Please contact customerservices lexology. Introduction Rule and its exceptions Determination Comment. As a general rule, Irish law does not permit a shareholder to bring an action on behalf of the company in which it holds shares and treats the company itself as the proper plaintiff. This originates from Foss v Harbottle 1 and derives from the fact that a company has separate legal personality. However, through four recognised exceptions to that rule, a shareholder can bring proceedings on behalf of the company in a derivative action.
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In this article, we are going to study the Foss v Harbottle case, which introduced the concept of the rule of the majority. A company is a juristic person which is conferred a separate legal entity different from the members who form it i. Decisions of the company are taken by the Member Shareholders and the Board of Directors on behalf of the Company. The company also takes decisions regarding pursuing litigation.
As per the Companies Act , shareholders who hold the majority of shares, rule the company. This majority principle is recognized in a landmark case Foss v Harbottle. The decision taken by the majority shareholders was binding on the minority. Now, this principle has been replaced and minority shareholders have been given greater power under Companies Act There were provisions under the Companies Act, to protect the interest of the minority shareholders.
But the minority has been incapable or unwilling due to lack of time, recourse or capability- financial or otherwise. Hence there were many cases of oppression of minority shareholders. Rule of Majority Rule in Foss v Harbottle :. The principle of rule by the majority has been made applicable to the management of the affairs of Companies.
Once passed by majority members as per requirements, it becomes binding on all the members of the Company. In such cases, Courts do not, in general, interfere in the management of the company on the insistence of shareholders in matters of internal administration as long as the directors are acting within the powers conferred to them under the Memorandum of Articles and Article of Association.
The Court will not ordinarily intervene to protect the minority interest affected by the resolution, as on becoming a member, each person impliedly consents to submit to the will of the majority of the members. Thus, if wrong is done to the Company, it is the Company which is the legal entity having its own personality, and that can only institute a suit against the wrongdoer, and shareholders individually do not have the right to do so.
This rule was laid down as early as in the landmark case of Foss v. This rule is the foundation of common law jurisprudence regarding who may bring an action on behalf of the company. They also prayed that the defendant might be decreed to make good to the company the losses.
In other words, the proper plaintiff, in that case, was the company and not the two individual shareholders. The principle of Foss v Harbottle only applies where a corporate right of a member is infringed.
The rule does not apply where an individual right of a member is denied. In Edwards v. Secondly, where the alleged wrong is a transaction which might be made binding on the company or association and on all its members by a simple majority of the members, no individual member of the company is allowed to maintain an action in respect of that matter for the simple reason that, if a mere majority of the members of the company or associations is in favour of what has been done, then cadet quaestio cannot be questioned.
Rule of Majority in Indian Scenario:. The rule of Foss v Harbottle is not completely applicable to the Indian scenario and the right of minority members are protected by the law. The legislature and the Court have clearly demarcated the boundaries as to when can a minority shareholder bring an action against the company when the act of the company prejudices its interests. In Rajahmundry Electric Supply Corpn.
Nageshwara Rao, AIR SC case, the Court observed that the conduct with which the defendant is charged is an injury not to the plaintiffs exclusively, it is an injury to the whole corporation. In such cases, the rule is that the corporation should sue in its own name and its corporate character.
It is not a matter of course for any individual members of a corporation thus to assume themselves the right of suing in the name of the corporation. In law, the corporation and the aggregate of members of the corporation are not the same things.
Parasrampuria Synthetic Ltd, Appeal No. Harbottle rule to the Indian situations, Indian conditions, and Indian corporate realities would be improper and is misleading. The principle, in the countries of its origin, owes its genesis to the established factual foundation of shareholder power and majority shareholder power centred around private individual enterprise and involving a large number of small shareholders, is vastly different from the ground realities.
Exceptions to the Majority Rule:. The majority rule endorsed in Foss v Harbottle extends to cases in which the corporations are competent to ratify managerial misdeeds. There are certain acts and incidents which no majority of shareholders can approve or affirm.
In such cases, each and every shareholder may sue to enforce obligation owed to the company. The following are the exceptions to the rule of the majority. The rule in Foss v Harbottle applies only as long as the company is acting within its powers.
A shareholder may bring action against a company in those instances where an act is ultra vires the Memorandum of Association and the Articles of Association. Such actions are void and cannot be made legal through ratification by majority members. In Bharat Insurance Company Ltd v.
One of the objects of the company was: To advance money at interest on the security of lands, houses, machinery and other property situated in India. The plaintiff complained that the several investments have been made the company without adequate security and contrary to the provisions of the memorandum and therefore prayed for a perpetual injunction to restrain it from making such investment. But the application of the assets of the company is not a matter of mere internal management.
It is alleged that directors are acting ultra vires in their application of the funds of the company. Under these circumstances, a single member can maintain a suit for declaration as to the true construction of the article in question. Good faith is an important ingredient in determining maintainability in such instances since the action of the plaintiff is for the purpose of doing justice to the company. In Nurcombe v. In the matrimonial proceeding between them, she came to know of the improper profits made by the husband and such profits were even taken into consideration in preparing the award, it was held that she was not a proper plaintiff for a derivative action.
