Peter Hook v Bernard Sumner and Ors – A Derivative Claims Case

Peter Hook v Bernard Sumner and Ors (2015) EWHC 3820 (CH)

On a Friday afternoon in September 2011, three people; Bernard Sumner, Stephen Morris and Gillian Gilbert, gathered in a room without telling the fourth. Documents were signed, the company reshaped, and the name licensed. 

All four were members New Order, one of Britain’s most celebrated bands. The fourth man, left out of the room, was bassist Peter Hook, and the heart of the dispute was not about music at all. It was about a company, a brand, and who had the right to profit from both.

A Band, a Company, and a Falling Out

New Order formed in 1980 from the tragic end of Joy Division and went on to become one of the defining acts of British music. They performed until 1993, reunited between 1998 and 2007, and were extraordinarily successful. 

In 2007, personal differences between Hook and the other members fractured the band irreparably. It became clear the four individuals would never work together again. What they still shared, however, was a company called Vitalturn Co Ltd which was incorporated back in 1992, with each of the four holding equal shares and sitting on the board as directors. That company owned the New Order trademarks, the goodwill in the name, and the rights to a substantial back catalogue of recorded music. 

The Meeting They Didn’t Tell Him About

On 2 September 2011, Hook was abroad and the other three members knew this. They chose that day deliberately. 

The three defendants circulated a written shareholders’ resolution among themselves and signed it on the spot. That resolution amended the company’s Articles of Association so that in future, a majority of directors could pass board resolutions and not, as had previously been required, all of them. Hook was not given the resolution as the Companies Act 2006 required. A copy was posted to him the same day, but this was too late for him to respond. 

The legal consequence of that procedural failure was limited, Under the Companies Act 2006, failing to circulate a written resolution to all members is a criminal offence, but the resolution is still deemed valid if signed by the requisite majority. With 75% of the shares between them, the three defendants had sufficient votes. The resolution passed. 

With the articles now changed, the three directors, acting as a majority board, then resolved to approve the terms of a trademark licence. The licence would grant the right to use the New Order name and trademarks to a separate company they owned and controlled, then called Top Robe Limited. A further shareholders’ resolution authorising the directors to sign it was circulated and signed on the same day. Again, Hook was not included. Again, the resolution was technically valid. 

The trademark licence was signed the same day. Hook found out that Monday, when his solicitor received an email. Two days later, Top Robe Limited changed its name to New Order Ltd. 

Terms of the Licence

The licence granted a worldwide, exclusive right to use the New Order name for performing, recording, merchandising, sponsorship, and publishing, effectively every commercial use of the brand. In return, the new company would pay a royalty of 5% of its gross revenue to the old company, Vitalturn. 

The licence had no fixed end date and it ran indefinitely, terminable on six months’ notice, but with the specific provision that the licensor (Vitalturn, the company all four members owned) could not give notice to terminate for the first ten years. 

Since that September day in 2011, the defendants had performed and recorded as New Order without Hook, using other musicians on a session basis. The reformed group was very successful and the reported income of New Order Ltd from those activities came to approximately £7.8 million. 

Of that £7.8 million, Vitalturn received 5%. Hook’s share of that 5% was one quarter, meaning he received approximately 1.25% of the total income generated by the commercial use of a name he had helped create.

a derivative claims case

A Derivative Claims Case Quickly Follows

Unsurprisingly, Hook wanted to sue the other directors on behalf of Vitalturn for the loss that company had suffered by entering into an undervalue transaction, but Vitalturn was controlled by the very people he wanted to sue.  

The mechanism available to him was a derivative claim, a legal procedure under section 263 of the Companies Act 2006 that allows a shareholder to bring proceedings on behalf of a company when the company’s directors are the alleged wrongdoers and cannot be trusted to pursue the claim themselves. As with all derivative claims, the first step needed to proceed was for Hook to ask the court’s permission to bring his action. 

The defendants argued the claim should fail at this first hurdle, for several reasons: 

  • The shareholders had validly approved the licence, so there was no breach of directors’ duties.  
  • The defendants had taken professional advice.  
  • The claimant’s proposed royalty rates were commercially unrealistic and no court would ever award them.  
  • Pursuing the claim would distract and annoy the defendants, and might cause them to stop performing altogether, cutting off any future income to Vitalturn. 

The judge rejected these arguments one by one. He noted that the advice relied upon had been carefully structured to benefit the defendants personally, not the company. He observed that the argument “the defendants would stop performing if sued” was, in substance, an argument that wrongdoers should be immune from litigation because they find it inconvenient. He dismissed the binary framing, either accept the defendants’ 5% or receive nothing, as a fallacy. 

On the question of whether shareholders can authorise their own directors to enter into transactions that harm the company, the judge identified a serious and arguable legal point: there is a long-standing equitable principle that not even the full body of shareholders can validly consent to the misappropriation of company assets.  

The Company’s Interests and Who Was Looking After Them

Perhaps the most pointed observation in the judgment was about process, not figures. 

Before the meeting of 2 September, the three defendants had taken legal advice from a solicitor and from a Queen’s Counsel. They had also taken advice from a firm of chartered accountants. All of that advice, however, was sought and given in their personal capacities. They had deliberately structured it that way, which is why they declined to disclose most of it to the court, maintaining it was legally privileged to them as individuals. 

Nobody sought advice on behalf of the company, and the company’s own solicitors and accountants were not involved. The US agent who had played a significant role in the group’s affairs was not asked. The agreement itself was drafted by solicitors acting solely for the benefit of the new company.

Derivative Claims Case

Permission Granted with a Strong Word of Advice

The judge granted Hook permission to continue the derivative claim. He concluded that Hook’s application for permission fulfilled the required criteria:  

  • A reasonable, independent director of Vitalturn, acting in the company’s best interests, could properly decide to pursue the Claim..  
  • The potential damages were substantial, and the defendants appeared able to pay.  
  • The claim was not obviously bound to fail. 
  • Hook was also found to be acting in good faith. The fact that he stood to benefit personally if the claim succeeded was not a bar to bringing the action.. 

What Hook did not receive was a costs indemnity from the company. The judge declined this, reasoning that the dispute was in substance a shareholders’ dispute, and it would be unfair to fund one side’s litigation from a company owned by both parties. 

 

Why This Case Matters

Two years after the High Court granted permission for the derivative claim to proceed, both sides reached a private settlement in September 2017. The terms were never disclosed. The courtroom drama ended not with a judgment but with a joint statement and a quiet drawing of lines. The case is important because of what the permission hearing alone established.  

It confirmed that minority shareholders in a small company are not powerless in the face of a coordinated majority. It demonstrated that directors cannot insulate themselves from their duties to the company simply by taking personal legal advice and passing shareholder resolutions. It showed that the value locked inside a jointly owned business belongs to the company and all of its members, not just to those with the loudest voice in the room.  

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