Foss v Harbottle

"Foss v Harbottle" (1843) 2 Hare 461, 67 ER 189 is a famous decision English precedent on corporate law. In any action in which a wrong is alleged to have been done to a company, the proper claimant is the company itself. This is known as the rule in "Foss v Harbottle".

Facts

Two minority shareholders initiated legal proceedings against, among others, the directors of the company. They claimed that the directors had missapplied the company's assets.

Judgment

The court dismissed the claim and held that when a company is wronged by its directors it is only the company that has standing to sue. In effect the court established two rules. Firstly, the "proper plaintiff rule" was said stated as follows,

Secondly, the "majority rule principle" states that 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.

Developments

The rule was later extended to cover cases where what is complained of is some internalirregularity in the operation of the company. However, the internal irregularity must be capable ofbeing confirmed/sanctioned by the majority.

The rule in "Foss v Harbottle" has another important implication. A shareholder cannot generally bring a claim to recover any diminution in the value of his or her shares in circumstances where the diminution arises because the company has suffered an actionable loss. The proper course is for the company to bring the action and recoup the loss with the consequence that the value of the shares will be restored.

Because "Foss v Harbottle" leaves the minority in an unprotected position, exceptions have arisen and statutory provisions have come into being which provide some protection for the minority. By far and away the most important protection is the unfair prejudice action in ss. 994-6 of the Companies Act 2006. Also, there is a new statutory derivate action available under ss. 260-269 of the 2006 Act.

Exceptions to the rule

There are certain exceptions to the rule in "Foss v. Harbottle", where litigation will be allowed. The following exceptions protect basic minority rights, which are necessary to protect regardless of the majority's vote.

;1. "Ultra vires" and illegalityThe directors of a company, or a shareholding majority may not use their control of the company to paper over actions which would be "ultra vires" the company, or illegal.

*s.39 Companies Act 2006 for the rules on corporate capacity
*"Smith v. Croft (No2)" for the illegality point

;2. Actions requiring a special majorityIf some special voting procedure would be necessary under the company's constitution or under the Companies Act, it would defeat both if that could be sidestepped by ordinary resolutions of a simple majority, and no redress for aggrieved minorities to be allowed.

*"Edwards v. Halliwell" [1950] 2 All ER 1064

;3. Invasion of individual rights
*"Pender v. Lushington" (1877) 6 Ch D 70, per Jessel MR

...and see again, "Edwards v. Halliwell" [1950] 2 All ER 1064

;4. "Frauds on the minority"
*"Atwool v. Merryweather" (1867) LR 5 EQ 464n, per Page Wood VC

...and see "Greenhalgh v. Arderne Cinemas Ltd" for an example of what was "not" a fraud on the minority

ee also

*UK company law

Notes