Introduction

( Majority Rule and Rights of Minority Share-Holders )

Similar to other institutions, a company is run by democratic process and its affairs are carried on by resolution of majority of shareholders in meetings.

In a public limited company,the members holding paid-up shares have a right to vote in respect of every resolution placed before the company. The right of a member to vote has been recognised as right to property. Resolutions of majority are generally binding upon the minority shareholders and subsequently on the company. This however, may lead to possibility that the members having majority strength and this may lead to a possibility that the members having majority vote may result in the mismanagement in the company.

With a view to protecting the rights of minority shareholders and safeguard the interests of investors from oppressive decisions of the majority shareholders, adequate provisions are made in the Companies Act so that those who control affairs of the company exercise their powers according to the set principles of natural justice. These provisions are incorporated in sections 241 to 243 of the Companies Act, 2013.

The Rule in Foss v. Harbottle

The principle that the will of the majority should prevail over the will of the minority in matters of internal administration of the company is known as the rule in Foss v. Harbottle (1843).

In the case of Foss v Harbottle  the plaintiffs were the minority shareholders in the company “Victoria Park Company”. This company was primarily setup to buy 182 acres of land near Manchester. The two plaintiffs alleged that the company had entered into a number of improper and fraudulent transactions and that the company’s property had been misapplied and wasted. They also alleged that various mortgages had been improperly given on the company’s property by the directors. They claimed the directors had breached their fiduciary relationship and made profit in secret. The plaintiffs sought appointment of a receiver and action against the defendants (five directors) for losses caused to the company.

The Court rejected the petition and ruled that it was incompetent for the plaintiff’s to bring such proceedings, the sole right to do so being vested in the company in its corporate character.

The court dismissed the claim and held that in the event that a company is wronged by its directors, shareholders, officers and third parties, it is only the company that bears the right to sue. 

The Court observed :

“ The conduct with which the defendants are charged is an injury not to the plaintiff’s exclusively, it is an injury to whole corporation. In such cases the rule is that the corporation should sue in its own name and in its corporate character.”

The rule established in this case was that courts will not ordinarily intervene in a matter which the company is competent to settle itself or in case of an irregularity, can ratify or exempt it by its own internal procedure. An action which is supported by majority shall be binding on the minority and no suit against such action would lie at the instance of the minority.

The essence of the rule is that the majority have a right to determine everything connected with the management of the company where a general meeting has confirmed the action taken by the directors, the minority cannot be permitted to bring an action which may nullify the wishes of the majority shareholders.

In India, the importance of this majority power has been recognised in Bhajekar v. Shinkar.The Court ruled that, the few minority shareholders with little influence are not allowed to take legal action asking the judicature to intervene in decisions about the administration of the business.

Exception of the rule of Foss v. Harbottle

The rule in Foss v. Harbottle is not absolute but is subject to certain exceptions.

1. Ultra vires acts : The powers of the majority of members is subject to the provisions of the company’s memorandum or articles. A company, therefore, cannot legally authorise or ratify any act which being outside the ambit of the memorandum, is ultra vires the company.

2. Fraud on Minority : The majority cannot be allowed to benefit itself unduly at the expense of the minority. Therefore, where the conduct of a majority of shareholders constitutes a fraud on the minority, the latter can sue the former.

3. Acts requiring special resolution : There are certain acts which can be done only by passing special resolution. Therefore if, any such act done by majority without passing special resolution, any member or members can bring an action to restrain the majority.

4. Infringement of Individual membership right of a shareholder : The majority rule prevails only in respect of corporate membership right (eg right to receive dividend) and not where any personal right of the individual member has been infringed.

5. Wrongdoers in control : If the wrongdoers are in control of the company, the minority shareholders representative action for fraud on the minority will be entertained by the court.

6. Oppression and Mismanagement : The section 241 of the Companies Act, 2013 relates to prevention of oppression and mismanagement in a company.