Chapter 2 Majority rule Flashcards
Explain the Salomon doctrine.
A company is a metaphysical entity, that is, the law treats a company as having a
personality of its own.
What is a consequence of the principle of majority rule?
A consequence of the principle of majority rule is that every member of the company is
contractually bound by the articles, both to the company and to each
other (s.33 CA 2006).
In which section is the consequence of the majority rule described?
S.33 CA 2006
What is the main issue with the majority rule?
How the law strikes a balance between the majority rule principle, the
need to safeguard the company against abuse by its controllers and
the need to protect minority shareholders.
Explain the concept of a derivative action and the rationale behind it.
As its name suggests, such an action derives from the company,
which would otherwise have no means of suing in respect of the
wrong committed against it. It permits minority shareholders in exceptional circumstances to bring an action on behalf of the company.
RATIONALE: If the wrongdoers are the
directors themselves and they control the company, they will obviously
prevent the company from seeking legal redress against them.
Explain the basic concept of the rule in Foss v. Harbottle.
The rule in Foss v. Harbottle is that when a wrong has been
committed against the company, the proper claimant in respect of
that wrong is the company.
Explain the rationale behind the rule in Foss v Harbottle (2).
• It prevents multiplicity of legal proceedings being brought in respect
of the same issue – if minority shareholders were permitted to initiate
such proceedings there could feasibly be hundreds of actions.
• It upholds the principle of majority rule – that is, if the majority of
shareholders do not wish to pursue an action, then the minority are
bound by that decision.
What is the aim to determine by using the rule in Foss v Harbottle?
Determining locus standi.
Explain the case of Foss v Harbottle and why the case failed.
the claimants were two shareholders in the
Victoria Park Company. They brought an action against the company’s
five directors and promoters alleging that the defendants had
misappropriated assets belonging to the company and improperly
mortgaged its property.
It was held that the action must fail. The harm in question was suffered
by the whole company, not just by the two shareholders. It was open
to the majority in general meeting to approve the defendants’ conduct,
and to allow the minority to bring an action in these circumstances
would risk frustrating the wishes of the majority.
Which case illustrates clearly the principle of the majority rule?
MacDougall v Gardiner
Explain the case of McDougall v Gardiner and the outcome of the case.
The chairman of the Emma Silver Mining Co adjourned a general
meeting of the company without allowing a vote to be taken on the
issue of adjournment as requested by a shareholder, MacDougall, who
therefore brought an action claiming:
• first, a declaration that the chairman had acted improperly
• second, an injunction to restrain the directors from taking any
further action.
The Court of Appeal held that the basis of the complaint was something
that, in substance, the majority of the company was entitled to do and
there was no point in suing where ultimately a meeting would have to
be called at which the majority would, in any case, get its way.
What is a representative action?
A representative action is brought by a shareholder on behalf of
themself and all other members who have an interest in the litigation.
What are personal actions and explain the example in MacDougall v Gardiner.
where the right of a shareholder has been infringed by the majority, they can sue.
Here, the injury or wrong in question is not suffered by the company as
such, but by the shareholder. Therefore, the anxiety underlying Foss v
Harbottle does not arise.
A shareholder’s rights can arise by virtue of a contract, for example
under the company’s constitution or by a shareholders’ agreement.
Thus, where a dividend is declared but not paid, a shareholder can sue
for payment by way of a legal debt.
When can a minority shareholder not sure for a personal action for reflective loss?
A wrong may result in a loss to the company which leads to a
diminution in the value of a member’s shareholding. This means
that the only loss suffered by the shareholder is reflected in the loss
sustained by the company. In such instances, the shareholder cannot
sue.
When can a minority shareholder sure for a personal action of reflective loss?
The member will be able to sue if the shareholder can
establish that the defendant’s conduct constituted a breach of some
legal duty owed to them personally (e.g. under the law of contract,
torts or trusts), and the court is satisfied that such breach of duty
caused the member personal loss which is separate and distinct from
that sustained by the company.
Explain the Johnson case.
In Johnson v Gore Wood & Co the House of Lords explained that the reason for disallowing the shareholder’s claim for reflective loss was that if a member could sue there would be a risk of double recovery. Though note the criticisms of the reasoning here by Lords Reed and Sales in Sevilleja Garcia (above). Lord Reed held that the reasoning in Johnson (other than that of Lord Bingham (see above)) should be departed from.
Explain the tension between Sevilleja case and Johnson case.
“the bulk of the judgment” related to the proper application of the rule against reflective loss. On this issue the court split, 4:3. The minority simply wanted to abolish the rule, but the majority were content to reform the rule, disapproving or overruling various statements which had been made in Johnson v Gore Wood & Co [2002] 2 AC 1 and subsequent cases. In particular the majority held that the subsequent decisions in Giles v Rhind [2003] Ch 618, Perry v Day [2004] EWHC 3372 and Gardner v Parker [2004] EWCA Civ 781 were all wrongly decided.
