THE RULE IN FOSS V HARBOTTLE & MINORITY PROTECTION UNDER COMMON LAW
LAW 485
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FOSS V HARBOTTLE Shareholders
Directors
sued 3
1
Mismanaged Misapplied its property 2
The company
loss
Held : the action was dismissed on procedural ground and 2 propositions were laid down. 1. Proper plaintiff rule 2. Majority rule.
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PROPER PLAINTIFF RULE
Th e
co m pa no ny t t sh he ou m ld e m ta be ke rs ac t
io n,
To redress wrong done to a company or to recover money or damage alleged to be done to the company, the action should prima facie be brought by the company itself (Burland v Earle). The shareholder cannot take action for wrong done to the company as the company and the shareholders are two separate body. Someone (wrongdoer) Did wrong The company Rule in FVH & common law exceptions/ss
If a wrong has ben committed against the company, only the company can take legal action against the wrongdoer. The members cannot take action on behalf of the company.
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MAJORITY RULE • 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 get it wishes (McDaughall v gardiner). No member can take any action for any wrong done to the company if the majority decide not to take any action. The minority cannot interfere with the decision made by the majority. • Decision of majority will prevail.
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PAVLIDES V JENSEN The minority
2
sued
The co & 3 directors 1
Sold the co’s mine for 182.000 while its real value was about 10 millions. The co suffered loss Mr. X Held : the action was not maintainable. The Judge observed: “ It was open to the co, on the resolution of a majority of the shareholder to sell the mine at a price decided by the co in that manner, and it was open to the co by a vote of majority to decide that if the director by their negligence or error of judgment had sold the co’s mine at under value, proceeding should not be taken against the directors”. Rule in FVH & common law exceptions/ss
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ADVANTAGES OF THE RULE • To prevent multiplicity of action over the same matter. • To prevents unnecessary litigation (legal action) by refusing to hear complaints about matters which are in competence of the general meeting. The court will not waste time by giving orders if they could validly be reversed shortly afterwards by the general meeting.
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DISADVANTAGE OF THE RULE • It may produce an unfair or unsatisfactory result. It can be abused to the detriment of the company as a whole. • There is a possibility the company will not take action as no one to take action on its behalf especially at the time when the wrongdoer are the one who control the company. In this situation the controller(wrongdoer) will not take action on company’s behalf against themselves. • The members particularly the minority are also at a disadvantage. The value of their investment is affected. • Because of this unfair result, the law provides exceptions to the rule where the shareholder may be allowed to take action against the wrongdoer for the wrong done to the company. • There also statutory remedies conferred on members. Rule in FVH & common law exceptions/ss
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EXCEPTIONS TO THE RULE IN F V H – COMMON LAW PROTECTION
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1. FRAUD ON THE MINORITY • If the actions of the majority constitute a fraud on the minority and the wrongdoers are in control of the company, a minority member may bring an action to enforce the company’s right. (derivative action). • It is a procedural device to enable justice to be done. • The court has discretionary power to disallow action if: – The minority does not come with ‘clean hand’ or – Where he has been guilty of an unreasonable delay in bringing action (Nurcombe v Nurcombe [1985])
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FRAUD? • an abuse of power whereby the majority secures an unfair gain at the expense of the minority. • Gopal Sri Ram J in Abdul Rahim b Aki’s case: “it is sufficient for a Plaintiff to show that those wielding majority control abused the power vested in them in the sense that they used their power for a collateral purpose and not for the true purpose for which such powers were granted”. S 213- requires a director to exercise his powers for a proper purpose and in good faith in the best interest of the company. Rule in FVH & common law exceptions/ss
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3 THINGS MUST BE SHOWN TO MAINTAIN AN ACTION ON GROUND OF FRAUD ON THE MINORITY The majority obtained some sort of benefit. If the wrongdoer obtains no benefit for himself, the minority member is not allowed to maintain an action on co’s behalf.
Pavlide v Jensen Daniel
The benefit was obtained at the expense of the company or that some loss or detriment be caused to the company. If the company suffered no loss, the minority cannot sue.
Regal Cook v Deek Rule in FVH & common law exceptions/ss
Wrongdoers are in control. The majority/wrongdoers used their controlling power to prevent an action being brought against them by the company.
Prudential Assurance
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DANIEL Company
Director 2nd Defendant
Sold the land at below its market value
Minority sued the directors for causing loss to the company. Held: Templeman J allowed the minority shareholder to maintain the action as the majority acted in a manner which benefits themselves at the expenses of the company. There was a fraud on the minority.
