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FOSS V. HARBOTTLE: THE RULE OF MAJORITY AND EXCEPTION TO IT UNDER THE COMPANIES ACT, 2013

Author: Sakshi Mittal, III year of B.B.A.,LL.B.(Hons.) from UNIVERSITY OF PETROLEUM AND ENERGY STUDIES


Introduction

In a democracy you indeed have to win by a majority. Similarly, a company which is a large group of individuals acts in accordance with the decisions taken by the majority of its members in its general meeting and board meetings. The dissenting minority (if there is one) is bound to accept any such decisions unless and until he is able to show that the power, which vests withthe majority, has been abused.[1]A shareholder holding more than fifty percent of company’sshare is called as a majority shareholder whereas Minority shareholders can be defined as,shareholders holding not more than 10% shares of a company. This is in view of Section 235 of the Companies Act, 2013 which has put the said limit of 10% of shares of a company for 'dissenting share holders' in case of acquisition of shares of suchshareholders. [2]


As per the Companies Act 1956[3], shareholders who hold the majority of shares, rule the company. This majority rule was laid down in the case of Foss v. Harbottle[4]. The justification for this democratic rule laid down in Foss v Harbottle is that the will of the majority prevails. Consequently, there have been instances where the powers of the majority shareholders havebeen misused. The protection of the minority shareholders within the domain of corporate activity constitutes one of the most difficult problems facing modern company law. The aim must be to strike a balance between the effective control of the company and the interest of the small and individual shareholders.[5]


Foss v. Harbottle case is a leading English precedent in company law. According to the rulelaid down in this case, if any loss is suffered by the company by the negligent or fraudulentactions of its members or outsiders, then the action can be brought in respect of such losses, either by the company itself or by away of derivative action and the shareholders individually do not have the right to do so as the companyistheseparatejuristicpersonwhich means it can sue or be sued in its own name. This case also states that the court will not interfere in theinternal matters of the company where the issue can be resolved or confirmed by the simple majority.[6]However, the very need for the court’s interference may arise because of improper working of the company by the Management or the majority. Therefore, in few circumstances an individual shareholder is also allowed to bring a legal action which are called a sexceptions to this rule.


Exceptions to the rule

The dominant powers of the majority shareholder do not extend to all situations. There are certain provisions in favor of the minority shareholders which is called as the exceptions to the rule of Fossv. Harbottle but they are protected by: The common law and the provisions of the Companies Act, 2013. These exceptions are as follow:


1) Ultra Vires & Illegal Acts

The company needs works in accordance to the objectives mentioned in the memorandum of association of the company and nothing beyond that. If the company acts beyond its powers then it is said to be ultravires and up held as void.[7]Even asinglemember can bring a suit against a corporation if the acts so performed fall outside the Memorandum or Article of Association and hence, such acts would be declared as ultravires. Therefore, such acts or actions are held as void and can’t be held legal even if the majority shareholders ratify.


2) Fraud on Minority

In the case of Edward v. Halliwell, the Hon‘ble Court held that, "Where the majority of a company‘s members use their power to defraud or oppress the minority, their conduct is liable to be impeached even by a single shareholder."[8]The current trend is to consider any duty violation that results in financial loss for the corporation to be a fraud againstthe minority. It is encouraging that the courts have stepped up to expand minority protection in light of the legislature's lack of action in that area and give minorities more opportunities than ever beforetoexpress theirgrievances in court.


3) Acts Requiring Special Majority

Certain actions can only be carried out by a general meeting of shareholders passing a special resolution for example issue of sweat equity shares, changes to the provisions of the memorandum of association, changes to the articles of association. Therefore, any member or members can file an action torestrainthe majority shareholders if they intend to conduct any such act by passing just an ordinary resolution or withoutpassingaspecial resolution in the manner required by law.


4) Wrongdoers In Control

Even when the firm has been clearly mistreated, the controlling shareholders may refuse to allow legal action to be taken against the wrongdoer. Any member or members mayfile a suit on the company's behalf in these circumstances in order to protect thecompany's interests. In the case of Glass v. Atkin[9], it was held that the control exists ifit would be futile to call a general meeting because the wrongdoers would directly orindirectly exercise adecisive influenceover theresult.


5) Individual Membership Rights

Each shareholder has certain personal rights that he may use in conflicts with thecompany and his other shareholders. The individual members can enforce their rights against the company like the right to vote, right to stand in elections etc. [10]While thearticles of association may also have an influence and the companies act has itself provided shareholders many of these rights. The rule of the majority is incompatible without consideration for these rights, which are also known as individual membership rights.


