Foss v Harbottle
Encyclopedia
Foss v Harbottle 67 ER 189 is a leading English precedent
in corporate law
. In any action in which a wrong is alleged to have been done to a company, the proper claimant is the company itself. This is known as "the rule in Foss v Harbottle", and the several important exceptions that have been developed are often described as "exceptions to the rule in Foss v Harbottle". Amongst these is the 'derivative action', which allows a minority shareholder to bring a claim on behalf of the company. This applies in situations of 'wrongdoer control' and is, in reality, the only true exception to the rule. The rule in Foss v Harbottle is best seen as the starting point for minority shareholder remedies.
and, according to the report,
This became Victoria Park, Manchester
. Subsequently, an Act of Parliament incorporated the company. The claimants alleged that property of the company had been misapplied and wasted and various mortgages were given improperly over the company's property. They asked that the guilty parties be held accountable to the company and that a receiver be appointed.
The defendants were the five company directors (Thomas Harbottle, Joseph Adshead, Henry Byrom, John Westhead, Richard Bealey) and the solicitors and architect (Joseph Denison, Thomas Bunting and Richard Lane
); and also H Rotton, E Lloyd, T Peet, J Biggs and S Brooks, the several assignees of Byrom, Adshead and Westhead, who had become bankrupts.
of members in a general meeting, then the court will not interfere, cadit quaestio.
irregularity in the operation of the company. However, the internal irregularity must be capable of
being confirmed/sanctioned by the majority.
The rule in Foss v Harbottle has another important implication. A shareholder cannot generally bring a claim to recover any reflective loss - a diminution in the value of his or her shares in circumstances where the diminution arises because the company has suffered an actionable loss. The proper course is for the company to bring the action and recoup the loss with the consequence that the value of the shares will be restored.
Because Foss v Harbottle leaves the minority in an unprotected position, exceptions have arisen and statutory provisions have come into being which provide some protection for the minority. By far and away the most important protection is the unfair prejudice action in ss. 994-6 of the Companies Act 2006
(UK) (s 232 Corporations Act 2001
in Australia). Also, there is a new statutory derivate action available under ss 260-269 of the 2006 Act (and s 236 Corporations Act 2001
in Australia).
1. Ultra vires
and illegality
The directors of a company, or a shareholding majority may not use their control of the company to paper over actions which would be ultra vires the company, or illegal.
2. Actions requiring a special majority
If some special voting procedure would be necessary under the company's constitution or under the Companies Act, it would defeat both if that could be sidestepped by ordinary resolutions of a simple majority, and no redress for aggrieved minorities to be allowed.
3. Invasion of individual rights
...and see again, Edwards v Halliwell
[1950] 2 All ER 1064
4. "Frauds on the minority"
...and see Greenhalgh v Arderne Cinemas Ltd for an example of what was not a fraud on the minority
Precedent
In common law legal systems, a precedent or authority is a principle or rule established in a legal case that a court or other judicial body may apply when deciding subsequent cases with similar issues or facts...
in corporate law
Corporate law
Corporate law is the study of how shareholders, directors, employees, creditors, and other stakeholders such as consumers, the community and the environment interact with one another. Corporate law is a part of a broader companies law...
. In any action in which a wrong is alleged to have been done to a company, the proper claimant is the company itself. This is known as "the rule in Foss v Harbottle", and the several important exceptions that have been developed are often described as "exceptions to the rule in Foss v Harbottle". Amongst these is the 'derivative action', which allows a minority shareholder to bring a claim on behalf of the company. This applies in situations of 'wrongdoer control' and is, in reality, the only true exception to the rule. The rule in Foss v Harbottle is best seen as the starting point for minority shareholder remedies.
Facts
Richard Foss and Edward Starkie Turton were two minority shareholders in the "Victoria Park Company". The company had been set up in September 1835 to buy 180 acre (0.7284348 km²) of land near ManchesterManchester
Manchester is a city and metropolitan borough in Greater Manchester, England. According to the Office for National Statistics, the 2010 mid-year population estimate for Manchester was 498,800. Manchester lies within one of the UK's largest metropolitan areas, the metropolitan county of Greater...
and, according to the report,
"enclosing and planting the same in an ornamental and park-like manner, and erecting houses thereon with attached gardens and pleasure-grounds, and selling, letting or otherwise disposing thereof".
This became Victoria Park, Manchester
Victoria Park, Manchester
Victoria Park is an suburban area of Manchester, England. Victoria Park lies approximately 3 kilometres south of Manchester city centre, between Rusholme and Longsight.It is east of Wilmslow Road and west of Anson Road.-History and description:...
. Subsequently, an Act of Parliament incorporated the company. The claimants alleged that property of the company had been misapplied and wasted and various mortgages were given improperly over the company's property. They asked that the guilty parties be held accountable to the company and that a receiver be appointed.
The defendants were the five company directors (Thomas Harbottle, Joseph Adshead, Henry Byrom, John Westhead, Richard Bealey) and the solicitors and architect (Joseph Denison, Thomas Bunting and Richard Lane
Richard Lane (architect)
Richard Lane was a distinguished English architect of the early and mid 19th century. Born in London and based in Manchester, he was known in great part for his restrained and austere Greek-inspired classicism. He also designed a few buildings – mainly churches – in the Gothic style...
