Rule of the majority: FOSS Vs HARBOTTLE
As in any other democratic setup, the voice of the majority prevails in the
corporate world also. Differences between the majority shareholders and the
minority shareholders of companies have always existed - and will continue to
exist. human nature being what it is. However, it becomes necessary to strike
balance between the two. As unanimity in any field is at best theoretical
concept, it becomes necessary to balance the effective control of the
management (that is, the majority) with the interests of small shareholder
(that is, the minority).
When the shareholder of a company passes an ordinary resolution at a general meeting, it is
evident that the majority of the shareholder present and voting have approved the course of
action contained in such a resolution. However, formatters which are crucial and of a great
importance to a company, The law requires the assent not of a bare majority but of three-fourth
of the shareholders present and vote in the shape of a special resolution. Thus, the
entire working of companies is based on what the majority wants. At the same
time, the protection of the minority shareholders in the corporate world is also
vital. The Act, therefore, seeks to strike a golden balance to ensure that, on the
one hand, the majority is not hampered in the proper management of the
company and on the other hand, the rights of the minority are not trampled upon.
Only this can ensure the smooth functioning of any company.
The basic rule of "majority prevails" was laid down as far back as 1843 in
a famous English case, Foss v. Harbottle [(1843) 67 ER 189]. In this case, two
shareholders filed a suit against the directors of a company, alleging various
illegal and fraudulent transactions on their part, whereby the company's property
was misapplied and wasted, and seeking an order from the court that the
directors make good this loss to the company. The suit was dismissed on the
ground that, if at all such allegations were true, it is the company- and not
individual shareholders - who could sue. The court was of the view that it is
not open to individual members of a company to assume to themselves this
right of suing for an alleged loss, as such loss, if at all, was being caused to the
company and not to them. It was observed that it is not the function of the court
to interfere in matters which the majority of shareholders had the power to
confirm, as long as the management acts within the scope of its powers as per
the memorandum and articles of the company. Thus, the rule of the majority in
the corporate world was firmly established in the shape of the "Rule in Foss v.
Harbottle".
The majority rule got a further boost several years later when Lorci Justice
Mellish made the following observations in MacDougall v. Gardiner, [(1875)]
The application of the Rule in Foss v. Harbottle in India is best seen in
Bhajekar v. Shanker (AIR 1934 Born 243), where the directors of a company
resolved at a board meeting to appoint a company as managing agent
(Managing agency, which is now abolished, was a common feature of India
companies in those days.) Some shareholders of the company objected to
this appointment on the ground that the company which was proposed to be
appointed as the managing agents was in fact a dummy company and
was not in the best interests of the company. This appointment was, however
confirmed at two meetings of the shareholders. The objecting shareholder
then approached the court for an order restraining the company from going·
ahead of this appointment. The court ordered a general meeting of the
shareholders to ascertain whether they were in favor of continuing this suit
The chairman of the meeting, appointed by the court, reported that a majority
of the shareholders were not in favor of continuing the said suit. Dismissing ·
the suit, the Bombay High Court observed as under:
"Under these circumstances, it is difficult to see how a few shareholders
who represent a minority are entitled to maintain the suit and ask the court
interfere on the question as to who the managing agents of should be the
Company”.
Exceptions to the Rule in Foss v. Harbottle
The rule of the majority cannot, however, be applied in all possible·
situations. There are certain circumstances in which six exceptions were given.
1. Ultra vires acts
2. Fraud on the minority
3. Acts requiring a special majority
4. Control in the hands of the wrongdoers
s. Individual rights of shareholders
6. Oppression and mismanagement.
Let us discuss those exceptions in detail:
1] ULTRA VIRES ACTS: If the act which is challenged is ultra vires the company, no majority
of shareholders can approve or ratify it, and even one shareholder can bring an
appropriate action against the company. This exception was impliedly, recognized in Foss v.
Harbottle itself and It Is evident that the rule of the majority applies only when the majority is
acting intra vires, that is, within the scope of its powers.
Case Law: Bharat Insurance Co. Ltd. v. Kanhaiya Lal (AIR 1935 Lah 742),
2] Fraud on the Minority: If the conduct of a majority of the shareholders amounts to a
fraud on the minority shareholders, it would not be fair to apply the rule in Foss v. Harbottle.
What constitutes fraud will, of course, depend on the facts and circumstances
of every individual case.
Case Law: Menier v. Hooper's Telegraph Works Ltd. [(187 4) 9 C. App. 350)
3] Acts requiring special majority: There are several decisions which
shareholders of a company cannot take by a simple majority, namely, by passing an
ordinary resolution. For many important matters, the Act has prescribed a special
resolution, which requires
the votes of three-fourths of the members present and voting, as for instance,
for alteration of the memorandum or the articles of the company, or for a change
in the company's name or for winding up the company. In such cases, a sheen
majority will not suffice and a majority of three-fourths of the members pre
and voting becomes necessary. It is in this sense that this also constitutes an
exception to the rule in Foss v. Harbottle.
