,000. The
board accepted that valuation as a basis for negotiation. On June 3, Mr.
Bartlett signed on behalf of Newman an agreement for the purchase of
the assets of T.P.G. for £325,000 (" the June agreement") but the agree-
ment was conditional on the approval of Newman and T.P.G. As the
agreement was between companies having among their directors the same
people, the Stock Exchange regulations required that the agreement be
G approved at extraordinary general meetings of Newman and T.P.G. With
the notice convening the extraordinary general meeting of Newman, a
letter signed by Mr. Bartlett with documents annexed (" the circular")
was sent to the shareholders. The letter stated that the directors of the
Newman board recommended that the shareholders voted in favour of
the proposal. The letter had been approved by the members of a com-
JJ mittee of the board except for Mr. Murray, who objected to it on the
basis that not all the directors had considered and approved the proposals.
The extraordinary general meeting was postponed as a result of pressure
from Mr. Murray, the plaintiffs and other institutional investors, so that

208
Prudential Assurance v. Newman Industries (C.A.) [1982]
a report could be prepared by the merchant bankers, Schroder, Wagg & .
Co. The report could not be produced in time, and a resolution was passed
at an extraordinary general meeting of Newman held on July 29, 1975,
approving the purchase of T.P.G.'s assets by Newman.
By an amended writ and statement of claim, the plaintiffs, Prudential
Assurance Co. Ltd., sued (i) on behalf of themselves and all the share-
holders of Newman other than Mr. Bartlett and T.P.G.; (ii) in the plain-
tiffs' personal capacity; and (iii) on behalf of all the shareholders of B
Newman on July 29, 1975, who like the plaintiffs had suffered damage
and were entitled to damages. They claimed, inter alia, a declaration
that the circular sent by Newman to their shareholders and signed by
Mr. Bartlett, was and had at all times been misleading and/or tricky;
damages against Mr. Bartlett and Mr. Laughton for conspiracy and breach
of duty; and further or in the alternative as against the fourth defendant C
T.P.G., a declaration that in entering into the agreement of June 3, 1975,
or in the alternative in receiving the money under the terms of the agree-
ment, when it knew or ought reasonably to have known that for Newman
to enter into the agreement, upon the terms on which it did so, involved
a conspiracy and breach of duty on the part of Mr. Bartlett and Mr.
Laughton. T.P.G. (a) acquired the benefit of the agreement as constructive JJ
trustees of Newman and, accordingly, held the benefit of the agreement
on trust for Newman, and (b) was liable to account to Newman for the
full amount of the loss suffered by Newman as a result of the acquisition
of the benefit.
By their defence the defendants denied the allegations made by the
plaintiffs and claimed that the plaintiffs were not entitled to any of the _
relief claimed. They sought to have heard as a preliminary issue whether
the plaintiffs, as a minority shareholder in Newman, were entitled under
the rule in Foss v. Harbottle (1843) 2 Hare 461 to maintain the claim
against them. On June 18, 1979, Vinelott J. refused the defendants'
application: see [1981] Ch. 229, 233.
Vinelott J. found that Mr. Bartlett and Mr. Laughton had conspired
to injure Newman and indirectly the shareholders with the result that "
Newman had acquired T.P.G.'s assets for £445,000 more than Newman
need have paid for them. He held that since the plaintiffs' personal,
derivative and representative claims were all founded on the conspiracy
to injure Newman, there was no objection to them being joined in one
action and, although Mr. Bartlett and Mr. Laughton did not have control
of Newman, it was doubtful whether the shareholders would have the O
independent advice which would enable them to exercise a proper judg-
ment on whether Newman should bring an action and, in those circum-
stances, justice required the court to entertain the action of a minority
shareholder.
The defendants Mr. Bartlett and Mr. Laughton appealed. On July 27,
28, 30, 31 the Court of Appeal delivered a reserved judgment divided j j
into seven chapters under the headings: (1) Introduction; (2) The position
of Newman Ltd. and T.P.G. Ltd. on March 31, 1973; (3) Events after
March 31, 1973; (4) The proceedings; (5) The law; (6) The examination

209
1 Ch. Prudential Assurance v. Newman Industries (C.A.)
of the judgment of Vinelott J.; and (7) Conclusions. Only chapters 5 and
7 are included in this report.
On July 31, no order was made by the court and the matter was
adjourned for argument on the form of the order and costs. On October
5 the parties stated that all outstanding matters between them had been
settled.
B The second and third defendants, Mr. Bartlett and Mr. Laughton,
appeared in person on the hearing of the appeal.
Leonard Caplan Q.C., Peter Curry Q.C. and Philip Heslop for the
plaintiffs.
Robert Reid Q.C. and David Hodge for the first defendant.
The fourth defendant did not appear and was not represented on the
rs hearing of the appeal.
Judith Jackson, on October 5, for the second and third defendants.
Jules Sher Q.C. and Charles Turnbull, on October 5, for the fourth
defendant.
Caplan Q.C. for the plaintiffs. The rule in Foss v. Harbottle (1843) 2
Hare 461 is a rule of procedure and not of substantive law. A minority
D shareholder can sue the company where the needs of justice so require.
The rule is of respectable antiquity and on the facts of the present case,
the plaintiffs were entitled to prosecute an action on behalf of the company
as a minority shareholder in the interests of justice.
[On June 10, 1981, the court stated that argument on the exception to
the rule in Foss v. Harbottle was not open to the plaintiffs as a demurrer
because the preliminary issue was not the subject of appeal in the court.
The preliminary point had been overtaken by the decision in the trial
before Vinelott J. [1981] Ch. 257. For these reasons, the court did not
wish to hear further argument on the matter.]
Cur. adv. vult.

p July 27, 28, 30, 31. CUMMING-BRUCE, TEMPLEMAN and BRIGHTMAN
L.JJ. took it in turns to read the following judgment of the court. In the
course of the introduction their Lordships said:
The great length of this judgment has naturally caused us to consider
whether it would be sensible to hand down a typed or printed version, as
an alternative to the many hours in court which will inevitably be spent
on delivering our judgment. We have rejected this obvious and convenient
" expedient for two reasons. First, the appellants have been found guilty
by the trial judge of a civil conspiracy in circumstances which, subject to
stricter procedures, could equally well have led to their conviction on a
charge of criminal conspiracy. In such circumstances we think that which-
ever way our verdict may go we should express our conclusions orally in
open court. Secondly, the delay which would be caused by typing or
JJ printing and then proof-reading a written judgment suitable for handing
down would postpone judgment over the Long Vacation, When men's
reputations are at stake, we do not think it is right to impose an avoidable
two months delay. [Having read chapters one to four, they continued: ]

210
Prudential Assurance v. Newman Industries (C.A.) [1982]
Chapter 5—The law .
As we have indicated, when, on January 9, 1976, the writ was issued
the plaintiffs, Prudential Assurance Co. Ltd., sued only in their personal
capacity and sought only to establish that the June agreement had not
been duly approved at a valid meeting. When the writ was first amended
in red on March 8, 1976, the title of the plaintiffs was altered so as to
indicate that it was suing on behalf of Newman, the first defendant, using
the time-honoured formula for this purpose " On behalf of themselves and ^
all other shareholders, etc. . . ." The writ was also amended by adding
Mr. Laughton and T.P.G. as defendants. The writ was expanded by
claiming as against T.P.G. rescission of the agreement and damages; and
also, as against Mr. Bartlett and Mr. Laughton, damages for breach of
duty and damages for conspiracy.
As we have already related, it was a matter of debate in the court c
below whether the action as reconstituted was exclusively a " derivative "
action for an injury allegedly done to Newman, as counsel for Mr.
Bartlett and Mr. Laughton assumed, or was additionally a " personal"
action for injury allegedly done to the plaintiffs and other shareholders.
Whether the action as then constituted and the claim as then formulated
could properly be regarded as pursuing both derivative and personal
D
remedies is not a matter which we need to consider.
A derivative action is an exception to the elementary principle that
A cannot, as a general rule, bring an action against B to recover damages
or secure other relief on behalf of C for an injury done by B to C. C is the
proper plaintiff because C is the party injured, and, therefore, the person
in whom the cause of action is vested. This is sometimes referred to as
the rule in Foss v. Harbottle (1843) 2 Hare 461 when applied to corpora- E
tions, but it has a wider scope and is fundamental to any rational system
of jurisprudence. The rule in Foss v. Harbottle also embraces a related
principle, that an individual shareholder cannot bring an action in the
courts to complain of an irregularity (as distinct from an illegality) in
the conduct of the company's internal affairs if the irregularity is one
which can be cured by a vote of the company in general meeting. We „
are not concerned with this aspect of the rule.
The classic definition of the rule in Foss v. Harbottle is stated in the
judgment of Jenkins L.J. in Edwards v. Halliwell [1950] 2 All E.R. 1064
as follows. (1) The proper plaintiff in an action in respect of a wrong
alleged to be done to a corporation is, prima facie, the corporation. (2)
Where the alleged wrong is a transaction which might be made binding
on the corporation and on all its members by a simple majority of the G
members, no individual member of the corporation is allowed to maintain
an action in respect of that matter because, if the majority confirms
the transaction, cadit quaestio; or, if the majority challenges the trans-
action, there is no valid reason why the company should not sue. (3) There
is no room for the operation of the rule if the alleged wrong is ultra vires
the corporation, because the majority of members cannot confirm the JJ
transaction. (4) There is also no room for the operation of the rule if the
transaction complained of could be validly done or sanctioned only by a
special resolution or the like, because a simple majority cannot confirm

