The majority rule and shareholder's remedies

Majority Rule (Proper Claimant Rule)

The rule in Foss v Harbottle (1843) is that when a wrong has been committed against the company, the proper claimant in respect of that wrong is the company itself. An individual shareholder is not empowered to initiate proceedings for a wrong to the company. As Lord Davey commended in Burland v Earle, the court are not willing to interfere with the internal affairs of the company, and in fact they have no jurisdiction to do so.

According to Jenkins LJ in Edwards v Halliwell (1950), there are two limbs to the rule:

(i) The proper claimant in an action in respect of a wrong done to a company is prima facie the company itself.

(ii) No individual member would be allowed to bring an action for a wrong done to the company, if the majority of members of the company are in favour of the alleged wrong.

As in the case of Foss v Harbottle (1843) itself, the two shareholders’ action against the directors and promoters for misappropriated assets belonging to the company and had improperly mortgaged its property has failed, because these wrongs done to the company have been approve by the majority shareholder in the general meeting.

Similarly, in MacDougall v Gardiner (1875), a member’s vote was not taken by the chairman in a general meeting. The court considered that the voting right may not be enforceable if the breach complained of could be ratified by a majority resolution. The court seems to being realistic here as there was no point in suing where ultimately a meeting has to be called at which the majority will, in any case, get its way. 

The exception to Foss v Harbottle

The rule in Foss v Harbottle (1843) is not an absolute bar to individual shareholders bringing an action in respect of an alleged wrong. There are four exceptions to the rule in Foss v Harbottle, namely: ultra vires or illegal acts; transactions requiring special majorities; personal rights; and the “fraud on minority” exception.

This was explained by Jenkins LJ in the case of Edwards v Halliwell (1950):

(i) Where the act is illegal or is wholly ultra vires the company. This has now been put on a statutory footing by section 40 Companies Act 2006.

(ii) Where the matter in issue requires the sanction of a special majority, or there has been non-compliance with a special procedure.

(iii) Where a member’s personal rights have been infringed in his capacity as a member.

(iv) Where a fraud has been perpetrated on the minority and the wrongdoers are in control. This common law remedy has now been reformed and put on statutory footing by virtue of the Companies Act 2006.

The proposed fifth exception, namely where it would be in the interests of justice to relax the rule, has been rejected by the Court of Appeal in Prudential Assurance v Newman (No.2) (1982).

Shareholder's remedies

Hence, following the above, there are a number of remedies available to shareholder, including those exceptions to majority rule.

These remedies include:

(i) Section 33 & 21(1) Companies Act 2006, the enforcement or alteration of company's constitution 

http://thewallyeffect.blogspot.my/2017/10/company-constitution-and-section-33.html


(ii) Section 40 Companies Act 2006, ultra vires

http://thewallyeffect.blogspot.my/2017/10/the-doctrine-of-ultra-vires.html


(iii) Section 260-264 Companies Act 2006, derivative claims


http://thewallyeffect.blogspot.my/2017/10/derivative-claims.html


(iv) Section 994 Companies Act 2006, unfair prejudicial conduct

http://thewallyeffect.blogspot.my/2017/10/unfair-prejudicial-conduct.html


(v) Shareholder agreement

http://thewallyeffect.blogspot.my/2017/10/shareholder-agreement.html


(vi) Variation of class rights

http://thewallyeffect.blogspot.my/2017/10/class-rights.html


(vii) Section 122(1)(g) Insolvency Act 2006, judiciary winding up 

http://thewallyeffect.blogspot.my/2017/10/judiciary-winding-up.html

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