By-
Ms. Aditi Poddar
Fourth-year student of B.COM-LLB (Hons)
Studying at St. Xavier’s University, Kolkata.
1
TABLE OF CONTENTS
ABSTACT: 3
KEYWORDS: 3
INTRODUCTION: 3
RESEARCH METHODOLOGY: 5
RESEARCH QUESTIONS: 5
LITERATURE REVIEW: 5
THE MAJORITY RULE IN INDIA: 6
RELEVENCY OF THE FOSS AND HARBOTTLE RULE IN INDIAN CONTEXT: 8
CONSTITUTIONAL PROTECTION PROVIDED BY THE COMPANIES ACT, 2013: 9
EXCEPTIONS TO THIS FOSS AND HARBOTTLE RULE: 10
ANALYSIS AND SUGGESTION: 13
CONCLUSION: 13
2
ABSTACT:
This paper explores the origins and subsequent evolution of the Foss and Harbottle rule
whose principal effect is to bar minority shareholders’ actions. I have marked out how the
minority shareholders can be protected within the domain of corporate governance.1 This
study seeks to achieve a compromise between effective corporate control and the concerns of
small individual shareholders. The current Companies Act, 2013 has numerous measures for
safeguarding investors’ interests and ensuring that the rights of majority and minority
shareholders are appropriately balanced, both of which are necessary for the efficient
operation of a company.
2 This study is an analysis of the Foss and Harbottle rule in Indian
Context. Apart from the safeguards provided by present Companies Acts that prevent
oppression and mismanagement, safeguards to protect the public interest are also supplied by
these exceptions to the supremacy of majority rule.
KEYWORDS:
Oppression, Mismanagement, Majority, Minority, Rules, Foss, Harbottle.
INTRODUCTION:
The concept of Oppression Mismanagement can be traced down through the decision of Foss
and Harbottle at 1843. Under Sections 241-246 of The Companies Act of 2013, outlines
provisions for dealing with oppression and mismanagement in a company. The word
‘Oppression’ is the unjust or cruel use of power. ‘Mismanagement’ is when a company’s
affairs are conducted in such a way that it is harmful against the interests of the company or
the public interest. Mismanagement can be financial, ethical, or operational. Several factors,
like power concentration, a lack of transparency, conflicts of interest, and unethical activity,
might contribute to it. Members of a firm may file a complaint under the NCLT if they
2 Li, Xiaoning, A comparative study of shareholders’ derivative actions, (2006), available at
https://pure.rug.nl/ws/files/76576612/Complete_thesis.pdf, last seen on 10/01/24
1 Li, Xiaoning, A comparative study of shareholders’ derivative actions, (2006), available at
https://pure.rug.nl/ws/files/76576612/Complete_thesis.pdf, last seen on 10/01/24
3
believe that the way the company conducts business is oppressive to any of the members or
detrimental for the public interest.
Majority Powers and Minority Rights depicts the idea of more people who thinks that a
company can only exist through its Majority. One cannot put a resolution of 100% vote as
because it is not possible practically. Also, one cannot allow dictatorship as people have
invested in the company so they must have rights. Even if there is certain incidental detriment
to Minority but the company is benefiting and this doesn’t cause an oppression. But if the
minority is affected because of majority then it will create oppression. SEBI also initiated
Rules to protect the Minority Rule.
The origin of the Foss and Harbottle Rule is traced to some early nineteenth century. Foss v
Harbottle, 3
(1843) is about 180 years old, judgement in company law, the Chancery Court
declared that if a company suffers losses as a result of the irresponsible or fraudulent
activities of its members or outsiders, legal action can only be launched by the company itself
or through a derivative action.4 This implies that stockholders cannot sue for the company’s
losses. The company has the right to sue in its name. This rule is also known as the “proper
plaintiff rule”.5
This Foss v. Harbottle Rule also applies in India. It states that only the company, not the
shareholders, may file a lawsuit after being mistreated.
The Rule in Foss v Harbottle:
In the Foss v. Harbottle case, the court established two main rules. These are-
▪ The first is known as the “Proper Plaintiff Rule,” which means that a wrong done to
the company does not equate to a wrong done to the shareholders. It specifies that if
the firm suffers a loss or wrong because of dishonest or careless actions, the company
will pursue legal action against it. The “Separate Legal Entity” principle, which
regards the firm as a separate legal entity from its members, prohibits outsiders from
suing on the company’s behalf.
