CASE STUDY ON FOSS V. HARBOTTLE (1843) 67 ER 189
INTRODUCTION
Foss v Harbottle is a major precedent for English corporate law. In any case in which a wrong is claimed to have been made to a corporation, the company itself is the proper complainant. This is known as the “Foss v Harbottle rule,” and the many significant exceptions that have been established are also defined as “Foss v Harbottle exceptions to law.” Among such is the “derivative action,” which enables a minority shareholder to lodge a claim on behalf of the corporation. Among such is the “derivative action,” which enables a minority shareholder to lodge a claim on behalf of the corporation. In Foss v Harbottle the rule is better used as the starting point for remedies for minority shareholders.
Parties and Judges Names
Court: Court of Appeal
Coram: Wigram VC, Jenkins LJ
Plaintiff: Foss and Turton
Defendants: Thomas Harbottle & ORS
Facts
In 1835, Victoria Park Company was formed to purchase 180 acres (0.73 km2) of land near Manchester for the development of Victoria Park, Manchester. The company was subsequently incorporated in the Townships of Rusholme, Charlton-upon-Medlock and Moss Side, in the County of Lancaster, by “An Act for the Establishment of a Company for the Purpose of Laying Out and Maintaining an Ornamental Park,” and Royal assent was granted on 5 May 1837.
The firm had two minority shareholders, Richard Foss and Edward Starkie Turton. They were of the opinion that the company’s property had been misused and abused and that multiple mortgages were wrongly granted over the property of the company. They claimed against five company directors (Thomas Harbottle, Joseph Adshead, Henry Byrom, John Westhead, Richard Bealey); the solicitors (Joseph Denison); the architect (Thomas Bunting and Richard Lane); and also H. Rotton, E. Lloyd, T. Lloyd, T. Biggs and S. Brooks, Byrom, Adshead and Westhead ‘s different assignees, who had been bankrupt.
Their argument had been based on the following reasons:
- fraudulent transactions in respect of which the company’s assets were misapplied;
- the number of suitable directors to form a board had ceased to be sufficient; and
- there was no clerk or office in the company;
- and that, in these cases, the shareholders were not allowed to take the property from the hands of the defendants who were directors except by initiating litigation.
Issue
Whether or not the right of a corporation to sue can be exercised by its corporate characters in its own capacity or on behalf of the company itself?
Judgment
The claim was dismissed. It was held:
- The continuity of the Board ‘s life shall be planned de facto;
- Under the law, the prospect of convening a general meeting of shareholders able to control the activities of an existing board was not precluded;
- Nothing stopped the company from seeking recourse of its corporate nature of respect of the matter to which the case relates;
- The plaintiffs could not sue in the form of a plea which claimed that the corporation was dissolved in practice.
- The outcome of this case shows that, if a corporation is wrongly performed, even though the wrongdoers are its directors, it is only the corporation which is liable to sue.
- In effect the court established two rules:
- The “proper plaintiff rule” – a wrong done to the company may be vindicated by the company alone;
- The “majority rule principle” – if the alleged wrong can be confirmed or ratified by a simple majority of members in a general meeting, then the court will not interfere.
- However, there are certain exceptions to the rule in Foss v Harbottle, namely: –
- Ultra vires or illegal acts;
- transactions requiring special majorities;
- personal rights; and
- the “fraud on the minority” exception.
- Wrongdoers in control
- Oppression and mismanagement
Ultra Vires
The Foss v. Harbottle rule applies only as long as the organization operates within its remit. Ultra vires acts are actions that fall beyond a corporation’s authority to execute. These activities fall outside the powers expressly referred to in the Companies Act and even outside those referred to in Article of Association and Memorandum of association. For cases where an act is ultra vires the memorandum of association and articles of association, the shareholder may bring proceedings against a corporation. These acts are null and void and cannot be made lawful by majority members ratification.
Fraud on Minority
Where a majority of members of a company use their power to defraud or oppress the minority, even a single shareholder is liable to impeach their conduct. Where a majority of members of a company use their power to defraud or oppress the minority, even a single shareholder is liable to impeach their conduct. Where a majority of members of a company use their power to defraud or oppress the minority, even a single shareholder is liable to impeach their conduct. Any branch of duty that makes the company should be considered a fraud on the minority.
Wrongdoers in Control
A controlling shareholder or managing director has a fiduciary responsibility toward the firm. The majority cannot claim the company’s properties or the minority shareholders’ interest to themselves.
Acts Requiring Special Majority
There are some decisions with a simple majority of the company’s shareholders cannot take. For these decisions they shall be approved by a special majority, i.e. three-fourths of the members present and voting shall be necessary to vote. For example, amendment of an association of article or memorandum of association. Where a majority purports to do some such act by passing only an ordinary resolution or by passing a special resolution in the manner prescribed by statute, some member or member may bring proceedings to restrain the majority.
Individual Membership Rights
Every shareholder exercised some personal rights in him against the company and its shareholders. The acts themselves confer a significant number of these privileges on shareholders, but they may also emerge from articles of association. These rights are the rights of individuals or of individuals generally known as party membership rights and the law of the majority clearly does not apply to them. The shareholder is entitled to impose his individual rights against the corporation such as the right to vote, the right to stand for the director’s election, etc. The right to individual membership means that individual shareholders may insist on strict observance of the legal rules, statutory provisions and the provisions in the memorandum and articles which cannot be waived by a majority of the shareholders.
Oppression and Mismanagement
Where the provisions of sections 241 to 246 of the Companies Act, 2013 apply or the provisions of Sections 397 and 398 of the Companies Act, 1956 shall apply a suit which may be bought by minority shareholders. Therefore, it is a constitutional privilege given to a shareholder overriding the restrictions of the majority rule. 100 members or members with 1/5th of the members in the company register can make the application.
Author: Bahaar,
Amity Law School, Noida 3rd Year student
