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FOSS VS.

HARBOTTLE
(1843) 67 ER 189
Table of contents

1. Facts and issues of the case


2. Judgment and principles laid
3. Exceptions to the rule of Foss Vs. Harbottle
4. Companies act 2063, Section 139
5. Companies act 2063, Section 140
6. Subsequent exceptions
FACTS
• “Victoria Park Company” was incorporated under an Act of
Incorporation called “An Act for establishing a Company for the
purpose of Laying out and Maintaining an Ornamental Park within
the Townships of Rusholme, in the country of Lancaster” in 1837.
• Richard Foss had subscribed for two shares and Edward Starkie
Turton for 12 shares of 100 pounds each
• Bill was filed in October 1842 by Richard Foss and Edward Turton,
on behalf of themshelves and all other shareholders of shares in the
company against five company directors (Thomas Harbottle,
Joseph Adshead, Henry Byrom, John Westhead, Richard Bealey)
and the solicitors and architect (Joseph Denison, Thomas Bunting
and Richard Lane); and also H Rotton, E Lloyd, T Peet, J Biggs and S
Brooks, the several assignees of Byrom, Adshead and Westhead,
who had become bankrupts.
• Bill stated that purchase and sale of 180 acres of land situated in
parish of Manchester was the result of an arrangement fraudulently
concerted and agreed upon by directors of the company, with an
object of enabling themselves to derive a profit from establishment
of said company; and that the arrangement amongst the persons
who were parties to the plan was that a certain number from
amongst themselves would be appointed directors.
• Bill stated that directors borrowed large sums of money from their
bankers upon credit of the company.
• Bill also stated that the directors finding it impossible to raise
money by mortgage in a legitimate manner, resorted to several
contrivances for the purpose of evading the provisions of the Act
and raising money on mortgage of the property of the company, by
which means large sums of money had been charged by way of
mortgage or lien upon the same.
Plaintiff’s claim
• The company was not to be treated as an ordinary corporation and that it
was in fact a mere partnership, having objects of private benefit, and that
it must be governed by rules analogous to those which regulated
partnerships or joint stock companies, consisting of numerous persons,
but not incorporated. The Act of Incorporation was intended to be
beneficial to the company, and to promote the undertaking, but not to
extinguish any of the rights of the proprietors inter se. The directors were
trustees for the Plaintiffs to the extent of their shares in the company;
and the fact that the company had taken the form of a corporation not be
allowed to deprive the cestui que trust of a remedy against their trustees
for the abuse of their powers.
• The bill alleged that the two remaining directors had refused to institute
the suit, and showed, in fact, that it would be against their personal
interest to do so, inasmuch as they were answerable in respect of the
transactions in question; if the plaintiffs could not, therefore, institute the
suit themselves they would be remediless.
Defendant’s claim
• On the part of the Defendants it was contended that the suit
complaining of injuries to the corporation was wholly informal in
having only some of its individual members, and not the
corporation itself, before the Court.
JUDGEMENT
By Vice Chancellor Wigram
Upon the facts stated, the continued existence of a
board of directors de facto must be intended.

• “In substance, the board of directors de facto,


whether qualified or not, carry on the business of
the company at a given place, and under this Act of
Parliament it is manifest that service at that place
would be deemed good service on the company.”
• “In the absence of any special allegation to the
contrary I am bound to assume that the affairs of
the company have been carried on by the body in
whom alone the powers for that purpose were
vested by the Act, namely, a board of directors.”
Proper plaintiff rule
• “The Victoria Park Company is an incorporated body, and the
conduct with which the Defendants are charged in this suit is
an injury not to the Plaintiffs exclusively; 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 corporation.
• In law the corporation and the aggregate members of the
corporation are not the same thing for purposes like this; and
the only question can be whether the facts alleged in this case
justify a departure from the rule which, prima facie , would
require that the corporation should sue in its own name and
in its corporate character, or in the name of someone whom
the law has appointed to be its representative.”
Two grounds of complaint considered by the court:
• One ground is that the directors of the Victoria Park Company,
the Defendants Harbottle, Adshead, Byrorn and Bealey, have,
in their character of directors, purchased their own lands of
themselves for the use of the company, and have paid for
them, or rather taken to themselves out of the monies of the
company a price exceeding the value of such.

