Foss Vs Harbottle

Saving Minority share holders

1. COMPANY LAW PRESENTATION MS SHAKARI MURUGANDAN

2. TASK “Majority of members of company are in an advantageous position to run the company according to their command, the minority of share holders are often oppressed” Discuss the above fact based on the rule of FOSS V HARBOTTLE

3. Introduction In the day-to-day working of a company, certain decisions need to be taken regarding the management of the company and these decisions are generally taken by the majority members. In this process of decision-making, there may arise certain occasions wherein the interests of the majority shareholders may come in conflict with that of the minority shareholders. In such a case, if the decisions taken, are not in the larger interest of the company as a whole, but only caters to the interest of one particular group, the minority group whose interest may have been violated can raise its voice against such an action.

4. Minority share holders A minority shareholder is defined as a shareholder who does not exert control over a company. The majority shareholders almost always exert an absolute control over the company, its management, its board of directors, and so on .   M inority shareholders and its efficiency, in order to verify if the law suffices for their protection, or if the minority shareholders need an ethical protection, which has a much wider scope. 

5. CASE FACTS In Foss v Harbottle (1842), 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 .

6. This rule is derived from two general legal principles of company law , A company is a legal entity separate from its shareholders . The Court will not interfere with the internal management of companies acting within their powers.  Where an ordinary majority of members can ratify the act, the Court will not interfere.  This simply means, if the majority can ratify an act, the minority cannot sue.

7.   Exceptions to the rule in Foss v Harbottle U ltra vires or illegal acts Transactions requiring special majorities Acts that infringe a shareholder’s personal rights Acts of fraud against the minority on behalf of the persons controlling the company

8. Why Minority Shareholders Seeking Remedies ?   In unethical companies, the minority shareholders will always lose in the long run. Unethical managers tend to work on the verge of the law, finding loopholes, and getting the legal advice of the best lawyers, in cases of wrongdoing to the minority shareholders. Boards of Directors and executives of companies tend to safeguard primarily the interests of the majority or controlling shareholders, who have appointed and remunerate them. Independent Directors, who are appointed by the executives, decisions of their committees, and fairness opinions that they order, are in many cases unreliable to minority shareholders, as they tend to comply with the opinions of the majority shareholders.

9. Types of Action that can be commenced by Minority Shareholders   There are 3 types of actions that Minority shareholder(s) can bring : Personal Action A personal action may be commenced by a member to enforce a right due to him personally where such rights have been abused by an act . An example of personal action is where a shareholder commences an action to enforce the term of a contractual obligation with the company.

10. Representative Action A representative action is commenced where an individual member’s right has been infringed, and the infringement affects other members in the company, the appropriate action will be a representative action Example : A member will be suing the company on behalf of himself and other aggrieved members Derivative Action A derivative action is when minority members/shareholders bring an action in the name of the company to correct the wrong done to a company by majority/controlling shareholders.

11. THANK YOU