Foss v Harbottle

Question 1

What is the general rule when a wrong is done to the company?

Answer 1

The proper plaintiff in any action against the wrongdoer is the company itself (as the company is a separate legal personality)

Question 2

What happened in Foss v Harbottle?

Answer 2

In Foss v Harbottle, Two members of a company took an action against five directors and other associates for misapplying company monies in relation to a land deal in which the directors were personally involved.
The members asked that the ‘wrongdoers’ make good the losses.
The action failed on the grounds that the wrongs committed were against the company, so any action against the wrongdoers ought to have been taken by the company and not by the individual members

Question 3

What does the rule in Foss v Harbottle preserve?

Answer 3

It preserves the principle of majority decision-making; it prevents interference with the internal management of a company, and it deters futile actions by members against irregularities and wrongdoings which are capable of being ratified by the general meeting.

Question 4

What are the exceptions to the rule in Foss v Harbottle? [1-4]

Answer 4

1. Illegal or ultra vires acts
2. Special Majority Approval
3. Fraud on a minority
4. Other exceptions may be carved out where justice requires it.

Question 5

Why is an ultra vires act an exception?

Answer 5

Illegal or ultra vires acts are not capable of ratification

Question 6

What happened in Cockburn v Newbridge Sanitary Steam Laundry Co?

Answer 6

Bribes to officials in the war office. Held acts beyond the powers of the company may be challenged by a shareholder.

Question 7

What happened in Parke v Daily News Ltd?

Answer 7

Minority shareholder successfully claimed that gratuitous payments made to employees of the company were ultra vires.

Question 8

Does the ultras vires doctrine continue to apply?

Answer 8

Yes, to all companies except LTDs

Question 9

Can any claim of illegality stand?

Answer 9

It is not enough to enough to make unsubstantiated claims of illegality. Must identify precise facts that support such a plea (Keaney v Sullivan).

Question 10

Why is special majority approval a category?

Answer 10

A breach of the requirement to have a special resolution is not ratifiable by the majority (Bying v London Life Association)

Question 11

What happens if a simple majority breaches this requirement?

Answer 11

A minority shareholder is not prevented from seeking a declaration that the resolution is invalid (Baillie v Oriental Telephone and Electric Co Ltd)

Question 12

Is the Special Majority Approval a true exception?

Answer 12

It is an inherent contractual right of the member, so no

Question 13

What is fraud on a minority considered to be?

Answer 13

The only true departure from the rule in Foss v Harbottle. It is a vague concept.

Question 14

Is fraud the same as the criminal definition?

Answer 14

No, it could arise from any act which involves an abuse of power or moral turpitude (Connolly v Seskin Properties Ltd)

Question 15

What happened in Meiner v Hooper’s Telegraph Work?

Answer 15

Contracts diverted to company in control of former chairman.
Majority used voting power and control of the board to procure the abandonment of proceedings in relation to the diverted contracts.
The actions of the majority were held to be the type that should come within this exception.

Question 16

What happened in Cooks v Deeks?

Answer 16

Contract diverted, resolved that the company’s plant should be sold to their new company altogether with a declaration that the company had no interest in the diverted contract.
The court held the purported ratification of the directors’ actions by the general meeting was ineffective as it constituted fraud on the minority.

Question 17

What must a member demonstrate to the court?

Answer 17

 A member must satisfy the court that the wrong was done by the controlling majority and that the majority benefitted from the wrongdoing. Control goes beyond mere ownership (Glynn v Owen)

Question 18

What rule emerged from Pavildes v Jensen?

Answer 18

Member must satisfy the court that the wrongdoers benefitted, otherwise, their actions are capable of ratification - Pavildes v Jensen