Foss vs Harbottle case law(Majority Rule)

 

Foss v. Harbottle is a landmark case in company law that revolve around principle of corporate personality and the rights of the shareholders.

The Foss v. Harbottle case, decided in 1843, laid the foundation for the Majority and Minority rule in corporate law.

INTRODUCTION 

Foss v Harbottle is a landmark case in the history of company law that established fundamental principles regarding the legal standing of the shareholders in bringing actions against the company's directors for alleged wrongs committed within a company. the case was heard in 1843 in the court of Chancery in England.

Foss v Harbottle also introduced the Majority rule, emphasizing that decision affecting the company should generally be made by the majority of shareholders. It established that if a majority of share holders approves or disapproves of a particular action, the court would not intervene.

However , the case did recognize exceptions  to this rule.

This case set the foundation framework for the balance between the majority rule and minority protection in corporate governance influencing subsequent developments in company law and providing a basis for understanding the dynamics of shareholder rights within a corporate structure.

FACT OF THE CASE:

Background of Company:

• The company named "Victoria Park Company" has been setup in september 1835.
• The case involved a company with a distinct legal identity, separate from its individual shareholders.

Plaintiff:

• Richards Foss and Edward Turton, who were Minority shareholders in the company.
• legal action against the promoter and the director of the company. 
• Allegations : 

1. Property of the company misapplied and wasted.
2. by fraudulent and illegal transactions and
3. Various mortgages were  given improperly over the company's property.

Defendant:

• Defendant were Five directors of the company.

1. Thomas Harbottle
2. Joseph Adshead
3. Henry Byrom
4. John Westhead
5. Richard Bealey

ARGUMENTS:

Shareholder's Allegation:

• Shareholders argued that the actions of the directors were harming the company's financial stability. 
• They claimed that the dividend irregularities and questionable land transactions were against company's best interest.

Breach of Fiduciary Duties:

• Shareholders contended that the directors had breached their fiduciary duties by not acting in the best of interest of the company and its shareholders.

Demand for Legal Remedies:

• Shareholders demanded legal remedies against the alleged wrongs, seeking court intervention to hold the directors accountable for theirs actions.

JUDGMENT:

1) Proper Plaintiff Rule:

• The court held that the company. as a separate legal entity, is the proper party to bring the legal action for wrongs done to company.
• Individual shareholder or the Group of shareholder were not recognized as having inherent right to sue on behalf of  the company for actions that affected the company itself.

2) Majority Rule:

• A company stands as an artificial entity.
• The directors run it in accordance to the wish of the majority.
• The directors accepts the resolution passed by the majority of the members.
• The majority Members have the power to make rules and have the supremacy in the company.
• Limitations: 1)The powers of the majority of the members are subject to the MOA and AOA of the company. A company cannot go over or authorize any act legally outside the MOA. If company acts beyond the MOA, this will regarded as the ULTRAVIRES .                                                         2)The resolution made by the majority should not be in conflict with the Compaines Act or any Statues.

3) Exceptions for Minority Action:

• Recognizing exceptions to the majority rule, the court allowed minority shareholders to bring legal action in case of fraud, legality, or actions contrary to the company's constitution  i.e  MOA
• This exception became known as the MINORITY Rule, providing protection for minority shareholders when their interest were unfairly prejudiced.

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