Foss V. Harbottle

Case Title: Foss V. Harbottle

Citation:  [1843] 67 ER 189, (1843) 2 Hare 461

Court: Court of Chancery

Bench: Wigram VC, Jenkins LJ

Judgment Date: December 5, 1843

Parties Involved: 

Petitioner- Richard Foss and Edward Starkie Turton

Defendant- Thomas Harbottle & Others

Introduction 

The English landmark case of Foss v. Harbottle (1843) laid down the foundational principle of company law that the company itself is the proper plaintiff for any wrongs committed against it. In this case, two minority shareholders, Richard Foss and Edward Starkie Turton, brought an action against the directors, solicitor, and architects of the Victoria Park Company, contending fraud and misuse of the company’s property. The court, however, dismissed the suit and held that it was not maintainable since the alleged wrongs were to the company as a whole and could be ratified by the majority of shareholders. Wigram VC emphasized that when the company’s internal management and board are in existence, it is for the company, acting through its majority shareholders, to seek redress. It was further reaffirmed that a company may sue and be sued in its own name, and no individual shareholder can act on its behalf.

Facts of the Case

The claimants, Richard Foss and Edward Starkie Turton, were the two shareholders of Victoria Park Company, which was formed to buy land for use as a pleasure park. They brought an action on behalf of themselves against the company’s directors (Thomas Harbottle, Joseph Adshead, Henry Byrom, John Westhead, Richard Bealey) and solicitor and architect (Joseph Denison, Thomas Bunting, and Richard Lane). The shareholders alleged that, by concerted and illegal transactions, the directors and the solicitor had caused the company’s property to be lost. It was argued that the directors were acting in concert and effectuating several transactions illegally and fraudulently, thereby wasting and misusing the company’s property. It was pleaded that the wrongdoers be held liable and that the defendants might be proclaimed to overcome the company’s losses. The maintainability of the suit was in question.

Issues Raised

Is it legally permissible for minority shareholders to institute a suit representing the company to hold directors accountable for their actions?

Petitioners’ Contentions (Richard Foss and Edward Starkie Turton)

The claimants contended that the directors breached their duty of care and diligence by misapplying and wasting the company’s property by fraudulent and illegal means. Additionally, they argued that the transactions had resulted in losses for the company and that, as minority shareholders, they had the right to sue the directors on behalf of the company. The claimants also argued that the majority of shareholders had not approved the transactions and that they were entitled to challenge the decision.

Defendants’ Contentions (Thomas Harbottle & Others)

The defendants contended that the claimants lacked the authority to bring an action because they were not the legitimate claimants as per the Act of Incorporation. They put forth the argument that any loss incurred by the corporation because of the transactions directly affects the company as a whole rather than the shareholders personally. Therefore, individual shareholders possess no right to bring action against the directors and the solicitor in their individual capacity as shareholders.

Judgment 

Wigram VC  held that the action brought by minority shareholders was not maintainable. The wrong done to the company was the one that could be ratified by the majority of members. It was further held that since the company’s board of directors was still in existence, and since it was still possible to call a general meeting of the company, there was nothing to prevent the company from obtaining redress in its corporate character, and the action by the claimants could not be sustained. Section 21(1)(a) of the Companies Act also provides that a company has the right to sue and be sued in its own name, and an individual member cannot initiate legal proceedings on behalf of the company. If any contractual right exists in favour of the company, it is the company itself that must bring the action. The company itself is the rightful plaintiff for any wrong committed against it, and it can take action only through the decision of its majority shareholders. The decision whether to commence proceedings against the directors should be left to the majority shareholders.

Court’s Analysis 

• Majority Rule

The majority have the right to bar a minority action whenever they might lawfully ratify the alleged misconduct.

• Proper plaintiff Rule

Normally the company has the exclusive right to sue upon a corporate cause of action. To redress a wrong done to a company or to the property of the company, or to enforce rights of the company, the proper claimant is the company itself, and the court will not ordinarily entertain an action brought on behalf of the company by a shareholder.

• Separate Legal Entity

The court also reasserted from time to time that since a company is a persona at law (legal person), the action is vested in it, and cannot be brought by a single member.

• Multiplicity of Actions

A situation of multiplicity of actions could occur if each individual member were allowed to commence an action in respect of a wrong done to the company.

Court’s Order May Be Ineffective 

It should be noted that the court order could be made ineffective by passing of an ordinary resolution of members in a subsequent general meeting, provided that the general meeting is not controlled by the wrongdoers. If the thing complained of is a thing which, in substance, the majority of the company is entitled to do, there can be no use in having a litigation about it, the ultimate end of which is only that a meeting has to be called, and then ultimately the majority gets its wishes.

Observations 

The court laid down the rule of the majority and the rule of the proper plaintiff. The court ruled that it is not for the minority shareholders to bring an action against the directors independently when the board of directors is in existence. The decision to bring action should be left to the majority shareholders. A company is a separate legal entity; the right of action is vested in it, not in any individual. However, there is undue technicality and doctrinal obscurity in the Foss V. Harbottle rule, which, if applied unconditionally, would abuse the rights of the minority shareholders. Therefore, certain exceptions are necessitated to be made-

Ultra Vires and Illegal Acts

The rule does not apply to the acts ultra vires the company, for not even a unanimous decision of the shareholders can ratify such an act. The plaintiff in such cases can bring a personal action or a derivative action.

Breach of Fiduciary Duty

Directors and promoters who have been guilty of breach of fiduciary duties to the company can be sued through a derivative action if they’re able to prevent the company from suing them in its own name, for they have control over the company’s majority votes or otherwise. Thus derivative actions have been brought against directors for misappropriating the company’s property or misapplying it in the breach of provisions of the Companies Act.

Fraud or Oppression against Minority 

Where the company’s majority shareholders use their authority to oppress or defraud the minority, their actions are liable to be impeached even by a single shareholder.

Infringement of Personal Rights of Individual Members

In several judicial precedents, the courts have held that if an insufficiently informative notice is served of a resolution to be proposed at a general meeting, any member who does not attend the meeting, or who votes against the resolution, may bring a representative action against the company or its directors to effectuate the resolution.

Inadequate Notice of Resolution Passed at Meeting of Members 

The rule of majority applies only to the collective rights of members as shareholders. However, if an individual right of a member—such as the right to vote or the right to receive dividends—is violated, the member may initiate legal action in his own capacity.

Conclusion 

The decision in Foss v. Harbottle (1843) remains a keystone of company law, formulating the principle that the company itself is the proper plaintiff for wrongs done to it and that decisions to bring proceedings must be left to the majority of shareholders. While this rule endorses the doctrine of separate legal personality and validates the autonomy of corporate management, its strict application can leave minority shareholders vulnerable to oppression by the majority shareholders. To balance majority control with minority protection, courts have developed judicially affirmed exceptions—such as ultra vires acts, breach of fiduciary duty, fraud or oppression against the minority, and infringement of personal rights. Thus, the Foss v. Harbottle rule, though cardinal, is not absolute; its exceptions ensure that the principles of justice, fairness, and accountability are preserved within the framework of corporate governance.

Bibliography 

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