Rule in Foss v.

Harbottle case and An analysis of minority shareholder

rights

Submitted by
K.M.C.Arunmokan
BA0130014

Project Submitted to
Mr. K Govindarajan

TAMILNADU NATIONAL LAW SCHOOL

(A State University established by Act No. 9 of 2012)
Navalurkuttapattu, Srirangam (TK), Tiruchirappalli- 620009

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 ACKNOWLEDGEMENT

I am immensely happy to express my heartfelt thanks to our Vice Chancellor Kamala

Sankaran, for having given me this opportunity to do a doctrinal Research project on Rule in
Foss v. Harbottle and An analysis of Minority Shareholders rights at under graduate level.

With sense of gratitude, I would like to thank Mr. K. Govindarajan, Professor of Law, Tamil
Nadu National Law School, Tiruchirappalli - 620 009, for his valuable guidance and
encouragement given to me at every stage of this small Doctrinal Research work.

THANK YOU AGAIN TO ALL WHO HELPED ME.

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 DECLARATION

I, K.M.C.Arunmokan, Register Number BA0130014, hereby declare that this project work
entitled Rule in Foss v. Harbottle and An analysis of Minority Shareholders rights has
been originally carried out by me under the guidance and supervision of Mr. K.
Govindarajan, Professor of Law, Tamil Nadu National Law School, Tiruchirappalli - 620
009. This work has not been submitted either in whole or in part of any Degree / Diploma in
this Institution or any other Institution/University.

Place: Tiruchirappalli

Date: 22nd May 2017 K.M.C.Arunmokan

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 INDEX

ACKNOWLEDGMENT
DECLARATION
INTRODUCTION
CHAPTERS
1. Rule in Foss v. Harbottle case 6
2. Minority Share holders rights 8
3. Minority share holders rights as per Companies Act 2013 11

CONCLUSION 13

BIBLIOGRAPHY

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Introduction:
This project deals with the much celebrated case of English judicial history i.e. Foss v.
Harbottle. This project primarily emphasizes about the minority shareholders and their rights.
Minority shareholders are the persons in the company whose involvement in the companys
democratic decisions are overshadowed by the majority rule and to overcome this problem
companies act 2013 has come up to tackle the problems faced by the minority in companies
act, 1956. However minority shareholders are not defined under any law but still under
section 235 (power to acquire shares of dissenting shareholders) and section 244 (right to
apply for oppression and mismanagement) of companies act, 2013 have been given 10%
shares or minimum hundred shareholders whichever is less in companies with share capital
and 1/3rd of the total number of its members in case of companies without share capital.
It is a general principle of company law that an individual shareholder cannot sue for wrongs
done to a company or complain of any internal irregularities. This principle is commonly
known as the rule in Foss v Harbottle.1
Therefore this project primarily emphasizes on rights of minority shareholder who can be
squeezed out by the majority shareholders at any point of time. But law has been constructed
in such way that it protects minority shareholders as well and does not put minority
shareholders position at stake.
This project not only emphasizes the rights bestowed upon minority shareholder as in
accordance with Companies Act 1956, but also the present position of minority shareholders
as in accordance with Companies Act 2013 as well for a clear and better understanding of the
present scenario.
Therefore Chapter I of the paper deals with rule held in the Case of Foss v. Harbottle
followed by Chapter II which deals with position of minority shareholders in previous and
present legislation.

1
(1843) 67 ER 189

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 CHAPTER I
1. Rule in Foss v Harbottle:
Brief Facts of the Case:
In Foss v Harbottle (1842), two shareholders commenced legal action against the promoters
and directors of the company alleging that they had misapplied the company assets and had
improperly mortgaged the company property. The Court rejected the two shareholders' claim
and held that a breach of duty by the directors of the company was a wrong done to the
company for which it alone could sue. In other words, the proper plaintiff in that case was
the company and not the two individual shareholders.

This rule is derived from two general legal principles of company law. Firstly, a company is
a legal entity separate from its shareholders. Secondly, the Court will not interfere with the
internal management of companies acting within their powers. Where an ordinary majority
of members can ratify the act, the Court will not interfere. This simply means, if the majority
can ratify an act, the minority cannot sue.

However, there are four exceptions to the rule in Foss v Harbottle, namely :-
a. ultra vices or illegal acts;
b. transactions requiring special majorities;
c. personal rights; and
d. the fraud on the minority exception.

For the purpose of this article, I will concentrate on the last exception, that is, fraud on the
minority, which is the most common ground for derivative actions.

The fraud on the minority:

Under this exception, a minority shareholder can bring an action on behalf of the company,
where he can show :-
a. the wrong constitutes a "fraud against the minority"; and
b. the "wrongdoers are in control of the company" and will not allow the company to sue.

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Fraud against the minority:
The Court has interpreted the term "fraud" loosely to include fraud in a strict sense as well as
a breach of duty which results in conferring some benefit on the directors or third parties. It
has been held that gross negligence may also amount to fraud against the minority. The
Court will allow a derivative claim where the wrongdoers have benefited personally from
their self-serving negligence. Typical examples include, diverting business from the
company to themselves in breach of fiduciary duty, causing the company to sell assets to
themselves at an undervalue, or selling worthless assets to the company.

