Minority Shareholder's Rights

1. Rule in Foss v.
Harbottle
By
Gokul Krishnan R
Roll No. 1216

2. Brief Facts
• The Victorian Park company was incorporated by an Act
of Parliament in 1837 to develop ornamental gardens
and parks
• There were eight promoters of the scheme; Harbottle,
Adshead, Byron, Westhead, Bealey, Denison, Bunting
and Lane. The first five were the directors
• Foss and Turton were shareholders of the company and
they brought a derivative suit alleging that the
promoters through various illegal and fraudulent
transactions has misapplied and wasted the property of
the company

3. Judgment
• It was held by Vice-Chancellor Wigram 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
• The two principals which emerged from the judgment was
that the
• The court will not ordinarily intervene in the case of an
internal irregularity if the matter is one which the
company can ratify or condone by it’s own internal
procedure
• Where it is alleged that a wrong has been done to a
company , prima facie , the only proper plaintiff is the
company itself

4. Basis for the decision
The Right of the Majority Rule
The Company is a separate Legal Person
Prevention Of multiplicity Of actions

5. EXCEPTIONS

6. Acts ultra vires
Shareholder are entitled to bring an action against the company
and its officers in respect of matters which are ultra vires to the
company and which no majority of shareholders can sanction.
The rule in Foss v Harbottle applies only as long as the company
is acting within its powers.
In Bharat Insurance Company Ltd v. Kanhaiya Lall
“ application of the assets of the company is not a matter of
mere internal management. It is alleged that directors are acting
ultra vires in their application of the funds of the company. Under
these circumstances a single member can maintain a suit for
declaration as to the true construction of the article in question”

7. Fraud on minority
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
The fraud or oppression must involve an unconscionable
use of the majority’s power resulting, or likely to result,
either in financial loss or in unfair or discriminatory
treatment of the minority, and it must certainly be more
serious than the failure of the majority to act in the interest
of the company as a whole

8. Menier v. Hooper’s Telegraph Works Ltd
(1874) 9 Ch. App. 350)

9.  ‘Hooper’ was a majority shareholder in a company
and made a contract with the company to lay down
transatlantic telegraph cable
The majority shareholder ‘Hooper’ found that it
could make a greater profit by selling the cable to
another company which wished to lay it down on the
same route, but which would not buy unless it had
the necessary Government concessions for the
undertaking
The first company had obtained such concessions,
and so Hooper induced the trustee in whom they
were vested to transfer them to the second
company.

10. To prevent the first company from suing to recover the
concessions, Hooper procured the passing of a
resolution that the first company should be wound up
voluntarily, and that a liquidator should be appointed
whom Hopper could trust not to pursue the company’s
claim against Hooper and the trustee
Menier, a minority shareholder of the first company,
brought a derivative action against Hooper to compel it
to account to the company for the profits it derived from
the improper arrangements it had made.
It was held that Hooper’s machinations amounted to an
oppressive expropriation of the minority shareholders,
and that a derivative action would therefore lie against
it.

11. Acts requiring special majority
There are certain acts which can only be done by
passing a special resolution at a general meeting of
shareholders
Accordingly, if the majority purport to do any such
act by passing only an ordinary resolution or without
passing special resolution in the manner required by
law, any member or members can bring an action to
restrain the majority

12. Edwards vs. Halliwell
A trade union had rules which were the equivalent of
the articles of association, under which any increase in
members’ contributions had to be agreed by a 2/3rd
majority in a ballot of members
A meeting decided by a simple majority, to increase the
subscriptions without holding a ballot.
It was held that the rule in Foss did not prevent a
minority of a company from suing because the matter
about which they were suing was one which could only
be done or validly sanctioned by a greater than simple
majority

13. Wrongdoers in control
Sometimes an obvious wrong may have been done to the
company, but the controlling shareholders would not permit
an action to be brought against the wrongdoer
In such cases, to safeguard the interest of the company, any
member or members may bring an action in the name of
the company
In Glass v. Atkin the company was controlled equally by the
by the 2 plaintiffs and 2 defendants .Action arose alleging
that the two defendants had fraudulently converted the
assets to their own use.
The Court allowed the action stating that since the two
defendants controlled the company in the sense that they
could prevent the company from taking action