); and also H Rotton, E Lloyd, T Peet, J Biggs and S Brooks, the several assignees of Byrom, Adshead and Westhead, who had become bankrupts.
Judgment
The court dismissed the claim and held that when a company is wronged by its directors it is only the company that has standing to sue. In effect the court established two rules. Firstly, the "proper plaintiff rule" is that a wrong done to the company may be vindicated by the company alone. Secondly, the "majority rule principle" states that if the alleged wrong can be confirmed or ratified by a simple majoritySimple majority
Simple majority may refer to:In American and Canadian usage:* Majority, a voting requirement of more than half of all ballots castUsage elsewhere:* Plurality, a voting requirement of more ballots cast for a proposition than for any other option...
of members in a general meeting, then the court will not interfere, cadit quaestio.
Developments
The rule was later extended to cover cases where what is complained of is some internalirregularity in the operation of the company. However, the internal irregularity must be capable of
being confirmed/sanctioned by the majority.
The rule in Foss v Harbottle has another important implication. A shareholder cannot generally bring a claim to recover any reflective loss - a diminution in the value of his or her shares in circumstances where the diminution arises because the company has suffered an actionable loss. The proper course is for the company to bring the action and recoup the loss with the consequence that the value of the shares will be restored.
Because Foss v Harbottle leaves the minority in an unprotected position, exceptions have arisen and statutory provisions have come into being which provide some protection for the minority. By far and away the most important protection is the unfair prejudice action in ss. 994-6 of the Companies Act 2006
Companies Act 2006
The Companies Act 2006 is an Act of the Parliament of the United Kingdom which forms the primary source of UK company law. It had the distinction of being the longest in British Parliamentary history: with 1,300 sections and covering nearly 700 pages, and containing 16 schedules but it has since...
(UK) (s 232 Corporations Act 2001
Corporations Act 2001
The Corporations Act 2001 , sometimes referred to just as the Corporations Act , is an act of the Commonwealth of Australia that sets out the laws dealing with business entities in Australia at federal and interstate level...
in Australia). Also, there is a new statutory derivate action available under ss 260-269 of the 2006 Act (and s 236 Corporations Act 2001
Corporations Act 2001
The Corporations Act 2001 , sometimes referred to just as the Corporations Act , is an act of the Commonwealth of Australia that sets out the laws dealing with business entities in Australia at federal and interstate level...
in Australia).
Exceptions to the rule
There are certain exceptions to the rule in Foss v. Harbottle, where litigation will be allowed. The following exceptions protect basic minority rights, which are necessary to protect regardless of the majority's vote.1. Ultra vires
Ultra vires
Ultra vires is a Latin phrase meaning literally "beyond the powers", although its standard legal translation and substitute is "beyond power". If an act requires legal authority and it is done with such authority, it is...
and illegality
The directors of a company, or a shareholding majority may not use their control of the company to paper over actions which would be ultra vires the company, or illegal.
- s 39 Companies Act 2006Companies Act 2006The Companies Act 2006 is an Act of the Parliament of the United Kingdom which forms the primary source of UK company law. It had the distinction of being the longest in British Parliamentary history: with 1,300 sections and covering nearly 700 pages, and containing 16 schedules but it has since...
for the rules on corporate capacity - Smith v Croft (No 2)Smith v Croft (No 2)Smith v Croft [1988] Ch 114 is a UK company law case concerning derivative claims. Its principle that in allowing a derivative claim to continue the court will have regard to the majority of the minority's views has been codified in CA 2006 section 263.-Facts:Minority shareholders claimed to...
and Cockburn v. Newbridge Sanitary Steam Laundry Co. [1915] 1 IR 237, 252-59 (per O'Brien LC and Holmes LJ) for the illegality point
2. Actions requiring a special majority
If some special voting procedure would be necessary under the company's constitution or under the Companies Act, it would defeat both if that could be sidestepped by ordinary resolutions of a simple majority, and no redress for aggrieved minorities to be allowed.
- Edwards v HalliwellEdwards v HalliwellEdwards v Halliwell [1950] 2 All ER 1064 is a UK labour law and UK company law case about the internal organisation of a trade union, or a company, and litigation by members to make an executive follow the organisation's internal rules.-Facts:...
[1950] 2 All ER 1064
3. Invasion of individual rights
- Pender v LushingtonPender v LushingtonPender v Lushington 6 Ch D 70 is a leading case in UK company law, which confirms that a company member's right to vote may not be interfered with, because it is a right of property. Furthermore, any interference leads to a personal right of a member to sue in his own name to enforce his right...
(1877) 6 Ch D 70, per Jessel MR
...and see again, Edwards v Halliwell
Edwards v Halliwell
Edwards v Halliwell [1950] 2 All ER 1064 is a UK labour law and UK company law case about the internal organisation of a trade union, or a company, and litigation by members to make an executive follow the organisation's internal rules.-Facts:...
[1950] 2 All ER 1064
4. "Frauds on the minority"
- Atwool v Merryweather (1867) LR 5 EQ 464n, per Page Wood VC
- Gambotto v WCP Limited (1995) 182 CLR 432 (Aus)
...and see Greenhalgh v Arderne Cinemas Ltd for an example of what was not a fraud on the minority
See also
- UK company law
- Burland v Earle [1902] AC 93
- Punt v Symons & Company Ltd [1903] 2 Ch 516