The philosophy behind this rule must be clearly appreciated from the onset. Once a company is recognised as a distinct entity upon incorporation, in carrying out its functions as a going concern, the majority of the members i.e those who have the command of more than 50 percent of the vote in general meeting must be able to steer the course of the ship of the company in a direction that they feel it should go. It does not matter that such direction is not favourable to the other members who are regarded as the minority.
This fundamental concept of democracy which applies to every facet of human endeavour became a frait accomli to companies and was naturally extended to them when the opportunity came in the celebrated case of Foss vs Harbottle (supra).
It, in effect, means that a member is bound by the decisions of the majority as clearly and as usually expressed at the general meeting. If he opposes a resolution which eventually scales though with the required majority he is nevertheless bound by this decision of the majority. Shell Petroleum Development Company vs Nwawka.
The rule simply explained therefore is that in an action to remedy any wrong done to the proper plaintiff is the company itself and it is the majority who decide whether the company should sue for redress or not. The will of the majority prevails.
The fact of Foss vs Harbottle are as follows:
The plaintiffs, Foss and Turton, were shareholders in a company called ‘The Victoria Park Company’ which was formed to buy land to use as a pleasure park. The defendants were the other directors and shareholders of the company. The plaintiffs alleged that the defendants had defrauded the company in various ways and, in particular, that certain of the defendants had sold land belonging to them to the company at a very high price without disclosing this to the members of the company.
The plaintiffs now sued on behalf of the company and asked the court to order that the defendants make good the losses to the company.
It was held by the court that since the members of the company had not been consulted and that since it was possible that a simple majority of them in general meeting might resolve to allow the defendants keep the alleged profits, the court will not give a remedy to the company at the request of the minority.
The decision above is based on common sense and flows logically from corporate personality principle that a company Is a separate and distinct legal person from the members who constitute it. It is a simple rule of procedure which is applicable to all wrongs to the effect that it is the person that can if he so wishes to sue. The rationale behind the application of the rule in Foss vs Harbottle is that a court should not interfere ordinarily in the internal affairs or internal management of the company, union or association as the case may be, or attempt to redress any wrong to such company , union or association provided it is such wrong that the majority of the company or the company itself, can confirm or rectify thus, where the wrong complained is done to the company, only the company itself, rather than the individual or the minority shareholder can take action to redress the wrong and if the wrong is such that the majority of the shareholders or the members of the company can rectify it, by a decision of the majority, the court would not interfere.
The court in Ejikeme vs. Amaechi puts the position clearly and succinctly when it said: the proper plaintiff in an action in respect of a wrong alleged to be done to a company or association of persons is prima facie the company or association of persons itself. Where the alleged wrong is a transaction which might be made binding on the company or association and all its members by a simple majority of the members, no individual member of the company is allowed to maintain an action in respect of that matter for the simple reason that, if a mere majority of the members of a company or association is in favour of what has been done to the company or association and there is nothing in respect of which anyone can sue, if the other hand a simple majority of members of a company or association is against what has been done, then there is no valid reason why the company or association itself should not sue.
The rule in Foss vs. Harbottle has been codified under the Act specifically S.299 of the Act which provides that:
Subject to the provisions of this Act, where irregularity has been committed I the course of a company’s affairs or any wrong has been done to the company, only the company can sue to remedy that wrong and only the company can ratify the irregular conduct.
The rule in Foss vs. Harbotle was further confirmed in the case of: Mozley vs. Alston.
ADVANTAGES OF THE RULE
If every individual member of a company were allowed to sue anyone who had injured the company through a breach of duty, there could be as many actions as there are shareholders (in either words it prevents multiplicity of suits). Legal proceeding would never cease, in fact it would be the rule than the exceptions and there would be enormous wastage of time and money. The rule prevents the company from being torn to pieces by multiplicity of action. See La compagnie De Mayville vs. Whitley.
