Majority Rule: But Not as You Know It

In company law those who hold the

majority of shares "rule" the company. This has been the case since the court
in Foss v Harbottle (1843) 2 Hare 46 recognised the principle. If the majority
have made a decision to take or not take certain action, that will be
respected. Even if they are yet to make a decision no minority shareholder
can take that action because the proper person to do so is the company
which is recognised as the majority shareholders.
However, all that seems to have changed with litigation decisions concerning
derivative claims. Derivative claims are in place where a minority
shareholder is allowed to enforce the company's rights because those in
control of the company were the wrongdoers themselves. Therefore the
majority who "rule" the company are not going to sue themselves. If the
minority could not enforce the company's rights there would be a wrong
without a remedy. However, whether it is the majority or minority bringing
the action the proper claimant is still the company.
Before 2006, wrongdoer control needed to be proved before a claim would
be allowed to proceed to an action. If wrongdoer control could not be
established by the minority then the fundamental principle of majority rule
would be respected since the majority had not taken any decision as to
whether to enforce. If the illegal act could be rectified by the majority then
litigation is pointless because 'the ultimate end will be that a meeting will be
held, and the majority wishes will be granted'. MacDougall v Gardiner (19756) L.R. 1 Ch. D. 13 CA

The Companies Act 2006 now provides a statutory procedure for bringing a
derivative claim. The requirement that there is wrongdoer control is not
mentioned as a bar to a claim.
Therefore the legislator has chipped away at a fundamental principle of
company law that majorities rule the company and no minority can interfere
with their decision or lack of one. The Act's procedure now allows a
derivative claim to be brought by a shareholder in respect of an action
vested in the company.
Such a fundamental shift away from established principles certainly deserves
attention and the courts have so far offered some insight in three cases since
2006, see here, here and here. Looking forward I hope to draw some
analogies with the Unfair Contract Terms Act 1977 and the reasons behind
the reform to explain this shift.