Corporate Law Case: Foss vs. Harbottle, 67 E.R. 189 (1843).
Case: Majority rule and minority Protection
Plaintiff: Richard Foss and Edward Starkie Turton
Defendant: Thomas Harbottle and others
Case citation: 67 E.R. 189 (1843).
This case is related to Proper Plaintiff Rule and Majority Rule.
Facts of the Case:
The Victoria Park Company was formed to purchase land near Manchester and develop it into a public park. Richard Foss and Edward Starkie Turton were shareholders of the company.
Foss and Turton alleged that the company’s directors and other persons had improperly managed the company’s affairs. They claimed that company property had been misused and that assets had been improperly mortgaged(Given as security) and sold at an undervalue.
They argued that these acts caused financial loss to the company. They also claimed that the loss reduced the value of their shares.
Foss and Turton brought the action on behalf of themselves and the other shareholders. They asked the court to order the defendants to compensate the company for the loss caused by their alleged misconduct.
Legal Issues:
- Whether individual shareholders could sue for a wrong done to the company.
- Whether the company itself was the proper plaintiff.
- Whether the court could interfere in the company’s internal management.
- Whether the defendants could be held liable for the loss suffered by the company.
Decision of the Court:
The Court of Chancery dismissed the shareholders’ claim.
The court held that the company was the proper plaintiff because the alleged wrong was done to the company and the loss was suffered by the company. Individual shareholders could not normally bring an action for a loss suffered by the company.
The court also held that where a matter could be decided or ratified by the majority of shareholders, the court would generally not interfere in the company’s internal management.
However, the court recognised that this rule is not absolute. Shareholders may bring an action in certain exceptional situations, such as where the act is illegal, beyond the company’s powers, requires a special majority that was not obtained, or where the majority acts fraudulently against the minority.
Principles Established:
- The company is normally the proper plaintiff for a wrong done to the company.
- Individual shareholders cannot normally sue for loss suffered by the company.
- The majority of shareholders generally has the power to decide matters concerning the company.
- Courts generally do not interfere in internal company matters that can lawfully be decided by the majority.
- Exceptions may apply in cases of fraud, illegality, violation of personal shareholder rights, or acts beyond the company’s powers.