Another advantage of the rule is that if an individual member could sue a person who has caused loss to the company, and the company then ratify the person’s act at a general meeting, the legal proceedings could be quite useless, for a court will naturally hold that the will of the majority prevails, see Williams vs. Edu (supra).
The rule also applies to registered Trade Union
On the other hand, strict adherence to the rule may be a shield for directors who are also members to perpetrate fraud.
EXCEPTIONS TO THE RULE
S. 300 CAMA provide that a member may apply in court for an injunction or declaration to restrain the company from the following:
(a) entering into any transaction which is illegal or ultra vires, Powel vs. Kempton Racecourse Company - A shareholder was able to bring an action to restrain the company from doing business in a manner contrary to the provisions of the Betting Act which he thought was illegal. The business was however held to be legal.
Hoole vs. Great Western Railways - The company’s revenue during a particular half year although enough for payment of dividend, has been used for capital items. A scheme was therefore sanctioned by the general meeting of the company to offer preference shares at per equal in amount to the dividend which would have been payable. The shares could only be sold at considerable discount.
HELD: The scheme was ultra vires and a member may bring an action against a company or doing an ultra vires act.
S.300(b) Purporting to do by ordinary resolution any act which by its constitution or Act
Edwards vs. Halliwell - Rule 19 of the rules of the defendant’s trade union provided “The regular contributions of employed members shall be as per tables and no alteration to same shall be made until a ballot vote of the members has been taken and a majority obtained. A delegate meeting of the union, without taking any ballot, passed resolution increasing the amount of the contributions of employed members. The plaintiffs 2 members of the union claimed against 2 members of the union, claimed against 2 members of the executive committee of the union and the union itself a declaration that the alteration adopted at the delegate meeting was invalid. HELD: As the matter in question was not a mere irregularity in the internal management of the union, but was a matter of substance and tainted with oppression, the court will grant the plaintiff’s relief if it is proper to do so.
S300(C) Any act or omission affecting the applicant’s individual right as a member.
In Pender vs. Lushington - An action was brought by the shareholder whose vote was rejected on behalf of himself and all others who had voted with him, for an injunction to restrain the directors from acting on the footing of the votes being bad. HELD: The plaintiffs were entitled to an injunction. In CBN vs. Kotoye - The court reiterated the fact that an individual shareholder to whom harm is done, is entitled to seek legal redress to remedy the harm, notwithstanding the rule in Foss vs. Harbottle.
S. 300 (d) Committing fraud on either the company or the majority shareholders where the director fails to take appropriate action to redress the wrong done.
Cook vs Deeks - Here the wrong doers were in control and are not likely to sue themselves.
S. 300 (e) Where a company meeting cannot be called in time to be of practical use in redressing a wrong done to the company or the minority shareholders. Hodgson vs. National Local Government Officers Association - The plaintiff claimed as against an unregistered trade union, its executive council and its delegation to the trade union conference, that the executive council’s resolution and the directions of delegates were ultra vires the council, since they were repugnant to and inconsistent with and the plaintiff sought an injunction restraining the delegates from voting other than in accordance with the previously held resolution. The defendant contested the plaintiff’s locus standi on the basis of the rule in Foss vs. Harbottle. HELD: The rule in Foss vs. Harbottle does not extend to unregistered trade unions.
S. 300 (F) Where the directors are likely to derive a profit or benefit, or have profited or benefited from their negligence or from their breach of duty.
Daniels vs. Daniels - The plaintiffs were minority shareholders in the third defendant company. The first and second defendants were majority shareholders and directors of the company. In October 1970 the company sold certain land to the 2nd defendant for £4,250 on the instructions of first and second defendants as directors. In 1974 the land was sold by the second defendant for £120,000. The plaintiff brought an action against the defendant alleging that the price at which the land was sold to the 2nd defendant was well below its market value and that the 2nd defendant knew that was so.
