Submitted to: Sir Muhammad Zubair Khan

Submitted by: Ijaz Ali Shah

Program: LLM – 2023

Subject: Company Law

Assignment: In light of the following statements:

(a) The cardinal principle of corporate management is the rule by the majority of shareholders. &

(b) “Majority has its way but minority has its say.”

Write an assignment on the ‘rule of majority’ and its exceptions. Explain the true scope of the rule in
Foss v. Harbottle on the majority rule and minority’s rights along with exceptions to the rule.

Introduction

The majority and the minority are two opposite sides that belong to the democratic mechanism where
the first holds the supremacy and power to rule. Two important but opposing camps play a key role in
corporate governance to achieve corporate prosperity. Similarly, the corporate world is governed by a
democratic process where corporate affairs are governed and managed by the decision of the majority
of corporate members, which also seems fair and legitimate. Thomas Jefferson, who is one of the
founding fathers of the United States of America, is of the opinion that “though the will of the majority
is in all cases to prevail, that will, to be rightful, must be reasonable that the minority possess their
equal rights, which equal law must protect, and to violate would be oppression” (First Inaugural
Address on March 4, 1801) which means that the majority decisions must be sensible and reasonable
and which must not infringe the rights of the minority members. Thus, the rights and interests of
minority shareholders in the company are protected to prevent their exploitation in the form of
oppression and mismanagement by majority shareholders. The important case of Foss v. Harbottle
(1843) proved to be the promulgator of the rule that a company may itself be sued as a proper party. In
addition, the picture case also clarified the scope of the said rule. However, the present case established
certain exceptions to the aforementioned rule, according to which members of the minority can apply to
the court. In Pakistan, the Companies Act, 2017 provides a remedy for minority shareholders to address
these concerns to improve corporate equity. The majority shareholders monitor and control the
corporate governance of the business world, but the minority also has a say in the affairs of the
company, with the aim of protecting the latter from exploitation. This mandate focuses on the rules of
majority shareholders and also emphasizes the rights of minority shareholders in the company.

The Corporate Management

A company is a legal entity that has a separate legal personality from its members. Because it is an
artificial entity, its shareholders make all decisions through a voting system. The decisions about the
internal management and the daily work of the company are made according to the statutes. These
decisions are usually taken by majority vote of the members approved at duly convened general
meeting and board of directors (BOD) meetings of the company to manage the affairs of the company
for the betterment of the overall operations to and to maximize the value of the organization. This
business management is one of the key and most important features of the company, which, if well
thought out and implemented, can ensure the overall success of the company. In addition, business
management contains various parameters according to which it should be continued. For example, all
stakeholders must be considered when making such decisions; serves the rights and interests of all
shareholders. In addition, information must always be provided to company members on a regular basis,
ultimately improving the company's processes of honesty, transparency and accountability. In addition,
since the management of the company plays a key role in the success of the company, the teamwork of
the members always pays off, because the company cannot survive if the shareholders follow their own
interests and have their own axes to grind. As in the words of Tim Westergren, entrepreneur and co-
founder of Pandora “make your team feel respected, empowered, and genuinely excited about the
company’s mission”, meaning thereby that management of the company should go hand in hand. In
addition to the above, lack of trust is one aspect that should not prevail among members because it will
not take the company anywhere. It cannot be denied that the success of the association is the success of
the members and therefore the members should not put their interests before the interests of the
association. In short, if the shareholders want to get the maximum benefits and profits from the
company's business, they should cooperate and also avoid collisions, which would ultimately help the
company stand out from other companies.
The Meaning of Majority and Minority Shareholder

The concept of majority and minority shareholders exists throughout the business world. Every
shareholder of a company has certain basic rights. These include: the recognition of the fundamental
rights of the shareholder, the right to participate in making important changes in the company, the right
to vote, the right to consider the costs and income associated with the exercise of the right to vote, and
the disclosure of the right to vote. Moreover, it is an open secret that majority shareholders always
influence the actions of the company and almost always have complete control over the company, its
management and its board. The criteria describing the majority owner of any company are: the majority
shareholder has voting shares that exceed a certain threshold. Board members and the majority
shareholder have control over the company's strategic decisions. Thus, it is safe to say that the majority
shareholders have significant control over the organization by owning a large portion of the company's
shares. On the other hand, a shareholder who does not have controlling power in the company or a
person who does not have the same controlling power or influence as a majority shareholder is
considered a minority shareholder. A minority shareholder is an investor who seeks to maximize the
value of the organization. Therefore, a balance is needed between the responsibility of the majority
shareholders and the rights of the minority shareholders, because these are undoubtedly responsible to
the shareholders for whose benefit the company is managed. The majority shareholders are also
responsible, because the minority investment as investors could be used by the majority shareholders in
a strong position to promote private interests. It is pertinent to mention here that the ownership
structure of all jurisdictions continues to be concentrated with wealthy individuals and corporate groups
who hold coveted high positions in various companies where the exploitation of the minority
shareholder is in the hands of the majority.

