Company Law: Minority Protection Page 1 Prepared by Edmund Lau (Updated: Jan 2014) Majority Rule and Derivative Claims (a) The Proper Claimant Rule: Foss v Harbottle (1843) 2 shareholders sued directors/promoters for selling land to company at exorbitant price. Action dismissed. Shareholders have no locus standi to sue for any wrongs done to the company. The company, having legal personaliy/capacity, is entitled to sue for any wrongs done to it. It is not the business of any shareholders to sue on its behalf (i.e. A cannot sue B for B’s wrong done to C. C is the “proper claimant”, not A.)Hicks & Goo (2008): “The rule in Foss v Harbottlesprings from two related concepts: (a) that a company is a legal entity distinct from its shareholders; and (b) that a company cannot function effectively unless the will of the majority generally prevails.”Dignam & Lowry (2010): The rule is clearly stated as a procedural one governing locus standi –combining the SLP concept with “internal management” (i.e. the democratic “majority rule” doctrine).Problems with the rule: If the wrongdoer is also the one who controls the company, the company will not decide to sue him. Shareholders of public companies can at least realise their investment (i.e. sell of their shares) and the bad publicity of majority’s unfair conduct will havedetrimental consequences to company’s profitability and share value. Shareholders of private companies may be unable to sell their shares (i.e. no ready buyer, restricted by AOA to sell, and if there is bad publicity, will make the shares even more difficult to sell –or sell at lower price). Courts generally do not interfere with lawful exercise of majority powers in the management of the company (whether majority in the Board or in the General Meeting). The reluctance of the court mean that any irregularities should be resolved internally by majority resolution: Carlen v Drury (1812) –“This Court is not required on every occasion to take the management of every Playhouse and Brewhouse in the Kingdom.” (per Lord Eldon) Burland v Earle (1902) –“It is an elementary principle of the law relating to joint stock companies that the Court will not interfere with the internal managementof companies acting within their powers, and in fact has no jurisdiction to do so. Again, it is clear law that, in order to redress a wrong done to the company or to recover money or damages alleged to be due to the company, the action should prima facie be brought by the company itself.” (per Lord Davey)
Company Law: Minority Protection Page 2 Prepared by Edmund Lau (Updated: Jan 2014) (b) Exceptions to the Rule: Edwards v Halliwell (1950) Constitution requires 2/3 ballot to alter members’ contributions (i.e. special procedure required). General Meeting increased contributions without ballot (i.e.