The defendant applied to strike out the statement of claim because it disclose no ground that would justify an action by the minority shareholder against the majority for damage caused to the company. HELD: The application was dismissed. Minority shareholders are entitled to bring an action where the majority of the directors negligently though not fraud, had benefited themselves at the expense of the company.
This fundamental concept of democracy which applies to every facet of human endeavour became a frait accomli to companies and was naturally extended to them when the opportunity came in the celebrated case of Foss vs Harbottle (supra).
It, in effect, means that a member is bound by the decisions of the majority as clearly and as usually expressed at the general meeting. If he opposes a resolution which eventually scales though with the required majority he is nevertheless bound by this decision of the majority. Shell Petroleum Development Company vs Nwawka.
The rule simply explained therefore is that in an action to remedy any wrong done to the proper plaintiff is the company itself and it is the majority who decide whether the company should sue for redress or not. The will of the majority prevails.
The fact of Foss vs Harbottle are as follows:
The plaintiffs, Foss and Turton, were shareholders in a company called ‘The Victoria Park Company’ which was formed to buy land to use as a pleasure park. The defendants were the other directors and shareholders of the company. The plaintiffs alleged that the defendants had defrauded the company in various ways and, in particular, that certain of the defendants had sold land belonging to them to the company at a very high price without disclosing this to the members of the company.
The plaintiffs now sued on behalf of the company and asked the court to order that the defendants make good the losses to the company.
It was held by the court that since the members of the company had not been consulted and that since it was possible that a simple majority of them in general meeting might resolve to allow the defendants keep the alleged profits, the court will not give a remedy to the company at the request of the minority.
The decision above is based on common sense and flows logically from corporate personality principle that a company Is a separate and distinct legal person from the members who constitute it. It is a simple rule of procedure which is applicable to all wrongs to the effect that it is the person that can if he so wishes to sue. The rationale behind the application of the rule in Foss vs Harbottle is that a court should not interfere ordinarily in the internal affairs or internal management of the company, union or association as the case may be, or attempt to redress any wrong to such company , union or association provided it is such wrong that the majority of the company or the company itself, can confirm or rectify thus, where the wrong complained is done to the company, only the company itself, rather than the individual or the minority shareholder can take action to redress the wrong and if the wrong is such that the majority of the shareholders or the members of the company can rectify it, by a decision of the majority, the court would not interfere.
The court in Ejikeme vs. Amaechi puts the position clearly and succinctly when it said: the proper plaintiff in an action in respect of a wrong alleged to be done to a company or association of persons is prima facie the company or association of persons itself. Where the alleged wrong is a transaction which might be made binding on the company or association and all its members by a simple majority of the members, no individual member of the company is allowed to maintain an action in respect of that matter for the simple reason that, if a mere majority of the members of a company or association is in favour of what has been done to the company or association and there is nothing in respect of which anyone can sue, if the other hand a simple majority of members of a company or association is against what has been done, then there is no valid reason why the company or association itself should not sue.
The rule in Foss vs. Harbottle has been codified under the Act specifically S.299 of the Act which provides that:
Subject to the provisions of this Act, where irregularity has been committed I the course of a company’s affairs or any wrong has been done to the company, only the company can sue to remedy that wrong and only the company can ratify the irregular conduct.
The rule in Foss vs. Harbotle was further confirmed in the case of: Mozley vs. Alston.
ADVANTAGES OF THE RULE
If every individual member of a company were allowed to sue anyone who had injured the company through a breach of duty, there could be as many actions as there are shareholders (in either words it prevents multiplicity of suits). Legal proceeding would never cease, in fact it would be the rule than the exceptions and there would be enormous wastage of time and money. The rule prevents the company from being torn to pieces by multiplicity of action. See La compagnie De Mayville vs. Whitley.
Another advantage of the rule is that if an individual member could sue a person who has caused loss to the company, and the company then ratify the person’s act at a general meeting, the legal proceedings could be quite useless, for a court will naturally hold that the will of the majority prevails, see Williams vs. Edu (supra).