5 Law Bhoomi, Foss vs Harbottle Case, August 8, 2023.
4 Law Bhoomi, Foss vs Harbottle Case, August 8, 2023.
3 Foss v Harbottle,67 ER 189 (1843).
4
▪ The “Idea of the majority” is the second rule. In this case, the minority is unable to
file a lawsuit or take action if the majority verifies something or has the power to
affirm anything.
However, minority shareholders felt that these stringent guidelines were unfair and severe
as they were unable to pursue legal action even though they had legitimate rights. In order
to address this, the court established exceptions to the broad rules that permitted suit in
Foss v. Harbottle.
Section 2416 addresses the prevention and remedies of oppression and mismanagement,
which are currently the subject of a significant number of cases heard at the NCLT.
RESEARCH METHODOLOGY:
The Doctrinal Research Methodology is followed while writing this research paper. This
study is analysed while referring to some Secondary sources like books, articles and other
publications and some Primary source like The Companies Act, 2013, case laws. This study
includes in-depth and an overall study of the subject, and elaborate theoretical research.
RESEARCH QUESTIONS:
- What is understood by the term ‘Majority Rule’?
- How is the Foss and Harbottle Rule relevant in Indian context?
- What are the Exceptions that are drawn from this Rule?
- How far does the Statute provide protection it under The Companies Act, 2013?
LITERATURE REVIEW:
- The Rule of Majority in Company Law-
The Author Vedant Sharma, in his paper The Majority Rule in Company Law discussed about
the evolution of the principle regarding the majority rule in the common law and mentions
the development of it through the case of Foss v. Harbottle. He mainly focused on the right of
the majority to rule. He also discussed bout the derivative action and many other topics
regarding the majority rule and its context in Indian origin.
6 The Companies Act, 2013.
5
- Majority Rule in Company Law-
The Author Yash Vardhan Gupta, in his paper discussed that the majority equity shareholders
now hold a dominant position in a company, posing a challenge to contemporary company
law. To improve company orientation, regulations must strike a balance between majority and
minority interests, aiming to maximize benefit for the maximum number of individuals.
- Foss v Harbottle breakdown: Rules developed and exceptions under Company Law-
The Author Papa Nyan Neizer, in his paper discussed about the solutions for wrongs
committed under company law are a major topic of discussion through the Foss v. Harbottle
case. He establishes the broad guidelines and exceptions to the rule, and discussed who can
file suit in case of wrong done to the company. He reviewed the brief facts of the Foss and
Harbottle case and explained why the rule in Foss v. Harbottle and its related exceptions are
relevant to a shareholder who plans to bring a derivative action under the Companies Act of
Ghana in addition to discussing the exceptions found in Ghanaian statutes and common law.
7
THE MAJORITY RULE IN INDIA:
Legally established companies are separate legal organizations with the “power to acquire,
hold and dispose of property, both movable and immovable, tangible and intangible, to
contract and to sue and be sued, by its name,”8 according to Section 9
9 of the Act. The court
consistently decided in numerous decisions that action is vested in the company as an entire
entity and cannot be exercised by a single individual member because a company is a persona
in the sense of the law. The court has frequently determined that an action brought by an
individual shareholder cannot be recognized because it lacks the support of the majority of
shareholders, and the majority of shareholders may forfeit their right to litigate. Therefore, a
company may only bring legal action if –
a) Should a resolution to that effect be passed by the company’s directors; or
9 The Companies Act, 2013.
8 Executive Programme Company Law, available at,
https://www.icsi.edu/media/webmodules/publications/Company%20Law%20(OS)(%20June%202019).pdf, last
seen at 11/01/24.
7 Papa Nyan Neizer, Foss v Harbottle breakdown: Rules developed and exceptions under Company Law, Dec 2,
(2023) available at
https://medium.com/@Neizer/foss-v-harbottle-breakdown-rules-developed-and-exceptions-under-company-law-
a910c65ce42c, last seen at 11/01/24.
