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Case Analysis of Foss v. Harbottle

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FACTS:

In this case of Foss vs Harbottle, there were two shareholders Richard Foss and Edward Starkie Turton and there was a Director on the other side that was Harbottle in the Victoria Park Company. Foss and Turton are minority shareholders, Foss and Turton being minority shareholders filed a case against the Director and solicitors (lawyer of the company) alleging them that they have done such transactions which had led to losses to the company. They were alleged to do some transactions which have made the company suffer the losses. Foss and Turton are the minorities and they don’t have the majority shares. The case in the court was rejected on the ground that Foss and Turton are the minority shareholders. The case of Foss v. Harbottle protects the majority and minority had no such rights. The rationality was given that minorities are not the aggrieved party, if the transaction was conducted by the Board of Directors less profitably then the company is the aggrieved party, the loss has occurred to the company and there is no personal right of the shareholders that have been breached. Here the company is the aggrieved party, the court said that the company is also a person, not a natural but an artificial one. In the eyes of law, it is a legal person.

The issue, in this case, is that can an individual shareholder or any outsider of the company can sue the directors of the company. Whether the individual shareholders or the minority shareholders have the power to sue the Board of Directors for the wrongdoing to the company.

EXCEPTIONS TO THIS CASE:

The exceptions say that the minority can sue, but the Foss v. Harbottle case says that the minority cannot sue. The exception to the case of Foss v. Harbottle, where minority interests are protected, is the whole chapter of Oppression and Mismanagement. There is more exception like the Ultravires act. If a company has done anything Ultravires, then even minorities can sue. And if the company going on doing the Ultra vires act, the minority can ask the court to pass an injunction order to restrain the company from continuing doing anything Ultra vires.        

THE NON-INTERFERENCE RULE:

The essential concept of the court’s non-interference in internal management is spelled forth in the case of Foss v. Harbottle. A member cannot bring the case against the Directors for alleged wrong done to the company. Then who can bring such action? Because the corporation is the proper party to such an action, it will bring the action in the will of the majority. Now, the implications or the advantages in the case of Foss v. Harbottle judgment were mainly three i.e. it again emphasized on separate legal entity of the company, so if anything is done against the company, then company is the aggrieved person and company has the right to sue. Secondly, it protects the will of the majority. The will of the majority should prevail. Thirdly, this case protected and prevented the multiplicity of the cases.

The Foss v. Harbottle rule in the Indian context, the ICICI v. Parasrampuria Synthetic Ltd. SSL, the Delhi court said that will not add the case of Foss v. Harbottle. The case of Foss v. Harbottle is not applied in this case.      

JUDGEMENT:

The judgment of Foss v. Harbottle protects the majority rule and not the minority rule. The court ruled that the case could not be initiated by minority shareholders, but that nothing prevents the corporation from doing so, according to the court. Nothing was stopping the corporation from initiating action through a majority of shareholders. Minority shareholders cannot bring an action because the aggrieved party is the company who by the majority of the shareholders can bring an action. The case of Foss v. Harbottle judgment was further supported in the case of MacDougall v. Gardiner judgment. The court held in the MacDougall v. Gardiner, the judgment given by the court was that, what the minority shareholders are complaining about, is the subject matter which the majority of shareholders can complain about. If any act done by the Board of Directors is alleged to be irregular or if any act done by the Board of Directors is alleged to be illegal, then the correct party to sue is the company. 

In the case of Rajahmundry Electric Supply Co. v. Nageshwara Rao, the court will typically refrain from interfering with the Board of Directors’ internal administration of the corporation and its affairs unless they are operating within the authority given by the articles. Moreover, when the Director’s actions are supported by the majority of the shareholders than in general minority shareholders cannot do anything about it. In another case, Pavlides v. Jensen, the company had a mine, and the directors sell that mine to a buyer. No action was taken by a majority of shareholders. One minority shareholder tries to sue the company and brought an action against three of the Directors on been negligent in selling a mine lower than the actual price that the damages of that occurred to the company and that mine also owned by the company. Here, as same as that minority shareholder cannot sue the company. it is the subject matter which the majority of shareholders can complain about. If any act done by the Board of Directors is alleged to be irregular or if any act done by the Board of Directors is alleged to be illegal, then the correct party to sue is the company. 

The court ruled that the case could not be initiated by minority shareholders, but that nothing prevents the corporation from doing so, according to the court. Nothing was stopping the corporation from initiating action through a majority of shareholders. Minority shareholders cannot bring an action because the aggrieved party is the company who by the majority of the shareholders can bring an action.

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