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GAZETTE
JULY-AUGUST 1978
Actions by Shareholders
—a new development
William OT>ea,
Lecturer in Law,
University College, Dublin.
It was decided in the case of
Foss
v.
Harbottle
[ 1843 2
Hare 461] that if a wrong has been done to a company
only the company can sue. There are a number of
advantages in such a rule. For example, it prevents
multiplicity of actions, often for trivial reasons. Aslo, as
Gower
points out in his book on company law (3rd
Edition 1969), if the action complained of is one which
could be ratified by the company in general meeting it is
pointless to have litigation about it except with the
consent of the general meeting. However, the other side of
the coin is that a strict application of
Foss
v.
Harbottle
would unduly strengthen the position of majority
shareholders in a company. The fiduciary and other
duties of the directors could be disregarded with impunity
as long as they had voting control. In fact a rigid
application of the rule with no exceptions would put the
minority completely at the mercy of the majority.
Accordingly, the courts have, since 1843, been prepared
to recognise certain exceptions to it. It is generally
accepted that, until recently, at least, those exceptions can
be reduced to four well-defined categories (See
Gower
pp.
584-585;
Hahlo
'Casebook on Company Law' 1977 Ed
pp 533-534). Therefore it can be said that an action by an
individual shareholder, instead of by the company, is
allowed in four circumstances:—
(i) When it is complained that the company has acted,
or is proposing to act, ultra vires. Authorities for this
proportion include
Simpson v. Westminster Palace
Hotel Co.
(1860) 8 H.L.C. 712;
Russell
v.
Wakefield
Waterworks Co.
[1875] Lr 20 Eq 474; and
Yorkshire Miners Association
v.
Howden
[1905]
A.C. 256.
(ii) Where the Act complained of could
be
effective only
if resolved upon by more than a simple majority vote
(i.e. where a special resolution or an extraordinary
resolution is needed and it is said not to have been
validly passed). Authorities here include
Baillie
v.
Oriental Telephone Co
[1915] 1 Ch 5038; and
Cotter
v.
National Union of Seamen
[1929] 2 Ch
589.
(iii) Where the "personal" rights of the plaintiff
shareholder are infringed or are about to be infringed.
The meaning or extent of "personal" rights is still
somewhat unclear. Such rights would include the
right to vote (if granted by the Articles). Examples of
"personal" rights may be found in several decided
cases which include
Johnson
v.
Lyttle's Iron Agency
[18771 5 Ch D 687;
Pender
v.
Lashington
[ 1877] 6
Ch D 70;
Wood
v.
Odessa Waterworks Co.
[1899]
42 Ch D 636; and
Salmon
v.
Quin and Axtens
[ 1909]
1 Ch 311.
(iv) Where those who control the company are
committing, or have committed, fraud on the
minority. The authorities on what constitutes "fraud"
are legion. The 'locus classicus' of this exception to
the doctrine in
Foss
v.
Harbottle
is the statement by
Pagewood V-C in
Attwool
v.
Merryweather
[1867]
LRE 5 Eq 464 to the effect that "If I were to hold
that no bill could be filed by shareholders to get rid of
the transaction on the ground of the doctrine of
Foss
v.
Harbottle,
it would be simply impossible to set
aside a fraud committed by a director under such
circumstances, as the director obtaining so many
shares by fruad would always be able to outvote
anybody else" (p468).
It has been argued that the recent decision of Mr.
Justice Templeman in
Daniels
v.
Daniels
[1978] 2 AER
89 has extended the exceptions to
Foss
v.
Harbottle.
The
scope of that decision is uncertain however. In the May
1978 edition of the "Law Reporter" its was stated that
Daniels
v.
Daniels
has added negligence on the part of
management to the list of exceptions to
Foss
v.
Harbottle.
A perusal of Mr. Justice Templeman's judgment,
however, demonstrates that such a statement is far too
wide. The facts of the case are as follows. The plaintiffs
were minority shareholders in a company. The defendants
were majority shareholders and directors. In October
1970 the Company sold land to one of the directors for
£4,200. This was done on the instructions of the
defendant directors. In 1974 the director who had bought
the land sold it for £120,000. The minority shareholders
brought an action alleging that the 1970 sale had been at
an undervalue and that the defendants knew this.The
defendants applied to have the statement of claim struck
out as it did not allege fraud or any other ground which
would justify an action by minority shareholders against
the majority for damage done to the company. In fact the
statement of claim alleged, at the most, negligence
because it charged that the plaintiffs had, in October
1970, purported to adopt the probate value of the land
which was usually much less than the open market value.
They should have known that this was the case but
apparently they did not.
The application to strike out the action was dismissed.
It was dismissed on the basis that, to quote the All
England Reports,
"The confines of [the Rule in
Foss
v.
Harbottle]
should
not be drawn so narrowly that directors were able to
make a profit out of their own negligence. Therefore
minority shareholders were entitled to bring an action
where the majority of the directors negligently, though
without fraud had benefited themselves at the expense of
the company."
The reasoning shows confusion if not outright
cowardice. Templeman J. referred with approval to
authorities which stated that a shareholder has no right to
bring an individual action against directors who are
nothing more than "an amiable set of lunatics". What
distinguished such cases from the case before him was
that " . . . . to put up with foolish directors is one thing: to
put up with directors who are so foolish that they make a
profit of £115,000 odd at the expense of the company is