14. Individual membership rights
Certain rights are vested upon the shareholders through the Act
or the Articles of Association , these rights are called as
“individual membership rights”
In case of such rights the rule of majority do not apply
In the case of Karus v. Lloyd Property Ltd. , A director refused to
retire in accordance with the articles and invalidly continued in
office
The shareholder was held to be entitled to bring an action on
the ground that the “individual rights of plaintiff as a member
have been invaded”
In Nagappa Chettiar v. Madras Race Club, the Court observed
that a shareholder is entitled to enforce his individual rights
against the company, such as his right to vote, the right to have
his vote recorded, or his right to stand as a director of a company
at an election

15. INDIAN POSITION

16. JUDICIAL POSITION
In the case of Rajahmundry Electric Supply Co. v.
Nageshwara Rao the Supreme Court of India observed that
“Courts will not, in general, intervene at the instance of
shareholders in matters of internal administration, and will
not interfere with the management of a company by its
directors, so long as they are acting within the power
conferred on them under the Articles of Association”
In the case of ICICI v. Parasrampuria Synthetic Ltd
Mechanical and automatic application of rule in Foss v.
Harbotlle in Indian conditions and corporate realities would
be improper and misleading

17. • The court held that the corporate setup in England where
there is private individual enterprise with large number of
small shareholders is different from India
• modern Indian corporate entity is not the multiple
contribution of small individual investors but a
predominantly state-supported funding structure at all
stages by receiving substantial funding up to 80% or more
from financial institutions ,which are entirely state-
controlled or represent substantial interest and, thus, their
Shareholding may be small but it is these financial
institutions which provide entire funds for the continuous
existence and corporate activities

18. Provisions to protect minority
shareholders in Companies Act 2013
Variation of Class Rights (Section 48)
According to this section in situations where the share
capital of a company is divided into different classes of
shares , the rights of any class of share can only be varied by
the consent of 3/4th of majority of shareholders of that class
 Moreover the holders of at least 10% of shares who did not
consent to or vote in favor of such resolution for variation
can approach the Tribunal for cancellation of variation
under Section 48(2) of the Act. Any default by the company
in complying with the provisions of this section is punished
by fine extending up to Rs. 5,00,000 and a minimum fine of
Rs. 25,000

19. Request for Investigation –
Under Section 213 of the Act 100 or more members
holding not less than one-tenth of total voting power
can apply to the tribunal with adequate evidence for
conducting an investigation into the affairs of the
company
Scheme of compromise or arrangement
 According to sub-clause (c) of Section 230(7) if
compromises or arrangement results in variation of
shareholders rights, such rights shall be given effect to
under provisions of Section 48 .
Clause (e) provides that the Tribunal order may also
provide for an exit offer to dissenting shareholders so as
to implement the terms of compromise or arrangement
effectively.

20. Oppression and Mismanagement
Under Section 241 of the Act a member of the company can
apply to the Tribunal to prevent oppression under the
grounds that the affairs of the company is conducted contrary
to public interest or material change has taken place in the
management or control of the company.
Right of dissentient shareholders under take-over
bids(S.235)
 When an offer to purchase all shares is received and the
offer is accepted by the holders of 90% of shares , the party
making the offer may on the same terms acquire the
remaining shares also
However the Companies Act protects the minority
shareholders interest even in such cases by allowing the
dissenting shareholders to apply to the tribunal praying that
their shares should not be allowed to be acquired on the
terms of the scheme

21.  Class action (S.245)
An application can be made by number of members or
depositors of a company before a Tribunal on the
grounds specified under Section 245(1).Such application
can be made on the ground that management or
conduct of affairs of the company is being carried in a
way prejudicial to the interest of the company. The
Tribunal in such applications can grant relief such as
passing an order to restrain the company from
committing act that is ultra vires or contrary to the
Memorandum or in contrary to any law

22. THANK YOU