Company Law Assignment

NAME : SAMUEL PATIENCE

STUDENT NUMBER: N01310247W

PROGRAM : FISCAL STUDIES

DEPARTMENT : FINANCE

COURSE : COMPANY LAW 2 CIN 2206

LECTURER : MR MAKUYANA

QUESTION

“By becoming a shareholder in a company, a person undertakes by his contract to be bound by the decisions of the prescribed majority of shareholders, if those decisions on the affairs of the company are arrived at in accordance with the law, even when they adversely affect his own rights as a shareholder.”
Per Trolip JA and Ors v President Brand Gold Mining Co. 1969 (3) SA 629(A).
Give an assessment of the above statement in light of any applicable principles of common law under the law of companies. (25)
It can be reasonably assumed that since all the shareholders in a company have one objective which is to maximize the value of their investment, they all agree to one option when making financial decisions. This is why there is the majority shareholder rule. The judgment given in the case of Per Trolip JA in Samuel and Ors v President Brand Gold Mining Co. 1969 (3) SA 629 (A) is in support of this majority rule. In this case law the judgment was,” By becoming a shareholder in a company, a person undertakes by his contract to be bound by the decisions of the prescribed majority of shareholders, if those decisions on the affairs of the company are arrived at in accordance with the law, even where they adversely affect his own rights as a shareholder.” However there are exceptions to this rule because sometimes the minority is oppressed, so the exceptions to the majority rule are there to protect the minority.

The majority shareholder rule means that the decisions and choices of the majority will always prevail over those of the minority. This means that the minority is obliged to subject itself to the decisions of the majority as long as they are lawful and as long as the majority acts lawfully the court will refuse to interfere in the conduct of the company affairs at the instance of the minority. This was shown in the case of Levin vs felt and tweeds (pvt) ltd where the court stated that it is not part of the business of the court of justice to determine the wisdom of the course adopted by company in the management of its own affairs. It is also stated that if the decision in question is one which the company could have ratified in a general meeting, the court will be bound by the majority decision and will adopt a hands off approach. According to company law principle, the statement in the preceding paragraph greatly supports the principle of majority rule. This same principle was laid down in the case of Foss vs Harbottle. In that case two shareholders of the Victoria park company alleged against five directors of the company and others that they misapplied the company’s properties and as such they should be held liable and accountable for the losses and the properties. The court dismissed the claim and held that when a company has been wronged by its directors it is only the company which can take action against them. There are various justifications of the Foss vs Harbottle rule. The first one is the "proper plaintiff rule" which is that a wrong done to the company may be vindicated by the company alone. This rule has the effect of recognizing the separate legal personality of the company. A company is able to sue and be sued in its own name in all cases. Allowing other people to sue on behalf of the company has the effect of limiting the capacity of a company as a separate legal persona hence the rule of Foss vs Harbottle prevents that. The duties of the directors are owed to the company and not to the individual shareholders so it is the company which can sue.

The second justification is that of the "majority rule principle" which states that if the alleged wrong can be confirmed or ratified by a majority of members in a general meeting, then the court will not interfere. In other words it allows the wishes of the majority to prevail when decisions are being made. The court has said in some of the cases that an action by a single shareholder cannot be entertained because the feeling of the majority of the members has not been tested and that they may be prepared to waive their right to sue. This is very important because shareholders should agree on the same things since they want the same thing which is maximization of the value of their investment, if all of them do not agree then it is reasonable to consider the wishes of the majority in order to avoid serious conflict. Another justification of this rule is that it prevents multiplicity of actions over one or similar incidents arising from the same set of facts. The court is a very busy place, some people fail to have their cases heard in court for years so allowing individual shareholders to come appealing to the court on issues that the company can solve itself or on issues where there is no proper plaintiff is a waste of time for the courts. This serves the purpose of making things easier for the courts. Also usually litigation of a minority is futile if the majority opposes it.

There are other cases in which the Foss vs Harbottle rule was used. One such case is that of MacDougall vs Gardiner (1875). In this case, the articles empowered the chairman with the consent of the members in a meeting to adjourn a meeting and also provided for taking a poll if demanded by the shareholders. The adjournment was moved and declared by the chairman. A shareholder brought an action for a declaration that the chairman’s conduct was illegal. It was held that the action could not be brought by the shareholder. If the chairman was wrong, only the company could sue. Lord Melish said that if the thing complained of is a thing which in substance the majority of the company are entitled to do, there can be no use in having 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.

Another case is the recent south African case of Szabo v Star Contractors (Pty) Ltd1[4] delivered on 13 June 2013, the court reiterated the rule to the effect that in addressing a wrong done to the company, the action for such purpose should be brought by the company itself.

However to protect the minority, there are various exceptions to the majority rule which is stated stated in the case of Per Trolip JA in Samuel and Ors v President Brand Gold Mining Co. 1969 (3) SA 629 (A). The first exception is where the decision made by the majority is ultra vires which means illegal. Foss vs. Harbottle will apply only when the act done by the majority is one which the company is authorized to do by its memorandum. No simple majority of members can confirm or ratify an illegal act, not even if all the shareholders are willing to do so. In case of ultra vires acts, even a single shareholder can restrain the company from committing those acts by filing a suit of injunction. Majority rule will not prevail where the act in question is illegal. For example in the case of Park vs Daily News (1962) CH 627 where a shareholder managed to stop the company from making ultra vires gifts to the employees.