• The other ground is that the Defendants have raised money in


a manner not authorized by their powers under their Act of
Incorporation; and especially that they have mortgaged or
encumbered the lands and property of the company, and
applied the monies thereby raised in effect, though
circuitously, to pay the price of the land which they had so
bought of themselves.
Majority rule
• “Although the act should prove to be voidable, the cestui que trusts
may elect to confirm it. The corporation, in a sense, is undoubtedly
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 subject, by the very terms of the incorporation in the
present case, has power to bind the whole body, and every
individual corporator must be taken to have come into the
corporation upon the terms of being liable to be so bound.”
• “Whilst the Court may be declaring the acts complained of to be
void at the suit of the present Plaintiffs, who in fact may be the
only proprietors who disapprove of them, the governing body of
proprietors may defeat the decree by lawfully resolving upon the
confirmation of the very acts which are the subject of the suit.
The very fact that the governing body of proprietors assembled
at the special general meeting may so bind even a reluctant
minority is decisive to shew that the frame of this suit cannot be
sustained whilst that body retains its functions. In order then that
this suit may be sustained it must be shewn either that there is no
such power as I have supposed remaining in the proprietors, or,
at least, that all means have been resorted to and found
ineffectual to set that body in motion : this latter point is
nowhere suggested in the bill: there is no suggestion that an
attempt has been made by any proprietor to set the body of
proprietors in motion, or to procure a meeting to be convened
for the purpose of revoking the acts complained of.”
“The first ground of complaint is one which, though it might prima facie
entitle the corporation to rescind the transactions complained of, does not
absolutely and of necessity fall under the description of a void transaction.
The corporation might elect to adopt those transactions and hold the
directors bound by them. In other words, the transactions admit of
confirmation at the option of the corporation.”

“I am of opinion that this question—the question of confirmation or


avoidance—cannot properly be litigated upon this record, regard being
had to the existing state and powers of the corporation, and that
therefore that part of the bill which seeks to visit the directors personally
with the consequences of the impeached mortgages and charges, the
benefit of which the company enjoys, is in the same predicament as that
which relates to the other subjects of complaint. Both questions stand on
the same ground, and, for the reasons which I stated in considering the
former point, these demurrers must be allowed.”
EXCEPTIONS
In Fanning v Murtagh, the judge identified that,
as a matter of Irish law, there are four
recognized exceptions to the Foss v Harbottle
rule, which she summarized as comprising the
following categories of wrongdoing:
1. Ultra Vires or Illegal

• The directors of a company, or a shareholding majority


may not use their control of the company over actions
which would be ultra vires the company rules or illegal in
general
2. Invasion of individual Rights

• The minorities are allowed to claim when their


individual rights ( such as voting rights) are invaded by
any of the companies member or Board of directors
regardless to their minority shareholdings.
3. Fraud on minorities

• Fraud on the minority refers to an improper exercise of


voting power by the majority of members of a company.
• It is the evidence of failure to cast votes for the benefit
of the company as a whole.
• In such cases minorities are to be heard.
4.Irregularity in the passing of a resolution

