CHANAKYA NATIONAL LAW UNIVERSITY

NYAYA NAGAR, MITHAPUR, PATNA-800001

COMPANY LAW
RULE IN FOSS v. HARBOTTLE CASE and AN ANALYSIS OF
MINORITY SHAREHOLDER RIGHTS

SUBMITTED BY:

RAJ SHEKHAR

ROLL NO.-1958

SEMESTER- SEVENTH

SESSION-:2018-2023

COURSE-B.A.LL.B(HONS.)

SUBMITTED TO:

Ms.Nandita S. Jha

Assistant Professor of Law

AUGUST 2021

RESEARCH PROPOSAL SUBMITTED IN PARTIAL FULLFILMENT OF COURSE

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 DECLARARTION

I hereby declare that the project entitled “RULE IN FOSS v. HARBOTTLE CASE
and AN ANALYSIS OF MINORITY SHAREHOLDER RIGHTS” submitted
by me at CHANAKYA NATIONAL LAW UNIVERSITY is a record of bona fide
project work carried out by me under the guidance of our mentor Ms. Nandita
S Mishra. I further declare that the work reported in this project has not been
submitted and will not be submitted, either in part or in full, for the award of any
other degree or diploma in this university or in any other university.

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 ACKNOWLEDGEMENT

It is a fact that any research work prepared, compiled or formulated in isolation is inexplicable to
an extent. This research work, although prepared by me, is a culmination of efforts of a lot of
people who remained in veil, who gave their intense support and helped me in the completion of
this project.

Firstly, I am very grateful to my subject teacherMs.Nandita S Mishra, without the kind support
andhelp of whom the completion of this project was a herculean task for me. She donated
hervaluable time from her busy schedule to help me to complete this project.I would like to thank
her for hervaluable suggestions towards the making of this project.

I am highly indebted to my parents and friends for their kind co-operation and encouragement
which helped me in completion of this project. I am also thankful to the library staff of my college
which assisted me in acquiring the sources necessary for the compilation of my project.

Last but not the least, I would like to thank the Almighty who kept me mentally strong and in good
health to concentrate on my project and to complete it in time.

I thank all of them !

----

RAJ SHEKHAR

ROLL NO.:-1958

B.A.LL.B(HONS.)

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 TABLE OF CONTENTS

1. Introduction

2. Foss v. Harbottle case

3. Minority shareholder rights in the past legislation

4. Minority shareholder rights & duties as per Companies act 2013

5. Conclusions

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
company’s 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 1/3 rd of the total number of its
members in case of companies without share capital 1.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.

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 shareholder’s 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.

1
Minority Interests, Ministry of Corporate Affairs, (September 1, 2021, 09:00 PM),
https://www.mca.gov.in/MinistryV2/minority+interests.html/

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Therefore Chapter 2 of the project deals with rule held in the Case of Foss v.
Harbottle followed by Chapter 3 and 4 and which deals with position of minority
shareholders in previous and present legislation.

AIMS AND OBJECTIVE

The researcher aims to examine the rules regarding the minority shareholder rights with
comparative analysis of both present and past legislation

HYPOTHESIS

The Minority shareholders rights are overshadowed by the majority one.

RESEARCH METHODOLOGY

The researcher is supposed to take up the doctrinal method in pursuance of the completion of this
project. Also, this project shall while mainly focusing on the doctrinal research shall be
complemented by some empirical finding too.

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 SOURCES OF DATA

The researcher while writing this project has taken recourse to various pri mary and
secondary sources. Primary sources would include various laws. Secondary
sources would include books and articles, reports and websites.

LIMITATION OF STUDY

1. The researcher is not well versed about the subject matter so there is limitations of knowledge

2. Money is one of the limitations since researcher is a student.

3. Another limitation is that research area is limited for the researcher.

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 2. FOSS V. HARBOTTLE CASE

2.1 Brief facts of the case-

Two shareholders of a company brought an action on behalf of themselves and all other
shareholders against directors and solicitors of company, alleging that Directors and solicitor’s
carried illegal transaction thereby causing losses to the company. The transactions were fraudulent
and illegal whereby the property of company was misapplied and wasted. Therefore shareholders
claimed damages to be paid by defendants. The question was as to the maintainability of suit.