6) Breach of Fiduciary Duty

Fiduciary duty means an obligation of a person to act in another party's best interest. Aderivative action may be brought up by the minority shareholder against the directors of the company who have been found guilty of a breach of their fiduciary duties to thecompany. In the case of, Satya Charan Lal v. Rameshwar Pd. Bajoria, it was held bythe Hon‘ble Court that when a director breaches the fiduciary duty, every shareholderofthecompany hasas anauthorized organ to bring the action.[11]


7) Derivative Action

When some wrong is done to the company the shareholders can bring an action for thewrong done as they are not suing under their own right but under the right of othermembers whose relief is sought. The company has to be joint as the co-defendant sothat the company is bound by the judgement given. When the action is against a thirdparty it is called a derivative action as individual member sues under a claim whichbelongsto the company thus theright is derived from it.[12]


Conclusion

As a company is a separate juristic person, it can sue or be sued in its own name. The company’s decisions are taken by the board of directors. These directors are just the agents of the company so it is their duty to work in the best interest of the company. According to the provisions mentioned in the Companies Act, 1956 the corporation was governed by the majority shareholders that is whoowns the maximum number of shares. Thistheorywas also considered as the majority rule in the case of Foss v. Harbottle and their decisions were binding on all the minority shareholders as well.


To diversify the flow of ideas in anorganization, it is paramount that the rule of majority in the company decision making is adequately balanced with the exchange of effective constructseven from the minority shareholders.[13] The companies act, 2013 grants minority shareholdersmore rights and power in an organization as compared to previous legislation. In order toprotect the rights of minority owners, there are provisions under the Companies Act, 1956 butbecause of lack of time, redress or capacity, the minority was unable or unable, financial or otherwise. Hence, there have been sever a linstances of minority share holder discrimination.


It might be said that the well-known case law of Foss v. Harbottle holds a special place in English jurisprudence. Numerous statutes dealing with corporation law in many nations have the irroots in its implications.However, in light of minority rights and the coercive methods of majority stake holders, the application of the rule of majority established in the casehas become vulnerable to various exceptions. Not every decision-makingmethodfavour majorityrule. The rule in Foss v. Harbottle is applicable only in case of infringement of a democratic or corporate right of a member and is not applicable in case of denial of his personal or individual right.[14]


References

Article(S)

  • DrSukhvinder singh dari , 'Majority Rule and Minority Protection under CompaniesAct 1956 with special reference to Foss vs Harbottle ' [October 2014] Vol-1, Issue-9(ISSN2348-6848)International Journalof Research (IJR)

  • Wedderburn, K. W. “Shareholders’ Rights and the Rule in Foss v. Harbottle.” TheCambridgeLawJournal,vol.15,no.2,1957,pp.194–215. JSTOR,http://www.jstor.org/stable/4504462.Accessed 11Feb. 2023

  • Rohan Aniraj , 'FOSS VS HARBOTTLE (1843)' [2021] VOL 1 ISSUE 3(ISSN:2582-7820)Jus Corpus Law Journal (JCLJ)

  • Vedant sharma, 'The Rule of Majority in Company Law' (The Rule of Majority inCompany Law, 13th july) <https://articles.manupatra.com/article-details/The-Rule-of-Majority-in-Company-Law>accessed 11February2023

  • N.A.Bastin, MinorityProtectionin CompanyLaw,1968 Jbl320

Statutes

  • TheCompanies Act,2013, s 235(1)

  • TheCompanies Act 1956

CaseLaws

  • Fossv.Harbottle,[1843]2Hare461

  • ALakshmanaswamiMudaliar v.LICAIR1963SC1185

  • Edwardv.Halliwell1950 2 AllER 1064.

  • NagappaChettiarv. MadrasRaceClub(1949)1MLJ662

  • Glassv. Atkin(1967) 65DLR(2d)501

  • SatyaCharanLalv.RameshwarPd.Bajoria,MANU/FE/0042/1949


[1] DrSukhvinder singh dari , 'Majority Rule and Minority Protection under Companies Act 1956 with specialreference to Foss vs Harbottle ' [October 2014] Vol-1, Issue-9(ISSN 2348-6848) International Journal ofResearch (IJR) [2] TheCompaniesAct,2013,s235(1) [3] TheCompaniesAct1956 [4] Fossv.Harbottle,[1843]2 Hare461 [5] N. A. BASTIN, MINORITY PROTECTION IN COMPANY LAW, 1968 JBL 320 [6] Wedderburn, K. W. “Shareholders’ Rights and the Rule in Foss v. Harbottle.” The Cambridge Law Journal,vol.15,no.2,1957,pp.194–215. JSTOR,http://www.jstor.org/stable/4504462.Accessed11 Feb.2023. [7] ALakshmanaswamiMudaliarv.LICAIR1963 SC1185 [8] Edwardv.Halliwell 19502AllER1064. [9] (1967)65 DLR(2d)501 [10] NagappaChettiarv.MadrasRaceClub (1949)1MLJ662 [11]SatyaCharanLal v.RameshwarPd.Bajoria,MANU/FE/0042/1949 [12]RohanAniraj, 'FOSSVSHARBOTTLE(1843)'[2021] VOL1ISSUE3(ISSN:2582-7820) JusCorpusLaw Journal(JCLJ) [13] Vedant sharma, 'The Rule of Majority in Company Law' (The Rule of Majority in Company Law, 13thjuly) <https://articles.manupatra.com/article-details/The-Rule-of-Majority-in-Company-Law> accessed 11February2023 [14] Supranote, 6

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