Enforcment of members rights

Rule in Foss v Harbottle (1843) 67 ER 189 (Shareholders’ rights-majority rule, minority protection) Introduction. This is a classical leading English case in precedent in the area of corporate law. “ The rule in Foss v Harbottle provides that individual action in law for any wrongs done to the corporation brought in respect of such losses, it must be its self( through management) or by way of a derivation. Brief Fact Summary; The case of Foss v Harbottle 1843: laid down a general principle that the courts will not interfere in the internal management of a company at the insistence of the minority share holders. Here an action was brought by the minority alleging that the directors were responsible for the losses that had occurred when they sold some of there own land to the company , what was alleged to be an over valuation. The court held that the action must fail as the proper plaintiff in such circumstances was the company it self. Synopsis of the rule of Law: In any action which a wrong is alleged to have been done to a company, the proper claimant is the company itself. This applies in situation of “wrongdoer control” and is, in reality, the only true exception to the rule. Facts: Richard Foss and Edward Starkie Turton were two minority shareholders in the “Victoria Packers Company”. The company had been set up in September 1835 to buy 180 acres (0.73Kms2) of land near Manchester. The claimants alleged that property of the company had been misapplied and wasted and various mortgages were given improperly over the company’s property. They asked that the guilty parties be held accountable to the company and that a receiver be appointed. The defendants were the five company directors (Thomas Harbottle, Joseph Adshead, Henry Byrom, John Westhead, Richard Bealey.) and the solicitors and architects (Joseph Deniso, Thomas Butinga and Richard Lane); and also H Rotton, E Lloyd, J Biggs and S Brooks, the several assignees of Byrom, Adshead and Westhead, who had become bankrupts. The Victoria park company was an incorporated body, and the conduct with which the defendants are charged in this suit is an injury not to the plaintiff’s executives; it is an injury to the whole corporation by individuals whom the corporation entrusted with powers to be exercised only for the good of the corporations. The court dismissed the claim and held that when a company is wronged by its directors it is only the company that has standing to sue. In effect the court established two rules. Firstly, the “proper plaintiff rule.” Is that a wrong done to the company may be vindicated by the company alone. Secondly, the majority of members in a general meeting, then the court will not interfere, cadit quaestio Case law: And from the case; of Pavlides v Jeson and others 1956, a company sold asbestos mine for £182,000 when its real value was close to £1,000,000. A minority shareholder brought an action for damages against three directors who were responsible for the sales against the company, alleging gross negligence. The court held that the action could not have brought by the minority share holders because it was the company itself which should decide whether to reduce the wrong that had been committed. If a case should arise of injury to a corporation by some of its members, for which no adequate remedy remained, except that of a suit by individuals corporations in their private characters, and asking in such character the protection of those rights to which in their corporation characters they were entitled, I can not but think that the principle so forcibly laid down by Lord Cottenham in Wallworth v Holt (4 Myl & Cr ; see also 17 Ves 320, per Lord Eldon) and other cases would apply, and the claims of justice would be found superior to any difficulties out of technical rules respecting the mode in which corporations are required to sue. Similar cases: Preston v The Grand Collier Dock Company (1840) 11 Sim 327, SC; 2 Railway Case( the proprietors a general meeting assembled , retained power of exercising the functions conferred upon by the act of incorporation, it can not be competent to a individual cooperators to sue in the manner proposed by the plaintiff on the present record. This in effect purports to be a suit by cestui que trust complaining of fraud committed or alleged to have been committed by persons in fiduciary character. The corporation in a sense, is un doughtily the cestui que trust; but the majority of the proprietors at a special general meeting assembled, independently of any general rules of law upon the subjects, by the very terms of the incorporation and in present case has power to bind the whole body and every individual cooperator must have come into the corporation upon the terms of being liable to be bound. Thus the process of incorporation, having invested a company with a separate legal personality, dictates that the company and individual members are separate. If a wrong is committed against the company it is the company, by virtue of a decision made by the board of directors that should seek redress for it. Judgment: The court dismissed the claim and held that when a company is wronged by its directors it is only the company that has the standing to sue. As the action to which the minority share holders objected could have been ratified by the majority then it was the, majority shareholders who should decided whether an action should be brought in the name of the company the court saw no merit in interfering in the internal management of a company by passing judgment on its commercial decisions. Developments from the case: The rule was later extended to cover cases where what is complained of is some internal irregularity in the operation of the company. How ever, the internal irregularity must be capable of being confirmed/ sanctioned by the majority. The rule in Foss v Harbottle has another important implication. A share holder can not generally bring a claim to recover any reflective loss-a diminution in the value of his or her shares in circumstances where the diminution arises because the company has suffered an actionable loss. The proper course for the company is to bring the action and recoup the loss with the consequences that the value of the shares will be restored. Exceptions to the rule: The rule in Foss v Harbottle dose not applies to every type of action taken by the majority. In certain situations the court will hear a claim brought by minority shareholders, even though the majorities do not wish it. The following exceptions protect basic minority rights, which are necessary to protect regardless of the majority’s vote. Thus; Ultra vires and illegality Proposed ultra vires activities can be restrained, even by a member holding a single share; Where directors attempt to do some thing requiring a special resolution which they do not obtain, then action can be ratified by an ordinary resolution. Were this to be otherwise, the protection for minority is granted in circumstances where a three quarter majority is needed would be avoided; Where a wrong is suffered to a member in personal capacity, through the action of the directors. For example For instance in Pender v Lushington (1877) the company chair man wrongful refused to accept the votes cast by certain share holders. The court held that the company could be restrained from carrying out the proposed resolution. When a fraud has been committed against the minority. This dose not mean fraud in the criminal sense, rather conduct which is grossly unfair. An example is provided by Daniel v Daniels (1978).Here two company directors, in 1970, instructed the company to sell land to one of them for£4,250. In 1974 the land was resold for £120,000 and a minority shareholder brought an action claiming that damages should be payable to the company. The court held that despite no allegation of fraud the action by the individual shareholder should be allowed to proceed. Other exemplified case include that of Smith v Croft (No. 2) and Cockburn v New bridge Sanitary Laundry Co. [1916] 1 I R 237, 252-59( per O’Brien LC and Holmes LJ) for the illegality point. Actions requiring a special majority: If some special voting procedure would be necessary under the company’s constitution or under the companies act, it would defeat both if that could be sidestepped by ordinary resolutions of a simple majority, and no redress for aggrieved minorities to be allowed .i.e. Edward v Halliwell [1950] 2 ALL ER 1064 Invasion of individual rights: Exemplified in the case of [Pender v lushington (1877) 6 Ch D 70, per jessel M R], and also in the case of [Edward v Halliwell (1950) 2 ALL ER 1064] Frauds on the minority Case examples include; [Atwool v Merryweather (1867) L R 5 E Q 464n, per page Wood VC], [Gambotto v WCP Limited (1995) 182 C L R 432 (Aus)]. Conclusion As noted in the above expositions, the rights enjoyed by the members of the company are primarily contractual arising from the classes of share acquired and the rights attached to them as specified in the articles. Nevertheless, ultimate control of the business is in the hands of the share holders by the exercise of voting power in the general meeting. This leaves the minority in a very vulnerable position. References: John Ellison et al, Business Law Business Education Publishing Ltd (1993) Wikipedia, the free encyclopedia http://www.duhaime.org/Legal Dictionary /R/RuleinFossvHarbottle.aspx 5