211
1 Ch. Prudential Assurance v. Newman Industries (C.A.)
a transaction which requires the concurrence of a greater majority. (5) There
is an exception to the rule where what has been done amounts to fraud
and the wrongdoers are themselves in control of the company. In this
case the rule is relaxed in favour of the aggrieved minority, who are
allowed to bring a minority shareholders' action on behalf of themselves
and all others. The reason for this is that, if they were denied that right,
their grievance could never reach the court because the wrongdoers them-
B selves, being in control, would not allow the company to sue.
By their summons issued on May 10, 1979, Mr. Bartlett and Mr.
Laughton invoked the rule in Foss v. Harbottle. After some 2\ days of
argument Vinelott J. dismissed the summons on June 18, 1979, not on the
ground that the plaintiffs were entitled to bring a derivative action but on
the ground that it was more convenient to decide that issue after the action
£ had been tried. For reasons which we explain later we have no doubt
whatever that that was a wrong decision.
Although not a party to the summons of May 10, Newman supported
it. Newman was represented by leading counsel, who made a forceful
statement on day 1 to the effect that, although the action was brought
for the benefit of Newman, "it is the concern of the board that the
company shall not be killed by kindness." He added that not only was it
D the view of the board that the action was one which they did not wish
to pursue on behalf of the company but that it was quite contrary to the
interests of the company that the transaction should now be the subject
of any rescission or criticism. He said: " l a m therefore concerned . . .
that this action . . . shall not proceed—a fortiori... it should be disposed
of as quickly as possible." This protest was repeated at the close of the
E plaintiffs' case on day 34, when counsel formally withdrew in order to
avoid needless expense. This is what counsel then told the court:
" My clients, Newman Industries Ltd., are necessary formal parties to
this action, but they are neither prosecuting it as a corporate entity
nor now defending it in a combative role. The circumstances of the
case . . . as far as my researches go are unique. They are unique from
p the company's point of view in this particular material respect in
that, although the action is framed in part as a minority shareholder's
action, there is in fact no shareholding or board control vested in the
personal defendants. Indeed, as regards the Newman board Mr.
Laughton has not been a director since before the commencement of
this action, and Mr. Bartlett, although holding such office, has at all
material times been but one only of a number of directors compris-
G ing the present Newman board. As I indicated briefly to your Lordship
at the commencement of this trial, my learned junior and I were at
pains to defend it by decision of the independent board, that is to say
Mr. Bartlett taking no part in that decision. The independent board,
so I have it, was motivated by the desire and wish that your Lord-
ship might be afforded every assistance which a substantial public
JJ quoted company might be expected to render a court concerned with
its affairs. . . . The independent board itself has throughout main-
tained the view that, whilst it was powerless to prevent the Prudential
from pursuing the action, it was not one it, the independent board,

212
Prudential Assurance v. Newman Industries (C.A.) [1982]
wished to adopt on Newman's behalf, nor had it been approached by
any shareholder requesting that it should. It has been and in fact
remains the view of the independent board that any advantage to
the company which this action could procure for it is vastly out-
weighed by harm being inflicted upon it by the action continuing with
the consequent adverse publicity and other side effects."
Observe what was being said on behalf of Newman to the judge: " any _
advantage to the company which this action could procure is vastly
outweighed by harm being inflicted upon it." This was an apparently
responsible statement made by eminent leading counsel on the instructions
of persons said to be the independent members of the board. The judge
does not refer to this statement in his judgment; he does not say that he
did not believe it; he does not say that he regarded the independent mem-
bers of the board as acting under the influence of Mr. Bartlett. He does C
not seem to have asked himself the all-important question: " Ought I to
be trying a derivative action? "
The assertion by Newman's counsel that the independent board " was
powerless to prevent the Prudential from pursuing the action " may have
been based on the supposition that the plaintiffs had on the facts alleged
in the statement of claim a personal cause of action for damages against jy
Mr. Bartlett and Mr. Laughton independently of Newman's cause of
action for damages. This supposition, if it existed, was erroneous for
reasons which we explain later. It would have been open to Newman to
have issued its own summons before the trial in order to test the right
of the Prudential to pursue a derivative action, and to have supported it
with evidence proving the objectiveness of the board's view and explain-
ing the potential injury to Newman which would be caused by the B
proceedings.
At the end of the day the judge found that a fraud had been com-
mitted by Mr. Bartlett and Mr. Laughton against Newman. The judge
then addressed his mind to the question whether the right of a shareholder
to sue in a case of fraud extended beyond a case of voting control by the
wrongdoers. It was not pleaded, and could not be alleged, that Mr. Bartlett p
and Mr. Laughton had voting control. The conclusion reached by the
judge was that a shareholder was entitled to prosecute an action on behalf
of the company if " the interests of justice do require that a minority
action should be permitted" see [1981] Ch. 257, 327; and that this was
established in the instant case because the judge was satisfied on the
evidence as a whole:
" that there was no way in which Prudential could have ensured
that the question whether proceedings should be brought by Newman
would be fairly put to the shareholders or even that a full investiga-
tion would be made into all the circumstances surrounding the trans-
action including in particular Mr, Cooper's valuation."
In widening the scope of the accepted exception to the rule in Foss v. JJ
Harbottle by holding that a derivative action can be maintained whenever
the interests of justice so require, the judge, at pp. 322-323, drew attention
to references to " the justice of the case " which appear in some of the

213
1 Ch. Prudential Assurance v. Newman Industries (C.A.)
. reported authorities on this topic: Russell v. Wakefield Waterworks Co.
A
(1875) L.R. 20 Eq. 474, 480 and Edwards v. Halliwell [1950] 2 All E.R.
1064, 1067; to which may be added Baillie v. Oriental Telephone and
Electric Co. Ltd. [1915] 1 Ch. 503, 518; Cotter v. National Union of
Seamen [1929] 2 Ch. 58, 69 and Heyting v. Dupont [1964] 1 W.L.R.
843, 851.
We turn now to certain of the authorities, starting with Foss v. Harbottle,
B 2 Hare 461. It came before Sir James Wigram V.-C, on demurrer. The
facts are narrated in that report at intimidating length and can be sum-
marised as follows. The company concerned was the Victoria Park Com-
pany, which had been incorporated by Act of Parliament in 1837 to
develop certain plots of land. There were eight promoters, Harbottle,
Adshead, Byrom, Westhead, Bealey, Denison, Bunting and Lane. The
Q directors were the first five of these gentlemen.
Lane was the architect and Bunting the solicitor. Foss and Turton
were the complaining shareholders. They filed a bill on behalf of them-
selves and all other shareholders in the company (except the defendants)
against the eight promoters, including the assignees of three of them who
had become bankrupt. It was alleged that the plots had been bought by
the company in pursuance of an arrangement fraudulently concocted
D between seven of the promoters to enable them to derive a personal benefit
from the establishment of the company and the sale to it of the plots at
exorbitant prices. It was further alleged, at pp. 478-479, 480:
" . . . the defendants concealed from the plaintiffs . . . the several
fraudulent and improper acts of the . . . defendants, and the plaintiffs
. . . had only recently ascertained the particulars thereof . . . and they
E were unable to set forth the same more particularly,—the defendants
having refused to make any discovery thereof, or to allow the plaintiffs
to inspect the books, accounts, or papers of the company . . . and that
at [general meetings of the company] false and delusive statements
respecting the circumstances and prospects of the company were made
by the directors to the proprietors who attended such meetings, and
p the truth of the several fraudulent and improper acts and proceedings
therein complained of was not disclosed."
The bill charged that, in the circumstances, the defendants were jointly
and severally liable to make good to the company the losses incurred in
consequence of the wrongful and fraudulent acts and proceedings to
which they were parties or privies. The defendants (except Byrom, who
G took no part) demurred to the bill on the ground that the corporation was
not before the court, and that the defect could not be cured by making
the corporation a defendant because the plaintiffs were not entitled to
represent the corporation.
For the purposes of the application Wigram V.-C. made the assump-
tion that the company was entitled, as matters then stood, to complain
„ of the transactions mentioned in the bill. He continued at pp. 490-491,
H
492:
" . . . the b i l l . . . is brought by two individual corporators, professedly
on behalf of themselves and all the other members of the corporation,

214
Prudential Assurance v. Newman Industries (C.A.) [1982]
except those who committed the injuries complained of,—the plaintiffs .
assuming to themselves the right and power in that manner to sue on
behalf of and represent the corporation itself.
" It was not, nor cculd it successfully be argued, that it was a
matter of course for any individual members of a corporation thus
to assume to themselves the right of suing in the name of the cor-
poration. In law, the corporation, and the aggregate members of the
corporation, are not the same thing for purposes like this; and the B
only question can be, whether the facts alleged in this case justify a
departure from the rule which prima facie would require that the
corporation should sue in its own name and in its corporate character,
or in the name of some one whom the law has appointed to be its
representative. . . . If a case should arise of injury to a corporation by
some of its members, for which no adequate remedy remained, except Q
that of a suit by individual corporators in their private characters,
and asking in such character the protection of those rights to which
in their corporate character they were entitled, I cannot but think
that the principle so forcibly laid down by Lord Cottenham in
Wallworth v. Holt, and other cases, would apply, and the claims of
justice would be found superior to any difficulties arising out of
technical rules respecting the mode in which corporations are required D
to sue.
" But, on the other hand, it must not be without reasons of a very
urgent character that established rules of law and practice are to be
departed from,—rules, which, though in a sense technical, are founded
on general principles of justice and convenience; and the question is,
whether a case is stated in this bill, entitling the plaintiffs to sue in E
their private characters."
Wigram V.-C. then proceeded to answer this question in the negative, for
the reasons indicated in the following extracts from his judgment, at pp.
492-493:
" . . . the directors are made the governing body, subject to the
superior control of the proprietors assembled in general meetings;
and, as I understand the Act, the proprietors so assembled have power,
due notice being given of the purposes of the meeting, to originate
proceedings for any purpose within the scope of the company's
powers, as well as to control the directors in any acts which they
may have originated. . . . The first ground of complaint is one which,
though it might prima facie entitle the corporation to rescind the G
transactions complained of, does not absolutely and of necessity fall
under the description of a void transaction. The corporation might
elect to adopt those transactions, and hold the directors bound by
them. In other words, the transactions admit of confirmation at the
option of the corporation...."
Wigram V.-C. then considered the second ground of complaint (which **
we need not deal with) and continued, at pp. 493, 494-495:
" . . . whilst the supreme governing body, the proprietors at a special