The Court held that suit is not maintainable and action could not be brought by minority
shareholders. The wrong done to the company is one which could be ratified by the majority of
members. The company was the proper plaintiff and company can only bring the action through
the majority shareholder. The majority of member should decide whether to commence
proceedings against directors. 2

This case mainly derive following rules –

1. Court will not ordinarily intervene in the case of an internal irregularity if the matter is one
which the company can ratify or condone by its own internal procedure.
2. When wrong has been done to company, the only proper plaintiff is company itself.

Advantages of rule –

- Recognition of separate legal entity of Company

- Preservation of right of majority to decide

- Courts will not interfere

2
Foss v. Harbottle (1843) 2 Hare 461

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2.2 The rule of Non- Interference-

The general principle of company law is that every member holds equal rights with other members
of the company in the same class. The scale of rights of members of the same class must be held
evenly for smooth functioning of the company. In case of difference(s) amongst the members the
issue is decided by a vote of the majority. Since the majority of the members are in an advantageous
position to run the company according to their command, the minorities of shareholders are often
oppressed. The company law provides for adequate protection for the minority shareholders when
their rights are trampled by the majority. But the protection of the minority is not generally
available when the majority does anything in the exercise of the powers for internal administration
of the company. The court will not usually intervene at the instance of shareholders in matters of
internal administration, and will not interfere with the management of a company by its directors
so long they are acting within the powers conferred on them under the Articles of Association of
the company. In other words, the Articles are the protective shield for the majority of shareholders
who compose the Board of Directors for carrying out their object at the cost of minority of
shareholders.3

2.3 Exceptions-

Generally the rule by majority applies and thus minority shareholder cannot bring the action but
in these below situation the minority shareholder can bring action to protect their interests, so there
are certain exceptions of the rules given in the case4-

1. Ultra vires and illegal acts: Acts which are violative of object clause of MOA/AOA are
ultra vires & illegal acts. Such acts cannot be rectified by the majority vote on resolutions
can come within purview of courts. Here, ultra vires & illegal acts cannot be rectified even
by the unanimous votes by the members. Hence the rule is not applicable. One can
approach court in both representative/ derivative capacity depending on circumstances. 5

3
Samriddhi Pandey, Majority Powers and Minority Rights, Legal Bites, (September 2, 2021, 08:00 PM),
https://www.legalbites.in/majority-powers-minority-rights/
4
Foss v. Harbottle (1843) 2 Hare 461

5
N. V. Paranjape Textbook on Company Law, 10th Edition (India: Central Law Agency, 1995) at p. 263

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 2. Breach of duty: The minority shareholders may bring an action against the company,
where although there is no fraud, there is a breach of duty by directors and majority
shareholders to the detriment of the company.

3. Fraud or oppression against minority: When the majority of the company’s members
use their power to defraud or oppress the minority, their conduct is liable to be impeached
even by a single shareholder. The fraud or oppression must involve an unconscionable use
of majority’s power resulting or likely to result, either in financial loss or unfair or
discriminatory treatment of the minority. 6

4. Resolution requiring Special Majority but is passed by a simple majority: A

shareholder can sue if an act requires a special majority but is passed by a simple majority.
Simple or rigid, formalities are to be observed if the majority wants to give validity to an
act which purports to impede the interest of minority. An individual shareholder has the
right of action to restrain the company from acting on a special resolution to which the
insufficient notice is served.7

5. Personal actions: Individual membership rights cannot be invaded by the majority of

shareholders. He is entitled to all the rights and privileges appertaining to his status as a
member. An individual shareholder can insist on the strict compliance with the legal rules,
statutory provisions. Provisions in the Memorandum and the Article of Association are
mandatory in nature and cannot be waived by a bare majority of shareholders. 8

2.4 RELATED CASE LAWS

6
G. A. Olawoyin Status and Duties of Company Directors( Ille-Ife: University of Ife Press 1977) p. 11
7
G. A. Olawoyin Status and Duties of Company Directors( Ille-Ife: University of Ife Press 1977) p. 268
8
Companies Law – Majority Rule and Minority Rights, Indian Filings, (September 3, 2021, 09:00 PM),
https://www.indiafilings.com/learn/company-law-majority-rule-and-minority-rights/

