Cook v Deeks [1916] 1 AC 554 

Key Point

  • The minority shareholders can sue in a derivative action whenever the wrongdoers in control of a company appropriate to themselves money, property, or advantage to the company. This is also known as a ‘fraud on the minority’.

Facts

  • The directors had breached their fiduciary duties by diverting a contract from the company into their own names.
  • The transaction was ratified by a resolution which was carried because the wrongdoing directors held the majority of the votes.

Held (Privy Council)

  • The benefit of the contract was held on constructive trust for the company.
  • The directors were to account to the company for the profits they have made.

Lord Buckmaster

  • ‘If, as their Lordships find on the facts, the contract in question was entered into under such circumstances that the directors could not retain the benefit of it for themselves, then it belonged in equity to the company and ought to have been dealt with as an asset of the company. Even supposing it be not ultra vires of a company to make a present to its directors, it appears quite certain that directors holding a majority of votes would not be permitted to make a present to themselves. This would be to allow a majority to oppress the minority. To such circumstances the cases of North-West Transportation Co. v. Beatty 12 and Burland v. Earle 13 have no application.
  • ‘In the same way, if directors have acquired for themselves property or rights which they must be regarded as holding on behalf of the company, a resolution that the rights of the company should be disregarded in the matter would amount to forfeiting the interest and property of the minority of shareholders in favour of the majority, and that by the votes of those who are interested in securing the property for themselves.’