215
1 Ch. Prudential Assurance v. Newman Industries (C.A.)
. general meeting assembled, retain the power of exercising the func-
tions conferred upon them by the act of incorporation, it cannot be
competent to individual corporators to sue in the manner proposed
by the plaintiffs on the present record . . . the majority of the pro-
prietors at a special general meeting assembled, independently of any
general rules of law upon the subject, by the very terms of the incor-
poration in the present case, has power to bind the whole body, and
B every individual corporator must be taken to have come into the
corporation upon the terms of being liable to be so bound. How then
can this court act in a suit constituted as this is, if it is to be assumed,
for the purposes of the argument, that the powers of the body of the
proprietors are still in existence, and may lawfully be exercised for a
purpose like that I have suggested? Whilst the court may be declaring
p the acts complained of to be void at the suit of the present plaintiffs,
who in fact may be the only proprietors who disapprove of them,
the governing body of proprietors may defeat the decree by lawfully
resolving upon the confirmation of the very acts which are the subject
of the suit. The very fact that the governing body of proprietors
assembled at the special general meeting may so bind even a reluctant
minority, is decisive to show that the frame of this suit cannot be
D sustained whilst that body retains its functions. In order then that this
suit may be sustained, it must be shown either that there is no such
power as I have supposed remaining in the proprietors, or, at least,
that all means have been resorted to and found ineffectual to set that
body in motion: this latter point is nowhere suggested in the bill:
there is no suggestion that an attempt has been made by any pro-
n prietor to set the body of proprietors in motion, or to procure a
meeting to be convened for the purpose of revoking the acts com-
plained of. The question then is, whether this bill is so framed as of
necessity to exclude the supposition that the supreme body of pro-
prietors is now in a condition to confirm the transactions in question;
or, if those transactions are to be impeached in a court of justice,
whether the proprietors have not power to set the corporation in
F motion for the purpose of vindicating its own rights."
These questions were answered against the plaintiffs.
The next case which falls for consideration related to the fraudulent
promotion of some worthless lead mines. There were in fact two actions.
It is important to observe that in the first action there was a motion to
strike out, but no such motion in the second action, which proceeded to
G trial. The first action is reported as East Pant Du United Lead Mining Co.
Ltd. v. Merryweather (1864) 2 Hem. & M. 254. It was alleged that
Merryweather, a director of the company, acting in concert with one of
his co-directors, Whitworth, had fraudulently sold the mines to the
company for £4,000 cash, which they shared between themselves, and
600 shares, to be allotted to Merryweather. In June 1864 a bill was filed
JJ in the name of the company against Merryweather to set aside the sale.
In August the defendant moved to strike out the bill by way of demurrer.
The court adjourned the application in order to allow an opportunity for
a general meeting to be held. The meeting was held in October. A resolu-

216
Prudential Assurance v. Newman Industries (C.A.) [1982]
tion was proposed for adopting the proceedings and continuing the action. .
Whitworth proposed an amendment to stay the action and refer the
dispute to arbitration. The amendment was put to the vote, and a poll
was taken. Out of 668 votes cast 324 were against the stay and 344 were
in favour of the stay, but of the latter 78 votes were cast by Merryweather
and 28 votes by Whitworth; if Merryweather had not voted, the motion
would have been supported by only 266 votes and would have been lost.
It was argued by counsel for the company, at p. 257: B
" If a minority of a company were allowed to file a bill in the
company's name, charging fraud against some of the majority, and
alleging that those persons were not to be considered as shareholders
or entitled to vote, and thus endeavouring to turn their minority into
a majority so as to acquire the right to use the name of the company,
any company's affairs might be made the subject of litigation, upon C
allegations of fraud which might be entirely false; and yet, as this
could not be proved till the hearing, irremediable mischief might be
done in the meantime."
Page Wood V.-C. acceded to the motion, expressing his reasons, at p. 261:
" Then comes the question, has the company now sanctioned the suit? ^
To decide that it has done so, would be to discard Mr. Merryweather's
votes, and to do that would, in effect, be to decide now on this appli-
cation the question at issue in the suit. But if I assume, as upon this
motion I must assume, that Mr. Merryweather was entitled to the
600 shares which he actually holds in the company, the further
question occurs, has he a right to vote in respect of such shares upon
a question in which he is personally interested? Now as to the E
management of the company by the board, no director is entitled to
vote as a director in respect of any contract in which he is interested;
but the case is different when he acts as one of the whole body of
shareholders. The shareholders of one company may have dealings
with interests in other companies, and therefore it would be mani-
festly unfair to prevent an individual shareholder from voting as a F
shareholder in the affairs of the company, At a general meeting,
therefore, Mr. Merryweather's votes must be held to be good, so
long as he continues to hold his shares. Further than this, the court
cannot be asked now to give an opinion, for to do so would be to
decide the very question at issue in the cause."
A shareholder then began another action in December, suing on behalf G
of himself and all other shareholders (except Merryweather and Whit-
worth) against Merryweather, Whitworth and the company. This is
reported as Atwool v. Merryweather in a footnote to Clinch v. Financial
Corporation (1868) L.R. 5 Eq. 450, 464, and more fully in 37 L.J.Ch. 35.
On this occasion the defendant did not move to strike out the bill. The
action was fought to a finish. Page Wood V.-C. held, first, that the contract JJ
was a complete fraud, and secondly, that there was not such a defect in
the constitution of the suit as would be fatal according to the authority of
Foss v. Harbottle. Page Wood V.-C. referred to the fact that there was

217
1 Ch. Prudential Assurance v. Newman Industries (C.A.)
. plainly a majority of shareholders, independent of those implicated in the
fraud, who supported the bill.
The principles which seem to emerge from these two cases are (i) that
if the defendant against whom fraud is alleged applies to strike out the
action in limine, it will not be assumed that he was guilty of fraud so as
to disentitle him from casting his votes at a general meeting against the
action; but, (ii) that if the action is in fact fought to a conclusion, and
B the court finds the defendant guilty of fraud, it will in those circumstances
discount the votes of those implicated in the fraud in reaching a con-
clusion whether the plaintiff is authorised to sue on the company's behalf.
What the two cases leave open is the question in what circumstances the
alleged delinquent, or the company, can halt the proceedings in limine.
Vinelott J. placed considerable reliance on this case in widening the
p accepted exception to the rule in Foss v. Harbottle. He said [1981] Ch.
257, 320:
" . . . Atwool v. Merryweather, L.R. 5 Eq. 464 shows that the court
has jurisdiction to entertain a claim by a minority shareholder and to
make an order in favour of the defendant company even where the
other defendants, alone or together with the plaintiffs, do not have a
majority of votes in general meeting and where the other shareholders
" are not parties. If that is so, then as I see it, the exception can only be
founded on a general jurisdiction of the court to make an order for
recovery of property or damages in favour of a defendant company
against co-defendants where the jurisdiction is invoked by a minority
shareholder."
We doubt whether Atwool v. Merryweather goes so far in support of
" the judge's conclusion. It was not a case in which the company or the
delinquents sought to stop the action in limine. The action had been
fought to a conclusion, the liability of the defendant directors had been
established, and nothing, therefore, remained except for the company to
reap the benefit of the judgment. The court could hardly deny the right of
the plaintiff to an order in favour of the company to give effect to its
F proved rights, in the face of a resolution which, excluding the votes of
the proven fraudsters, was a majority resolution. Page Wood V.-C. said,
at p. 468:
" having it plainly before me that I have a majority of the share-
holders, independent of those implicated in the fraud, supporting the
bill, it would be idle to go through the circuitous course of saying that
Q leave must be obtained to file a bill for the company, and pro forma
have a totally different litigation."
There is a clear distinction to be drawn between the application of the
rule in Foss v. Harbottle when it is sought to stay proceedings in limine,
and its application when nothing remains but to enforce a judgment in
a derivative action which has been permitted to proceed.
JJ A simple application of the first aspect of the rule in Foss v. Harbottle
is to be found in Gray v. Lewis (1873) L.R. 8 Ch.App. 1035. The facts,
shortly stated, were as follows: Charles Lafitte & Co. Ltd. (" the company ")
was incorporated in December 1865 to purchase the right to extend to this

218
Prudential Assurance v. Newman Industries (C.A.) [1982]
country the business of Charles Lafitte & Co. of Paris (" the partner- .
ship ")• The plaintiff Gray subscribed for shares. The company never
acquired anything from the partnership, and was ordered to be wound
up in November 1866. Shortly thereafter Gray filed a bill on behalf of
himself and all other shareholders in the company, against the company,
its directors, its liquidator and the National Bank, alleging that the assets of
the company had been misapplied by the National Bank and by the directors
of the company, and seeking an order that the bank and the directors of B
the company might be declared liable to make " good to the shareholders
of the company " the loss sustained " by the shareholders." Sir Richard
Malins V.-C. made a decree declaring that the bank and the directors
were liable to replace the money, and directed that the amount found due
should be paid into court. The National Bank, and Lewis and Henshaw,
two of the directors, appealed. The appeal of the National Bank was p
compromised with the concurrence of the liquidator, on the basis (clearly
unobjectionable) that the National Bank should discharge the debts of
the company. The appeal by Lewis and Henshaw came before the Court
of Appeal in Chancery, and was allowed. The reasons were put trenchantly
by James L.J., with whom Mellish L.J. agreed, in these words at p. 1050:
" The bill should not have been filed by a shareholder on behalf of
himself and all other shareholders. It is very important, in order
to avoid oppressive litigation, to adhere to the rule laid down in
Mozley v. Alston (1847) 1 Ph. 790 and Foss v. Harbottle, 2 Hare 464,
which cases have always been considered as settling the law of this
court, that where there is a corporate body capable of filing a bill for
itself to recover property either from its directors or officers, or from
any other person, that corporate body is the proper plaintiff, and the E
only proper plaintiff. One object of incorporating bodies of this kind
was, in my opinion, to avoid the multiplicity of suits which might have
arisen where one shareholder was allowed to file a bill on behalf of
himself and a great number of other shareholders. The shareholder
who first filed a bill might dismiss it, and if he was a poor man the
defendant would be unable to obtain his costs, then another share- p
holder might file a bill, and so on. It was also stated to us in the
course of the argument that even after the plaintiff had dismissed his
bill against a particular defendant a fresh bill might be filed against
the defendant so dismissed. Therefore there might be as many bills
as there are shareholders multiplied into the number of defendants.
The result would be fearful, and I think the defendant has a right to
have the case made against him by the real body who are entitled to G
complain of what he has done.
" Now in this case I am of opinion that the only person—if you
may call it a person—having a right to complain was the incorporated
society called Charles Laffitte & Co. In its corporate character it was
liable to be sued, and was entitled to sue; and if the company sued
in its corporate character, the defendant might allege a release or a JJ
compromise by the company in its corporate character—a defence
which would not be open in a suit where a plaintiff is suing on behalf
of himself and other shareholders. I think it is of the utmost import-

