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MAJORITY RULE (Foss vs. Harbottle, 1843)


Supremacy of the majority is the fundamental principle of company law.  Generally, majority members are entitled to exercise powers of the company and control its affairs.  A group of persons controlling ¾ of the votes would have a complete control of the company, and a little more than half the votes would give considerable influence allowing control over appointments to the Board.

The Act lays down certain matters, which have to be decided by shareholders at a general meeting by simple majority, whereas certain more important matters can be decided by a special majority of ¾ of the shareholders. Therefore, it is obvious the administration of a company goes with the majority rule.

The principle of majority rule was recognized in Foss vs. Harbottle (1843).  It is also known as “proper plaintiff principle”, which states that, in order to redress a wrong done to a company or to the property of the company or to enforce rights of the company, the proper claimant is the company itself, and the court will not ordinarily entertain an action brought on behalf of the company by a shareholder.

Case Law: Foss vs. Harbottle (1843)
The claimants, Foss and Turton, were shareholders in a company ‘The Victoria Park Company’ which was formed to buy land for use as a pleasure park.  The defendants were the other directors and shareholders of the company.  The claimants alleged that the defendants had defrauded the company in various ways and in particular that the defendants had sold land belonging to them to the company at exorbitant price.  The claimants now asked the court to order that the defendants make good the losses to the company.

It was held by Vice-Chancellor Wigram that since the company’s board of directors was still in existence, and since it was still possible to call a general meeting of the company, there was nothing to prevent the company from obtaining redress in its corporate character, and the action by the claimants could not be sustained.

In Foss vs. Harbottle two minority shareholders in a company alleged that its directors were guilty of buying their own land for the company’s use and paying themselves a price greater than its value.  This act of directors resulted in a loss of the company.

The minority shareholders decided to take action against the directors, but the majority shareholders in a meting resolved not to take any action against the directors alleging that they were not responsible for the loss which had occurred.

The court dismissed the suit on the ground that the acts of the directors were capable of confirmation by the majority members and held that the proper plaintiff for wrongs done to the company is the company itself and not the minority shareholders and the company can act only through majority shareholders.

The rationale in that line of reasoning is that a company is a separate legal entity from the members who compose it and as such, if any right of the company is violated, it is the company which can bring an action through the majority.

It was held that, “If the thing complained is a thing which, in substance, the majority of the company are entitled to do, or something has been done irregularity which the majority of the company are entitled to do regularly or if something has been done illegally which  majority of the company are entitled to do legally, there can be no use in laying litigation about it, the ultimate end of which is only that a meeting has to be called, and then ultimately the majority gets its wishes.

It was also held that, it is elementary principle of law relating to joint stock companies that the court will not interfere with the internal management of the company, acting within their powers and jurisdiction to do so.  Again it is clear that in order to redress a wrong done to the company or to recover monies or damages due to the company the action should prima facie be brought by the company itself”.

Basis of the Rule

(1)        The right of the Majority Rule

The court has said in some of the cases that an action by a single shareholder cannot be entertained because the feeling of the majority of the members has not been tested and that  they may be prepared to waive their right to sue.

(2)        The Company is a Legal Person

The court has also said from time to time that since a company is a person at law, the action is vested in it and cannot be brought by a single member.

(3)        The prevention of multiplicity of Actions

This situation could occur if each individual member was allowed to commence an action in respect of a wrong done to the company.

(4)        The court’s order may be made ineffective

The court’s order could be overruled by an ordinary resolution of members in a subsequent general meeting.



Case Law: MacDougall vs. Gardiner (1875)
The articles empowered the chairman with the consent of the members in a meeting to adjourn a meeting and also provided for taking a poll if demanded by the shareholders.  The adjournment was moved and declared by the chairman.

A shareholder brought an action for a declaration that the chairman’s conduct was illegal.  It was held that the action could not be brought by the shareholder.  If the chairman was wrong, only the company could sue.

Lord Melish said that if the thing complained of is a thing which in substance the majority of the company are entitled to do, there can be no use in having litigation about it, the ultimate end of which is only that a meeting has to be called and then ultimately the majority gets its wishes.

Advantages of the Rule in Foss vs. Harbottle

(i)         Recognition of separate legal personality of a company.  If a company has suffered some injury, then it is not the individual members, rather it should be the company to seek redress.
(ii)        It preserves the right of the majority to decide how the affairs of the company shall be conducted. It is the wish of the majority to prevail.
(iii)       Multiplicity of futile suits can be avoided, that is, if every member were permitted to sue everyone who has injured the company through a breach of duty, there would be enormous waste of time and money.
(iv)       Litigation at the suit of a minority is futile if majority do not wish it.