6
b) The shareholders’ right to bring a lawsuit as a claimant supersedes the director’s
authority if the firm announces its intention to file a lawsuit by an ordinary resolution
at a general meeting. If the shareholders want to file a lawsuit and the directors refuse,
the demands of the shareholders through the approval of an ordinary resolution will
take priority, but the majority shareholder’s right will always be respected.10
Compared to the weaker minority members, the company’s majority equity shareholders are
currently in a dominant position because of the rule of majority. The ratio of power falls in
favor of the majority equity stockholders as a result. The protection of minority shareholders
in the field of corporate governance presents a serious challenge to contemporary company
law.
11
The rule of majority was found to be further elaborated through the case of Edwards v.
Halliwell,12
[1950] , the Hon‘ble Court upheld that the rule of majority ‘When a company is
being wronged, the appropriate party to file a lawsuit is the company itself. No individual
shareholder of the company is permitted to pursue legal action regarding an alleged wrong
when it involves a transaction that could be binding on the company or all of its shareholders
by a special majority of the members. This is because if the majority of the company’s
members support the actions taken, they cannot be questioned.’
In the judgement of Rajahmundry Electric Supply Co. v. Nageshwara Rao,13
(1955) it was
established that the courts are not allowed to get involved at the behest of shareholders in
issues about internal affairs and the directors’ control over the company while they are
operating within the limits of the articles of incorporation.14
Also, the majority rule, also known as the internal management rule, stipulates that if
shareholders approve of wrongdoing against the firm at a general meeting, no shareholder
may file a lawsuit on the business’s behalf. Simply put, the court would not get involved in
something that the company could readily do and not.15
15 ibid. Modern Principles of Company Law in Ghana.
14 Rajahmundry Electric Supply Co. v. Nageshwara Rao, (1955) MANU/SC/0008/1955.
13 Rajahmundry Electric Supply Co. v. Nageshwara Rao, (1955) MANU/SC/0008/1955.
12 Edwards v. Halliwell, 2 All ER 1064 (1950).
11 Yash Vardhan Gupta, Majority Rule in Company Law, May 11, (2022) , available at
https://www.legalserviceindia.com/legal/author-25575-yash-vardhan-gupta-.html , last seen on 10/01/24.
10 Vedant Sharma, The Rule of Majority in Company Law, Jul 13 (2021) available at
https://articles.manupatra.com/article-details/The-Rule-of-Majority-in-Company-Law, last seen on 10/01/24.
7
RELEVENCY OF THE FOSS AND HARBOTTLE RULE IN INDIAN
CONTEXT:
A General briefing of the case through which the rule has established. In the case of Foss v
Harbottle16
the plaintiffs were a minority shareholder in Victoria Park, the corporation. The
company was founded solely on 182 acres of land close to Manchester. The two plaintiffs
claimed that the company had committed multiple unethical and dishonest activities,
and mishandled and wasted assets. They further claimed that the directors had improperly
granted several mortgages on the company’s assets. They further asserted that multiple
mortgages on the company’s assets had been fraudulently granted by the board. They asserted
that the directors had broken their fiduciary duty by secretly making money. In the final
stages, the claimants filed a lawsuit demanding the appointment of a receiver and the
accountability of the director’s negligence for these wrongs. The five directors of the
company are the defendants in this case. As a result, the court dismissed the claim, holding
that only the business was entitled to sue if any of its directors, officers, shareholders, or
other stakeholders had abused it. The idea of majority and the proper plaintiff rule were also
developed and established by the court’s ruling.17 This rule said that if the Majority confirms
something or has the ability to confirm something then the minority cannot file a suit or
perform an action.18
The rights of members of minority groups are legally protected, and the Foss and Harbottle
rules do not apply in their entirety to the Indian context. Both statutory and legal definitions
of the time limit within which a minority shareholder may file a lawsuit against the firm for
actions that jeopardize its interests have been made clear.
The Delhi High Court concluded in the well-known case of The Industrial Credit &
Investment Corporation of India Limited (ICICI) v. Parasrampuria Synthetic Ltd. that it
would be unfair and incorrect to apply the Foss v. Harbottle Rule in a technical and automatic
manner to Indian circumstances. The purpose of this rule was to establish a foundation for
shareholder control cantered on a single company and involving an important amount of
18Papa Nyan Neizer, Foss v Harbottle breakdown: Rules developed and exceptions under Company Law, Dec 2,
(2023) available at
https://medium.com/@Neizer/foss-v-harbottle-breakdown-rules-developed-and-exceptions-under-company-law-
a910c65ce42c, last seen at 11/01/24.
