In Foss vs. Harbottle two minority shareholders in a company alleged that its directors were guilty of buying their own land for the company’s use and paying themselves a price greater than its value. This act of directors resulted in a loss of the company.
The minority shareholders decided to take action against the directors, but the majority shareholders in a meting resolved not to take any action against the directors alleging that they were not responsible for the loss which had occurred.
The rationale in that line of reasoning is that a company is a separate legal entity from the members who compose it and as such, if any right of the company is violated, it is the company which can bring an action through the majority.
It was held that, “If the thing complained is a thing which, in substance, the majority of the company are entitled to do, or something has been done irregularity which the majority of the company are entitled to do regularly or if something has been done illegally which majority of the company are entitled to do legally, there can be no use in laying litigation about it, the ultimate end of which is only that a meeting has to be called, and then ultimately the majority gets its wishes.
Such individual rights include the right to attend meetings the right to receive dividends the right to insist in strict observance of the legal rules; statutory provisions in the memorandum and articles. If such a right is in question, a single shareholder can on principle, defy a majority consisting of all other shareholders.
Thus, where the chairman of a meeting at the time of taking the poll ruled out certain votes which should have been included, a suit by a shareholder was held to be validly filed.
Where the candidature of a shareholder for directorship is rejected by the chairman, it is an individual wrong in respect of which the suit is maintainable.
(v) Where there is breach of duty
A minority shareholder can bring a suit against the company where there is a breach of duty by the directors and majority shareholders to the detriment of the company.
Case Law: Daniels vs. Daniels (1978)
A company on an instruction of the two directors (husband and wife), having majority shareholding sold the company’s land to one of them, (the wife) at a gross under value. The minority shareholders brought an action against the directors and the company.
It was held that minority shareholders had a valid cause of action.
(vi) Oppression and Mismanagement
Where there is oppression of minority or mismanagement of the affairs of the company, Foss vs. Harbottle does not apply.
Oppression refers to an act performed in a burdensome, harsh and wrongful manner. A shareholder can bring an action against the management of the company on the grounds of oppression and mismanagement.