Foss V. Harbottle 2t486s

FOSS VS. HARBOTTLE (1843) 67 ER 189

Table of contents 1. 2. 3. 4. 5. 6.

Facts and issues of the case Judgment and principles laid Exceptions to the rule of Foss Vs. Harbottle Companies act 2063, Section 139 Companies act 2063, Section 140 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 t 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 , 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 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 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 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 it 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 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 ing of a resolution

• When a special resolution is needed for any decision which needs qualified majority and if such resolutions are ed 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 ed 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 Subsection(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 tly, 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 : (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 ed 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 tly 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 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 t 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.