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I) In ICICI v. Parasrampuria Synthetic Ltd9 , the Delhi High Court has held that a mechanical
and automatic application of Foss v. Harbottle rule to the Indian situations ,Indian conditions and
Indian corporate realities would be improper and is misleading. The principle , in the countries of
its origin ,owes its genesis to the established factual foundation of shareholder power and majority
shareholder power centred around private individual enterprise involving a large number of small
shareholders ,is vastly different from the ground realities.

II) In the case of VN Bhajekar v. KM Shinkar10, in this case, it was decided by the board of
directors to appoint managing agents of the company, few shareholders were not in favor of this
decision but despite this, the directors confirm the appointment. The shareholder filed the petition
in the court where the court held that the few minority shareholders who possess little authority
are not entitled to file a suit in the court asking the court to intervene in the matters like who should
be the managing agent of the company.

III) In Rajahmundry Electric supply Corp. v. A. Nageshwara Rao11 , the Court observed that
the conduct with which the defendant is charged is an injury not to the plaintiffs exclusively ,it is
an injury to the whole corporation. In such cases, the rule is that the corporation should sue in its
own name and its corporate character. It is not a matter of course for any individual members of a
corporation thus to assume themselves the right of suing in the name of the corporation. In law,
the corporation and the aggregate of members of the corporation are not the same things.

3. MINORITY SHAREHOLDER RIGHTS IN THE PAST

LEGISLATION
9 1998 92 CompCas 238 Delhi
10 (1934) 36 BOMLR 483
11 1956 AIR SC 213

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Many provisions in companies act, 1956 deals with situations where minority
shareholders are affected and the same can be divided into various major heads 12:-

➢ 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.
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 company’s accounts.
2.) Company doomed to trade unprofitably but the directors continue to draw their
salary.
3.) Company affairs being given in the wrong person’s hand who misuses it.
4.) Any resolution passed by the company which is violative of the company’s
memorandum or articles or contrary to any provisions of law for the time being in
force.
Section 397 of Companies Act 1956 dealt with the provision of oppression and
mismanagement

➢ 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

12
Companies Act, 1956,available at https://www.mca.gov.in/Ministry/pdf/Companies_Act_1956_13jun2011.pdf/ ,
accessed on September 3, 2021, 10:00 PM.

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 person (including a minority shareholder) may appear before the court to initiate a
class action. 13

➢ 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.

➢ 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.14

➢ 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 shareholder’s meeting.

13
Reconstruction and Amalgamation, Legal Services India (September 5 , 2021, 07:00 PM),
http://www.legalservicesindia.com/article/1423/Reconstruction-and-Amalgamation.html/
14
Sahu, Manjeet Kumar, Rights of Minority Shareholders in India Under the Companies Act, 1956 (April 1, 2013).
Available at SSRN: https://ssrn.com/abstract=2564925/ or http://dx.doi.org/10.2139/ssrn.2564925/

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 ➢ 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. 15

4. MINORITY SHAREHOLDER RIGHTS AND DUTIES AS PER

COMPANIES ACT 2013
15
Sahu, Manjeet Kumar, Rights of Minority Shareholders in India Under the Companies Act, 1956 (April 1, 2013).
Available at SSRN: https://ssrn.com/abstract=2564925 or http://dx.doi.org/10.2139/ssrn.2564925

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Despite the fact provisions have been in place under the Companies Act 1956 to protect the interest
of the minority shareholders, the minority has been incapable or unwilling due to lack of time,
recourse or capability- financial or otherwise. This has resulted in the minority to either let the
majority dominate and suppress them or squeeze them out of the decision making process of the
company and eventually the company. CA 2013 has sought to invariably provide for protection of
minority shareholders rights and16 can be regarded as a game changer in the tussle between the
majority and minority shareholders. Various provisions have been introduced in CA 2013 to
essentially bridge the gap towards protection and welfare of the minority shareholders under CA
1956.

