Sei sulla pagina 1di 5

BHARATI VIDYAPEETH

NEW LAW COLLEGE, PUNE

Subject :- Mergers and Acquisitions


Topic : Case study on Foss v. Harbottle

MADE BY:-
Aadi Kushwaha
BA LLB (4th year)
Roll no. : B-69
TABLE OF CONTENTS:

1. Introduction

2. Facts

3. Reasoning

4. Judgement

5. Conclusion
Case study on Foss v Harbottle (1843) 67 ER 189

1. INTRODUCTION

‘In a democracy you indeed have to win by a majority’. Likewise, a company which is an
association of individuals acts in accordance with the decisions taken by the majority of its
members. The dissenting members i.e. minority (if there is one) is bound by the decisions
unless and until they are able to show that the power, which vests with the majority, has been
abused or prejudices the interest of the company. The members of a company can express
their wishes at general meetings by voting for or against the resolutions proposed. However,
the resolution binds all the members, even those who vote against it. The protection of the
minority shareholders within the domain of corporate activity constitutes one of the most
difficult problems facing modern company law. The aim must be to strike a balance between
the effective control of the company and the interest of the small and individual shareholders.
Similarly in the words of Palmer: “A proper balance of the rights of majority and minority
shareholders is essential for the smooth functioning of the company.” The Companies Act,
2013 therefore, contains a large number of provisions for the protection of the interests of
investors in companies. The aim of these provisions is to require those who control the affairs
of a company to exercise their powers according to certain principles of natural justice and
fair play.
2. FACTS:

The case concerned a company by the name ―The Victoria Park Company. Richard
Foss and Edward Starkie Turton were two minority shareholders in the "Victoria
Park Company". The company had been set up in September 1835 to buy 180 acres
(0.73 km2) of land near Manchester and, according to the report:-
"enclosing and planting the same in an ornamental and park-like manner, and erecting
houses thereon with attached gardens and pleasure-grounds, and selling, letting or
otherwise disposing thereof".
It was agreed to form a joint stock company to consist of the defendants and other
persons in order to undertake the project. It was alleged in the bill that prior to the Act
of Incorporation being passed, the defendants had purchased a considerable portion of
the land from the original owners with a view to re-selling it to the company later at a
profit. The bill stated that the purchase and sale of the said land as aforesaid was the
result of an arrangement fraudulently concerted and agreed upon between the
defendants at or after the formation of the company was agreed upon, with the object
of enabling themselves to derive a profit or personal benefit from the establishment of
the said company. It was further alleged that the defendants had mortgaged or
encumbered the lands and property of the company and applied the monies thereby
raised in effect though circuitously, to pay the price of the land which they had so
bought of themselves.

This became Victoria Park, Manchester. Subsequently, an Act of Parliament


incorporated the company. The claimants alleged that property of the company had
been misapplied and wasted and various mortgages were given improperly over the
company's property. They asked that the guilty parties be held accountable to the
company and that a receiver be appointed. In October 1842, Richard Foss along with
Edward Starkie Turton, proprietors of shares in the company (shareholders) filed a
bill on behalf of themselves and all other shareholders (except the defendants) against
Thomas Harbottle and a few others (five of whom were directors in the company).
3. REASONING:

(i) The Proper Plaintiff Principle : The company is the proper plaintiff (pursuer) in
any action to right a wrong against it.
(ii) The Internal Management Principle: The courts will not interfere with the internal
management of a company. It is for the company to decide whether it is being
properly managed.
(iii) Irregularity Principle: A member cannot sue to rectify a mere informality where
the act would be within.

4. JUDGEMENT:
The Court held that the action could not be brought by the minority shareholders. The wrong
done to the company was one which could be ratified by the majority of members. The
company was the proper plaintiff for the wrong done to the company, and the company can
act only through its shareholders. In other words, the proper plaintiff in that case was the
company and not the two individual shareholders. The majority of the members should be left
to decide whether to commence proceedings against the director.

This rule is derived from two general legal principles of company law. Firstly, a company is
a legal entity separate from its shareholders. Secondly, the Court will not interfere with the
internal management of companies acting within their powers. Where an ordinary majority
of members can ratify the act, the Court will not interfere. This simply means, if the majority
can ratify an act, the minority cannot sue.

5. CONCLUSION:

The rule in Foss v. Harbottle provides that individual shareholders have no cause of action in
law for any wrongs done to the corporation and that if an action is to be brought in respect of
such losses, it must be brought either by the corporation itself (through management) or by
way of a derivative action. The rule is the consequence of the fact that a corporation is a
separate legal entity. Other consequences are limited liability and limited rights. The
company is liable for its contracts and torts; the shareholder has no such liability. The
company acquires causes of action for breaches of contract and for torts which damage the
company. No cause of action vests in the shareholder. Later on, the several important
exceptions that have been developed are often described as "exceptions to the rule in Foss v
Harbottle". Amongst these is the 'derivative action', which allows a minority shareholder to
bring a claim on behalf of the company. This applies in situations of 'wrongdoer control' and
is, in reality, the only true exception to the rule. The rule in Foss v Harbottle is best seen as
the starting point for minority shareholder remedies.