A company consists of two main components, namely the members and the board of directors (“BOD”). The former has certain rights they can exercise while the latter is in charge of managing the business and affairs of the company.
Certain company decisions require member approval. However, it should be noted that a director may or may not be a member of the company. The BOD will thus be in control of resolutions passed if they hold a majority of the shares.
This thus begs the question, “What happens to the members who hold the minority number of shares but are not part of the BOD? In the event of conflict between the BOD (who are also the majority shareholders) and the members, are the rights and interest of the minority shareholders protected?”
Rules laid down in Foss v Harbottle
To address this issue, two rules were developed in Foss v Harbottle. Namely:
The rules laid down in Foss v Harbottle were reaffirmed in the case of Burland v Earle whereby it was held that as long as a decision was made by the majority and can be cured by voting, the court cannot intervene. The reason being if every member was allowed to sue, then there will be too many suits for the same subject matter. If the Proper Plaintiff Rule is adhered to, there will only be 1 suit on the same subject matter instead of multiple suits.
Exceptions to the Rules
1) Ultra vires acts
This refers to acts that are beyond the objects and powers set out in the memorandum. It also refers to illegal and criminal acts.
2) Fraud on the minority
S213 of the Company Act 2016 (“CA”) provides that director shall exercise his powers for a proper purpose and in good faith in the best interest of the company. If there is fraud on the minority and the wrongdoers are themselves in control of the company, then the rule in Foss v Harbottle is relaxed in favour of the aggrieved minority.
However, 2 elements need to be established:
– There is fraud; and
– The wrongdoers are in control of the company.
3) Special majorities
According to Edward & Anor v Halliwell & Ors, the rules in Foss v Harbottle did not prevent an individual member from suing if the matter in respect of which he was suing was one which could validly be done or sanctioned, not by a simple majority of the members of the company, but only by some special majority.
4) Personal rights
Where the personal and individual rights of members have been invaded, the individual members may bring an action themselves.