Presented by; NOR FASHILA BINTI OMAR SAKINAH BINTI ABDULLAH HAKIM NABILAH SYAHIRAH BINTI ZULKARNAIN SHAHIDA

AZLIN BINTI SHAMSUDIN RODIATUL ADAWIYAH BINTI HASSAN FATIN NADIA BINTI FADZIL AC220 5A

Question 74

Notwithstanding the general principle laid down in Foss v Harbottle (1843) 2 Hera 461 which states where the companys interests are infringed, only the company may sue to protect these interests, the court does in certain circumstances allow minority shareholders to bring actions to protect the companys interest by way of exceptions to the above rule. (100 marks)

Common law Exceptions to the rule in Foss v Hossbottle

The law allows several exceptions to its operation. If the minority can bring themselves within any one of the exceptions to the rule, they permitted to bring an action against the company,the majority or the directors. There are five exceptions to the rule in FOSS V HASBOTTLE recognizes by the common law.

1. Where the act of the company is ULTRA VIRES

In common law, individual shareholders could bring an action complaining that the company was acting or intending to acts which were beyond the objects and power set out in the memorandum but also to illegal and criminal acts of the company. It has been held that a decision of the directors made with the knowledge of its shareholders may nonetheless be ultra vires in the circumstances: Naiz Bi Bi v Mogah Omnibux Ltd.

 In Malaysia, the common law positon in relation in ultra vires acts of the company has to be considered in the light of s 20(1) of the Act. The effect of s 20(1) is to disable the company that entered into a ultra vires transaction from avoiding the transactions on the basis that is ultra vires. In the case of Bee See& Tay v Ong Hun Seang (1997) 2 SLR 193, it preserves the validity of the ultra vires acts vis--vis outsiders. In the case of Hawkesbury Development Co Ltd v Landmark Finance Pty Ltd, the Supreme Court of New South Wales held that the power to restrain an ultra vires transaction is lost if the transaction is wholly executed

2.

Where the act of the company requires a special majority

The rule in Foss v Harbottle prevents a shareholder from bringing an action where the general meeting is able to ratify the misconduct or irregularity by ordinary resolution. Where this ratification requires more than a simple majority, a member can bring an action.

 Under the Act,a company can only do certain things by special resolution of the general meeting. Section 152(1) defines a special resolution as a resolution to be considered at a meeting to which 21 days notice has been given and passed by a majority of not less than three quarters of the members entitled to vote. This exception prevents a company from doing by bare majority that which the Act or article require to be done by special majority.

 The operation of this exception is illustrated in Edwards v Halliwell (1950) 2 All ER 1064. In that case, the rules of a trade union provided for regular contributions to be made by its member accordance with the certain tables. A delegate meeting of the union resolved to increase a contribution the required ballot of members.

3. Where the members personal rights are infringed

A remedy can be obtained against persons holding the dominant power in the company. A person might dominate a company even though he does not control the majority of the votes. Example of the personal rights conferred by the Act are provided by sec 65 and 148. The former provision confers a right on holders of classes of shares to bring an action to prevent the majority from altering the articles so as to vary class rights otherwise than in accordance with the procedure laid down in the Act, memorandum or articles.

 Personal rights may also be conferred on a member in the articless. In Hickman v Kent or Romney Marsh Sheep-breeders Association (1915) 1 Ch 881, it was held that the articles may confer rights which are enforceable. By the virtue of s 33(1) such articles create a statutory contract between the company and its members and between the inter se. Where this is the case,a member has a personal right to oblige the company or other members to comply with the provision of such articles.

 In the case of Pender v Lushington (1877) 6 Ch D 70 , the articles provided that member were entitled to only one vote for every ten share held up to maximum 100 votes. A member who held the large number of shares knowing of this restriction on voting, transferred a number of his shares to Pender who has to vote accordance with the tranferors directions. Penders votes were dissallowed during the general meeting. The court held that upheld his right to bring an action and decided that he came within the exception to the rule in Foss v Harbottle because he was enforcing a personal right conferred on all members to have their votes recorded

 The more recent cases, however have taken a different approach. The courts have looked at whether the breach of the articles has in fact been ratified by the majority in general meeting rather than whether the breach is merely capable of ratification. Thus the success of the minority interest actions depended on whether the breach was actually ratified rather than on the technical application of the rule in Foss v Harbottle.

4. Where majority member commit a fraud on minority.

A shareholder is also entitled to sue if the actions of the majority constitute a fraud on the minority. This exception to the rule in Foss v Harbottle is an application of a broader principle developed by the courts of equity, which prevented the holders of various types of powers from exercising their voting power. To act bona fide for the benefit of the company as a whole : Allen v Gold Reefs of West Africa (1990) 1Ch 656. If they fail in this duty they are regarded as having commited a fraud on the minority.

 If the majority commits a fraud on the minority and the injured party is the company, the minority shareholders are permitted to bring an action in the name of the company against the majority. This is a derivative action and is discussed below. However, the minority themselves are the injured parties, they have a personal right of action against both the majority and the company itself.

 Alternatively, they can bring the action against the majority in the name of the company. This aspect of fraud on the minority is thus the same as the third exception to the rule in Foss v Harbottle discussed above, where personal rights are infringed , Since the same abuse power may both injure the company and infringe the personal rights of the minority.

 Futher, a resolution of the general meeting which is a fraud on the minority may also be challenged by members who lack voting rights such as preference shareholders : Pavlides v Jensen (1956) Ch 565.
The assertion of fraud on the minority now appears to be included within s 181 which has the advantage of enabling a member to seek a wide range of remedies without procedural difficulties.

 The common law cases, however provide examples of conduct that may come within the ambit of s 181 even though it is now unusual for a member to bring a common law action to remedy the unfair acts of the majority.