Foss v Harbottle: exception to the majority rule under Companies Act by VEDANT JAIN by LEXCLIQ

The majority supremacy, however, does not prevail in all situations. The operative field of the rule in Foss v. Harbottle extends to cases in which the corporations are competent to ratify managerial sins. But there are certain acts which no majority of shareholders can approve or affirm. In such cases, each and every shareholder may sue to enforce the obligation owed to the company. He brings the action as a representative of the corporate interest. In American literature, a representative action of this kind is called the ‘derivative actions’. The relief goes to the company. Similarly, a shareholder may sue to recover ultra vires spend money from the company’s officers responsible for the transaction.

  • Acts ultra vires:

A shareholder is entitled to bring an action against the company and its officers in respect of matters which are ultra vires and which no majority of shareholders can sanction. The rule in Foss v. Harbottle applies only as long as the company is acting within its powers

In Narcombe v. Narcombe, the action was by the wife, a minority shareholder, against the wrongdoings of her husband as a director. In the matrimonial proceeding between them, she came to know of the improper profits made by the husband and such profits were even taken into consideration in preparing the award, it was held that she was not a proper plaintiff for a derivative action.

  • Fraud on minority

Where the majority of a company’s members use their power to defraud or oppress the minority, their conduct is liable to be impeached even by a single shareholder. The concept of fraud on the minority can be best understood in the landmark case Menier v. Hooper’s Telegraph Works Ltd. In this case, a company was formed to lay down a transatlantic telegraph cable which was to be made by Hooper’s Telegraph Works Ltd. The majority shareholder ‘Hooper’ found that it could make a greater profit by selling the cable to another company that wished to lay it down on the same route, but which would not buy unless it had the necessary Government concessions for the undertaking. It was held that Hooper’s machinations amounted to an oppressive expropriation of the minority shareholders and that a derivative action would therefore lie against it.

  • Acts requiring special majority:

There are certain acts which can only be done by passing a special resolution at a general meeting of shareholders. Accordingly, if the majority purport to do any such act by passing only an ordinary resolution or without passing a special resolution in the manner required by law, any member or members can bring an action to restrain the majority.

  • Wrongdoers in control:

Sometimes an obvious wrong may have been done to the company, but the controlling shareholders would not permit an action to be brought against the wrongdoer. In such cases, to safeguard the interest of the company, any member or members may bring an action in the name of the company. In the case of Glass v. Atkin, it was held that the control exists if it would be futile to call a general meeting because the wrongdoers would directly or indirectly exercise a decisive influence over the result. It has been suggested that the principle should extend to this extent that when a director is in breach of fiduciary duty, every shareholder may be regarded as an authorized organ to bring the action.

  • Individual membership rights:

Every shareholder has vested in him certain personal rights against the company and his shareholders. A large number of such rights have been conferred upon shareholders by the acts themselves, but they may also arise out of articles of association.

  • Oppression and mismanagement:

Lastly, it has been stated by Sinha J of the Calcutta High Court in Kanika Mukherjee v. Rameshwar Dayal Dubey that the principle embodied in Section 397 and 398 of the Indian Companies Act which provides for the prevention of oppression and mismanagement, is an exception to the rule in Foss v. Harbottle which lays down the Sanctity of the majority rule

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