Wrongdoers are in control of the company:

Control of a majority of the voting shares was believed to be necessary to bring a derivative
action. However, the Court of Appeal in Waddington Limited v Chan Chun Hoo Thomas
and others [2006] adopted the more flexible concept of de facto control. In that case, a
minority shareholder in a listed company brought an action against a director in respect of
wrongs done to various subsidiaries. Although the director did not have voting control, the
Court found that he was in de facto control of each of the subsidiary companies in the group.

Restrictions:
The major restrictions to a successful derivative action relate to the obscurity of the law and
the costs of the proceedings.
Owing to the ambiguity surrounding the notions of "fraud against the minority" and
"control by the majority", the Court has in the past held that the question of the locus
standi of minority shareholders should be dealt with first as a preliminary issue before the
trial of the action.
It must also be borne in mind that if a derivative action is successful all recovery flows to the
company and the plaintiff shareholder only receives a small pro-rata benefit. Only in
appropriate cases will the unsuccessful plaintiff/shareholder's costs be indemnified by the
company.

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 CHAPTER II

2. RIGHTS OF MINORITY SHAREHOLDERS:

Many provisions in companies act, 1956 deals with situations where minority shareholders are
affected and the same can be divided into various major heads:-

2.1 OPPRESSION AND MISMANAGEMENT OF THE COMPANY:

Oppression is a means of exercising authority or power in a burdensome, cruel or unjust

manner. Example of oppression could be: -not calling a general meeting, depriving the
member of right to dividend etc.

It can be also filed in case there is any material change in the management or control of the
company such as:-

1. Alteration in the board of directors.

2. Manager.

3. In the ownership of companys share.

4. If it has no share capital in its membership.

5. In any other manner whatsoever.

Right to apply for application under section 241:- If a company having share capital:-

1. Not less than 100 members of the company.

2. Not less than one-tenth of the total number of its members.

Whichever is less shall have the right to apply under section 241.

However, any member or members holding not less than one-tenth of the issued share capital
of the company subject to the condition that the applicant has paid all calls, shall also have the
right to apply under section 241. In case a company is not having a share-capital not less than
one-fifth of the total number of its members shall have the right to apply under section 241.

Power of the tribunal on receiving the application (section 242):- On an application made
under section 241, the tribunal shall frame its opinion on two points:-

a.) That the companys affairs are being conducted in a manner prejudicial or oppressive.

b.) That to wind up the company would unfairly prejudice such member or members.

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On the basis of above two points, the tribunal shall pass an order which includes:-

a.) The regulation of the conduct of the affairs of the company in future.

b.) The purchase of shares or interest of any member of the company by other members
thereof.

c.)Restriction on the transfer or allotment of the shares of the company.

d.) Removal of the managing directors, manageror any of the directors of the company.

e.) Imposition of costs as may be deemed fit by the tribunal,etc.

Mismanagement means conducting the affairs of the company in a manner prejudicial to

public interest or in a manner prejudicial to the interests of the company. Instances which
can be considered as mismanagement in the company are:-

1.) Secret profit being made out of the companys accounts.

2.) Company doomed to trade unprofitably but the directors continue to draw their salary.

3.) Company affairs being given in the wrong persons hand who misuses it.

4.) Any resolution passed by the company which is violative of the companys memorandum
or articles or contrary to any provisions of law for the time being in force.

2.2. RECONSTRUCTION AND AMALGAMATION OF THE COMPANY:

In case of reconstruction and amalgamation, minority shareholders may be suppressed in

taking decisions of the company and therefore the Courts, while approving the scheme must
follow judicial approach by making the public aware about the proposed scheme in
newspapers to seek any objections, against the scheme from the shareholders. If any
objections are found, then any interested person (including a minority shareholder) may
appear before the court to initiate a class action.

2.3. RIGHTS OF SHAREHOLDERS TO BE INFORMED THROUGH CORRECT

DISCLOSURES:

The right of the company members to attain the timely information must be expressed clearly
in the statute. The financial information and disclosures need to be provided to shareholders
in a simple format. This leads to informed investment decision making by the shareholders
and help increasing the credibility of the company.

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2.4. RIGHT OF MINORITY TO BE HEARD:

An appropriate mechanism should be established for ensuring that provisions relating to

Minority Interest do not obstruct the Board or the management from performing their
functions genuinely in interests of the company so that the Board and the management
should, be protected from undue and unjustified interference from unscrupulous shareholders
acting in the guise of investors rights.

2.5. RIGHTS OF MINORITY SHAREHOLDERS DURING MEETING OF THE

COMPANY:

Sometimes the minorities are deprived of an effective hearing because meeting of the
company are conducted in such a manner and therefore it must be ensured that they have the
right to attend the general meetings, right to direct the court for the appointment of a general
meeting, to appoint proxies so that they can attend and vote at general meeting, making
proposal at shareholders meeting.

