Understanding Majority Rule and Minority Protection in Company Law
The principle of majority rule applies to company management, where resolutions are passed by simple or three-fourth majority. The rule of supremacy of majority, established in the case of Foss v. Harbottle in 1843, dictates that courts do not typically interfere to protect minority shareholders. Shareholders may not individually sue for wrongs done to the company, as the corporation must sue in its own name. This principle safeguards the company as a whole against internal management disputes.
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MAJORITY RULE AND MINORITY PROTECTION Compiled by: Dr. Rahul Pandey Asst. Professor Shia P.G. College Lucknow
MAJORITY RULE AND MINORITY PROTECTION Rule of Supremacy of Majority The principle of rule of majority is applicable to the management of the affairs of companies. The members of the company pass resolution by simple majority and in certain cases by three fourth majority. Once a required resolution is passed it becomes binding on all the members. The courts in general do not interfere at the instance of the shareholders ordinarily to protect the minority shareholders. If a wrong is done to the company, the company can institute a suit against the wrongdoer; and shareholders individually do not have the right to do so. This is called the rule of supremacy of majority. [SOURCE/CREDIT : Company Law, B.K. GOYAL. SINGHAL LAW PUBLICATIONS, NEW DELHI] The Companies Act, 2013 (BARE ACT)
This rule was laid down in 1843 in the case of Foss v. Harbottle, (1843) 67 ER 189. In this case the Court said: The conduct with which the defendants are charged is an injury not to the plaintiffs exclusively. It is an injury to the whole corporation. In such cases the rule is that the corporation should sue in its own name and in its corporate character. It is not a matter of course for any individual members of a corporation thus to assume to themselves the right of suing in the name of the corporation. In law the corporation and the aggregate of member of the corporation are not the same thing for purpose like this.
Thus the principle laid down in Foss v. Harbottle is that at the instance of a shareholder the court will not interfere in the matters of internal management and administrative of a company so long as the directors are acting within the powers conferred upon them by the constitutional documents of a company. In that case the court held that where by an act of directors an injury is caused to the whole corporation, and not to individual member of the corporation, the rule is that the corporation should sue in its own name and in its corporate character. A corporate cannot assume to himself the right of suing in the name of the corporation.
In Foss v. Harbottle, (1843) 2 Hare 461: (1843) 67 ER 189, a suit was filed by two shareholders F and T of a company, on behalf of themselves and all other shareholders against the directors and solicitors of the company. They alleged that the directors and the solicitors by their fraudulent and illegal transactions had caused the company s property to be lost. It was prayed that the defendants should be asked to make good the company s losses. The question was whether the suit was maintainable. It was held that action could not be brought by minority shareholders. Thus where a wrong is done, company alone may sue and action will not lie at the suit of minority of members. The court further said that the conduct with which the defendants were charged was an injury not to the plaintiffs exclusively, it was an injury to the whole corporation. In such cases the rule is that the corporation should sue in its own name and in its corporate character. It is not matter of course for any individual members of a corporation thus to assume to themselves the right of suing in the name of the corporation. In law the corporation and the aggregate of members of the corporation are not the same thing for purposes like this.
The rule in Foss v. Harbottle is based on the maxim that only the injured party may sue. As the company is the injured party and it has a separate legal entity it is the only party entitled to sue in case of any wrong done to it by the majority of the members. But the injury or loss to the company affect all the members, not simply the majority or the minority or any particular member. Therefore the Delhi High Court in ICICI v. Parasrampuria Synthetics Ltd., SCL July 5, 1998 held that a mechanical and automatic application of Foss v. Harbottle rule to the Indian situations, Indian conditions and Indian corporate entity is not the multiple contribution of small individual investors but a predominantly and indeed overwhelmingly state-supported funding structure at all stages by receiving substantial funding upto 80% (including debt) or more from financial institution which are entirely state controlled or represent substantial interest. Therefore, to exclude them or render them voiceless on the principle of Foss v. Harbottle would not be fair.
Exceptions to the Rule of Supremacy of Majority The rule laid down in Foss v. Harbottle operates only where the acts of directors are of such a nature which the company is competent to ratify or approve by a corporation by any majority. There are many acts which cannot be ratified or approve by a company by any majority. In such cases the rule laid down in Foss v. Harbottle does not apply and each and every shareholders may sue to enforce obligation owed to the company. Such acts are as follows: 1. Ultra vires and illegal acts. The rule in Foss v. Harbottle does not apply where the act complained of is ultra vires the company, as the shareholders cannot ratify such an even unanimously.
2. Fraud on minority. Where the conduct of the majority of a companys members amounts to fraud on minority, the majority of the shareholders can be impeached even by a single shareholders. An act constitutes fraud on minority where the effect of the act is to discriminate between the majority shareholders and the minority shareholders and the majority shareholders are given advantage over the minority shareholders. 3. Act requiring special majority. An act, requiring a special resolution to be passed at a general meeting of shareholders before it is done, is done by passing only an ordinary resolution or without passing the special resolution in the manner required by law. 4. Wrongdoers in control. Despite the above acts an individual member of a company may also sue in his own name if the company is in the hands of wrongdoers themselves and the controlling shareholders do not allow an action to be brought for obvious wrongs committed by one of them.
5. Individual membership rights. A shareholder is entitled to enforce certain individual rights against the company and such rights include right to vote, the right to have its vote recorded and right to stand as director of the company at an election. 6. Statutory exceptions. The Companies Act, 2013 has also made certain provisions which operate as exceptions to the rule laid down in Foss v. Harbottle. These provisions are: (a) Variations of Shareholders Right. As per Section 48, where share capital of the company is divided into different classes of shares, the rights attached to any class of shares may be varied with the written consent of the holders of not less than three-fourths of the issued shares or by special resolution. However, where the holder of ten per cent of the issued share capital did not consent to such variation, they may apply to Tribunal to have the variation cancelled.
(b) Oppression and Mismanagement. Section 241 lays down the circumstances in which an application may be made to the Tribunal by any member of a company or by the Central Government for relief in cases of oppression and mismanagement in the affairs of the company. [SOURCE/CREDIT : Company Law, B.K. GOYAL. SINGHAL LAW PUBLICATIONS, NEW DELHI] The Companies Act, 2013 (BARE ACT)
