17. Protecting the minority

The rule in Foss v Harbottle

In Foss v Harbottle two shareholders sued the directors for selling their own property to the company at an inflated price. The court dismissed the claim. The proper claimant for a wrong done to the company is the company itself, and if the majority can ratify the act, the court will not interfere at the request of a minority.

Section 255 puts this into the Act: where an irregularity has been committed in the company's affairs or a wrong done to the company, only the company can sue to remedy the wrong and only the company can ratify the irregular conduct.

The exceptions at common law

Illegal or ultra vires acts, which the majority cannot ratify.

Acts needing a special majority: in Edwards v Halliwell a trade union raised subscriptions by a simple majority when its rules required two-thirds. Members could sue.

Personal rights: such as the right to vote, as in Pender v Lushington.

Fraud on the minority by those in control: in Cook v Deeks directors diverted a contract to themselves and then used their votes to declare that the company had no interest in it. That could not be ratified. In Daniels v Daniels a minority could sue where the majority directors sold company land to one of themselves at a gross undervalue, even without fraud, because they benefited from their own negligence.

Internal management: Burland v Earle confirmed that the court will not interfere with internal management where the majority acts within its powers.

Injunction or declaration: section 256

On a member's application, the court may restrain the company by injunction or declaration from, among other things: entering into an illegal or ultra vires transaction; doing by ordinary resolution what needs a special resolution; acting against the applicant's individual rights as a member; committing fraud on the company or the minority where the directors fail to act; and cases where directors profit from their negligence or breach of duty.

The derivative action: section 258

A member may apply to the court for leave to bring an action in the name of or on behalf of the company, or to intervene in an action to which it is a party. Under section 258(2) the court must be satisfied that:

Control: the wrongdoers are directors in control who will not take the necessary action.

Notice: the applicant gave the directors reasonable notice of his intention.

Good faith: the applicant is acting in good faith.

Company's interest: the action appears to be in the company's best interests.

Section 260 says evidence that the shareholders approved the conduct is not conclusive. Section 262 says the applicant need not give security for costs, and the court may order interim costs under section 263.

Unfairly prejudicial and oppressive conduct: sections 265 to 267

Under section 266 a member may petition the court where the company's affairs are being conducted in a manner that is oppressive, unfairly prejudicial or unfairly discriminatory to a member or members, or in disregard of the members' interests, or where an act, omission or resolution, actual or proposed, is or would be so. The Commission may also petition in the cases the section covers. Section 267 gives the court power to grant relief.

Persuasive cases: in Scottish Co-operative Wholesale Society v Meyer a holding company ran down its subsidiary's business to the prejudice of the minority, and was ordered to buy their shares. In O'Neill v Phillips the House of Lords held that unfairness generally means a breach of the company's rules or of an understanding on which the members agreed to associate.

Just and equitable winding up

As a last resort, the court can wind up a company on the just and equitable ground under section 350. In Ebrahimi v Westbourne Galleries a member of a small company run like a partnership was removed as a director and excluded from management. Winding up was ordered. In Re Yenidje Tobacco the two members were deadlocked and would not speak to each other, so the company was wound up.