17 Papa Nyan Neizer, Foss v Harbottle breakdown: Rules developed and exceptions under Company Law, Dec 2,
(2023) available at
https://medium.com/@Neizer/foss-v-harbottle-breakdown-rules-developed-and-exceptions-under-company-law-
a910c65ce42c, last seen at 11/01/24.
16 Foss v Harbottle 67 ER 18 (1843).
8
minor shareholders. The theory is very different from the actual circumstances in India,
having its roots in the established factual foundation of shareholder power in the countries
where it originated.19 This foundation revolves around private individual enterprise and
involves a significant number of small shareholders. In India, commercial enterprises are
mostly supported by state regulations that obtain funding up to 80% or more from financial
institutions rather than by the various investments of medium- and small-sized investors.20
Applying the Foss v. Harbottle rule in this case would be the same as favouring the majority
of shareholders, who hold a higher percentage of the shares, over financial institutions, which
may own a lower percentage of the shares by funding these businesses to the tune of 80% or
more. Since these financial institutions have actually been the company’s primary source of
funding, it would be unfair and wrong to exclude them or give them no opportunity to speak
when applying the Foss v. Harbottle rule.21
CONSTITUTIONAL PROTECTION PROVIDED BY THE COMPANIES
ACT, 2013:
Underneath in this paper there are few Legal Frameworks provided by the Companies
Act,2013 is discussed:
Section 21(1)(a)22 of the Companies Act, affirms that a member may not bring legal action on
the company’s behalf and that a corporation may bring legal action on its own; this supports
the ruling in Foss v. Harbottle.23
It is the company’s obligation to file a lawsuit if it has a legal
right against a party.
24
Section 241 25 gives employees of a corporation a legal access to petition the NCLT for
redress in situations including mistreatment and oppression.26
26 Gupta, Suniti. “Administration of Company Law in India.”, Veer Bahadur Singh Paranuchal University,
Jaunpur (India), 2018
25 The Companies Act, 2013.
24 Law Bhoomi, Foss vs Harbottle Case, August 8 (2023)
23 Brenda Hannigan. The derivative claim and the rule in Foss v Harbottle”, Oxford, University Press (OUP),
2018
22 The Companies Act, 2013.
21 Vedant Sharma, The Rule of Majority in Company Law, Jul 13 (2021), available at
https://articles.manupatra.com/article-details/The-Rule-of-Majority-in-Company-Law, last seen at 11/01/24.
20 Vedant Sharma, The Rule of Majority in Company Law, Jul 13 (2021), available at
https://articles.manupatra.com/article-details/The-Rule-of-Majority-in-Company-Law, last seen at 11/01/24.
19 Vedant Sharma, The Rule of Majority in Company Law, Jul 13 (2021), available at
https://articles.manupatra.com/article-details/The-Rule-of-Majority-in-Company-Law, last seen at 11/01/24.
9
Section 24227 provides the National Company Law Tribunal (NCLT) the authority to
intervene in and defend the company’s and its stakeholders’ interests.28
Section 39729 When a company’s operations are conducted in a way that is oppressive to a
member or members, or that is detrimental to the public interest, it is defined as oppression.
Section 397(1)30 of the Companies Act, 1956 gives company members the right to apply to
the court for relief. 31 This could be done if the management of the company’s operations is
hurting the public interest or is oppressive to a member or members.
Section 398 32also defines mismanagement as conducting a company’s affairs in a way that
harms the public interest or the company’s interests. This section also states that the
Company Law Board acts to prevent injustice to the company’s interests as a whole.
EXCEPTIONS TO THIS FOSS AND HARBOTTLE RULE:
There is a corporate democracy under the Foss and Harbottle rule. Despite their reluctance to
get involved in corporate governance cases, the courts have accepted the gravity of the
guidelines established in Foss v. Harbottle, especially concerning minority parties. For this
reason, the courts have established a few exceptions to these guidelines. These exclusions are
in place to guarantee a suitable balance between the interests of majority and minority
shareholders.