• When a special resolution is needed for any decision


which needs qualified majority and if such resolutions
are passed without the qualified majority, the minorities
have right to claim as it affects the decisions and
consequences of the company as a whole.
Pender V. Lushington(1877)
• John Pender had bought 1000 shares of Direct United States Cable
Company Ltd also the Chairman of Globe Telegraph and Trust
Company Ltd. Pender split his votes and registered the holders uder
a number of nominees.
• Lushigton, the Chairman of a meeting of shareholders, wrongfully
refused to recognize votes of nominee shareholders.
• Held:
• The refusal infringed upon personal rights of the nominee shareholders
• Thus could bring personal action
• If the company breaches a provision in the AOA or MOA which does
not confer personal right as a member, the action will fail. (Eley v
Positive Government Life Assurance (1875))
Greenhalgh v. Arderne Cinemas Ltd (1951)
• Mr Mallard (majority shareholder) at Arderne Cinemas Ltd made an
agreement with Sol Sheckman (an outsider) that he would sell his
shares for six shillings (thirty pence) each and accept £5000 to step
down from the board of directors.
• This was authorized at a general meeting by a special resolution of t
he company, which at the same time changed
the articles of association. The articles
had said that if shares were to be transferred, they would
be offered first to existing company shareholders. But Mr Mallard
had not told the meeting that his £5000
payoff was actually going to come from the company's funds, and
not from Sheckman. Mr Greenhalgh (a minority shareholder)
sought a declaration that the resolution was a fraud on
him and the other minority shareholders, and asked for compensati
on.
• Lord Evershed MR (with who Asquith and Jenkins LLJ concurred) he
ld that the £5000 payment was not a fraud on the minority. None of
the majority voters was voting for a private gain. The alteration of t
he articles was perfectly legitimate, because it was done properly.
SECTION 139
139. Remedy for act done against rights and
interests of shareholders
1. Based on the ground that the business of a company is carried
on or is likely to be carried on in such a manner as to be
prejudicial to the rights and interests of any shareholder of the
company or that any act done or intended to be done on behalf
of the company or the failure of the company to do any act
required to be done has resulted in or would result in a prejudice
to the rights and interests of any shareholder, such shareholder
may make a complaint/ petition to the court for an appropriate
order.
(2) A shareholder who makes a petition pursuant to Sub-
section(1) shall prove that the director, managing director,
manager or any officer who manages and controls the company
has done or intends to do any act with ulterior motive or made or
intends to make undue discrimination, in contravention of the
memorandum of association or articles of association or
consensus agreement.

(3) On receipt of a petition as referred to in Sub-section(1) , the


court may if , upon inquiring into the concerned company,
director or officer, the claim set forth in the petition appears to
have a base , issue such order in the name of the company as it
thinks appropriate for providing remedy thereto.
(4) In issuing an order pursuant to Sub-section (3), notwithstanding anything contained in the
memorandum of association, articles of association or consensus agreement, the Court may,
without prejudice to the generality of the said Sub-section, also issue the following order,
namely:
(a) Preventing the act and action done and taken against the rights and interests of any or all
shareholders and carrying of the business of the company in the future in a due manner;
(b) Preventing any act and action being done and taken or requiring to do any act not done or
intended not to be done by the company;
(c) Requiring to institute, on behalf of the company a civil case against any one, in pursuance of
a direction given by the court;
(d) Requiring to buy back the shares of any shareholder in accordance with the procedures set
forth in this Act, by reducing the capital of the company, and to return the amount of such
shares;
(e) In the event of any loss and damage being suffered any shareholder from a discrimination
made against him/her, requiring the company or the person making such discrimination to pay
compensation to the shareholder for the same;
(f) Liquidating the company;
g) Requiring the company itself or any other shareholder of the company to purchase the
shares held in the name of any shareholder;
(h) Recovering the loss and damage caused to the company or its shareholders from the
director or officer who has caused such loss and damage; 141
(i) Where the company is to buy back its own shares, issuing an order to reduce the share
capital of such company as if the share capital of such company were reduced by it by adopting
a special resolution on reduction of share capital; where the memorandum and articles of
association of the company is to be amended by virtue of such order, issuing other appropriate
order also to make necessary amendment thereto.
(5) Notwithstanding anything contained in Sub-section (1) or (2),
the remedy available to a person who suffers any loss or damage
because of the fact that a company or its director or any person
responsible for the management or control of the company or its
employee has failed to do any act required to be done or done any
act required not to be done or otherwise done a discriminatory
treatment shall not be deemed to be limited to this Section only;
and such person may institute an action, whether individually or
jointly, on behalf of him/herself or other shareholder, as well, to
have any remedy available under other prevailing law.
(6) Where a collective remedy is demanded pursuant to Subsection
(5), the court may issue appropriate order with or without making
necessary inquiry into some or all shareholders of that class.
(7) Notwithstanding anything contained elsewhere in this Act, where
the court has issued an order in a manner that the company shall not
make any amendment to its memorandum of association or articles
of association or shall make an amendment to any specific matter for
the protection of the rights and interests of any or all shareholders,
in such a case, no amendment shall be made to the memorandum of
142 association or articles of association without obtaining prior
approval of the Court.
(8) If a company makes any amendment to its memorandum of
association or articles of association by or pursuant to an order of
the Court under Sub-section (7), such amendments shall be deemed
to be an amendment adopted by a special resolution in the general
meeting of the company.
(9) The Office shall make entry of the following orders issued by
the court pursuant to this Section in the company register: (a) An
order issued for the reduction of share capital of a company; (b) An
order issued requiring any amendment to the memorandum of
association or articles of association of the company.
(10) The provisions of this Section shall also apply to any person
who has not yet been registered as a shareholder of a company but
the shares have already been transmitted to his/her name through
legal procedures as if such person were a shareholder of the
company. 1
SECTION 140
140. Right to shareholder to institute case on
behalf of company:
(1) A company may file in the Court a case against any director,
office or shareholders or any person having control over the
company pursuant to the consensus agreement to have any
rights and interests of the company enforced.
(2) If the company concerned fails to institute a case under
Subsection(1),any share holder holding two and half percent or
more of the shares in the paid-up capital of the company
separately or jointly with two or more shareholders holding five
percent shares may, on behalf of the company, file in the Court a
case against any such director or officer or the person having
control over the company or any other person.
(3) while filing a case by a shareholder pursuant to
Sub-section (2), he/she shall state about what sort of
effort he/she has made to persuade the company to
institute the case by itself.
(4) where a case is filed pursuant to Sub-section (2),
the Court may decide whether it would be appropriate
to keep on the case being run by the shareholder or to
get the company to take over the case, and if it is
found appropriate to get the company to take over
the case, it may order the company to take over the
case..
(5) Any case once filed pursuant to Sub-section (1)
or (2) shall not be capable of being dismissed or
being compromised except in cases where such
compromise contains such terms ad conditions as
specified by the Court.
(6) where a case file pursuant to Sub-section (2) is
adjudged sustaining the claim made by the claimant
shareholder, the expenses incurred by him/her in
the institution of such case and reasonable
expenses made for the services of legal practitioner
shall be reimbursed by the company. Where such
claim is not sustained, such amount out of the
expenses incurred by the defendant in defending
such case as the Court thinks appropriate shall be
reimbursed from the complainant shareholder.
SUBSEQUENT CASES
Wallersteiner vs. Moir 1975