Exceptions to the Rule in Foss vs. Harbottle (Protection of the Minority)

It is clear from Foss vs. Harbottle rule that it is the majority rule that prevails in the company management.  Such powers may be misused to exploit the minority shareholders and to serve personal ends.  This may be clear in case of private companies where few individuals own majority of shares.

Palmer rightly pointed out that, “a proper balance of rights of majority and minority shareholders is essential for the smooth functioning of the company”.
To curtail the power of the majority, the following exceptions have been admitted as follows:-
(i)         Acts which are ultra vires or illegal

Foss vs. Harbottle will apply only when the act done by the majority is one which the company is authorized to do by its memorandum.
No simple majority of members can confirm or ratify an illegal act, not even if all the shareholders are willing to do so.  Incase of ultra vires acts, even a single shareholder can restrain the company from committing those acts by filing a suit of injunction.  Majority rule will not prevail where the act in question is illegal.

(ii)        Acts supported by insufficient majority

For certain acts, it might require ¾th majority.  The rule in Foss vs. Harbottle cannot be invoked by a simple majority if the act requires special majority. If the requirements of special majority are not fulfilled, any shareholder can restrain the company from acting on resolutions.

Case Law: Edwards vs. Halliwell (1950)
A trade union had rules which were the equivalent of the articles of association, under which any increase in members’ contributions had to be agreed by a 2/3rd majority in a ballot of members.  A meeting decided by a simple majority, to increase the subscriptions without holding a ballot.  The claimants as a majority of members applied for a declaration from the court that the resolution was invalid.

It was held that the rule in Foss did not prevent a minority of a company from suing because the matter about which they were suing was one which could only be done or validly sanctioned by a greater than simple majority.

(iii)       Where the act of majority constitutes a fraud on the minority

A resolution would constitute a fraud on minority if it is not bona fide for the benefit of the company as a whole. Similarly, an action of the majority which discriminates between majority shareholders and minority could constitute a fraud of majority. A special resolution would be liable to be impeached if the effect of it were to discriminate between the majority shareholders and minority shareholders, so as to give the former advantage of which the latter were deprived.

The rule in Foss would create grave injustice if the majority were allowed to commit wrongs against the company and benefit from those wrongs at the expense of the minority, simply because no claim could be brought in respect of the wrong.

Case Law: Cook vs. Deek (1916)
The directors of a Railway Construction company obtained a contract in their own names to construct a railway line.  The contract was obtained under circumstances which amounted to breach of trust by the directors who then used their voting powers to pass a resolution of the company declaring that the company had no interest in the contract.

It was held that the benefit of the contract belongs in equity to the company and that the directors would benefit themselves at the expense of the minority.  It is tantamount to majority oppressing the minority.  In case of breach of duty of this sort, the rule in Foss did not bar the claimants’ claim.

Case Law: Brown vs. British Abrasive Wheel Co. (1919)
A company required further capital.  The majority who represented 98 percent of the shareholders, were willing to provide this capital but only if they could buy up the 2 percent minority.  The minority would not agree to sell and so the majority shareholders proposed to alter the articles to provide for compulsory acquisition under which 9/10th of shareholders could buy out any shareholders.
Lord Asbury held that the alteration of the articles would be restrained because the alteration was not for the benefit of the company.  The rule in Foss did not bar the claimant’s claim.

(iv)       Where it is alleged that the personal membership rights of the plaintiff shareholder has been infringed

Such individual rights include the right to attend meetings the right to receive dividends the right to insist in strict observance of the legal rules; statutory provisions in the memorandum and articles. If such a right is in question, a single shareholder can on principle, defy a majority consisting of all other shareholders.

Thus, where the chairman of a meeting at the time of taking the poll ruled out certain votes which should have been included, a suit by a shareholder was held to be validly filed.
Where the candidature of a shareholder for directorship is rejected by the chairman, it is an individual wrong in respect of which the suit is maintainable.

(v)        Where there is breach of duty

A minority shareholder can bring a suit against the company where there is a breach of duty by the directors and majority shareholders to the detriment of the company.

Case Law: Daniels vs. Daniels (1978)
A company on an instruction of the two directors (husband and wife), having majority shareholding sold the company’s land to one of them, (the wife) at a gross under value.  The minority shareholders brought an action against the directors and the company.
It was held that minority shareholders had a valid cause of action.

(vi)  Oppression and Mismanagement

Where there is oppression of minority or mismanagement of the affairs of the company, Foss vs. Harbottle does not apply.

Oppression refers to an act performed in a burdensome, harsh and wrongful manner. A shareholder can bring an action against the management of the company on the grounds of oppression and mismanagement.

 
 
 

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