Majority Rule, Minority Rights and the Principle of Non-interference

In one line

What the majority of members decides binds the company, so a court will not interfere in the internal management of a company at the suit of a member; but that rule fails where the act complained of is illegal or ultra vires, needs a special majority, invades a member's personal right, or is a fraud on the minority, and the Act now supplies statutory remedies of its own.

In exam wording: the rule in Foss v. Harbottle has two branches, the proper plaintiff rule and the internal management rule; the exceptions are the source of minority protection; and sections 241 to 246 are the modern statutory route.

Why the law has this at all

A company decides by voting, and voting means the larger holding prevails. That is not an accident of the Act; it is what buying more shares is for.

But majority rule creates two problems, and the law's answer to each is different.

The first problem is litigation. If any one of ten thousand members could sue the directors whenever he disagreed with them, the company would never be out of court, and the same complaint could be litigated by each member in turn. So the courts developed the rule in Foss v. Harbottle, which sends the complaint back to the company, whose own majority may decide whether to sue.

The second problem is abuse. A majority that can do anything can help itself to the company at the minority's expense, and telling the minority to persuade the majority to sue is telling them to ask the wrongdoer for permission. So the rule has exceptions, and the Act, building on them, gives the minority its own standing under sections 241 and 245.

The Act keeps both halves. Nothing in it abolishes majority rule; what it does is name the situations in which a member may go to the Tribunal in his own name.

Some words this chapter uses

The proper plaintiff is the person in whom the cause of action is vested. Internal management means the conduct of the company's affairs in matters the company itself can regulate. Ratification is the company's approval, after the event, of something done without authority. A fraud on the minority is a use of majority power to appropriate to the majority what belongs to the company or to the members generally. A qualified majority means a special resolution or other prescribed majority. A personal right is one a member holds in his own capacity, as against a right of the company.

The rule in Foss v. Harbottle

Facts. Foss v. Harbottle arose out of a company formed to lay out and sell land as a park. Two members sued the directors and promoters, alleging that they had applied the company's property improperly and had wasted it, and asked the court to make them make good the loss. The company itself was not the plaintiff; the two members sued on their own behalf and on behalf of the other members.