➢ OPPRESSION AND MISMANAGEMENT OF THE COMPANY :-

CA 2013 provides for provisions relating to oppression and mismanagement under Sections 241-
246. Section 241 Section 244(1) provides for the right to apply to Tribunal under Section 241,
wherein the minority limit is same as that mentioned in CA 1956. Under CA 2013, the Tribunal
may also waive any or all of the requirements of Section 244(1) and allow any number of
shareholders and/or members to apply for relief. This is a huge departure from the provisions of
CA 1956 as the discretion which was provided to the Central Government to allow any number of
shareholders to be considered as minority is, under the new CA 2013 been given to the tribunal
and therefore likely to be exercised by the tribunal. 17

➢ RECONSTRUCTION AND AMALGAMATION OF THE COMPANY:

With respect to minority shareholder rights at the time of reconstruction and amalgamation of
companies, Companies Act 2013 has provided for Section 235 and 236. Section 235 is
corresponding to Section 395 of Companies act 1956 and provides that transfer of shares or any

16
Minority Interests, Ministry of Corporate Affairs, (September 6, 2021, 09:00 PM),
https://www.mca.gov.in/MinistryV2/minority+interests.html
17
Section 244(1) of Companies Act, 2013.

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class of shares in the transferor company to transferee company requires approval by the holders
of not less than nine-tenths (9/10) in value of the shares whose transfer is involved and further the
transferee company may, give notice to any dissenting shareholder that it desires to acquire his
shares. Section 235 makes it mandatory for the majority shareholders to notify the company of
their intention to buy the remaining equity shares the moment acquirer, or a person acting in
concert with such acquirer, or group of persons becomes the registered holder of ninety per cent
(90%) or more of the issued equity share capital of a company. It further provides that such shares
are to be acquired at a price determined on the basis of valuation by a registered valuer in
accordance with such rules as may be prescribed. 18

Companies Act 2013, in addition to minor improvements to certain provisions of Companies Act
1956 has also introduced new provisions affecting the reconstruction and amalgamation
procedures.19 These, inter alia, include:

1.CA 2013 vide Section 235(4) in respect of 'Dissenting Shareholders' provides that the sum
received by the transferor company must be paid into separate bank account within the specified
period of time as against the provision mentioned in Section 395(4)of CA 1956 which lacked
clarity on this aspect. 20

2. As per CA 2013, Section 236 (1) and (2), the Acquirer on becoming registered holder of ninety
percent (90%) or more of issued equity share capital shall offer minority shareholder for buying
equity shares at the determined value;

3. Section 236 (3) of CA 2013 has provided the minority with an option to make an offer to the
majority shareholders to buy its shares; and 21

4. Section 236 (5) of CA 2013 requires the transferor company to act as a transfer agent for making
payments to minority shareholders.

18
Section 235 of Companies Act, 2013.
19
Reconstruction and Amalgamation, Legal Services India (September 6 , 2021, 07:00 PM),
http://www.legalservicesindia.com/article/1423/Reconstruction-and-Amalgamation.html
20
Section 235(4) of Companies Act, 2013.
21
Section 236(3) of Companies Act, 2013.

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 ➢ RIGHT TO APPOINT A DIRECTOR :

Companies Act 2013 has sought to empower the minority shareholders in corporate decision
making also. Section 151 of the CA 2013 requires listed companies to appoint directors elected by
small shareholders, i.e. shareholders holding shares of nominal value of not more than twenty
thousand rupees (INR 20,000/-).22 The Draft Companies Rules elaborates the provision in this
regard under Clause 11.5 of Chapter XI and provides that a listed company may either suo-moto
or upon the notice of not less than five hundred (500) or one-tenth (1/10) of the total number of
small shareholders, whichever is less, elect a small shareholders’ director from amongst the small
shareholders. Here, it is important to note that small shareholders are different from the minority
shareholders as small shareholders are ascertained according to their individual shareholding
which should be less than twenty thousand rupees (INR 20,000/-); whereas minority
shareholders/shareholding is collectively ascertained and regarded as having non-controlling stake
in the company. However, small shareholders can be included in and/or regarded as minority
shareholders by virtue of their small shareholding amounting to non-controlling stake in the
company.

