The protection afforded to minority shareholders by which to assert the rights of the company in an action for a wrong that is alleged to have been done to the company by the majority.
Bit of history: Under the law as it stood until recently, aggrieved minority shareholders generally found it easier to kill off the company by petitioning for its winding up under the just and equitable ground. This was because of the procedural obstacles established in Foss v Harbottle
Case law concerned:
Foss v Harbottle – which concerned the misapplication of the property of the company by the directors. Since the claimants could not satisfy the liabilities or wind up the affairs of the company, they sought to complain of the losses and expenses occasioned by the acts of the defendants.
It was held that in “any legal proceedings in which a wrong is alleged to have been done to a company, the proper claimant is the company”. Although logical on its face, the rule presented multitudinous frustration for courts over the years.
What is the basis of the rule in Foss v Harbottle?
The court will not ordinarily entertain an action brought on behalf of the company by a shareholder. As identified in Carlen v Drury by Lord Eldon in which he declared that, “the court is not required to be on every occasion to take the management of every playhouse and brew house in the Kingdom”.
WHY?
To prevent a multiplicity of actions, which in return may make the courts order ineffective.
What academics have to say about Foss?
Sugarman acclaimed on the Law Commission’s consultation paper on shareholder remedies 1997, that the rules governing shareholder remedies in English company law are notoriously convoluted. Towering over this area, like Frankenstein’s monster, stands the legacy of Foss v Harbottle. While not a gothic novel, it has nonetheless generated its own horror stories of unfulfilled rights and ruinous litigation.
Exceptions to the rule:
It has long been