The rule also applies to registered Trade Union
On the other hand, strict adherence to the rule may be a shield for directors who are also members to perpetrate fraud.
EXCEPTIONS TO THE RULE
S. 300 CAMA provide that a member may apply in court for an injunction or declaration to restrain the company from the following:
(a) entering into any transaction which is illegal or ultra vires, Powel vs. Kempton Racecourse Company - A shareholder was able to bring an action to restrain the company from doing business in a manner contrary to the provisions of the Betting Act which he thought was illegal. The business was however held to be legal.
Hoole vs. Great Western Railways - The company’s revenue during a particular half year although enough for payment of dividend, has been used for capital items. A scheme was therefore sanctioned by the general meeting of the company to offer preference shares at per equal in amount to the dividend which would have been payable. The shares could only be sold at considerable discount.
HELD: The scheme was ultra vires and a member may bring an action against a company or doing an ultra vires act.
S.300(b) Purporting to do by ordinary resolution any act which by its constitution or Act
Edwards vs. Halliwell - Rule 19 of the rules of the defendant’s trade union provided “The regular contributions of employed members shall be as per tables and no alteration to same shall be made until a ballot vote of the members has been taken and a majority obtained. A delegate meeting of the union, without taking any ballot, passed resolution increasing the amount of the contributions of employed members. The plaintiffs 2 members of the union claimed against 2 members of the union, claimed against 2 members of the executive committee of the union and the union itself a declaration that the alteration adopted at the delegate meeting was invalid. HELD: As the matter in question was not a mere irregularity in the internal management of the union, but was a matter of substance and tainted with oppression, the court will grant the plaintiff’s relief if it is proper to do so.
S300(C) Any act or omission affecting the applicant’s individual right as a member.
In Pender vs. Lushington - An action was brought by the shareholder whose vote was rejected on behalf of himself and all others who had voted with him, for an injunction to restrain the directors from acting on the footing of the votes being bad. HELD: The plaintiffs were entitled to an injunction. In CBN vs. Kotoye - The court reiterated the fact that an individual shareholder to whom harm is done, is entitled to seek legal redress to remedy the harm, notwithstanding the rule in Foss vs. Harbottle.
S. 300 (d) Committing fraud on either the company or the majority shareholders where the director fails to take appropriate action to redress the wrong done.
Cook vs Deeks - Here the wrong doers were in control and are not likely to sue themselves.
S. 300 (e) Where a company meeting cannot be called in time to be of practical use in redressing a wrong done to the company or the minority shareholders. Hodgson vs. National Local Government Officers Association - The plaintiff claimed as against an unregistered trade union, its executive council and its delegation to the trade union conference, that the executive council’s resolution and the directions of delegates were ultra vires the council, since they were repugnant to and inconsistent with and the plaintiff sought an injunction restraining the delegates from voting other than in accordance with the previously held resolution. The defendant contested the plaintiff’s locus standi on the basis of the rule in Foss vs. Harbottle. HELD: The rule in Foss vs. Harbottle does not extend to unregistered trade unions.
S. 300 (F) Where the directors are likely to derive a profit or benefit, or have profited or benefited from their negligence or from their breach of duty.
Daniels vs. Daniels - The plaintiffs were minority shareholders in the third defendant company. The first and second defendants were majority shareholders and directors of the company. In October 1970 the company sold certain land to the 2nd defendant for £4,250 on the instructions of first and second defendants as directors. In 1974 the land was sold by the second defendant for £120,000. The plaintiff brought an action against the defendant alleging that the price at which the land was sold to the 2nd defendant was well below its market value and that the 2nd defendant knew that was so.
The defendant applied to strike out the statement of claim because it disclose no ground that would justify an action by the minority shareholder against the majority for damage caused to the company. HELD: The application was dismissed. Minority shareholders are entitled to bring an action where the majority of the directors negligently though not fraud, had benefited themselves at the expense of the company.
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