219
1 Ch. Prudential Assurance v. Newman Industries (C.A.)
. ance to maintain the rule laid down in Mozley v. Alston and Foss v.
Harbottle, to which, as I understand, the only exception is where the
corporate body has got into the hands of directors and of the majority,
which directors and majority are using their powers for the purpose
of doing something fraudulent against the minority, who are over-
whelmed by them, as in Atwool v. Merryweather, L.R. 5 Eq. 464,
where Page Wood V.-C. under those circumstances, sustained a bill
B by a shareholder on behalf of himself and others, and there it was
after an attempt had been made to obtain a proper authority from the
corporate body itself in public meeting assembled."
This case highlights what the rule in Foss v. Harbottle is primarily con-
cerned with, namely, is a plaintiff shareholder entitled to prosecute an
action on behalf of the company for a wrong done to it, or ought the
C action to be struck out on the footing that it is for the company and
not for a shareholder to sue? That is what Foss v. Harbottle itself was
about, and what the first East Pant Du case, 2 Hem. & M. 254, was about.
The second East Pant Du case, Atwool v. Merryweather, L.R. 5 Eq. 464,
raised a related but different question, namely, if at the end of the day
fraud is proved, are the circumstances such that the company is capable
_ of condoning the fraud? Clearly not, if the fraud will only be confirmed
by a majority by the use of the fraudsters' own voting power.
It is commonly said that an exception to the rule in Foss v. Harbottle
arises if the corporation is " controlled" by persons implicated in the
fraud complained of, who will not permit the name of the company to be
used as plaintiffs in the suit: see Russell v. Wakefield Waterworks Co.,
L.R. 20 Eq. 474, 482. But this proposition leaves two questions at large,
E first, what is meant by " control," which embraces a broad spectrum
extending from an overall absolute majority of votes at one end, to a
majority of votes at the other end made up of those likely to be cast by
the delinquent himself plus those voting with him as a result of influence
or apathy. Secondly, what course is to be taken by the court if, as happened
in Foss v. Harbottle, in the East Pant Du case and in the instant case,
p but did not happen in Atwool v. Merryweather, the court is confronted
by a motion on the part of the delinquent or by the company, seeking to
strike out the action? For at the time of the application the existence of
the fraud is unproved. It is at this point that a dilemma emerges. If,
upon such an application, the plaintiff can require the court to assume as
a fact every allegation in the statement of claim, as in a true demurrer,
the plaintiff will frequently be able to outmanoeuvre the primary purpose
G of the rule in Foss v. Harbottle by alleging fraud and " control" by the
fraudster. If on the other hand the plaintiff has to prove fraud and
" control" before he can establish his title to prosecute his action, then
the action may need to be fought to a conclusion before the court can
decide whether or not the plaintiff should be permitted to prosecute it.
In the latter case the purpose of the rule in Foss v. Harbottle disappears.
JJ Either the fraud has not been proved, so cadit quaestio; or the fraud has
been proved and the delinquent is accountable unless there is a valid
decision of the board or a valid decision of the company in general meet-
ing, reached without impropriety or unfairness, to condone the fraud.

220
Prudential Assurance v. Newman Industries (C.A.) [1982]
We think that this brief look at the authorities is sufficient for present .
purposes. For it so happens that this court cannot properly on this appeal
decide the scope of the exception to the rule in Foss v. Harbottle. The
reason is this. Vinelott J. permitted the action by the plaintiffs on behalf
of Newman to proceed, and there was no appeal from that decision. In
the result he found that Newman was entitled as against Mr. Bartlett and
Mr. Laughton to damages for conspiracy and breach of fiduciary duty,
and he directed an inquiry as to damages subject to a stay in case of an B
appeal. Thereafter, Newman had three choices, subject to the operation
of the stay. First, it might do nothing. In this case the plaintiffs would be
entitled, if they so desired, to issue a summons to proceed with the inquiry.
Secondly, Newman might decide for some proper reason, assuming that
a proper reason might exist, and duly resolve at a proper board or general
meeting, to proceed no further with the claim against Mr. Bartlett and C
Mr. Laughton. In this event, assuming that the resolution of the board
or of the company in general meeting was in all respects proper, the
plaintiffs would be unable to proceed with the inquiry because a valid
release could be pleaded by Mr. Bartlett and Mr. Laughton. Thirdly,
Newman might adopt the order which the plaintiffs had obtained on its
behalf and pursue the inquiry accordingly. This would occasion no -Q
procedural problem nor even any special procedural step. Any party,
plaintiff or defendant, can issue a summons to proceed upon an order. It
would not be necessary for Newman to apply to be made a plaintiff, or
to start a fresh action and rely upon the principle of res judicata, as was
suggested at one time in the course of the argument. The order has been
made, Newman is a party to the action. Newman can enforce the order.
If this course were adopted, the rule in Foss v. Harbottle is irrelevant. E
The rule has no room to operate where the company itself is proceeding
with an action, or to enforce a judgment, pursuant to a valid board or
company resolution.
Newman by its counsel, acting (as we must assume) upon due authority
conferred by the company, stated before us that if the finding of fraud
stood it would accept the benefit of the order made in its favour. That is F
the end of Foss v. Harbottle so far as this appeal is concerned. It is plainly
impossible for Mr. Bartlett or Mr. Laughton to prevent the board of
Newman instructing its solicitors to proceed with the inquiry, and recov-
ering from Mr. Bartlett and Mr. Laughton what may be certified to be
due.
It was in the light of these considerations that we declined to hear G
any argument from Mr. Caplan and Mr. Curry on the topic of Foss v.
Harbottle. However desirable it might be in the public interest that we
should express our conclusions on Vinelott J.'s analysis of the rule in
Foss v. Harbottle and what he saw as the exception to it, it was neces-
sary for us to bear in mind that the rule had ceased to be of the slightest
relevance to the case. It would have been a grave injustice to all parties jr
to increase the already horrendous costs of this litigation by allowing
time for argument on an interesting but irrelevant point. Such considera-
tion of the law as appears in this judgment is, apart from a few sub-

221
1 Ch. Prudential Assurance v. Newman Industries (C.A.)
missions made by Mr. Bartlett, merely a reflection of our own thoughts
without the benefit of sustained argument.
In the result it would be improper for us to express any concluded
view on the proper scope of the exception or exceptions to the rule in
Foss v. Harbottle. We desire, however, to say two things. First, as we
have already said, we have no doubt whatever that Vinelott J. erred in
dismissing the summons of May 10, 1979. He ought to have determined
^ as a preliminary issue whether the plaintiffs were entitled to sue on behalf
of Newman by bringing a derivative action. It cannot have been right to
have subjected the company to a 30-day action (as it was then estimated
to be) in order to enable him to decide whether the plaintiffs were entitled
in law to subject the company to a 30-day action. Such an approach
defeats the whole purpose of the rule in Foss v. Harbottle and sanctions
C the very mischief that the rule is designed to prevent. By the time a
derivative action is concluded, the rule in Foss v. Harbottle can have
little, if any, role to play. Either the wrong is proved, thereby establishing
conclusively the rights of the company; or the wrong is not proved, so
cadit quaestio. In the present case a board, of which all the directors
save one were disinterested, with the benefit of the Schroder-Harman
report, had reached the conclusion before the start of the action that the
D
prosecution of the action was likely to do more harm than good. That
might prove a sound or unsound assessment, but it was the commercial
assessment of an apparently independent board. Obviously the board
would not have expected at that stage to be as well informed about the
affairs of the company as it might be after 36 days of evidence in court
and an intense examination of some 60 files of documents. But the board
E clearly doubted whether there were sufficient reasons for supposing that
the company would at the end of the day be in a position to count its
blessings; and clearly feared, as counsel said, that it might be killed by
kindness. Whether in the events which have happened Newman (more
exactly the disinterested body of shareholders) will feel that it has all been
well worth while, or must lick its wounds and render no thanks to those
who have interfered in its affairs, is not a question which we can answer.
But we think it is within the bounds of possibility that if the preliminary
issue had been argued, a judge might have reached the considered view that
the prosecution of this great action should be left to the decision of the
board or of a specially convened meeting of the shareholders, albeit less
well informed than a judge after a 72-day action.
So much for the summons of May 10. The second observation which
G we wish to make is merely a comment on Vinelott J.'s decision that there
is an exception to the rule in Foss v. Harbottle whenever the justice of
the case so requires. We are not convinced that this is a practical test,
particularly if it involves a full-dress trial before the test is applied. On the
other hand we do not think that the right to bring a derivative action
should be decided as a preliminary issue upon the hypothesis that all
JJ the allegations in the statement of claim of " fraud " and " control" are
facts, as they would be on the trial of a preliminary point of law. In our
view, whatever may be the properly defined boundaries of the exception
to the rule, the plaintiff ought at least to be required before proceeding

