Submitted by Pallav Tarnekar
I. Rule of Majority:
1. The principle of rule by majority has been made applicable to the management of the affairs of Companies. The members pass a resolution on various subjects either by simple majority or by 3/4 majority. Once the majority is passed by the requisite members, it becomes binding on all the members of the Company.
2. As a resultant corollary, the Court will not ordinarily intervene to protect the minority interest affected by the resolution, as on becoming a member, each person impliedly consents to submit to the will of the majority of the members. Thus, if wrong is done to the Company, it is the Company which is the legal entity having its own personality, and that can only institute a suit against the wrongdoer, and shareholders individually do not have the right to do so.
II. Foss v. Harbottle:
Two distinct but linked propositions were phrased-
1. The Court will not ordinarily intervene in the cases of an internal irregularity if the matter is one which the Company can ratify or condone by its own internal procedure.
2. Where it is alleged that a wrong has been done to a Company, prima facie, the only proper plaintiff is the Company itself.
III. Facts of Foss v. Harbottle:
1. An action was brought by 2 shareholders, 'F' and 'T', of a Company, on behalf of themselves and all other shareholders against the Directors and Solicitors of the Company, alleging that by illegal transaction they had caused loss to the Company.
2. It was alleged that the Directors were acting in a fraudulent manner and effecting illegal transaction to cause loss.
3. It was prayed that the defendant might be decreed to make good to the Company the losses.
4. The Court held that the action could not be brought by the minority shareholders. The wrong done to the Company was one which could be ratified by the majority of the members.
5. The Company was the proper plaintiff for the wrongdoer to the Company, and the Company can only act through the majority shareholders to decide the proceedings against the Directors.
6. A similar observation was given by the SC in the case of- Rajahmundry Electric Supply Co. v. Nageshwara Rao
The aforesaid decisions are essentially a logical extension of the principle that a Company is a separate legal entity from the members who compose it. Once it is admitted, the Company is the proper person to bring action.
IV. Personal Rights of Members:
1. The principle of Foss v. Harbottle only applies where a corporate right of a member is infringed. The rule does not apply where an individual right of a member is denied.
2. The rights given to minority individuals arise from contract or general laws.
Thus, following are the rights which an individual cannot use as his corporate rights-
i. To have his name and shareholding entered on the register of members to prevent unauthorised additions or alterations.
ii. To vote at meetings of members.
iii. To receive dividends which have been duly declared.
iv. To exercise pre-emption rights over other members' shares.
v. To restrain the Company from doing ultra vires acts.
vi. Opportunity to speak at meetings.
vii. To transfer shares, etc.
Any other rights mentioned in the Companies Act, 2013 such as right to inspect various documents of registers, to have share certificate and to appoint a proxy.
V. Representative and Derivative Action:
1. In certain circumstances an individual member may bring an action to remedy a wrong done to his Company or to compel his Company to conduct its affairs in accordance with its constitution, even though no wrong has been done to him personally and even though the majority of his fellow members do not wish the action to be brought.
2. The individual members' action in these exceptional cases may be described as representative because it is brought on behalf of himself and persons other than himself who would go along with him to protect their legitimate corporate rights.
3. When the relief is sought against third parties for the Company's benefit, the action may also be described as derivative, because the individual member sues to enforce a claim which belongs to the Company, and his right to sue is derived from it.
VI. Exception to the Rule in Foss v. Harbottle:
In the following cases the rule in Foss v. Harbottle does not apply, i.e., the minority shareholders may bring an action to protect their interest-
1. Ultra Vires and Illegal Acts:
Case: Edward v. Halliwell
Held: The rule in Foss v. Harbottle does not apply where the act complained of is ultra vires the Company.
2. Breach of Fiduciary Duties:
Case: Satyacharanlal v. Rameshwar Bajoria
Held: A derivative action may be brought against the Directors and Promoters if they have been guilty of breach of their fiduciary duties to the Company, if they are able to prevent the Company from suing them in its own name because they control a majority of the votes at a general meeting, or because they are otherwise able to prevent a general meeting from resolving that the Company shall sue them.
3. Fraud or Oppression against Minority:
Case: Edward v. Halliwell
Held: Where the majority of a Company's members use their power to defraud or oppress the minority, their conduct is liable to be impeached even by a single shareholder.
4. Inadequate Notice of a Resolution passed at the Meetings of Members:
If an insufficiently informative notice is given of a resolution to be proposed at a general meeting, any member who does not attend the meeting, or who votes against the resolution, may bring a representative action to restrain the Company and its Directors from carrying out the Resolution.
5. Qualified Majority:
Where the act or the articles require a qualified majority for passing of a resolution, the rule in Foss v. Harbottle cannot be invoked to override these requirements.
6. Where the Personal Rights of an Individual Member have been Infringed:
As already noted, the principle of majority rule is applicable only to the corporate membership rights of a member. Infringement of a member's individual right like right to vote, right to receive dividends, etc. entitles him to proceed in his own name.
7. Statutory Exceptions:
i. Variation of Class Rights- s.48
ii. Request for Investigation- s.213
iii. Scheme of Compromise or Arrangement- s.230
iv. Oppression and Mismanagement- s.241
v. Rights of Dissentient Shareholders Undertake Over-bids- s.235
vi. Class Action- s.245
Submitted by Pallav Tarnekar