In Towers v. African Tug Co. Three years after these payments were made, two of the shareholders brought an action on behalf of the company seeking the repayment of these sums by the directors. Fraud on Minority:. Any breach of duty which causes loss to the company should be regarded as a fraud on the minority.
In Menier v. The first company had obtained such concessions, and so Hooper induced the trustee in whom they were vested to transfer them to the second company. Menier, a minority shareholder of the first company, brought a derivative action against Hooper to compel it to account to the company for the profits it derived from the improper arrangements it had made.
However, the majority were prepared to insert a provision regarding price which stated that the minority would get a price which the court thought was fair.
Astbury J held that the alteration was not for the benefit of the company as a whole and could not be made. One reason for this was that there was no direct link between the provision of the extra capital and the alteration of the articles. Wrongdoers in Control:. A controlling shareholder or director has a fiduciary duty toward the company. The majority cannot appropriate to themselves the property of the company or the interest of the minority shareholders.
In Daniels v Daniels,  Ch. In Glass v. Atkin, 65 DLR case, where the company was controlled equally by all members. The Court held that the control exists if it would be futile to call a general meeting because the wrongdoers would directly or indirectly exercise a decisive influence over the result and observed that the exception of wrongdoers in control to Foss v. Harbottle applies whenever the defendants are shown to be able by means of any manipulation of their position in the company to ensure that the action is not brought by the company and held the suit maintainable.
In Cook v Deeks  A. It was held that the directors had breached their fiduciary duty and abused their power of the majority. Acts Requiring Special Majority:. There are several decisions which shareholders of a company cannot take by a simple majority. For such decisions, they are to be ratified by special majority i. For e. If the majority purport to do any such act by passing only an ordinary resolution or without passing a special resolution in the manner required by law, any member or members can bring an action to restrain the majority.
In Dhakeswari Cotton mills v Nil Kumal Chakravorty, AIR Cal case, a special resolution was introduced in a general meeting to increase the monthly allowance and commission of the Managing Directors which was decided by a show of hands since no poll was demanded.
The plaintiff sought a declaration that the resolution was not binding since it did not have the appropriate majority. The Chairman had declared that had voted for and 78 had voted against the resolution which on the face of it shows that it failed. The court rule in favour of the plaintiff. In Nagappa Chettiar v. Madras Race Club, 1 MLJ case, the Court held that if the majority purport to do any such act by passing only an ordinary resolution or without passing a special resolution in the manner required by law, any member or members can bring an action to restrain the majority.
Individual Membership Rights:. Every shareholder has vested in him certain personal rights against the company and his shareholders. A large number of such rights are have been conferred upon shareholders by the acts itself, but they may also arise out of articles of association. A shareholder is entitled to enforce his individual rights against the company like the right to vote, right to stand in elections for the director, etc.
An individual membership right implies that the individual shareholders can insist on strict observance of the legal rules, statutory provisions and the provisions in the memorandum and articles which cannot be waived by a bare majority of the shareholder. Every shareholder can assert such a right in his own name. Madras Race Club, 1 MLJ case, the Court observed that a shareholder is entitled to enforce his individual rights against the company, such as his right to vote, the right to have his vote recorded, or his right to stand as a director of a company at an election.
If the shareholder, however, intends to recover damages alleged to be due to the Company, the action should ordinarily be brought by the company itself. In Henderson v Bank of Australasia, 45 Ch. The Chairman refused to record the amendment in spite of the fact that it was seconded and the original resolution was passed without amendments.
No reasons were given for this decision either. It was held that the shareholders have a right to move amendments to resolutions. In Joseph v. He was proposed as a candidate again to fill up the second vacancy.
Rule in Foss v Harbottle Law and Legal Definition
The Fact Factor
Foss v Harbottle: 25 Mar 1843
It is a general principle of company law that an individual shareholder cannot sue for wrongs done to a company or complain of any internal irregularities. This principle is commonly known as the rule in Foss v Harbottle. In Foss v Harbottle , two shareholders commenced legal action against the promoters and directors of the company alleging that they had misapplied the company assets and had improperly mortgaged the company property. The Court rejected the two shareholders' claim and held that a breach of duty by the directors of the company was a wrong done to the company for which it alone could sue. In other words, the proper plaintiff in that case was the company and not the two individual shareholders.
Derivative actions and exceptions to Foss v Harbottle
In this article, we are going to study the Foss v Harbottle case, which introduced the concept of the rule of the majority. A company is a juristic person which is conferred a separate legal entity different from the members who form it i. Decisions of the company are taken by the Member Shareholders and the Board of Directors on behalf of the Company. The company also takes decisions regarding pursuing litigation. As per the Companies Act , shareholders who hold the majority of shares, rule the company.