2.6. FAIR VALUATION AS A MEANS OF SAFEGUARDING MINORITY

INTERESTS:

For evaluating the shares of the company there must be an independent valuation mechanism
for safeguarding minority interests. The appointment of the independent valuer is required to
be appointed by the audit committee where such a committee would ensure that shareholders
must have the right to approach the tribunal if the process appears to be unfair. These
principles for valuation of shares could also applied in case of companies that are delisted and
have a shareholder base of 1000 or more.

2.7. RIGHT OF MINORITY SHAREHOLDERS TO SEEK INFORMATION:

Every individual shareholder has the right to know about all the information of the company.
The existing Act lays down the provision for fairness to all shareholders irrespective of each
individuals shareholdings. They have the right to receive Notice of General Meetings (the
AGM or the EGM), annual report and audited accounts and quarterly and annual accounts
etc.

2.8. CLASS ACTION:

A class action suit is a law suit where a group of persons approach the company law tribunal
to represent a common interest. It may be filed either by the members or depositors of the

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company. Class action suits help minority shareholders as a redressal tool to approach the
company law tribunal having the common interest.

The relief which the member or depositors (including minority shareholders) may get through
class action suits is to:-

1.) Restrain the company from committing an act which is ultravires of the company.

2.) Restrain the company from committing breach of any provisions of company including
memorandum or articles.

3.) Restrain the company from acting contrary to the provisions of any law for the time being
in force.

4.) Restrain the company from taking action contrary to any resolution passed by its
members, etc.

CHAPTER III

3. RIGHTS OF MINORITY SHAREHOLDERS AS PER COMPANIES ACT 2013:

Definitions:

Small Shareholder: a shareholder who is holding shares of nominal value of INR 20,000 or
such other sum as may be prescribed.

Minority Shareholder: Equity holder of a firm who does not have the voting control of the
firm, by virtue of his or her below fifty percent ownership of the firm's equity capital.

Objectives:

1. The objective of the policy is to protect the rights of the minority shareholders and keep
them updated about their rights from time to time.

2. To check that the Shareholder Relationship Committee is redressing the grievance of the
minority shareholders.

Rights of Minority Shareholders:

1. Right to appoint a director- Small shareholders, upon notice of not less than 1/10th of the
total number of such shareholders or 1000 shareholders, have a small shareholder director
elected.

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2. Right in decision making and such director appointed shall be considered as independent
director.

3. Oppression and mismanagement-

Right to apply to tribunal by the minority shareholders, when management or control of the
company is being conducted in a manner prejudicial to the interests of the class or company.

4. Rights with respect to reconstruction and amalgamation-

Purchase of shares of dissenting shareholders at a determined value by the registered valuer.

The minority have been given a right to make an offer to the majority shareholders to buy the
shares of minority shareholders.

The transferor company shall be the agent for making payments to minority shareholders.

5. Class action suit: Class action suit may be filed by the minority shareholders as per the
provisions of Companies Act, 2013

Steps taken by company to protect the rights of minority shareholders:

1. Provision of PIGGY BACKING- When a majority shareholder sells their shares, a

minority shareholder has the right to be included in the deal. This is called "piggybacking." It
protects your investment should the company be sold. Piggybacking requires that any party
considering the purchase of the business be able to buy 100 percent of the outstanding shares.

2. Provision of compulsory dividends to the minority shareholders.

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CONCLUSION:

By this research work, the research had opportunity to present and previous positions of
minority shareholders and their rights. On analysis of both old and new legislation, one can
understand the reason behind many regulations which are imposed by the state, which is so as
to protect the minority shareholders right. This research work has made the researcher clearly
understand the reason behind the legislations. State is very keen on protecting its subject
especially in reference with Minority shareholder. This project has also enabled me to
understand the ruling held by English Court of Law in the case of Foss v. Harbottle which is
the first every case to decide upon the minority shareholder rights.

It may be concluded that though minority shareholder views were not being considered due to
suppression of the majority rule in the company in the previous companies act, 1956. But if
we see todays scenario in the companies act 2013, then various steps have been taken to
protect the minority rights of the shareholder in the company irrespective of the fact whether
there is any oppression or mismanagement or any other affected rights of the minority
shareholders.

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BIBILIOGRAPHY:

1. Minority Shareholders Rights in India by Arjit Narendra Srivastava

http://lawfarm.in/blogs/minority-shareholders-right-in-india last acessed on 17/5/2017
3.50 P.M IST
2. Shareholders Rights Part I by Albert Lam http://www.hwg-
law.com/articles/shareholders-rights-part-i-common-law-derivative-action last
accessed on 17/5/2017 4.25 P.M IST
3. Rights of minority shareholders as per Companies Act 2013
http://www.atulauto.co.in/upload/corporate_report/1431596881_Policy%20for%20saf
egaurding%20rights%20of%20minority%20shareholders.pdf last accessed on
17/5/2017 4.14 P.M IST
4. Balance between majority and minority shareholder https://www.lawteacher.net/free-
law-essays/business-law/a-proper-balance-of-the-law-essays.php last accessed 17/5/2017
4.37 P.M IST

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