Majority Powers and the Principle of Majority Rule

Sometimes the members of the society can meet to decide on the routine affairs of the society, in which
case decisions are made by a simple majority of 51% of the total number of society members. In
addition, there may be situations where additional decisions are made that require a special majority.
For example, if the management of a company wants to change a section of the Memorandum of
Association (MOA), it should pass a special resolution, which means that 75% of the members of the
company support the change. This process is known internally as "internal management". Therefore,
decisions are made based on a majority vote, which is the basic principle of corporate law. Here, the
superiority of the majority must be understood in terms of voting rights, not numerical importance. In
addition, the Limited Companies Act 2017 gives every member of a company holding shares (primarily a
limited liability company) the right to vote on every decision. A resolution passed by a majority of
shareholders voting at a duly convened and held general meeting would bind the minority and the
company in all matters. In short, corporate democracy is realized when there are more majority
members than minority members in a general meeting or board meeting. Thus the concept of corporate
democracy is practiced, in which the will of the majority of the members rules, or the majority is
superior, and in which the courts generally refrain from interference, and that was the reason why Lord
Eldon appreciated the impression that " the court is not required at every opportunity to take control of
every gambling house and brewery in the kingdom."

Effects of Majority based Decisions

When deciding on meetings, situations may arise where the rights and interests of the majority
members may conflict with the minority members of the company. The superiority of the majority is
always accompanied by the inferiority of the minority, which indicates an imbalance in the company.
This exploitation of the minority members is mainly due to the greed of some members of the majority.
Since most go unpunished, they believe they can do anything and take more and more risks. Therefore,
it is possible that majority members can oppress minority members by using their superior position and
status. Abuse of power by those majority members always leads to oppression and bad governance.
Oppression refers to the suppression and violation of minority rights in the form of harsh, illegal and
burdensome treatment and financial loss, while mismanagement refers to the melting of public
interests or corporate interests in the hands of the majority. In addition, the dangers of oppression and
bad governance are realized because of the principle of democracy in the business world. It is
noteworthy that the acts of repression and mismanagement are continuous. However, majority power is
more important in the corporate industry, where the court tries to avoid interfering with the internal
affairs of the company. But if the decisions made are not in the larger interests of the company as a
whole and only serve the interests of one specific group, which means continued oppression and bad
management, a minority group whose interest may be violated can raise their voice against it.
Therefore, legal protection and its effectiveness must be thoroughly studied to check if the law is
sufficient for the legal protection of minorities.

The Rights and Protection of Minority Members and the Rule in Foss vs. Harbottle (1843)

In the business world, there is a possibility that a small group of members may have a majority
investment, while the majority of members may have a small percentage of the share capital. In any
case, the majority shareholders of the capital can be fatal to the interests of the minority participation in
the company, because the majority group could make almost all decisions in their favor and do what
they want and want. The latter group would even emerge victorious if its actions at general meetings
were questioned due to its greater voting rights in the company. Consequently, most of the members
end up at the helm of the company's affairs where they become despotic and tyrannical and enjoy
supreme power to rule and control the company's affairs. Thus, the purpose of the phenomenon of
protection of minorities is to bring effective control of the company and the interests of minorities to a
level. Palmer therefore rightly pointed out that "an appropriate balance between the rights of majority
and minority shareholders is essential for the proper functioning of a corporation". In cases of minority
oppression or majority mismanagement, there are some panaceas to protect the interests of the
former. Thus, that case focused on the balance between majority rule and abuse of minority
shareholders; at the same time outline the rights and protections of members as a whole.