The second exception is where the act was supported by insufficient majority. For certain acts, it might require ¾th majority. The rule in Foss vs. Harbottle cannot be invoked by a simple majority if the act requires special majority. If the requirements of special majority are not fulfilled, any shareholder can restrain the company from acting on resolutions. This was exercised in the case of Edwards vs Halliwell (1950). In this case, 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 was decided by a simple majority, to increase the subscriptions without holding a ballot. The claimants as a majority of members applied for a declaration from the court that the resolution was invalid. 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.
The third exception to the Foss vs Harbottle rule is when the act of the majority constitutes a fraud on the minority. A resolution would constitute a fraud on minority if it is not bona fide for the benefit of the company as a whole. Similarly, an action of the majority which discriminates between majority shareholders and minority could constitute a fraud of majority. A special resolution would be liable to be impeached if the effect of it were to discriminate between the majority shareholders and minority shareholders, so as to give the former advantage of which the latter were deprived. The rule in Foss would create grave injustice if the majority were allowed to commit wrongs against the company and benefit from those wrongs at the expense of the minority, simply because no claim could be brought in respect of the wrong.

A case law which supports this exception is that of Cook vs Deek (1916). In this case, the directors of a Railway Construction company obtained a contract in their own names to construct a railway line. The contract was obtained under circumstances which amounted to breach of trust by the directors who then used their voting powers to pass a resolution of the company declaring that the company had no interest in the contract. It was held that the benefit of the contract belongs in equity to the company and that the directors would benefit themselves at the expense of the minority. It is tantamount to majority oppressing the minority. In case of breach of duty of this sort, the rule in Foss did not bar the claimants’ claim. Another case law is that of Brown vs. British Abrasive Wheel Co. (1919) where the court held that the alteration of the articles could be restrained because the alteration was not for the benefit of the company therefore the Foss vs Harbottle was not considered in this case.

In addition, another exception to the rule is where it is alleged that the personal membership rights of the plaintiff shareholder has been infringed. Such individual rights include the right to attend meetings the right to receive dividends the right to insist in strict observance of the legal rules; statutory provisions in the memorandum and articles. If such a right is in question, a single shareholder can on principle, defy a majority consisting of all other shareholders. Thus, if the chairman of a meeting at the time of taking the poll rules out certain votes which should be included, a suit by a shareholder is held to be validly filed. Where the candidature of a shareholder for directorship is rejected by the chairman, it is an individual wrong in respect of which the suit is maintainable.
An example of such a situation is the case of Pender v Lushington (1877) 6 Ch D 70. The chairman of a general meeting refused to take the votes of certain shareholders into account. The members were able to bring an action to have their votes counted. Members have a personal right to have their counted. Another example is the case of Wood v Odessa Waterworks Company (1889) 42 Ch D 636. The general meeting approved a resolution to pay dividends not in cash but by issuing bonds. The members had a personal right to enforce their right under the articles to receive dividends in cash.

The courts also ignore the Foss vs Harbottle rule where there is breach of duty. A minority shareholder can bring a suit against the company where there is a breach of duty by the directors and majority shareholders to the detriment of the company. The case of Daniels vs Daniels (1978) is an example of where this exception was used. In this case, A company on an instruction of the two directors (husband and wife), having majority shareholding sold the company’s land to one of them, (the wife) at a gross under value. The minority shareholders brought an action against the directors and the company. It was held that minority shareholders had a valid cause of action.

The last exception that I am going to mention is where there is oppression and mismanagement. Oppression refers to an act performed in a burdensome, harsh and wrongful manner. A shareholder can bring an action against the management of the company on the grounds of oppression and mismanagement. In conclusion, my own assessment on the issue of majority rule stated in the case of Per Trolip JA in Samuel and Ors v President Brand Gold Mining Co. 1969 (3) SA 629 (A) is that it is true a that democracy has to be followed in running the company but that does not mean that others should suffer as a result of the democracy in decision making. What this means is that as much as there must be democracy in order to please more shareholders, business ethics and morals should be followed. Democracy in decision making is not an excuse to practice unfair and illegal practices against the minority shareholders and it is also unfair to let them suffer because they bound themselves in the contract when they became shareholders, therefore the court is willing to assist the minority shareholders where there is oppression.

References
1) Dr Udo C Braendle: www.univie.ac.at/...506/CG/shareholder-protection.pdf.
2) www.kenyalawresourcescenter.org/2011/07/majority-rule-foss-vs-harbottle-1843.html
3) www.mondaq.com/x/134566

References: 1) Dr Udo C Braendle: www.univie.ac.at/...506/CG/shareholder-protection.pdf. 2) www.kenyalawresourcescenter.org/2011/07/majority-rule-foss-vs-harbottle-1843.html 3) www.mondaq.com/x/134566