MINORITY
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Decisions of a company may be made either by the directors or shareholders in general meeting.
In both cases, the majority rule applies, whether by way of a simple or special majority.
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In Richard Foss and Edward Starkie Turton were two minority shareholders in the "Victoria Park Company".
The company had been set up in September 1835 to buy 180 acres (0.73 km2) of land near Manchester and, according to the report,
"enclosing and planting the same in an ornamental and park-like manner, and erecting houses thereon with attached gardens and pleasure-grounds, and selling, letting or otherwise disposing thereof".
This became Victoria Park, Manchester. Subsequently, an Act of Parliament incorporated the company.[1]
The claimants alleged that property of the company had been misapplied and wasted and various mortgages were given improperly over the company's property.
They asked that the guilty parties be held accountable to the company and that a receiver be appointed.
The defendants were the five company directors (Thomas Harbottle, Joseph Adshead, Henry Byrom, John Westhead, Richard Bealey) and the solicitors and architect (Joseph Denison, Thomas Bunting and Richard Lane); and also H Rotton, E Lloyd, T Peet, J Biggs and S Brooks, the several assignees of Byrom, Adshead and Westhead, who had become bankrupts.
Judgment
The court dismissed the claim and held that when a company is wronged by its directors it is only the company that has standing to sue.
In effect the court established two rules. Firstly, the "proper plaintiff rule" is that a wrong done to the company may be vindicated by the company alone, a reiteration of the Salomon principle.
Secondly, the "majority rule principle" states that if the alleged wrong can be confirmed or ratified by a simple majority of members in a general meeting, then the court will not interfere,legal term.
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There are two aspects to the rule in Foss v Harbottle:
the internal management rule –
An individual shareholder or even a group o shareholders forming a minority at a general meeting have no locus standi to bring an action to remedy a wrong doen to a comapny i the majority shareholders can ratify the wrong
eg: improper appointments of directors or improper conduct of general meetings.
This is known as the "Internal Management" rule or the "Indoor Management" rule. The courts usually do not with to interfere with decisions made by the majority shareholders
the proper plaintif rule
This is a recognition of the separate legal entity of the company . Where a wrong is done to the company, it is the proper plaintiff in any legal proceedings, which seek to remedy it
. The proper plaintiff rule applies whether the wrong to the company is acused by the directors, the controlling members or outsiders.
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The rule became a major obstacle in the way of the minority shareholders.
A company is unlikely to decide to bring an action against the majority shareholders complaining of their breach of duty.
The majority are also unlikely to bring an action complaining of an irregularity in the internal management of the company, where the irregularity works for their advantage.
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There are 5 exceptions to the rule in Foss v Harbottle by the common law:
The act of the company is ultra vires
The act of the company requires a special majority
A member’s personal rights are infringed
The majority perpetrate a fraud on the minority
The interests of justice require
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In common law, individual shareholders could bring an action complaining that the company was acting or intending to act on some matter which was ultra vires
Ultra vires refers not only to acts which were beyond the objects and powers set out in the memorandum but also to illegal and criminal acts of the company.
In Malaysia, the common law position in relation to ultra vires acts of the company has to be reconsidered in the light of section 20(1) of the act.
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Types of action that can be brought by minority shareholders are:
personal action-where the shareholder brings an action personally or individually and the remedy is for the shareholder alone. Such action will be brought in the shareholder's own name.
-Representative action or class action-where a single shareholder brings an action on behalf of himself and other shareholder whose rights are also infringed.
When bringing a representative or class action, the affected shareholders must have a common interest, ie they must have the sufferred the same loss.
-Derivative action-where a shareholder brings on behalf of the company of the company against the directors, management and / or other shareholders of the company, for a failure by the management. In effect the suing shareholder claims to be acting on behalf of the corporation, because the directors and management are failing to exercise their authority for the benefit of the company and all of its shareholder. The shareholder derives the right to bring an action from the company's right to bring action.
Since the action is brought in the company's name, if the derivative action is successful, compensation is paid to the company.