In Foss v Harbottle (), two shareholders commenced legal action against the promoters and directors of the company alleging that they had misapplied the. Foss v Harbottle Rule is an important rule which was discussed and applied by Wallis JA in am important judgment concerning corporate. Foss Vs Harbottle. 1. COMPANY LAW PRESENTATION MS SHAKARI MURUGANDAN; 2. TASK “Majority of members of company are in an.
|Published (Last):||6 August 2014|
|PDF File Size:||1.19 Mb|
|ePub File Size:||14.38 Mb|
|Price:||Free* [*Free Regsitration Required]|
It is a general principle of company law that an individual shareholder cannot sue for wrongs done to a company or complain of any internal irregularities. This principle is commonly known as the rule in Foss v Harbottle. In Foss v Harbottletwo shareholders commenced legal action against the promoters and directors of the company alleging that they had misapplied the company assets and had improperly mortgaged the company property.
The Court rejected the two shareholders’ claim and held that a breach of duty by the gs of the company was a wrong done to the company for which it alone could sue. In other words, the proper plaintiff in that case was the company and not the two individual shareholders. This rule is derived from two general legal principles of company law.
Firstly, a company is a legal entity separate from its shareholders. Secondly, the Court will not interfere with the internal management of companies acting within their powers. Where an ordinary majority of members can ratify the act, the Court will not interfere.
This simply means, if the majority can ratify an act, the minority cannot sue.
Rule in Foss v Harbottle Law and Legal Definition
For the purpose of this article, I will concentrate on the last exception, that is, fraud on the minority, which is the most common ground for derivative actions. Under this exception, a goss shareholder can bring an action on behalf of the company, where he can fosw The Court has interpreted the term “fraud” loosely to include fraud in a strict sense as well as a breach of duty which results in conferring some benefit on the directors or third parties.
It has been held that gross negligence may also amount to fraud against the minority. The Court will allow a derivative claim where the wrongdoers have benefited personally from harbotttle self-serving negligence.
Foss v Harbottle – Wikipedia
Typical examples include, diverting business from fsos company to themselves in breach of fiduciary duty, causing the company to sell assets to themselves at an undervalue, or selling worthless assets to the company.
Control of a majority of the voting shares was believed to be necessary to bring a derivative action.
In that case, a minority shareholder in a listed company brought an action against a director in respect of wrongs done to various subsidiaries. Although the director did not have voting control, the Court found that he was in de facto control of each of the subsidiary companies in the group.
Rule in Foss v Harbottle Definition:
The major restrictions to a successful derivative action hrbottle to the obscurity of the law and the costs of the proceedings. Owing to the ambiguity surrounding the notions of ” fraud against the minority ” and ” control by the majority “, the Court has in the past held that the question of the locus standi of minority shareholders should be dealt with first as a preliminary issue before the trial of the action.
It must also be borne in mind that if a derivative action is successful all recovery flows to the company and the plaintiff shareholder only receives a small pro-rata benefit. In view of the above restrictions, I shall look at the new statutory provisions in Part II of this article.
SHAREHOLDERS’ RIGHTS – PART I – COMMON LAW DERIVATIVE ACTION | Hampton, Winter and Glynn
Home Contact Us Site Map. Rule in Foss v Harbottle In Foss v Harbottlwtwo shareholders commenced legal action against the promoters and directors of the company alleging that they had misapplied the company assets and had improperly mortgaged the company property.
However, there are four exceptions to the rule in Foss v Harbottlenamely: The fraud on the minority Under this exception, a minority shareholder can bring an action on behalf of the company, where he can show: Fraud against the minority The Court has interpreted the term “fraud” loosely to include fraud hrabottle a strict sense as well as a breach of duty which foxs in conferring some benefit on the directors or third parties.
Wrongdoers are in control of the company Control of a majority of the voting shares was believed to be necessary to bring a derivative action. Restrictions The major restrictions to a successful derivative action relate to the obscurity of the law and the costs of the proceedings.