Case Law: Foss vs. Harbottle (1843)
The claimants, Foss and Turton, were shareholders in a company ‘The Victoria Park Company’ which was formed to buy land for use as a pleasure park. The defendants were the other directors and shareholders of the company. The claimants alleged that the defendants had defrauded the company in various ways and in particular that the defendants had sold land belonging to them to the company at exorbitant price. The claimants now asked the court to order that the defendants make good the losses to the company.
It was held by Vice-Chancellor Wigram that since the company’s board of directors was still in existence, and since it was still possible to call a general meeting of the company, there was nothing to prevent the company from obtaining redress in its corporate character, and the action by the claimants could not be sustained.
In Foss vs. Harbottle two minority shareholders in a company alleged that its directors were guilty of buying their own land for the company’s use and paying themselves a price greater than its value. This act of directors resulted in a loss of the company.
The minority shareholders decided to take action against the directors, but the majority shareholders in a meting resolved not to take any action against the directors alleging that they were not responsible for the loss which had occurred.
The court dismissed the suit on the ground that the acts of the directors were capable of confirmation by the majority members and held that the proper plaintiff for wrongs done to the company is the company itself and not the minority shareholders and the company can act only through majority shareholders.
Basis of the Rule
(1) The right of the Majority Rule
The court has said in some of the cases that an action by a single shareholder cannot be entertained because the feeling of the majority of the members has not been tested and that they may be prepared to waive their right to sue.
(2) The Company is a Legal Person
The court has also said from time to time that since a company is a person at law, the action is vested in it and cannot be brought by a single member.
(3) The prevention of multiplicity of Actions
This situation could occur if each individual member was allowed to commence an action in respect of a wrong done to the company.
(4) The court’s order may be made ineffective
The court’s order could be overruled by an ordinary resolution of members in a subsequent general meeting.
For details and Exceptions to Foss v Horbottle, play below Audio