▪ Exception 1: Acts Ultra Vires:
▪ Exception 2: Fraud on the Minority:
▪ Exception 3: Acts that required Special Majority:
▪ Exception 4: Wrong doers being in Control:
▪ Exception 5: Individual Membership Right:
▪ Exception 6: Oppression Mismanagement:
32 The Companies Act, 2013.
31 French, Derek. “Mayson, French, and Ryan on Company Law”, Mayson, French, and Ryan on Company Law,
2023
30 The Companies Act, 2013.
29 The Companies Act, 2013.
28 Gupta, Suniti. “Administration of Company Law in India.”, Veer Bahadur Singh Paranuchal University,
Jaunpur (India), 2018
27 The Companies Act, 2013.
10
Now, the following Exceptions are further discussed below,
Exception 1: Acts Ultra Vires: A shareholder may bring legal action against the company if
it takes actions that are “beyond the scope” of its articles of company. Only when the
company is operating within its authority does the Foss v. Harbottle rule come into play. In
the particular judgement of Bharat Insurance Co Ltd v Kanhaiya Lal,33
(1935) The court
noted that “the company itself is, without a doubt, the best judge of the affairs in these
situations, and the court ought not to become involved in any internal management
decisions.” However, using a company’s assets extends above basic internal management. It
is said that directors are using corporate cash beyond what is permitted by law. In certain
situations, an individual may file a lawsuit to get a declaration of the true meaning of the
article in question.”34
. Through this, it was made clear that a minority shareholder would need
to be an authorized plaintiff and come with clean hands to file a complaint or take any other
action.
Exception 2: Fraud on the Minority: Here, taking away something from the minority and
giving to the majority is implied. Impeachment may also be brought against the actions of a
majority of shareholders if they amount to a “fraud on the minority”. This refers to
“discriminatory action.” It is best to comprehend the concept of “fraud on the minority” in the
cases in which it has been established and implemented through. That case is Menier v
Hooper’s Telegraph Works (1874)35
In this instance, businesses A and B were competitors.
Most of the people who were in company A were also in company B. A legal action had been
started by company A against firm B. A decision to compromise the action in a way that
would benefit company B and harm company A was approved by the majority of attendees at
a meeting of company A. They thus made an effort to deny the business the advantages that
it could have obtained from firm B. As a result, the minority declared the resolution to be
void. In addition, the court revokes the resolution because it was determined that it defrauded
the minority by denying them.36
Exception 3: Acts that required Special Majority: Only special resolutions approved at the
annual shareholder meeting may be used to conduct certain actions. Therefore, if the majority
decides to engage in any such behavior, they may do so by passing a regular resolution or by
adopting a special resolution.37 After that, any member of the company may file a motion to
37 Avtar Singh, Company Law, 498- 507(17th Edition.2020).
36 Avtar Singh, Company Law, 498- 507(17th Edition.2020).
35 Menier v Hooper’s Telegraph Works LR 9 Ch App 350: (1874-80) All ER Rep Ext 2032.
34 Avtar Singh, Company Law, 498- 507(17th Edition.2020).
33 Bharat Insurance Co Ltd v Kanhaiya Lal, A.I.R 1935 Lah:792:160 IC 24.
11
stop the majority. Such actions were allowed in Dhakeswari Cotton Mills Ltd v Nil Kamal
Chakravorty and Chettiar v Madras Race Club, (1949).38
Exception 4: Wrong doers being in Control: Those who have mistreated the company are in
charge of controlling it when there is clear evidence of wrongdoing. However, since the
majority controls the firm and will never file a lawsuit, any member may file a lawsuit on the
company’s behalf against the perpetrator.
