Majority Rule And Minority Protection

Majority Rule And Minority Protection

As a general rule, the company is or has the responsibility of enforcing its own rights. The case of Foss vs Harbottle held that where a wrong is alleged to have been done to the company, the company and not the individual shareholder is the proper plaintiff. The Court of Chancery, per Wigram VC, in dismissing the suit by the minority shareholders held that the company was a separate legal entity from its shareholders and as such, no individual shareholder can bring a suit against the company. The company, by virtue of the fact that it has a separate legal entity from its members is the only one that can sue where it has suffered losses or damage and not the individual. This is because it was the company that suffered the loss and not the individual.

The Court went further to hold that where a majority of the members of a company has ratified an act done by the company, the court will do no more in meddling into the internal affairs of the company as the company has the power to ratify such acts done through its members in General Meeting. Any act of interference into this power by the courts will mean that the company is bereft of such powers to ratify an act done by its directors.

In addition, where it is alleged that something has been done by or on behalf of the company irregularly which the company would do regularly or regularize, there is no use having a suit, but all that needs to be done is for the majority to ratify and the same. Therefore, the rule in Foss vs Harbottle is also known as the Internal Management Rule. By this rule, the court could not interfere with the internal management of companies acting within their powers. If there is a wrong done to the company for which redress is needed, it is the company that must sue. The principle is based on the implications of corporate organization and management, which must include, subject to well laid down exceptions, the supremacy of the majority.

Thus, the rule lays down the majority rule and it is found on the rationale that to allow individual shareholders suits or actions for wrongs done to the company would result in multiplicity of actions which would be expensive, time wasting, blackmailing, and inhibiting. So much so that it would be tedious for the company to keep operation. So, the rule in Foss v Harbottle has been enacted into Section 341 CAMA 2020 which provides as follows: 

Over time, the rule admitted several exceptions. However, these exceptions could hardly be regarded as such because they cover instances of personal property to the shareholders of the company and not the company itself. The exceptions have been enacted in Section 343 CAMA. According to that section, a member of the company has the right to sue for an injunction or declaration to restrain the company from the following actions and that shall be without prejudice to the rights of the member as guaranteed under Sections 346-351 and Sections 353 -355 of the CAMA 2020.

THE EXCEPTIONS:
a. An action or transaction which is outrightly illegal or ultra vires.
However, it is doubtful that such individual would come under this exception where the ultra vires act has been completed.

b. The minority shareholder could also bring an action against the company, where the company purports to do an act which is required by the company’s M.O.A with a special resolution. or an act which is to be done by special resolution. This would also be stated as a violation of a special procedure.

c. The shareholder can sue individually where their rights as an individual shareholder has been violated by an act or omission of the company. This personal right attached to the membership of the company include:

i.    Right to attend meetings.
ii.    Right to vote during meetings.
iii.    Right to receive dividend.

The above listed rights are personal to the shareholders, not the company, going by their very nature and essence.

d. The shareholders could also individually sue to prevent a company from committing fraud, either against itself or on the minority shareholders. The individual shareholders could exercise this power where the directors have failed to take an appropriate action to address a wrong that has been done. In the case of COOK v DEEKS a company had four shareholders, who were also the board of directors. Three of the directors cut off relations with the fourth, Cook. When the three directors learned of a new Canadian Railway contract available for tender, they negotiated for it in the name of the Toronto company. Then they formed a new company to take the contract, in order to exclude Cook. The Toronto company issued a resolution declaring that the Toronto claimed no interest in the new Canadian Railway contract. However, Cook claimed that the benefit of the new contract belonged to Toronto. The Privy Council held that the new company and its three directors, who concluded new contract, must be liable for the profit made. The contract was obtained by the three directors whilst in their positions as fiduciaries within the old Toronto company. The benefit of the contract thus belonged in equity to the old Toronto company. The three directors could not use their voting power to put the new contract in their hands. 

e. The shareholders could also bring an action where a meeting cannot be called in time to be of practical use in redressing wrong done to the company or the minority shareholders.

f. Where the directors are likely to derive a profit or benefit or have profited or benefitted from their negligence or breach of duty.

g.  Any other act or omission, where the interest of Justice so demands.

In conclusion, the rule in Foss vs Harbottle is geared towards preserving the legal personality of the company, eliminating multiplicity of suits which would invariably slow down the operation of the company and to also check the extent of the court’s intervention in the company’s internal management, which ultimately keeps the majority rule afloat.