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

CA 2013 has introduced the concept of class action which was non-existent in CA 1956. Section
245 of CA 2013 provides for class action to be instituted against the company as well as the
auditors of the company.23 The Draft Companies Rules allow for this class action to be filed by
the minority shareholders under Clause 16.1 of Chapter-XVI. On close reading of Section 245 of
the Companies Act, 2013, it can be seen that the intent of the section is not only to empower the
minority shareholder and/or members of the company but also the depositors. Unlike Section 399
of CA 1956 which provides for protection to only shareholder/members of the company, Section

22
Section 151 of Companies Act, 2013.
23
Section 245 of Companies Act, 2013.

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245 of CA 2013 also extends this protection to the class of depositors as well. However, in the
current scenario, the provision of representation of a class of members or depositors by a particular
member or a depositor lacks clarity.

Further, section 245 does not empower the Tribunal with discretionary power to admit/allow any
class suit wherein class of members or depositors are unable to comply with the minimum number
of members/depositors requirement to be laid down in the Companies Rules. Also, on a close
reading of Section 241 and Section 245 of the Companies Act, 2013, we can find duplication in
protection provided to the members in case affairs of the company are conducted in a manner
prejudicial to the interest of the company/members.

4.1 RELATED CASE LAWS

I) In ICICI v. Parasrampuria Synthetic Ltd24 , the Delhi High Court has held that a mechanical
and automatic application of Foss v. Harbottle rule to the Indian situations ,Indian conditions and
Indian corporate realities would be improper and is misleading. The principle , in the countries of
its origin ,owes its genesis to the established factual foundation of shareholder power and majority
shareholder power centred around private individual enterprise involving a large number of small
shareholders ,is vastly different from the ground realities.

II) In the case of VN Bhajekar v. KM Shinkar25, in this case, it was decided by the board of
directors to appoint managing agents of the company, few shareholders were not in favor of this
decision but despite this, the directors confirm the appointment. The shareholder filed the petition
in the court where the court held that the few minority shareholders who possess little authority
are not entitled to file a suit in the court asking the court to intervene in the matters like who should
be the managing agent of the company.

III) In Rajahmundry Electric supply Corp. v. A. Nageshwara Rao26 , the Court observed that
the conduct with which the defendant is charged is an injury not to the plaintiffs exclusively ,it is
an injury to the whole corporation. In such cases, the rule is that the corporation should sue in its
own name and its corporate character. It is not a matter of course for any individual members of a

24 1998 92 CompCas 238 Delhi

25 (1934) 36 BOMLR 483
26 1956 AIR SC 213

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corporation thus to assume themselves the right of suing in the name of the corporation. In law,
the corporation and the aggregate of members of the corporation are not the same things.

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 5. CONCLUSIONS

By this research work, the researcher had opportunity to understand the 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. The researcher 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 shareholder’s position at stake. Upon careful examination
of the provisions of the CA 2013 it can be ascertained that legislative intent in CA 2013 is to
safeguard the minority interest in a more comprehensive manner. However, the provisions of CA
2013 not only requires proper implementation upon addressing the present lacunas but also
requires instilling confidence in the minority shareholders with respect to the institutional and
regulatory mechanism which ensures that interest of minority shareholders shall be given due
consideration. This dual approach towards enforcement of minority rights shall only guarantee
proper administration of the corporate activities. Nevertheless, Ministry of Corporate Affairs'
effort in preparation of a framework, which endeavors to empower minority shareholders, is
commendable.

This project has also enabled researcher 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 today’s 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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effective mechanism for resolution of commercial disputes.
BIBLIOGRAPHY

Sites Referred-

• https://www.mca.gov.in/

• https://www.legalbites.in/

• https://taxguru.in/

• http://www.legalservicesindia.com/

• https://www.researchgate.net/

• https://papers.ssrn.com/

Books Referred-

• Company law by Avtar Singh ( EBC, 17th Edition,2018)

• Taxmann’s Company Law by Dr. GK Kapoor & Dr. Sanjay Dhamija ( University

Edition,23rd Edition,2021)

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