Historically, the rule in Foss vs. Harbottle (1843) was of utmost importance. Basically, it says that a
company is a legal entity that is the appropriate party to sue in a situation where it has been harmed by
others. The rule serves as a tool to deter and prevent shareholders from filing multiple lawsuits. At the
same time, it was also assumed that the application of the aforementioned rule could encourage the
violators, who mostly control the company, to always decide on the start of the procedure, which would
be unfair. As a result, several exceptions to the rule that a minority shareholder has the right to sue on
behalf of the company have been established. In this case the two minority shareholders were Richard
Foss and Edward Starkie and Harbottle happened to be director of the Victoria Park Company. The
minority members filed a lawsuit against the company's director and lawyers, accusing them of misusing
and wasting company assets and that the assets were illegally pledged, causing huge losses to the
company. The minority shareholders demand the appointment of a liquidator and the defendants to pay
compensation for the damage caused to the company. The matter was heard by Wigwram VC, where he
said that because the individual members were not a proper party, the claim could not proceed. He
further said that the company itself would be a proper plaintiff if it were wronged. Thus, the rule in the
contested case prevented minority shareholders from bringing suit; that only a company as a legal entity
can claim compensation for abuses committed against it. Second, the court cannot accept such claims
even if the alleged unfairness is confirmed by a simple majority of shareholders present and voting,
paving the way for the "majority rule" principle.
Exceptions to the Majority Rule

(i) Ultra-vires Acts

In matters that are outside the jurisdiction of the company and cannot be confirmed by the
majority shareholders, the minority shareholder has the right to file a lawsuit against the
company and its employees.
(ii) Where a Special Majority is needed
If the general meeting intends to approve the law by a special majority, but it is done by a
simple majority or without the decision required by law, any shareholder can file a lawsuit
to retain the majority vote.
(iii) Personal Actions
An individual member is entitled to certain benefits and advantages that are generally not
understood by most shareholders. In this case, the shareholder can file a lawsuit on behalf
of himself and all other shareholders (whose rights are legally prohibited and allowed) to
enforce his rights.
(iv) Fraud by those in Control
This is perhaps the most important of all the exceptions. This exception allows a shareholder
to bring legal proceedings (derivative action) on behalf of the company against the fraudster
who also happens to be liable.
(v) Breach of Duty
Even if there is no fraud, minority shareholders can file a lawsuit against the company if any
directors (majority members) violate their duties to the detriment of the company.
(vi) Wrongdoers in Control
If the company is run by criminals, minority members can file a lawsuit on behalf of the
company to protect their interests. If minority members were deprived of their right to file a
lawsuit, their lawsuit would never reach court because the very criminals who manage and
control would never allow a company to be sued.
(vii) Prevention of Oppression and Mismanagement
To avoid threats of oppression and mismanagement by the majority shareholders, the
former has the right to file a lawsuit against the others. It is also important to note that
ordinary civil courts have jurisdiction to resolve such matters, except where and when the
Companies Act expressly prohibits it.

Current Minority Shareholder Protection Regime in Pakistan

Section 286 of the Companies Act, 2017 allows a power of attorney to be filed in court if the
shareholder(s) holding at least ten percent of the issued share capital or the Securities and Exchange
Commission of Pakistan (the Commission) or the Registrar is of the opinion, that the affairs of the
company are being conducted in an illegal or fraudulent manner and manner or that the affairs of the
company are likely to be conducted in an illegal or fraudulent manner and manner. The said order also
authorizes the member/members, the registrar and the committee to take measures if the affairs of the
association are managed in a way that is not foreseen in the Memorandum of association (MOA) and
Articles of Association (AoA) or conducted in a manner unreasonably contrary to the public interest. In
addition, if the affairs of the company are conducted in such a way that the way of doing business
burdens some of the shareholders or creditors (who have 10 percent of the paid-up capital), there can
be a knock on the door of the court after the fact. . Another remedy for minority members of Pakistan is
to contact the Commission under Section 256 of the Companies Act, 2017. Section 256 (1) of the Act
states: "If the Commission considers it necessary to investigate the affairs of a company:

(i) at the request of members holding at least one tenth of the total number of votes of the company
with share capital; (ii) at the request of at least one-tenth of all the members of such company having no
share capital; and (iii) On receipt of a notice under section 221 (5) or a notice from the registrar under
section 254 (6). However, the discussed point does not make the matter of minority shareholders any
easier, because the demand of members remains unchanged one tenth/10% of the general votes or one
tenth/10% of the members. The barriers provided in section 268 also do not serve the members,
because the voting conditions must be fulfilled before presenting a request to the committee.