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PAVLIDES Company
3rd party Sold the asbestos mine at Greatly under value
Director The minority sued the director for negligence causing loss to the company Held: it was not open to a minority shareholder to bring an action against the directors when all that was alleged was negligence. In this case the directors obtained no benefits to themselves. So no fraud on the minority. Rule in FVH & common law exceptions/ss
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COOK V DEEK Minority
Company
Contract
ed su
Director
Director took the contract for their own benefit and to the exclusion of the company
Held: a minority could maintain an action against the directors as there was a fraud on the minority. The directors had benefited at the expense of the company. Rule in FVH & common law exceptions/ss
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REGAL (HASTING) LTD V GULLIVER Regal
Director
Associated company Made profit on the sale of shares Regal itself could not have subscribed for the shares, which is why the Directors took them up.
Held: no fraud on the minority in this case because the benefit obtained by director was not at the expense of the company. The company could not have made the profit itself. Rule in FVH & common law exceptions/ss
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PRUDENTIAL ASSURANCE CO LTD V NEWMAN INDUSTRIES LTD. • Held: a derivative action on ground of fraud on the minority is unlikely to be allowed unless the wrongdoers are in actual control of the company and are using their controlling power to prevent the action from being brought by the company.
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ESMANCO V GREATER LONDON COUNCIL owned
GLC
flats
Own all Voting shares
On lease
Esmanco
tenants
One non voting share each
Agreement between E & GLC: GLC to dispose all the flats Then GLC decided not to sell breach of agreement E vs GLC for specific performance.
Then GLC passed a resolution to discontinue the action. Minority sued GLC
Held: the court allowed the action by the minority in the name of E on the ground that there was fraud on the minority. I.e. the majority prevented the co’s action. Rule in FVH & common law exceptions/ss
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2. INFRINGEMENT OF A MEMBER’S PERSONAL RIGHTS • Personal rights attached to shares given to each member by the CA 2016 or by the company’s constitution, cannot generally be ousted by the rule in F v H. • E.g. S 71 of the CA 2016 gives members rights to attend, participate and speak at the company’s general meeting. • E.g. S90(4) – rights attached to preference share are spelt out in the company’s constitution. • If the rights are infringed – the member may take action to enforce his right personally rather than on the company’s behalf to protect its constitution.
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PENDER V LUSHINGTON AOA: members were entitled to vote. Pender’s vote were disallowed. Pender vs directors to overturn the disallowances of his vote. Held upheld his right to bring action and decided that he come within an exception to the rule of F v H because he was enforcing a personal right conferred on all members to have their vote counted.
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3. ACTS REQUIRING SPECIAL MAJORITY
• If the transaction is outside the scope of the constitution(which can only be authorised by a special resolution) or • if for any other reason it requires a special majority to sanction, non-compliance of this requirement give a member a right to bring an action. • If the directors act without complying with the special majority requirement, individual member can sue the directors. Rule in FVH & common law exceptions/ss
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EDWARD V HALLIWEL • The constitution of the co : alteration of the contribution of employed members could only be made by a ballot vote of members and 2/3 majority obtained. • A delegate meeting passed a resolution increasing the amount of the contribution without taking a ballot vote of members and obtaining a 2/3 majority. • 2 members sued for a declaration that the alteration by the delegate meeting was invalid. • The action defended on the basis that the rule in F v H debarred the members from taking action. This defense was rejected. • Held: the resolution was invalid and that the right infringed were individual membership right. Also 2/3 majority requirement has not been complied with and for that reason, the rule in F v H did not apply. The individual member can sue.
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QUINS & AXTENS LTD V SALMON
• Constitution – certain contracts must be approved by Salmon and Axtens. In one transaction, Salmon did not consent. Axtens called a members’ meeting to pass a resolution to approve the transaction. • Upon application by Salmon, the court granted an injunction to restrain the company from acting on the members’ resolution.
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4. WHEN JUSTICE REQUIRED
• Court of Appeal in Prudential – doubted this as one of the exception to F v H rule. • Australia in Biala Pty Ltd v Mallina Holding Ltd was strongly in favour of such an exception. • Malaysia – court accepted it as an exception in Abdul Rahim b Aki v Krubong Industrial Park. • The court will allow a member to take action against the wrongdoer where the justice of the case is so requires.
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PROCEDURE IN MINORITY ‘S ACTION UNDER COMMON LAW
Rule in FVH Salmiah Salleh
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