Foss v. Harbottle: Jurisprudence and Exceptions
Foss v. Harbottle: Jurisprudence and Exceptions
Background of Foss v. Harbottle (1843)
Case: Foss v. Harbottle (1843) 2 Hare 461 (English company law case)
Facts: Two minority shareholders (Foss and Turton) sued the directors of a company for misappropriation of company funds and breach of duty.
Issue: Whether individual shareholders could sue directors or wrongdoers directly for wrongs done to the company.
Principle Established (Rule in Foss v. Harbottle)
The proper plaintiff in an action alleging wrongs done to the company is the company itself, not individual shareholders.
The "majority rule" principle: If the alleged wrong can be ratified or corrected by a majority of shareholders in a general meeting, then the court will not interfere at the instance of minority shareholders.
This principle is rooted in the idea that the company is a separate legal entity, and the majority of shareholders control the company’s decisions.
Key Points of the Rule
The Company is the Proper Plaintiff
Only the company, through its proper organs (like the board or shareholders), can sue for wrongs done to it.
Majority Rule Principle
The courts will not intervene if the alleged wrong can be resolved by the majority of shareholders approving or ratifying the action.
Avoidance of Multiplicity of Suits
Prevents individual shareholders from bringing multiple lawsuits on behalf of the company.
Preserves Corporate Democracy
Respects the decision-making power of the majority shareholders.
Exceptions to the Rule in Foss v. Harbottle
Though the general rule restricts minority shareholders from suing, the courts recognize exceptions where minority shareholders can bring a derivative action (a lawsuit on behalf of the company):
1. Fraud on the Minority
When the alleged wrong is a fraud committed by those in control of the company (usually directors or majority shareholders) that cannot be ratified by the majority.
Example: Misappropriation of company funds or assets by directors.
The minority can sue to prevent abuse of power.
2. Ultra Vires and Illegal Acts
When the company’s acts are ultra vires (beyond the powers of the company) or illegal.
Such acts cannot be ratified by shareholders because they are void.
3. Acts Requiring a Special Majority
When a particular act requires a special resolution (a higher threshold than a simple majority) and the majority improperly pass an ordinary resolution.
Minority can challenge the improper decision.
4. Invasion of Personal Rights
When a shareholder’s personal rights, such as voting rights or rights attached to shares, are infringed.
Such rights are personal and can be enforced by the shareholder individually.
5. When the Wrongdoers Control the Company
When those controlling the company are the wrongdoers, so the company cannot sue itself.
The minority shareholder can act in the company’s name to protect its interests.
Derivative Action
Modern company laws (including in India under the Companies Act, 2013) have codified the exceptions by allowing derivative suits.
Minority shareholders can apply to the court to bring an action on behalf of the company if the management wrongfully refuses to act.
Summary Table
| Aspect | Rule in Foss v. Harbottle |
|---|---|
| Proper Plaintiff | The company, not individual shareholders |
| Majority Rule | Majority can ratify actions; courts won’t interfere |
| Exception - Fraud on Minority | Minority can sue if fraud by controlling group |
| Exception - Ultra Vires/Illegal Acts | Acts beyond company powers are challengeable |
| Exception - Special Majority Requirement | Acts requiring special resolution must comply |
| Exception - Personal Rights | Shareholders can sue for infringement of personal rights |
Importance in Corporate Governance
Ensures that the company’s affairs are primarily managed by the majority.
Protects minority shareholders from oppression through recognized exceptions.
Balances corporate democracy with minority protection.
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