Suggestions for reform

The Corporate Governance Procedure of Pakistan for the Protection of Minority Shareholders and
Investors is part of Section 286 (Submission to Court) and Section 254 (Commission for Inquiry in
Corporate Matters). First, as evidenced by the jurisprudence, shareholders holding less than 10 percent
of the voting rights may not go directly to court or go to the commission to investigate the matter.
Second, the SECP's enforcement of the minority shareholder protection system, as highlighted by the
jurisprudential strand analyzed above and by Fatima Wahla54, is effective in protecting minority
shareholders from both directors and majority shareholders. However, the SECP is yet to develop
jurisprudence on Section 204. This raises the question of the need for derivatives in Pakistan. Abbas
provided Pakistan with a functional framework for derivatives and suggested that, following the
prominence of derivative suits in other jurisdictions, it could be a useful tool to protect minority
shareholders in Pakistan.55 It was suggested that derivatives should be legislated. at least through the
2017 amendment to the Companies Act. First, allowing derivative claims would allow a section 204
corporate law practice to develop. The role of the statutory director's duties was limited because the
duties set out in section 204 were not addressed in case law. As said before, the duties of the manager
are a necessary part of the system of corporate governance, but the practice of the court has not yet
discussed this part. The only reference to case law cited in this document is the duty to comply with the
law, disclosure to shareholders and general fiduciary duty. Section 204 does not mention the standard
of duties of a director. One reason is the absence of derivatives and the absence of such obligations
under the previous Companies Ordinance 1984. If the derivative claims are accepted, the shareholders
can take action in the name of the company against the directors for insolvency. To begin with,
individual shareholders are not allowed to file a lawsuit, which means that there is no case law on the
duties of the manager. If a derivative action is allowed, the usual remedy would be to bring an action
alleging that the directors breached their duties. Second, there is no application of section 204 especially
when performing the duties of the head of the commission as such. This means that even if a suit is filed
under section 286, it will not enable the director to fulfill his duties because it would have to show that
the company has been unfairly managed to the detriment of a particular member and that it is
dependent on the Company. Even if the voting requirement is omitted by section 286, it will not be a
source of benefit to the company because the requirement is that of the shareholder, not the company.
On the other hand, a derivative action allows a director's duties to be fulfilled by an action brought on
behalf of the company. This means that the shareholder would file a lawsuit on behalf of the company
and focus on protecting the interests of the company in order to maximize the value of the company. A
derivative action is therefore the correct way to fulfill the duties of a director because the shareholders
bring the action on behalf of the company. This would achieve two goals: first, minority shareholders
would have a better chance of recourse if they do not meet the voting requirements of sections 254 and
286. Second, the derivative action would be constructive in the implementation of the manager's tasks
and in the development of the jurisprudence of the assignments.

Conclusion

Majority and minority are two sides of the same coin, but the former has a dominant position in the
business world. The majority members always decide and manage the affairs of the company according
to the democratic process. All major and important decisions are taken by the majority shareholders.
Minority members of the company, on the other hand, are largely ignored when making decisions. The
majority shareholders can benefit from the minority shareholders, if the latter preserve the rights and
benefits of the latter. Because of such oppression and mismanagement, the wealthy classes benefit the
corporations while the less privileged class remains vulnerable. Basically, the company works for the
benefit of all and sundry, but the minority people are ignored. One of the most famous corporate cases,
Foss v. Harbottle, supports the majority principle and also supports that only a corporation as a legal
entity can be a proper party to a lawsuit. The cited case also extends some exceptions to a minority
group where it can sue wrongdoers despite being minority shareholders. In addition, the Limited
Liability Companies Act 2017 gives minority members a legal remedy to sue to prevent their exploitation
by the majority of the company.
Bibliography

Related Party Transactions and Minority Shareholder Rights, Available at:

https://www.oecd.org/daf/ca/50089215.pdf

Majority Rule vs. Minority Rights | Debate, History, & Examples, Available at:
https://study.com/learn/lesson/majority-rule-minority-rights-debate-history-examples.html

MINORITY SHAREHOLDER PROTECTIONS, Available at:

HTTPS://WWW.GENERALCOUNSELLAW.COM/MINORITY-SHAREHOLDER-PROTECTIONS/

Minority Shareholder Rights, Available at: https://fleximize.com/articles/001356/minority-shareholder-

rights

Management of the corporate joint venture and minority shareholder issues, Available at:
https://www.lexisnexis.co.uk/legal/guidance/management-of-the-corporate-joint-venture-minority-
shareholder-issues

MAJORITY RULE & PROTECTING MINORITY INTERESTS: Available at: https://bizorg.allard.ubc.ca/course-

materials/unit-8-weeks-12-13-majority-rule-protecting-minority-interests/