The basic principle of modern company law is that, in the administration of company’s affairs, majority rule prevail. Company is run primarily by directors and appointment and removal of directors are in the hands of the shareholders. So if the acts of directors are approved by the majority, minority shareholders cannot prevent the action. This principle is known as ‘majority rule’. So in case of any kind of mismanagement causing loss to the company, it is only the company who can seek remedy, individual shareholder or the minority shareholders has any right to prevent it. The proper authority is the company and the company only.
This principle was first established in a case – Foss vs. Harbottle – 1843
The fact of the case was like this, an action was brought by some shareholders against the directors of the company charging them with concerting and effecting various fraudulent and illegal transactions whereby the company’s property was misapplied and wasted, and praying that the defendants might be decreed to make good to the company the loss.
The action was rejected in respect of those transactions which the majority shareholders had the power to approve. The Court said that the conduct with which the defendants are charged is an injury not to the plaintiff exclusively; it is an injury to the whole corporation. In such case the rule is that the corporation. In such case the rule is that the corporation should sue in its own name and in its corporate capacity, not a single shareholder.
The rule was applied in all subsequent cases like Macdougall vs. Gardiner – 1875 and in Edwards vs. Halliwell -1950. The rule was more clearly explained in Edwards’ case.
- The proper plaintiff in respect of a wrong done or alleged to be done to the company is prima facie the company and the company itself.
- Where the alleged wrong is a transaction which might be made binding on a company be a simple majority, no individual member is allowed to maintain an action in respect of that matter for the simple reason that if a mere majority of the members of the company is in favor of what has been done, no question arises.
The majority supremacy, however, does not prevail in all situations. The operative field of the rule of Foss vs. Harbottle extends to cases in which the corporations are competent to ratify managerial sins. But there are certain acts which no majority of shareholders can approve or affirm. In such cases each and every shareholder may sue to enforce obligations owed to the company.
The exceptions are –
- Acts ultra vires: Acts ultra vires the company can, in no way, be ratified by the company, not even by the consent of all shareholders. So, if the company has done something or the majority has approved something ultra vires, any member may file a suit in the court of law.
Bharat Insurance Co Ltd. vs. Kanhaiya Lal (1935)
- Fraud on Minority: The conduct of the majority can also be impeached if it constitutes a fraud on minority shareholders. In Greenhalgh vs. Arderone Cinemas Ltd – 1951, a special resolution was impeached as it was discriminatory to the minority shareholders and gave an advantage to the majority of which the minority was deprived.
In Cooks vs. Deeds – 1916, the directors of a company holding three fourth of capital obtained a contract in their own names to the exclusion of the company. It was held a fraud on minority.
In Brown vs. British Abrasive Wheel Co – 1919, the majority in order to compel the minority shareholders to sell their shares to the majority altered the article and enabled themselves to purchase minority shares compulsorily. It was a fraud.
- Acts requiring special majority: The acts which are required by the Companies Act to be done by passing a special resolution, if done by an ordinary resolution, any individual shareholder can sue to prevent mismanagement and minority oppression.
- Infringement of individual right: Every shareholder has some personal rights as a member of the company against the company as well as the co-shareholders. In case of infringement of personal right, the individual will have a right of action.
In Pender vs. Lushington -1877, a member having the right to vote was prevented from exercising such right. So he was allowed to sue for the enforcement of his individual right.
- Protection by the Companies Act:
- a) Under section 193, minority shareholders can appoint an inspector to enquire about the minority oppression and on positive report, Registrar may apply for compulsory winding up of the company.
- b) If the right of any particular class of members is violated, one tenth of the members can apply to the court to annul such decision. [Section 71(1)]
- c) By the requisition of one tenth of shareholders an extra ordinary general meeting can be called.
- d) If the shares of a company are being transferred to another company, the minority will have the right to purchase such shares of the new company. [Section – 230]
- e) The minority shareholders have the right to apply to the court to take proper step if majority commits fraud on them. [Section – 233]