The Rule of Foss V/S Harbottle

There are 2 elements present for this rule to happen. They are found in the case of Edwards v/s Halliwell. It is the proper plaintiff in an action in respect of a wrong done to a company is prima facia the company itself. Where the alleged wrong is a transaction which might be made binding on a company and all its members. No individual member is allowed to maintain an action in respect of that matter. This means that whenever there is a transaction within the company and there has been a decision by the board (I. e. he majority), any individual member alone will not be able to go to court. In the case of Foss v/s Harbottle: There were 2 members (shareholders) of the Victoria Park Company who brought an action against the company’s 5 directors and promoters alleging that they had misapplied the company’s assets and had improperly mortgaged its properties. The shareholders wanted the directors to make good the losses sustained by the company. The court stated that: The injury was against the whole company and the company was the proper person to sue and not the individual members.

The second proposition came from this case called the majority rule: Mozley v/s Alston  2 shareholders tried unsuccessfully to restrain 4 directors of the company from acting as such when they should have retired under the articles. The court refused to permit the shareholder to bring their action. The court had in mind that if the thing that one is complaining about is the thing in a company that a majority is entitled to do, then there is no need for litigation.

Advantages to this rule:

• It is more convenient that a company should sue in respect of a wrong done.
• It eliminates wasteful litigation because there is a process of passing resolution in a company. If there is a problem that can be resolved by majority, there is no need to go to the court.
• It prevents vexatious actions started by troublesome minority trying to harass the company.

Disadvantage to this rule: The company is the proper person to sue but the company can only act through its human agents (I. e. the board, shareholders). Usually, the board may well be the people committing a wrong.

There are 4 exceptions to this rule:

• Where the act complaint of is illegal or is ultra vares.In the case of Prudential Assurance Co. Ltd v/s Newman Industries (No. 2)
• The court of appeal explains that where the wrongful act in issue is ultra vares, the rule does not operate because the majority of members can’t confirm the transactions. If any decision that was taken was taken outside the powers that the majority has, then the minority can bring an action as opposed to the rule.
• It has been seen that an action by a shareholder to recover money or on behalf of the company in respect of an ultra vares or an illegal transaction could be undertaken by personal actions. In the case of Smith v/s Croft (No. ) In this case, it has been decided that where what is sought is compensation for the company for the loss caused by the transaction. The wrong is done to the company, so the company is the proper plaintiff. The result out of the transaction caused a loss towards the company.
• Even though it was an illegal transaction, the loss was caused to the company. The shareholders can bring an action but an action called the derivative action (done on behalf of the company).

Where the matter in issue requires the sanction of the special majority or there has been non-compliance with the special procedure. An individual shareholder will have locus standing to sue where the act complains of is one which requires the approval of the special majority of members and such resolution has not been obtained. This covers a situation where the article of association has specified a particular procedure that must be followed in respect of a particular transaction. In the case of Edwards v/s Halliwell, 2 members successfully restraint and attempt by the delegate meeting to increase the member’s contribution without obtaining the 2/3 majority. In this case, regardless that the 2 remaining members could bring that action and eventually won on that action. In the case of Quin & Axtens Ltd v/s Salomon,

In this case, the Article of Association stated that certain transactions could not be entered without the consent of both managing director. One of the directors did not accept for a transaction but the company in a general meeting authorized the transaction without the director’s consent. ?In this case, the court allowed the individual member to enter an action and granted an injunction to the individual member prohibiting the majority from acting in breach of the article.