Foss v. Harbottle
Two shareholders sued the directors of their company for selling their own land to the company at an excessive price and misapplying its property. The court dismissed the suit because a wrong done to the company must be remedied by the company itself, and the majority could decide whether to sue or could approve what had been done. The case is the foundation of the majority rule in company law and gave rise to the proper plaintiff rule and the rule of internal management.
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Facts
A company was formed to buy land near Manchester and develop it as a park.
Two shareholders, Foss and Turton, sued the directors of the company, including Harbottle.
They alleged that the directors had sold their own land to the company at an excessive price and had misapplied the company's property.
Issues
Can individual (minority) shareholders sue the directors for wrongs allegedly done to the company?
Will the court interfere at the request of a minority in a matter that the majority of members can decide or approve?
Arguments
The shareholders (Foss and Turton) alleged that the directors had sold their own land to the company at an excessive price and had misapplied the company's property.
Judgment
The court dismissed the suit.
The alleged wrongs, if any, were wrongs done to the company, so the proper person to sue was the company itself.
The majority of members could decide whether the company should sue, or could even approve what had been done. So the court would not interfere at the request of a minority.
Legal principles
Proper plaintiff rule: for a wrong done to the company, the company alone is the proper plaintiff.
Rule of internal management: the court will not interfere in matters that the majority can lawfully decide or ratify.
Reasons for the rule: it respects the separate personality of the company; it prevents a flood of suits by individual shareholders; it avoids useless litigation where the majority would anyway ratify the act; and it keeps the courts out of business decisions.
Exceptions (where an individual member may sue): (1) where the act is ultra vires the company or illegal, since no majority can ratify it; (2) where the act needs a special majority but has been done by a simple majority (Edwards v. Halliwell); (3) where a member's personal rights are infringed, such as the right to vote, to receive a declared dividend, or to have his transfer registered.
Importance
This case is the foundation of majority rule in company law. Students must know the two rules it lays down (the proper plaintiff rule and the rule of internal management), the reasons behind them, and the exceptions that protect the minority, such as ultra vires or illegal acts, acts needing a special majority (Edwards v. Halliwell), and the infringement of personal rights.
Easy explanation
A company was set up to buy land near Manchester and turn it into a park. Two shareholders, Foss and Turton, felt the directors had cheated the company by selling their own land to it at too high a price and by misusing company property. So they sued the directors.
The court said no. If anyone was wronged, it was the company, not these two shareholders personally. A company is a separate person, so the company itself should sue. And whether the company sues or not is for the majority of members to decide; the majority could even approve what the directors did. So the court would not step in just because a minority asked it to.
From this come two rules: only the company can sue for a wrong done to it, and courts will not interfere in matters the majority can lawfully decide. But to protect minorities, a member can still sue if the act is illegal or ultra vires, if a special majority was needed but only a simple majority acted, or if his own personal rights (like voting or getting a declared dividend) are affected.
Practical example
Hypothetical: Prince and Farhan hold a few shares in a company run by directors Aadil and Zoya. Prince and Farhan believe Aadil sold his own building to the company at an inflated price. They sue Aadil in their own names. Following Foss v. Harbottle, the court would say the wrong, if any, is to the company, so the company is the proper plaintiff, and the majority can decide whether to sue or approve the deal. But if the company had refused to pay Neha a dividend that had already been declared, Neha could sue in her own name, because her personal right is infringed.
Key points
- Wrong done to the company: the company alone is the proper plaintiff (proper plaintiff rule).
- Courts will not interfere in matters the majority can lawfully decide or ratify (rule of internal management).
- The rule respects separate corporate personality and prevents a flood of shareholder suits and useless litigation.
- Exception: ultra vires or illegal acts cannot be ratified, so any member may sue.
- Exception: where a special majority is required, a simple majority cannot use the rule to escape it (Edwards v. Halliwell).
- Exception: a member may sue for infringement of personal rights, e.g. voting, declared dividend, registration of transfer.
Video explanation
Case explained
Foss v. Harbottle
Practise Company Law (Corporate Law) MCQs
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