222
Prudential Assurance v. Newman Industries (C.A.) [1982]
with his action to establish a prima facie case (i) that the company is .
entitled to the relief claimed, and (ii) that the action falls within the
proper boundaries of the exception to the rule in Foss v. Harbottle. On
the latter issue it may well be right for the judge trying the preliminary
issue to grant a sufficient adjournment to enable a meeting of share-
holders to be convened by the board, so that he can reach a conclusion
in the light of the conduct of, and proceedings at, that meeting.
We turn to the personal action. In the statement of claim, as amended B
on day 12. the plaintiffs pleaded that Mr. Bartlett and Mr. Laughton
" in breach . . . of their obligation to the shareholders . . . conspired
together to benefit T.P.G. at the expense of . . . the shareholders,"
and that " in furtherance of such conspiracy and in breach of . . .
their obligation to the shareholders . . . the defendants Bartlett and
Laughton procured the circular to be . . . distributed . . . well knowing C
and intending it to be misleading and tricky "; and " by reason of the
foregoing the defendants Bartlett and Laughton are in breach of . . .
their obligation to the shareholders."
In the amended prayer the plaintiffs in their personal capacity as a share-
holder in Newman claimed damages for conspiracy against Mr. Bartlett
and Mr. Laughton, and a declaration to the like effect on behalf of all ^
other shareholders who had suffered damages and were on the register
on July 29, 1975 (the date of the adjourned extraordinary general meeting).
Counsel for the plaintiffs agreed before us that no facts are relied upon
in support of the personal claim which are not relied upon in support of
the derivative claim.
Vinelott J. upheld the plaintiffs' personal claim, and also the repre- E
sentative claim with which it was linked. He began with the proposition,
which accorded with his findings, that Newman had been induced by
fraud to approve an agreement under which Newman paid more (he
thought about £445,000 more) than the value of the assets acquired and
thus £445,000 more than it needed to pay; therefore Newman's indebted-
ness to its bankers immediately after the transaction (about £5m.) was p
£445,000 more than it would have been but for the fraud; therefore the
fraud caused a reduction in net profits, which must have affected the
quoted price of Newman shares; therefore, the plaintiffs suffered some
damage in consequence of the conspiracy and that was sufficient to com-
plete the cause of action, the quantum of damages being left to an inquiry.
In our judgment the personal claim is misconceived. It is of course
correct, as the judge found and Mr. Bartlett did not dispute, that he and G
Mr. Laughton, in advising the shareholders to support the resolution
approving the agreement, owed the shareholders a duty to give such advice
in good faith and not fraudulently. It is also correct that if directors
convene a meeting on the basis of a fraudulent circular, a shareholder will
have a right of action to recover any loss which he has been personally
caused in consequence of the fraudulent circular; this might include the JJ
expense of attending the meeting. But what he cannot do is to recover
damages merely because the company in which he is interested has suf-
fered damage. He cannot recover a sum equal to the diminution in the

223
1 Ch. Prudential Assurance v. Newman Industries (C.A.)
. market value of his shares, or equal to the likely diminution in dividend,
because such a " loss " is merely a reflection of the loss suffered by the
company. The shareholder does not suffer any personal loss. His only
" loss " is through the company, in the diminution in the value of the
net assets of the company, in which he has (say) a 3 per cent, sharehold-
ing. The plaintiff's shares are merely a right of participation in the com-
pany on the terms of the articles of association. The shares themselves,
B his right of participation, are not directly affected by the wrongdoing.
The plaintiff still holds all the shares as his own absolutely unencumbered
property. The deceit practised upon the plaintiff does not affect the
shares; it merely enables the defendant to rob the company. A simple
illustration will prove the logic of this approach. Suppose that the sole
asset of a company is a cash box containing £100,000. The company has
£ an issued share capital of 100 shares, of which 99 are held by the plaintiff.
The plaintiff holds the key of the cash box. The defendant by a fraudulent
misrepresentation persuades the plaintiff to part with the key. The defend-
ant then robs the company of all its money. The effect of the fraud and
the subsequent robbery, assuming that the defendant successfully flees
with his plunder, is (i) to denude the company of all its assets; and (ii)
to reduce the sale value of the plaintiff's shares from a figure approach-
D ing £100,000 to nil. There are two wrongs, the deceit practised on the
plaintiff and the robbery of the company. But the deceit on the plaintiff
causes the plaintiff no loss which is separate and distinct from the loss to
the company. The deceit was merely a step in the robbery. The plaintiff
obviously cannot recover personally some £100,000 damages in addition
to the £100,000 damages recoverable by the company.
E Counsel for the plaintiffs sought to answer this objection by agreeing
that there cannot be double recovery from the defendants, but suggesting
that the personal action will lie if the company's remedy is for some
reason not pursued. But how can the failure of the company to pursue
its remedy against the robber entitle the shareholder to recover for him-
self? What happens if the robbery takes place in year 1, the shareholder
sues in year 2, and the company makes up its mind in year 3 to pursue
its remedy? Is the shareholder's action stayed, if still on foot? Supposing
judgment has already been recovered by the shareholder and satisfied,
what then?
A personal action could have the most unexpected consequences. If a
company with assets of £500m. and an issued share capital of £50m, were
defrauded of £500,000 the effect on dividends and share prices would
G not be discernible. If a company with assets of £10m. were defrauded,
there would be no effect on share prices until the fraud was discovered;
if it were first reported that the company had been defrauded of £500,000
and subsequently reported that the company had discovered oil in property
acquired by the company as part of the fraud and later still reported that
the initial loss to the company could not have exceeded £50,000, the
IT effect on share prices would be bewildering and the effect on dividends
would either be negligible or beneficial.
The plaintiffs in this action were never concerned to recover in the
personal action. The plaintiffs were only interested in the personal action

224
Prudential Assurance v. Newman Industries (C.A.) [1982]
as a means of circumventing the rule in Foss v. Harbottle. The plaintiffs .
succeeded. A personal action would subvert the rule in Foss v. Harbottle
and that rule is not merely a tiresome procedural obstacle placed in the
path of a shareholder by a legalistic judiciary. The rule is the consequence
of the fact that a corporation is a separate legal entity. Other conse-
quences are limited liability and limited rights. The company is liable for
its contracts and torts; the shareholder has no such liability. The company
acquires causes of action for breaches of contract and for torts which B
damage the company. No cause of action vests in the shareholder. When
the shareholder acquires a share he accepts the fact that the value of his
investment follows the fortunes of the company and that he can only
exercise his influence over the fortunes of the company by the exercise
of his voting rights in general meeting. The law confers on him the right
to ensure that the company observes the limitations of its memorandum p
of association and the right to ensure that other shareholders observe the
rule, imposed upon them by the articles of association. If it is right that
the law has conferred or should in certain restricted circumstances confer
further rights on a shareholder the scope and consequences of such further
rights require careful consideration. In this case it is neither necessary nor
desirable to draw any general conclusions.
The rule in Foss v. Harbottle is founded on principle but it also ^
operates fairly by preserving the rights of the majority. We were invited
to give judicial approval to the public spirit of the plaintiffs who, it was
said, are pioneering a method of controlling companies in the public
interest without involving regulation by a statutory body. In our view the
voluntary regulation of companies is a matter for the City. The compul-
sory regulation of companies is a matter for Parliament. We decline to E
draw general conclusions from the exceptional circumstances of the
present case. But the results of the present action give food for thought.
Vinelott J. thought it possible that Newman had suffered damage amount-
ing to £445,000 by the fraud of Mr. Bartlett and Mr. Laughton. Counsel
for Newman submitted in the court below that damage to Newman by the
prosecution of the action exceeded the benefits liable to be derived from „
the action. The costs of the proceedings at the end of the trial were said
in newspaper reports to be in the region of £750,000. If the judge's order
is upheld and if the damages suffered by Newman are assessed at £445,000
and the costs at £750,000 then those damages and about 95 per cent, of
the costs will fall on T.P.G. pursuant to the judge's order except in so
far as they are recovered from Mr. Bartlett and Mr. Laughton. If Newman
recover any damages they must indemnify the plaintiffs thereout G
against the difference between the costs of the plaintiffs paid by T.P.G.
and (with small exceptions) the costs of the plaintiffs on a common fund
basis. Part of Newman's costs must be borne by Newman in any event.
Part of the plaintiffs' costs must be borne by the plaintiffs in any event.
If this appeal succeeds the burden of the costs on the plaintiffs will
be enormous. The innocent shareholders of Newman, T.P.G. and the JJ
plaintiffs may well wonder, whether this appeal succeeds or not, if there
is not something to be said after all for the old fashioned rule in Foss v.
Harbottle.

225
1 Ch. Prudential Assurance v. Newman Industries (C.A.)
[Their Lordships then read Chapter 6 in which they examined the judgment
of Vinelott J. and continued: ]

Chapter 7—Conclusions
The problems involved in this case were caused by the fact that the
Prudential were the wrong plaintiffs.
If, indeed, Mr. Bartlett and Mr. Laughton defrauded Newman then
B the proper plaintiff was Newman. In an action by Newman against
Mr. Bartlett and Mr. Laughton for defrauding the company, and against
T.P.G. for enjoying the fruits of the fraud, the circular would be largely
evidential. The principal frauds pleaded would have been frauds practised
on the directors and practised on Mr. Cooper. Each fraudulent representa-
tion or fraudulent concealment would have been pleaded with particularity.
Q Furthermore, in an action by Newman against Mr. Bartlett and
Mr. Laughton all the documents necessary to enable Newman to plead its
case and to make sensible discovery would have been in the possession
of Newman at the outset. Newman would have known which documents
held by T.P.G. were relevant to be discovered. Newman would then have
been in a position to determine which of the discovered documents were
sufficiently important to produce to the court.
D Mr. Caplan frankly admitted that the plaintiffs pleaded and relied
upon the circular because that was the only document revealed to the
plaintiffs as a shareholder and the only document upon which they could
make out a case on the pleadings prior to discovery. Mr. Caplan also
frankly admitted that conspiracy was only pleaded because the plaintiffs
thought that a direct action could not succeed in the absence of a plea
E of conspiracy. The direct action was only pleaded because it was feared
that the derivative action might be defeated by the rule in Foss v. Har-
bottle, 2 Hare 461.
In these circumstances discovery was a shambles, there was no proper
selection of documents to be used at the trial because no one knew what
to select and what to discard, and the pleadings were never adequately
_, clarified or timeously amended. The complications and obscurities of the
statement of claim and the reliance on the circular and the enormous
weight of the discovered documents made it impossible for the defendants
adequately to prepare for the trial or to foresee the course or length of
the trial or to cope with the many trials of strength with regard to their
recollection and probity.
The obscurities and confusion of the pleadings, the mass of docu-
G mentary evidence, the fact that the Prudential, not being the proper
plaintiffs, had no knowledge of what had gone on inside Newman and
the assumed need to prove conspiracy led to the plaintiffs submitting that
every Newman and T.P.G. document and every act or omission by Mr.
Bartlett or Mr. Laughton was a badge of fraud, and to submit that Mr.
Cooper's valuation was only explicable by cunning on the part of
JJ Mr. Laughton and incompetence on the part of Mr. Cooper, and that the
directors of Newman were bemused and the advisers of Newman blinded.
The task of the judge was made very difficult because the pleadings
of the plaintiffs were concentrated on the circular for tactical reasons

