Derivative Action Case Study: Universal Project Management Services Ltd v Fort Gilkicker Ltd and Others

This story begins with two business partners: Dr Frischmann, a civil engineer, and Mr Pearce, a chartered building surveyor. United by ambition, they went into partnership with a view to developing properties across the UK and beyond. To keep things businesslike, they set up a limited liability partnership; Askett Hawk Properties LLP (Askett Hawk).

Frischmann decided to own his half of the LLP through a company owned and controlled by him alone; Universal Project Management Services Limited (Universal Ltd). Pearce chose to own his half of Askett Hawk personally.

There was no partnership agreement for Askett Hawk so both had equal shares, equal say, and equal responsibility in the firm.

Frischmann and Pearce ser up a different development company for each new project. For a development in Hampshire, located on a former Victorian coastal battery known as Fort Gilkicker, the company (special purpose vehicle) used was given the name Askett Hawk Developments (Gilkicker) Ltd (AHDG Ltd). The company was set up with Frischmann and Pearce each appointed as a director and Askett Hawk as the sole shareholder.

With this structure in place, the redevelopment of Fort Gilkicker into a series of residential units was underway.

How The Conflict Started

At first, things went to plan. Frischmann and Pearce secured planning permission through another company, which they owned jointly, and AHDG Ltd obtained an option to buy Fort Gilkicker from Hampshire County Council. The deal was an advantageous one, requiring only a small up-front fee for the option, with the balance due when the first property was sold.

Unfortunately, disagreements about the progress of the development began to surface. The suitability of the architect appointed became a point of contention. Frischmann had lost confidence in the architect and wanted him replaced, while Pearce was happy to keep him on board.

Pearce felt so strongly about the issue, he suggested to Frischmann that he (Pearce) would buy out Frischmann and run the project on his own.

Tensions had reached a high point when Frischmann left to go on holiday, leaving key matters unresolved and the option to buy Fort Gilkicker due to expire while he was away.

Kicked Out of the Deal

While Frischmann was enjoying his yearly getaway in Majorca. instead of extending the option or exercising it through AHDG Limited, the company both men owned through Askett Hawk, Pearce set up a brand-new company through an associate; Fort Gilkicker Properties Ltd (FGP Ltd), which was under his sole control.

The Fort Gilkicker option was then purchased through FGP Ltd on virtually the same terms as before, leaving AHDG Ltd and its shareholder; Askett Hawk, excluded from the project. This meant that whilst Pearce would still benefit from the expected millions of pounds of profit, Frsichmann/Universal Ltd, the other partner in Askett Hawk, would not receive anything.

Breach of Duty

When Frischmann returned and found out what had happened, he was understandably furious. From his perspective, Pearce, while still director of AHDG Ltd, had snatched the opportunity for himself by quietly shifting the deal into the new company. Frischmann claimed this was a breach of Pearce’s directors’ duties and fiduciary duties: Pearce owed a duty to act in the best interests of AHDG Ltd and its shareholder (Askett Hawk) and instead had acted in his own interests.

The Legal Question – Could Universal Ltd Sue?

Normally, only someone who owns shares in a company can bring a Derivative Claim to take legal action on behalf of that company against a misbehaving director. In this case though, Universal Ltd only owned shares in Askett Hawk, which in turn owned the shares in AHDG Ltd. The question before the Court was could Universal Ltd bring a Derivative Claim on behalf of AHDG Ltd against Pearce?

Universal Ltd’s claim depended upon the court allowing a ”multiple derivative action”. A claim where someone who didn’t directly own shares in a company, but did have an indirect, substantial interest (like being a shareholder in its parent firm), could bring a Derivative Claim on behalf of the company.

The court was asked two questions:

Did this form of action exist under English law before the Companies Act 2006?
Did the Companies Act 2006 prohibit such an action?

The Judge’s Reasoning

The Court examined the history and purpose of derivative actions. Traditionally, courts have allowed exceptions to the usual rule (“only the company can sue”) when those running the company are the very people who have committed the alleged wrongdoing. Over the years, courts have sometimes permitted shareholders in a parent company to sue on behalf of a subsidiary, though these cases were rare.

The Companies Act 2006 created new, clearer rules for Derivative Claims but limited them to direct shareholders of the company. This led to the debate: did the Act accidentally wipe out the right for indirect minority owners to sue (as in this case)?

Looking at the Act, its wording, and the official reports that led up to it, the Court decided that the Act hadn’t clearly abolished the old common law rights for multiple derivative actions. So, the judge concluded, the path remained open for Universal Ltd to bring a “double derivative action” on AHDG Ltd’s behalf, even though its ownership was one step removed.

The Judgement

The Court granted permission for Universal Ltd to continue its claim as a multiple derivative action on AHDG Ltd’s behalf. The judge also encouraged both parties to seek a mediated or negotiated settlement, hinting that justice is best served if business partners can find common ground without lengthy courtroom battles.

The ruling was welcomed for two reasons: it maintained a common-sense safeguard against corporate wrongdoing in layered ownership structures, and it ensured English law remained in step with other countries like Hong Kong, Singapore, and Canada.

Derivative Action Case Study: Universal Project Management Services Ltd v Fort Gilkicker Ltd and Others

How The Conflict Started

Kicked Out of the Deal

Breach of Duty

The Legal Question – Could Universal Ltd Sue?

The Judge’s Reasoning

The Judgement

Services

Christopher Burgon Solicitors Litigation Specialists

Understanding How Damages for Breach of Contract Are Calculated

How to Remove a Director from a Company Effectively

50-50 SHAREHOLDER DISPUTES