Revision notes on shareholder protection in Company Law.
Includes a detailed explanation of the rule of Foss v Harbottle, key statutes and an explanation of statutory remedies.
These notes were used for final year LLB Law studies in which I achieved a mark of 70% for Company Law.
Minority Shareholder Protection
General Issue
• Important decisions within a company are decided by a vote or resolution
passed by members
• each share usually carries a vote and so those with the most shares (the
majority shareholders) exercise the most votes
• this is not a problem when the majority shareholders cast their votes for the
benefit of the company as a whole, but this is not always the case
• there is a need for company law to protect the interests of the minority
shareholders
The Status of Minority Shareholders
• Majority of shares in a public company are owned by large institutional
investors – the company will also have individual shareholders who own a
small number of shares
• With private limited companies, there may be some members who own
relatively few shares compared to others
• Each share carries a single vote – thus a smaller minority shareholder cannot
hope to defeat the majority shareholders in any vote affecting the company
• This is simply a reflection of democracy; however, two issues can arise –
1. Where the majority shareholders conspire ton outvote the minority
shareholders to achieve their own objectives;
2. When the majority shareholders are also the directors are also the
directors of the company and so can ratify any decision, they might take
Key Case – Foss v Harbottle (1843)
• Two members of the Victoria Park Co. brought an action against the
company’s five directors and promoters
• Alleged that they have mis-applied company assets and had improperly
mortgaged its property
• The action sought to compel the defendants to make good the losses
sustained by the company and sought the appointment of a receiver
• It was held that the injury in question was not suffered by the claimants
exclusively, but was an injury against the company as a whole
• Therefore, it was only the company that could claim not the individuals
• Wigram VC – ‘In law the corporation and the aggregate members of the
corporation are not the same thing for purposes like this’
• Further held – given that it was open to the majority in general meeting to
approve the defendants conduct, the claimants action must fail – to allow the
minority to bring an action in these circumstances would risk frustrating the
wishes of the minority
, The Rule of Foss v Harbottle
• The company itself (rather than an individual shareholder) is the proper
plaintiff in any action where there is an alleged wring against the company
• This rule is in keeping with the doctrine of corporate personality but is harsh
for minority shareholders because it is often that the directors are the
wrongdoers
• As directors are unlikely to approve the company taking legal action against
themselves this can leave the shareholders without an apparent remedy
• The rule in Foss v Harbottle is not an absolute bar to individual shareholders
bringing an action in respect of an alleged wrong
Exceptions to the Rule of Foss v Harbottle
• In Edwards v Halliwell [1950] Jenkins LJ stated there were 4 exceptions to the
Rule of Foss v Harbottle:
1. Where the act complained of it illegal or is wholly ultra vires the company;
2. Where the matter in issue requires the sanction of a special majority, or
there has been non-compliance with a special procedure;
3. Where a member’s personal rights have been infringed;
4. Where a fraud has been perpetrated on the minority and the wrongdoers
are in control
Exceptions – 1. Ultra Vires
• Prudential Assurance Co Ltd v Newman Industries Ltd [1982] – CoA
explained that where the wrongful act in is ultra vires the company, the rule in
Foss v Harbottle does not operate because the majority of members cannot
ratify the transaction
• The ultra vires act in question relates to the giving of financial assistance to
facilitate the acquisition of shares in the company contrary to the requirements
of the CA 1981
• An individual shareholder could bring a personal action to restrain the
company from so acting because it infringed this personal right as an investor
to have the business conducted in accordance with the memorandum and the
articles of association
• However, where the shareholder is seeking damages for the loss suffered by
the company as a result of a transaction actually entered into, the action will
fail if he does not satisfy the requirement of wrongdoer control – this is
because the wrong is done to the company directly; and so, the company is
the proper claimant
Exceptions – 2. Special Majority/Special Procedure
• If a company’s constitution provides that a special majority is required to
approve an action and the company ignores the requirement then an
individual member bring proceedings to challenge the vote
• Edwards v Halliwell [1950] – the rules of the defendant trade union
provided that the contributions of members could not be altered without
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