226
Prudential Assurance v. Newman Industries (C.A.) [1982]
connected with the personal action; the statement of claim was vague and
obscure; the real issues were buried under general assertions of trickiness.
The defendants' advisers, no doubt overwhelmed by the number of
ingenious accusations of fraud which emerged, were not able adequately
to assist the judge by defining those accusations which were material and
sounded in damages, those accusations which were relevant but which did
not give rise to any damage, and those accusations which were wholly
irrelevant save as to credit. B
As the case proceeded and the nature of the plaintiffs' accusations
were gradually disclosed, it is not surprising that the judge decided to
intervene and himself to ask questions in order to clarify the evidence
being given by the witnesses. But we must criticise some of the inter-
ventions of the judge. When Mr. Murray was giving evidence, some of
the interventions appeared only capable of being answered in a way which Q
would confirm the views already formed by the judge. In the case of the
evidence of Mr. Bartlett and Mr. Cooper some of the judge's interventions
indicated that he had already formed a hostile view of the explanations
that the witnesses were trying to give. Experienced counsel represented
the plaintiffs and Mr. Bartlett. The judge should have allowed Mr. Scott
to elucidate from his witnesses the evidence that they were trying to give,
without interruption save in so far as it was necessary for clarification. ^
And it was for Mr. Scott and Mr. Caplan to make their points in cross-
examination. It is not appropriate for leading questions to be put from the
Bench.
The judge found a conspiracy which had never been pleaded, and
fraudulent conduct which had never been particularised. The plaintiffs,
in this court, attempted to overwhelm us with 30 or more accusations of E
fraud, but in the end fell back on six claims which they submitted had been
pleaded and found proven. Of those six the second was abandoned in the
course of the submissions of Mr. Caplan.
The first claim concerns the commercial reasons. Those reasons must
be read in the context of the information furnished by the circular with
regard to the size of the minority shareholdings which were to be acquired p
in associated companies, the activities and trading results of the principal
associated companies and the management influence said to have been
obtained by the vendor T.P.G. through those minority shareholdings. So
read, the commercial reasons informed the Newman shareholders that
Newman would benefit from a development and expansion of Newman's
international trade which would result from a partnership between
Newman and the associated companies secured by the acquisition of G
T.P.G.'s minority shareholdings. In effect, Mr. Bartlett was imparting to
the Newman shareholders his belief that he could influence the manage-
ment of the affairs of Newman and the associated companies for the
benefit of all concerned. So he believed. Therefore, to this limited extent
the circular was not misleading or tricky to the knowledge of Mr. Bartlett
and Mr. Laughton. But it does not follow, because there were valid JJ
commercial reasons for the transaction, that Mr. Bartlett and Mr.
Laughton, as directors of Newman, recommended the transaction to the
Newman shareholders in the bona fide belief that it was a transaction into

227.
1 Ch. Prudential Assurance v. Newman Industries (C.A.)
which Newman ought to enter. On this aspect we express our conclusion
A
later.
The second claim was abandoned. The third claim was that the circular
was tricky and misleading in concealing that the attributed values of quoted
associated companies were much higher than their current stock market
values: see statement of claim added by amendment after the trial began,
and the judgment [1981] Ch. 257,294, 297.
B The argument is that appendix 3 of the circular ought to have included
a comparison between the stock market price and Mr. Cooper's value of
each quoted shareholding in Metropole, Dover, Agar Cross and Clough.
The exact charge against Mr. Bartlett and Mr. Laughton is still not
spelled out. The claim may mean that Mr. Bartlett and Mr. Laughton
believed that Mr. Cooper's value exceeded a fair value for Newman to
n pay. It may mean that Mr. Bartlett and Mr. Laughton knew and believed
that it was excessive for Newman to pay a price significantly in excess
of the stock market price. It may mean that Mr. Bartlett and Mr. Laughton
believed that Mr. Cooper's value represented a fair price for Newman
to pay but realised that nevertheless the shareholders of Newman ought
to have an opportunity of comparing the Stock Exchange price with Mr.
Cooper's value. Whichever charge is made we consider that it has not
D been proved.
There is no evidence that Mr. Bartlett or Mr. Laughton thought that
the value of the shares of Clough, Dover, Agar Cross and Metropole
suggested in Mr. Laughton's letter to Mr. Cooper of April 11, 1975, was
excessive for Newman to pay. There is no evidence that they were afraid
of revealing Stock Exchange prices. Mr. Bartlett gave evidence that he
E did not believe that Stock Exchange prices were a reliable guide to the
value of the shareholdings, carrying with them the opportunities and
potentialities for which they had been purchased and which Newman
acquired from T.P.G. Neither Mr. Cooper nor Schroders appear to have
taken the view that Stock Exchange prices were a reliable guide. It was
impossible for Mr. Bartlett to explain to the shareholders in the circular
that Clough was a buy or sell situation together with the reasons. It was
F
impossible to reveal to the shareholders the plans of Mr. Laughton and
Mr. Bartlett with regard to Dover, Metropole and Agar Cross.
The fourth claim was that the circular was tricky and misleading in
the indication that the £100,000 Smithamcote loan was worth its face
value: statement of claim, paragraph 16; judgment [1981] Ch. 257, 296.
The evidence is that Mr. Bartlett and Mr. Laughton believed that the
G loan was worth the S. Newman Ltd. shares and that the S. Newman Ltd.
shares were worth more than £100,000.
The fifth claim is that the circular was tricky and misleading in the
indication that the £30,000 Abbott debt was worth its face value:
statement of claim, paragraph 16A added after the trial began, and
judgment at p. 297. The evidence is that Mr. Bartlett and Mr. Laughton
H believed the Abbott loan to be worth £30,000 and that T.P.G. was willing
to give Newman a guarantee of payment of principal and interest.
It did not occur to Mr. Cooper to reduce the value of the debt because
of the terms of the payment or the rate of interest. That being so, it is

228
Prudential Assurance v. Newman Industries (C.A.) [1982]
not permissible to infer that Mr. Bartlett or Mr. Laughton considered that
the value of the loan ought to be reduced and fraudulently concealed their
belief.
The sixth claim is that the circular was tricky and misleading in that
it concealed the January agreements: statement of claim, paragraph 18A.
We have already indicated that there was ample evidence to justify
the finding of the judge that the January agreements, and the payments
thereunder, were dishonestly concealed from the directors of Newman B
(to the extent that we have indicated) and from the shareholders of
Newman with the object, inter alia, of facilitating the acceptance of the
proposals set forth in the strategy document, and that this dishonest
concealment involved and included a misleading statement in the circular
of the origin and purpose of the payment of £216,000 by Newman to
T.P.G. c
As Mr. Angus Murray made plain in his evidence, he was always
puzzled because it was difficult, in discussions with Mr. Bartlett, to dis-
cover whether, as he spoke, he was wearing a Newman or a T.P.G. hat.
T.P.G. was a dealing and investment holding company. Newman was a
trading company. If T.P.G. identified and developed a commercial
opportunity, the moment might come when it would be sensible, in the
interests of the companies, for Newman to take over the T.P.G. interest ^
in a particular company. Hence Mr. Bartlett's proposals for " restructure "
of Newman and T.P.G. interests in associated companies in early
December 1974. And in its development of opportunities by improving
the management of associates T.P.G. introduced into its associated com-
panies those directors of Newman who were most suited to bring T.P.G.'s
plans to fruition. Further, the T.P.G. holding in Newman shares, and the E
option held by Newman over shares of T.P.G., had the double effect that
T.P.G. had a financial interest in the success of Newman, and Newman
could use T.P.G.'s shareholding to protect Newman from a takeover by
a third party at a time when its shares were unduly depressed on the
market as a consequence of the general financial climate which had
nothing to do with the profitability or assets of Newman. The period at „
the end of 1974, when T.P.G. was in serious liquidity trouble, coincided
with the occasion when Mr. Bartlett genuinely regarded Newman as
needing strengthening through diversification as Newman's existing
manufacturing activities showed signs of contraction. Mr. Bartlett and
Mr. Laughton were optimists, and Mr. Bartlett was always eager to
impress his personal commercial judgment upon his colleagues on the
Newman board. He met his match in Mr. Angus Murray, who was G
concerned about the administrative capacity and organisation in Newman,
worried about the risk of muddle through the close relationship of
Newman and T.P.G., and rightly cautious about the risk of overstretching
Newman's resources. He knew very little about the T.P.G. shareholdings,
or about the reasons of Mr. Laughton in selecting them. In this his position
was vastly different from that of Mr. Bartlett, Mr. Laughton, Mr. Bush JT
and Mr. Baldwin, and from officials such as Mr. Gollop who understood
the opportunities presented to Newman when the chance for stepping into
T.P.G.'s shoes presented itself to Newman in February 1975. The first