4] Control in the hands of the wrongdoers:
If a legal wrong has been committed against the company, but for some
reason, those in control of the company do not permit any action to be taken against the
wrongdoer, any member or members may approach the court safeguard the interests of the
company. This exception was recognized in Foss V. Harbottle itself.
Case Law: Glass v. Atkin (1967)
5] Individual rights of shareholders: Every member of a company has certain rights as a
member; such rights are conferred upon him by the law, and sometimes also by the articles of
the company and no majority can deprive him of such rights. The rule in Foss v.
Harbottle cannot apply to take away such "individual member rights",
6] Oppression and mismanagement: Ss. 241 to 246 of the Act contain elaborate provisions for
grant of relief against oppression and mismanagement and this constitutes the sixth except
to the rule in Foss v. Harbottle.
PREVENTION OF OPPRESSION AND MISMANAGEMENT:
Meaning: Oppression is the exercise of authority or power in an unjust manner against the
consent of the other party. In the Black Law Dictionary, the term ‘oppression’ is defined as ‘the
act or an instance of unjustly exercising power.’ It can also be viewed as an act or instance of
oppression and the feeling of being heavily burdened, mentally or physically, by troubles, adverse
conditions, and anxiety.
Application to Tribunal for relief in cases of Oppression
The aggrieved shareholder may approach the National Company Law Tribunal set up under the
Company legislations.
Application against oppression and mismanagement
Under the Companies Act, 1956 section 397 dealt with the application against oppression and
mismanagement. The Companies Act, 2013 lays down the provision to make an application
against oppression under section 241. Chapter XVI of the Company Act clearly specifies who can
raise a complaint and under which circumstances a complaint may be raised because of
oppression and mismanagement.
Illustration:
When a member of the company makes a complaint regarding the affairs of the company when
the affair may seem shady affecting the interest of the public at large or the company, or when
the affairs of the company is oppressive in nature and against the member making the complaint
or any other member of the company. The member may also make a complaint regarding the
material change in the management or control of the company which may seem to be prejudicial
to the company. The Central government may, by itself, file the oppression and mismanagement
application before the tribunal against a company if it believes that the affairs of the company are
prejudicial in nature.
Who can file an application against Oppression and Mismanagement?
The Provision of Section 244 of the Companies Act is also crucial as it describes who has a right
to file such an application. The right is broadly divided between the company and entitlement to
one member to file on behalf of the other members.
Oppression of the Minority
The management of a Company is based on the majority rule, but at the same time, the interests
of the minority can’t be completely overlooked. The majority or minority voting strength matters.
The reason for this distinction is that a small group of shareholders may hold the majority
shareholding whereas the majority of shareholders may, among them, hold a very small
percentage of share capital.
CLASS ACTION:
The word class action is defined under Section 245 of the Company Act. A class action
is where several claimants with common grievance against the company are allowed to
file a lawsuit against the company. Claimants can collectively use their resources such as
share attorney’s services and save their litigation costs to a great extent. The financial
scale attached to the class action suit is perceived as a saving grace for individuals with
limited resources.
The funding of a class action suit is usually made from the Investor Education Protection
Fund. This funding is subject to the feasibility of reimbursement from the IEPF which is
usually considered an acid test under the Company Act, 2013. The application is usually
made regarding the conduct of the affairs of the company being prejudicial to the interest
of the company or the members and its depositors. A class action may even be filed
against the directors or auditors of the company for misleading the members by furnishing
misleading reports.
Under the Security Class Action, a group of people affected by the changes made to the
MOA/AOA must bring a suit of class action instead of filing application of class action.
Numbers of members/ depositors who may bring class action suit:
• In case of companies having a share capital, not less than 100 members of the
company may bring a class action suit; or not less than 10% of the total number of
members whichever is less may bring a class action suit, or any member
individually or jointly holding 10% of the share may bring a class action suit
provided, all such shareholder members have paid up all the share dues.
• If the company does not have share capital, then not less than 1/5th of the
members can bring a class action.
• For a company having deposit capital, a class action suit may be brought by not
less than 100 depositors of the company or by a minimum of 10% of the total
depositors whichever is less, or a class action suit may also be brought by any
depositor individually or depositors jointly who are holding 10% of the outstanding
deposit of the company.
Conclusion (oppression and mismanagement): The recent collapse of large companies and
corporations globally has made such entities to carefully ponder over their actions towards affairs
of the company. Accountability has increased by the tool of class action suits that are filed against
the management personnel regarding their deeds of oppression and mismanagement. The
individual shareholder of the company and the minority shareholders have been empowered to
take up action against the unjustified abuse of power and authority by the managerial personnel
under the law regarding oppression and mismanagement. An individual may file an application
before the tribunal informing about the oppression and mismanagement carried out by any key
personnel, against him or any other shareholder of the company.
