Majority Rule and Its Limits

In one line

The default rule of company law is that the majority decides and the court will not interfere, because a company is a democracy whose members chose to be bound by majority decisions; s.241 is the statutory exception, and understanding why the exception was needed is the whole of this chapter.

In exam wording: under section 241(1) any member who complains that the affairs of the company have been or are being conducted in a manner prejudicial to public interest, or in a manner prejudicial or oppressive to him or any other member or members, or in a manner prejudicial to the interests of the company, may apply to the Tribunal for an order under this Chapter, provided he has a right to apply under section 244.

Why the law has this at all

A company is run by resolutions, and a resolution is carried by a majority. That is not an accident of drafting but the point of the institution: a body with hundreds or thousands of members cannot act unless the many are bound by the decision of the more numerous. Every member who subscribes takes his shares on those terms.

Two consequences follow at common law, and they are the foundation of this module.

The company is the proper plaintiff for a wrong done to it. If the directors have injured the company, the loss is the company's and the right to sue is the company's, to be exercised as the company decides, which means by its majority.

And the court will not interfere in an internal irregularity the majority can ratify. If what is complained of could lawfully be confirmed by an ordinary resolution, a court will not entertain a suit about it, because the litigation would be futile: the majority would simply ratify.

That is the rule in Foss v. Harbottle, 2 Hare 461, worked in [Corporate Governance: the Synthesis], and the reasoning behind it is quoted in a modern Indian setting in LIC of India v. Escorts Ltd., (1986) 1 SCC 264, where the Supreme Court described a company as being in some respects an institution like a State functioning under its basic constitution consisting of the Companies Act and the memorandum of association, with the members in general meeting and the directorate as the two primary organs, comparable to the legislative and the executive organs of a parliamentary democracy. In that case the Court upheld the removal of directors by a majority, saying that a minority of shareholders in the saddle of power could not be allowed to pursue a policy of venturing into a litigation to which the majority of the shareholders were opposed, since that is not how corporate democracy may function.