•The court was asked whether Moir would be


entitled to legal aid (Moir was running out of
money) to bring a derivative action on behalf
of a company against its majority
shareholder.
•Held: A minority shareholder bringing a
derivative action on behalf of a company
could obtain the authority of the court to sue
and he wouldn’t be personally liable for any
costs and expenses incurred by him.
Prudential Assurance v Newman Industries
1982
• The plaintiff was a large institutional investor which held 3% of the Newman
Industries which sought to bring a derivative claim against two directors
(Bartlett and Laughton) alleging that they had defrauded the company of
£400,000 (but this was never proved).
• Court of Appeal:
• Stressed that a court should not allow a derivative action by a shareholder to
commence unless the shareholder can establish a prima facie case that the
company is entitled to the remedy claimed and that it is an appropriate case
for a person to litigate on behalf of the company.
• Plaintiffs may not bring any action they please, no matter how public-spirited.
Burland v Earle 1902
• Lord Davey- “It is an elementary principle of the law relating to joint
stock companies that the Court will not interfere with the internal
management of companies acting within their powers, and in fact has
no jurisdiction to do so.(Majority Rule Principle).
• Again, it is clear law that in order to redress a wrong done to the
company or to recover moneys or damages alleged to be due to the
company, the action should prima facie be brought by the company
itself”.(Proper Plaintiff Rule)
S 138. Power to prevent directors and
officers from doing unauthorized act

1. If, on behalf of a company, any director or officer of the


company does any act beyond his jurisdiction, any
shareholder of such a company may make a petition to the
court to prevent such act.
Provided, however, that no petition may be made under this
section in connection with any act or action done or taken or
intended to be done or taken for the fulfillment of any liability
created from any act or action already done or taken by the
company.
Contd..
2. If, based on the report received by the Office pursuant to Section
124 in respect of any company, the Office thinks that the
business of such company could be carried on or is being carried on
in such a manner as to be prejudicial to the rights and interests of any
of or all shareholders of the company or any specific class or group of
its shareholders or that any act done or intended to be done by the
company or the failure of the company to do any act required to be
done has resulted in or would result in a prejudice to the interests of
such shareholders, the Office may make a complaint/petition to the
court against such company or its directors or officers.

3. On receipt of a petition as referred to in sub-section (1) or (2), the


Court may inquire into the concerned company or its directors or
officers and issue an appropriate order.