John Shaw & Sons (Salford) Ltd v Shaw [1935] 2 KB 113

Citation:John Shaw & Sons (Salford) Ltd v Shaw [1935] 2 KB 113

Rule of thumb:Can shareholders sue directors if they think that they are making bad commercial decisions? As a general rule, no. It is only if the decision is a breach of the company Articles that they can be sued. The Court cannot be used to second guess the commercial wisdom of directors’ decisions.

Judgment:

This case affirmed that shareholders do not have the right to challenge the commercial viability of directors’ decisions in Court – their main remedy against this is to vote the director out at the next general meeting or use otherwise use their rights to affect this, but the Court is not the proper forum for this, ‘I am therefore of opinion that the learned judge was right in refusing to dismiss the action on the plea that it was commenced without the authority of the plaintiff company. I think the judge was also right in refusing to give effect to the resolution of the meeting of the shareholders requiring the chairman to instruct the company's solicitors not to proceed further with the action. A company is an entity distinct alike from its shareholders and its directors. Some of its powers may, according to its articles, be exercised by directors, certain other powers may be reserved for the shareholders in general meeting. If powers of management are vested in the directors, they and they alone can exercise these powers. The only way in which the general body of the shareholders can control the exercise of the powers vested by the articles in the directors is by altering their articles, or, if opportunity arises under the articles, by refusing to re-elect the directors of whose actions they disapprove. They cannot themselves usurp the powers which by the articles are vested in the directors any more than the directors can usurp the powers vested by the articles in the general body of shareholders’, Greer LJ

Warning: This is not professional legal advice. This is not professional legal education advice. Please obtain professional guidance before embarking on any legal course of action. This is just an interpretation of a Judgment by persons of legal insight & varying levels of legal specialism, experience & expertise. Please read the Judgment yourself and form your own interpretation of it with professional assistance.