229
1 Ch. Prudential Assurance v. Newman Industries (C.A.)
serious Newman boardroom conflict was manifested on January 2, 1975.
The evidence proves that Mr. Bartlett, with Mr. Laughton's support, then
used every weapon available to carry the board with him as far as he
could. He kept Mr. Murray in the dark and proceeded to enter into the
January agreements and to arrange payments of the consideration to
T.P.G. which in the event amounted to £216,000, knowing full well that
Mr. Murray would have tried to prevent it had he known what was
B happening. Once embarked on this course Mr. Bartlett and Mr. Laughton
could or would not disclose to Mr. Murray and the Newman board as a
board what they had done, and Mr. Bartlett ended by confusing the
history of the £216,000 to Mr. Fryer of the Stock Exchange and misrepre-
senting it to the shareholders on July 8.
But these deceptions of Mr. Murray and of the shareholders at the
Q extraordinary general meeting were not because they believed that the
net consideration of £350 to £325,000 was too high. We are satisfied that
throughout Mr. Bartlett believed that his original figure was about right
and was content to rely upon his expectation that Deloittes would, after
their independent investigation, arrive at much the same conclusion.
The judge accepted the plaintiffs' submission that Mr. Bartlett and
Mr. Laughton must have known, and did know, that £350 to £325,000 was
" much too much. So he never had to consider the question whether the
explanation of the facts lay in an attempt by Mr. Bartlett, with Mr.
Laughton's concurrence, to keep Mr. Murray in the dark and thus carry
the rest of the board with him.
So what the judge would have found about this explanation must
remain unknown. But we are ourselves satisfied that this is the inference
E that should be drawn from the evidence of primary fact about the conceal-
ment of the January agreements and the advance payments of £216,000
made pursuant thereto.
Turning from the plaintiffs' claims as submitted in this court to the
issues which we indicated in chapter 6, the first issue is whether Mr.
Bartlett and Mr. Laughton genuinely believed that it was in Newman's
p interest to accept the proposals contained in the strategy document. The
evidence establishes that the transaction recommended in the strategy
document, namely, the purchase by Newman of the undertaking of T.P.G.
with certain exceptions, was a gamble from the start. In our judgment Mr.
Angus Murray was quite right in 1975 in urging that it was not a gamble
which Newman ought to take. The question, however, is whether Mr.
Bartlett and Mr. Laughton genuinely believed that it was a gamble which
G it was in the interests of Newman to take, or whether they merely put
forward the strategy document because T.P.G. needed to be rescued from
a gamble which had failed. If Mr. Bartlett and Mr. Laughton urged
Newman to gamble on the strategy document transaction not because they
believed Newman should take the gamble but only because they could
see no other way of rescuing T.P.G., then Mr. Bartlett and Mr. Laughton
JJ were fraudulent; it would matter not that they hoped the gamble would
succeed and were content for the price to be assessed by an independent
valuer. If, on the other hand, they believed that the strategy document
recommendation was for the benefit of Newman because it represented

230
Prudential Assurance v. Newman Industries (C.A.) [1982]
a golden opportunity for Newman to reap the benefit of T.P.G.'s initiative
at a fair price, then they were not fraudulent.
Quite rightly, counsel for the plaintiffs emphasised, both here and
below, the financial difficulties which faced T.P.G. It does not follow
that Mr. Bartlett and Mr. Laughton were guilty of fraud or breach of
duty because the transaction benefited T.P.G. more than Newman, or even
that it was inspired as a rescue operation for T.P.G. If a conflict of interest
and duty arises because a transaction is proposed between two companies, B
and directors of one company are also directors of the other company,
there are two, and only two, possible legal views on the legal viability of
the transaction. Either the transaction is one which the directors can
properly propose to each company, despite their conflict of interest and
duty, or it is one which they cannot properly propose because of their
conflict of interest and duty. The second view is basically correct in the Q
case of overlapping trusteeships. The first view is rightly accepted as
correct in the present case.
If, as we must assume, the transaction could properly go ahead despite
the conflict of interest and duty, then Mr. Bartlett and Mr. Laughton
were entitled to propose the transaction in order to benefit T.P.G.; and
similarly they were entitled to propose the transaction in order to benefit
Newman. Indeed, they were not entitled to propose the transaction except
for the purpose of benefiting both Newman and T.P.G.
The court cannot and will not enter into an inquiry in order to
discover whether the transaction would benefit one company more than
the other, or whether Mr. Bartlett and Mr. Laughton believed it would.
If such an inquiry were relevant, it would mean that the court would have
to hold such a transaction void unless the transaction would be, or was "
thought to be, of equal benefit (whatever that might mean) to each
company. Such an inquiry would be quite impracticable. It also follows
that the transaction is capable of being upheld although initiated as a
rescue operation for T.P.G. Every contract of sale must be initiated either
by the vendor or by the purchaser. If a sale is legally viable between a
particular vendor and a particular purchaser, the existence and nature and F
weight of the pressures affecting the initiator may explain the existence of a
fraud but do not justify an inference of fraud.
The judge's findings that there was a conspiracy to benefit T.P.G. at
the expense of Newman appear to indicate that he believed that the
strategy document was not bona fide propounded by Mr. Bartlett and
Mr. Laughton in the interests of Newman. But this and other indications G
in the judgment to the like effect are contradicted by the judge's comment
[1981] Ch. 257, 330, that Mr. Bartlett
" may well have believed that it would be for the ultimate benefit
of Newman that it should be placed in relation to the network of
associated companies in the central position which was originally to
have been occupied by T.P.G." H
We need not resolve these contradictions in the judgment because we do
not consider that a dishonest motive on the part of Mr. Bartlett and Mr.

231
1 Ch. Prudential Assurance v. Newman Industries (C.A.)
. Laughton in urging the adoption of the recommendations contained in the
strategy document can now sound in damages.
Even if the recommendation by Mr. Bartlett and Mr. Laughton that
Newman should gamble on the strategy document proposal was not bona
fide made in the interests of Newman, in the result Newman did gamble,
and gambled successfully. For obvious reasons Newman decided to keep
the fruits of the gamble rather than demand repayment of the stake and
B hand over the fruits. If a punter is induced by fraud to bet on a horse
and the horse loses, then the punter can recover his stake from the
fraudster. But if the horse wins, then the punter cannot both keep his
winnings and claim back his stake. In the present case Newman decided
to keep its winnings. It is true that the purchase of the Smithamcote
shares shows a loss against the value attributed to the Smithamcote shares
Q by Mr. Cooper, but the transaction offered by T.P.G. and accepted by
Newman was one transaction in which Newman gambled £1-5 million
and obtained advantages which it has elected to keep. If Newman were
induced to purchase the T.P.G. assets by fraud, then Newman, on dis-
covering the fraud, could rescind the contract of purchase and claim
damages, or, alternatively, claim damages for the fraud without rescission.
But Newman having abandoned the remedy of rescission because the
D gamble paid off, has suffered no damage as a result of that fraud.
The second issue is whether Mr. Bartlett and Mr. Laughton believed
that £350,000 was a fair price for Newman to pay for the acquisition of
T.P.G.'s undertaking. The net consideration of £350,000 was based on
assets worth £1-5 million subject to liabilities of £1,150,000. If Mr. Bartlett
and Mr. Laughton thought that the assets were not worth £1-5 million but
E were only worth, for example, £1-3 million, then irrespective of any fraud
involved in inducing Newman to gamble at all, Mr. Bartlett and Mr.
Laughton were guilty of fraud in advising Newman to pay a price which
to the knowledge of Mr. Bartlett and Mr. Laughton exceeded the price
which Newman should be advised to pay. The fact that the gamble
succeeded and that Newman intend to keep its winnings is irrelevant.
Newman, on this hypothesis, lost £200,000 because they paid £200,000
more than Mr. Bartlett and Mr. Laughton knew to be a fair price for
Newman to pay to acquire the assets.
In our judgment, however, there was no, or no sufficient, evidence
from which the judge could properly find that Mr. Bartlett and Mr.
Laughton did not genuinely believe that the assets were worth £1-5 million
subject to an independent valuation.
G There was no challenge to Mr. Bartlett's explanation of the origin of
the figure of £350,000 in the strategy document or in the origin of
the pro forma balance sheet. There was no, or no sufficient, evidence to
support the theory of a conspiracy to procure a persuadable accountant
instead of a non-persuadable merchant banker to act as valuer and then
to persuade the valuer to accept inflated values for the Smithamcote
JJ shares, the Smithamcote loan and the Abbott loan, which were not
capable of being inflated. There is no evidence that Mr. Laughton did not
genuinely believe in the values he put forward in his letter dated April
11, 1975. All the events which we have chronicled and all the con-

232
Prudential Assurance v. Newman Industries (C.A.) [1982]
temporaneous written evidence go to show that Mr. Bartlett and Mr. .
Laughton were confident rather than crooked and that Mr. Laughton's
disappointment when Mr. Cooper first put forward a net consideration
of less than £350,000 was genuine. The theory that Mr. Laughton then
over-persuaded Mr. Cooper over the telephone is not supported by any
evidence and was contradicted by Mr. Cooper. The theory that Mr.
Cooper was over-persuaded was then fortified by the theory that Mr.
Cooper was not competent. B
The third issue is whether Mr. Bartlett or Mr. Laughton made false
representations to, or knowingly concealed facts from, Mr. Cooper which
might influence his valuation.
There is no, or no sufficient, evidence of any false representations to,
or deliberate concealment from, Mr. Cooper in relation to any matter
other than the January agreements and the payments thereunder. Again Q
the plaintiffs' theories are unsupported by the contemporaneous evidence.
We have dealt fully with the facts and inferences which are relevant to
the January agreements and to the payments thereunder.
It must now be accepted that the January agreements and the pay-
ments thereunder were dishonestly concealed from the board of Newman
to the extent indicated. They were not disclosed to Mr. Cooper. They n
should have been disclosed to Mr. Cooper because by accepting and
retaining £215,950 in advance under the January agreements T.P.G. was
adhering to the prices specified in the January agreements. Thus Mr.
Bartlett should have mentioned the January agreements in the body of the
strategy document, should have mentioned the January agreements to the
board and should have told Mr. Cooper the facts concerning the January
agreements and the payments. The January agreements and the payments E
should have been disclosed also because Mr. Laughton, who had agreed
on behalf of T.P.G. to sell 800,000 Dover shares for £146,000 and to sell
the Metropole shares for £85,000, had written to Mr. Cooper on April 11,
1975, saying that 832,000 Dover shares were worth £240,000 and that the
Metropole shares were worth £350,000. The last payment of the instalments
of the aggregate sum of £215,950 was made after Mr. Cooper had been p
instructed. Mr. Laughton should have told Mr. Cooper that £215,950 had
been paid in advance when he was putting forward his arguments that
£75,000 should be included in Mr. Cooper's valuation under the heading
of interest. When Mr. Cooper later found out about the payment of
£215,950 he was allowed to believe that the payments had been made
on account of the strategy document transaction. Then Mr. Bartlett lied
about the origin and purpose of the payments in advance to the share- G
holders at the extraordinary general meeting. He did that in order to
conceal the existence of the January agreements, but there was no point
in concealing the January agreements unless they were thought to be
relevant or possibly relevant to the strategy document proposals and to
the value of the assets. If Mr. Bartlett had been truthful at the extra-
ordinary general meeting then at the very least there would, or might, j ,
have been a demand for Mr. Cooper to reconsider his valuation in the
light of the January agreements and the payments thereunder. When the
circular was prepared Mr. Bartlett knew that the January agreements

