Foss v. Hartbottle
Facts of the case Richard Foss & Edward Starkie were two minority shareholders in Victoria Park Company, the object of the company was to ‘ buy 180 acres ( 0.73 km per square ) of the land, hear the manchester to transform it into a park which is victoria park
Subsequently- in 1873 the act was passed by the parliament through which the company was incorporated, purpose- laying out & maintaining the ornamental park within - the township of Rushdme & Charlton upon Medlock and Moss side, in the company of Manchester.
Here property was misappropriated & wasted and various mortgages were given improperly over the company’s property.
Both the shareholders decide to take legal action on behalf of them & other shareholders also in the company. The files claim against 5 directors- Thomas Hartottle, Henry, John & architects (Thomas Bartina, Richard & others)
The contention of the applicant was based on
Fraudulent transactions through which the assets of the comp. Were misappropriated.
Insufficiency of qualified directors in the company. Who can make up the board?
The company had no clerk or office.
Due to all this, the shareholders have no power by which they could take the property from the directors. Hence, they filed legal proceedings against them.
Issue - whether the members of the company can file the suit on behalf of the company or not and can the guilty parties be held accountable for their wrong deeds or not?
Observation - Sir James Wigram Vice Chancellor - dismissed the claim of the shareholder and held that any individual shareholders or any outsiders of the company cannot take any legal action against the wrong done to the company because both the company and its shareholders are considered as “separate legal entities” as the company may sue and be sued in its name and members may not take any legal action on behalf of the company
Reason - shareholders of the company cannot sue the reason behind it is that the company is one who actually suffered injury and not its members so, it’s the company who will sue and take any legal action against those members who have misappropriated with its property
The court held that the rule applies only as long as the company is acting within its power a shareholder is entitled to bring an action against the company in respect of matters which are ultra vires the company and which no majority of shareholders can sanction. He followed the judgement of an incorporated company as it is unfavourable for minorities because it is what them from taking any legal action against misconduct
Two principal rules were established in this case -;
1st- Proper Plaintiff Rule - which says if any wrong is done to the company or the company suffers any loss due to the fraudulent or negligent act of a director or other outsiders then in such a situation only the company can so them, to enforce its right as the member of any outsider, cannot su on its behalf because of the principle of a separate legal entity, a member of the company can take legal action on its behalf against wrong over only if he is authorised to do so by the board of the directors or by an ordinary resolution pass in a general meeting.
2nd- Majority Principle Rule - says if the alleged wrong can be confirmed or ratified by a simple majority of members in a general meeting then the court will not interfere. However, these principles are very harsh and unjust for the minority shareholders as the rights they have are not much more powerful than those of majority shareholders and they were bad from obtaining justice under the rule and have to submit to the wrong done by the majority as they control the company’s conduct.
Therefore, to lessen this harshness
Exceptions to the rule of the supremacy of the majority
1. Ultra vires and legal act- the rule in Foss v. Harbottle does not apply where the act complaint of is ultra voice the company the shareholder cannot ratify such hacked ultra vires the company as the shareholder cannot ratify such an act even unanimously. In the case of ultra vires, the shareholder can bring either a person election based upon the company’s breach of its memorandum or derivative action based upon the wrong done to the company by those who have caused it to act ultra vires.
2. Fraud on minority - where the conduct of the majority of company members amounts to fraud on the minority then the majority shareholder can be increased even by the single shareholder.
3. Act requiring special majority - any act requiring a special resolution to be passed at the general meeting of the shareholder before it’s happening it is done by passing only an ordinary resolution without passing the special resolution in the manner which is required by the law.
4. Wrongdoers in control - An individual member of the company may also sue in his name if the company is in the hands of the wrongdoers, and controlling shareholders are not allowing the action to be brought for such obvious wrongdoing committed by one of them.
The court held that the rule applies only as long as the company is acting within its power a shareholder is entitled to bring an action against the company in respect of matters which are ultra vires the company and which no majority of shareholders can sanction.