233
1 Ch. Prudential Assurance v. Newman Industries (C.A.)
were material because in evidence he said that the position was that if the
strategy document proposals had not been accepted by the shareholders,
then the January agreements would have been put forward. When the
circular was prepared Mr. Bartlett and Mr. Laughton must have known
that the statement that £216,000 was an advance payment for the strategy
document transaction was at best a half-truth. They were originally
payments on account of the January agreements and those payments had
B never been formally ratified and continued as payments on account of the
strategy document proposal. If the circular had been revised so as to
disclose the January agreements and the payments, then Mr. Cooper,
as a member of Deloittes considering and playing a prominent part in the
production of the circular, would have had at least an opportunity to
inquire about the January agreements and to reconsider his valuation in
-, the light of those agreements.
The judge appears to have found that Mr. Bartlett and Mr. Laughton
dishonestly concealed the January agreements and the payments there-
under from Mr. Cooper, because in his judgment Vinelott J. said:
" Mr. Cooper was not told of the sale in January of the shares in
Metropole to Newman at the price of £85,000. He agreed that if he
~ had known of this sale he would have found it impossible to attribute
any value to the shares of Metropole except the agreed £85,000."
The judge made a similar comment about the Dover shares.
It is unsatisfactory that because the statement of claim was directed
wholly to the circular, Mr. Bartlett and Mr. Laughton were not directly
accused, and the judge did not directly hold, that Mr. Bartlett and Mr.
E Laughton dishonestly concealed the January agreements and the payments
thereunder from Mr. Cooper. But we consider that the dishonest conceal-
ment from the board and the shareholders (amply proved) necessarily
involved dishonest concealment from Mr. Cooper, even if Mr. Bartlett
and Mr. Laughton did not appreciate wholly or at all the significance to
Mr. Cooper of the January agreements in connection with value. Mr.
Bartlett's untrue statements to the shareholders at the extraordinary general
F
meeting and his acquiescence in misleading Mr. Cooper and in the form
of the circular support the inference that from start to finish Mr. Bartlett
and Mr. Laughton were dishonest in concealing the agreements from
everybody concerned, namely, the board, Mr. Cooper and the shareholders.
Although the statement of claim was directed in terms solely to the
circular, Mr. Bartlett and Mr. Laughton must have appreciated, once the
G statement of claim raised the issue of the January agreements, that they
were accused of concealing the January agreements and the payments
thereunder at all times from January 7, 1975, until completion of the sale
in July 1975, including concealment from Mr. Cooper. Mr. Bartlett gave
evidence to explain why the January agreements and the payments
thereunder were not disclosed and that explanation was not accepted by
„ the judge.
It is not possible to be certain whether and to what extent Mr.
Cooper's valuation would have been affected by a disclosure of the
January agreements and payments. It was only after some tendentious
Ch. 1982—12

234
Prudential Assurance v. Newman Industries (C.A.) [1982]
cross-examination by Mr. Caplan and some forceful intervention by the
judge that Mr. Cooper was persuaded to reach the conclusion which the
judge had already reached, and to make the remarks upon which
the judge relied.
Nevertheless we think that Mr. Cooper must have been impressed, and
ought to have been impressed, by the fact that T.P.G. had accepted the
prices specified in the January agreements as fair and reasonable values
for the Dover and Metropole shares, provided that the £215,950 was paid B
by instalments beginning in January. And £215,950 was paid in advance
by Newman and accepted by T.P.G. between January and April 1975.
Had Mr. Cooper known the facts he would have valued the Dover shares
at £150,000, i.e. the January price of £146,000 for 800,000 Dover shares
adjusted for the fact that Mr. Cooper was valuing 832,000 shares. He
would have valued the Metropole shares at £85,000, the January price, -,
instead of £100,000. This would have reduced the net consideration by
,£45,000, originally from £225,000 to £180,000.
On this basis the damage caused to Newman by the dishonest
concealment of the January agreements and the payments thereunder
from Mr. Cooper was £45,000. The damages are not affected by the fact
that Newman have accepted the transaction from T.P.G. and have kept
their winnings instead of reclaiming their stake. D
In the result we consider that the evidence, the statement of claim
and the judgment of Vinelott J. establish Newman's entitlement to
damages for dishonest concealment of the January agreements. That
concealment caused foreseeable loss to Newman of £45,000. Where such
dishonest concealment causes foreseeable loss, a cause of action in fraud
is established, even though the defendants did not deliberately intend to g
cause the loss. This fraud having been established, we do not consider
that the uncertain character of the pleadings requires this court to relieve
Mr. Bartlett or Mr. Laughton from the consequences of that fraud.
No amount of further evidence by Mr. Laughton or any other witness
could explain away the admitted fact that T.P.G. had accepted £215,950
as advance consideration under the January agreements, that Mr. Angus
Murray and Mr. Cooper knew nothing of the January agreements or the
payments thereunder and that Mr. Bartlett, with the acquiescence and
knowledge of Mr. Laughton, lied to the shareholders about the nature of
the payments.
The issue of fraud in connection with the January agreements was
clearly raised by the pleadings, albeit that the express allegation was
directed to the circular. The dishonest concealment of the January G
agreements was, we think, clearly established by the evidence. We have
commented adversely on the manner in which the whole action was
clouded by the pleadings and the presentation of the case, but we do not
consider that these defects enable Mr. Bartlett and Mr. Laughton to
escape from the consequences of the one relevant fraud which was
pleaded, proved, argued and decided. xx
We wish to hear argument in due course about costs in the court
below and in this court. T.P.G. may wish to ask this court to review
the order for costs against them made by the judge. We also wish to hear

235
1 Ch. Prudential Assurance v. Newman Industries (C.A.)
. argument about the plaintiffs' costs and their possible responsibility for
Newman's costs in the light of the plaintiffs' responsibility for pleading
the personal action and thereby prevailing upon the judge to hear the
derivative action despite the protests of Newman. We also wish to hear
arguments as to whether the enormous costs incurred by the plaintiffs as a
result of their own pleadings and presentation of the case ought to be
visited upon Mr. Bartlett and Mr. Laughton. We also wish to hear
B argument whether in the exceptional circumstances of the present case
Mr. Bartlett and Mr. Laughton are entitled to be relieved by the plaintiffs
in respect of the costs, or part of the costs, which were incurred by Mr.
Bartlett and Mr. Laughton themselves in repelling the indiscriminate
attacks which were made upon them, in a case in which the dishonesty
which alone founds our finding of damages was never clearly pleaded.
* We may have to consider whether it was practicable for the defendants
to consider paying something into court, if they were so minded—not
£450,000, but perhaps £45,000 or thereabouts—and so save themselves
the risk of paying lawyers' costs due to one side or the other of half a
million or more. At present we know nothing about the costs of this
lamentable litigation, and we wish to know about the figures involved
on all sides as costs in the High Court and this court. We expect all
D parties to present those figures when we hear the argument about costs
on the date arranged for restoring the appeal in order to settle the order
of the court, and to decide upon the proper orders for costs. We wish to
hear argument as to whether the £45,000 should be paid by T.P.G., who
benefited from the fraud, or by Mr. Bartlett and Mr. Laughton.
We would add this. The plaintiffs have painted Mr. Bartlett and Mr.
jj Laughton as crooks, deliberately milking Newman of vast sums of money
for their own benefit. This very serious allegation, persisted in to the end
in this court, has not been proved. Mr. Bartlett and Mr. Laughton have
successfully established that that case was based on a series of misunder-
standings. The plaintiffs have proved that in order to win the boardroom
battle in January, and to carry through a transaction which has proved to
be advantageous to Newman, Mr. Bartlett and Mr. Laughton kept Mr.
F
Angus Murray in the dark about the January agreements and the
advance payments made thereunder. Once embarked on this course of
concealment they could not, or would not, make a belated disclosure of
the matters they had concealed, and so were led into two further conceal-
ments—from Mr. Cooper and ultimately from the shareholders. It was
foreseeable that as a consequence of the non-disclosure to Mr. Cooper his
G valuation would be too high, and though £45,000 is not a great amount
in relation to £1-5 million, it is significant enough to escape the description
of minimal.
We are sorry that Mr. Laughton was not here to hear this court
pronounce that all but one of the serious allegations made against him
were not proved.
TT Before we rise we would say one thing. It is proposed to restore the
case in order to determine the form of the order and to hear the
submissions of the parties about costs, and the date that is provisionally
arranged is October 2. It is difficult to predict how long the submissions

236
Prudential Assurance v. Newman Industries (C.A.) [1982]
of the parties will be. There are five parties concerned and the submissions .
may be fairly long. Mr. Bartlett and Mr. Laughton in the court below
evidently spent a small fortune on their own costs and we know nothing
about their present financial position; but if it is practicable for them,
they may think that there would be great advantage in their instructing
their solicitors again to instruct counsel, who are already familiar with
the case, in order to argue those questions of costs which Mr. Bartlett
and Mr. Laughton wish to submit, and also to make any submissions B
which are appropriate on how the liability for the £45,000 should fall
as between T.P.G., who enjoyed the cash consideration from the
purchase, and the two personal defendants. Whether it will be practicable
for Mr. Bartlett and Mr. Laughton to dig again into their pockets for the
purpose of legal representation on the order for costs we do not know.
As we have said, we do not know what the figures are. It may be that p
the figures altogether might run into, not five figures but six. So that if it is
practicable for the two gentlemen we have mentioned to make a further
investment—whether it would be properly described as commercial
judgment or a gamble we know not—that might be to their advantage.

Hearing adjourned.

Solicitors: C. F. Whitehorn; Macfarlanes.

October 5. On the resumed hearing, counsel announced that the
parties had agreed the terms of a settlement and by consent the following
order was made.
E
Appeal allowed in part.
Respondent's notice dismissed.
Order of Vinelott J. varied to extent
stated in judgment.
Leave granted to fourth defendant to
proceed with appeal from judgment
of Vinelott J. in terms of amended *
notice of appeal.
On basis that all parties had agreed
terms of settlement on all matters
(including any party's rights to
damages, costs or any other relief)
no further order made. G
All further proceedings stayed.
Solicitors: Simmons & Simmons; C. F. Whitehorn; Macfarlanes;
Hopkins, Fuller.
L. G. S.