39 This is popularly known as Derivative Action. US
codified it through 2006 UK’s Company Act. This was also recognised in Foss and Harbottle
itself. It was seen that class action suit was in name of class and Derivative action in name of
the company was performed. It was seen that in India guidelines for derivative action can
only be done through the Clean Hands Theory. Also, the reason for the failure of this
derivative action was studied . The principle laid down through the Foss rule was found
suitable in the case of Glass v Atkin,40
(1967) an Ontario High Court ruling, The two
plaintiffs and the two defendants shared equal ownership over a corporation. The two
defendants were accused of dishonestly converting the company’s assets for their personal
gain in a lawsuit that emerged. The defendants controlled the company and were able to
prohibit it from filing litigation, so even though the company should normally file a lawsuit
when it has the right to do so, the court allowed this action and decided that it was
appropriate for the two plaintiffs to file a lawsuit on the company’s behalf in this
case. Consequently, it has been proposed that the principle be expanded so that each
shareholder may be considered an authorized body to file the case.41
Exception 5: Individual Membership Right: In relation to the Individual membership Right,
every shareholder has individual rights. If anyone wants to take away the right then a suit can
be filed. Members may also use their legal rights like the ability to vote and run for office
against the company in question. In the following judgement of Pender v
Lushington,42
(1877) A shareholder who was eligible to vote filed a lawsuit to force the
directors to record his vote after another shareholder’s vote was denied.
43Court observed:
Regardless of whether a shareholder votes in support of the majority or the minority, the court
noted that each shareholder has the right to have his or her vote recorded separately. For this
43 Avtar Singh, Company Law, 498- 507(17th Edition.2020).
42 Pender v Lushington, LR 6 Ch D 70 (1877).
41 Avtar Singh, Company Law, 498- 507(17th Edition.2020).
40 Glass v Atkin 65DLR (2d) 50 (1967)
39 Avtar Singh, Company Law, 498- 507(17th Edition.2020).
38 Dhakeswari Cotton Mills Ltd v Nil Kamal Chakravorty and Chettiar v Madras Race Club, (1949) 1 MLJ 662.
12
reason, he can file a lawsuit. That is unrelated to the issue that came to light in Foss v.
Harbottle, where he claimed his right to vote in any manner, majority or minority. The vote
had to be recorded because it served the interests of the company, and if he was still refused,
he could face legal consequences.” 44
Exception 6: Oppression Mismanagement: Lastly, it has been stated by SINHA J of the
Calcutta High Court in Kanika Mukherji v Rameshwar Dayal Dubey, (1966)45
that the
principle established in Foss v. Harbottle, which establishes the supremacy of the majority
rule, is waived in the case of sections 397 and 398 of The Companies Act, 2013, which
permit avoiding oppression and mismanagement.46 Through this exception, If there is
mismanagement or oppression within the corporation, the shareholders have the right to take
legal action. Additionally, under certain provisions of the Companies Act, they may file a
case with the tribunal or court.
47
ANALYSIS AND SUGGESTION:
The idea of the majority and the proper plaintiff rule states that if the majority agrees on
something, the minority is not permitted to act or file a case. This was established by the
court through the Foss and Harbottle decision. The rights of minority members are legally
protected, and the Foss and Harbottle rules do not apply in all Indian circumstances.
Applying the concept to Indian circumstances would be unfair and erroneous since it would
favor the majority of shareholders against financial institutions, which are the main source of
funding for commercial firms, as was observed in a case. It is evident that the Foss v.
Harbottle rule is only applicable when a member’s corporate or democratic rights are
infringed; personal or individual rights are exempt from this rule.
CONCLUSION:
The discussion above gives the impression that decisions are made and enforced
unwaveringly by the majority. A democratic country believes that company law adequately
protects minority shareholders if the majority violates their rights. However, the value of
every individual’s shareholding is important when it comes to company matters. Even though
their shareholding is far smaller than that of the person with the majority of the shareholding,
47 Avtar Singh, Company Law, 498- 507(17th Edition.2020).
46 Law Bhoomi, Foss vs Harbottle Case, August 8 (2023)
45 Kanika Mukherji v Rameshwar Dayal Dubey, (1966) 70 CWN 236.
44 Avtar Singh, Company Law, 498- 507(17th Edition.2020).
13
a number of the minority will be obligated by the decision made if one of them votes in favor
of the arrangement’s scheme. A court will not interfere with a director’s ability to manage a
company or intervene on behalf of shareholders in internal administrative disputes, according
to the precedent set in Foss v. Harbottle, insofar as the director is operating within the scope
of authority granted by the articles of association. It arises logically from the Foss v.
Harbottle finding that a company is a separate legal entity.
SUBMITTED BY:
ADITI PODDAR
14
ST. XAVIER’S UNIVERSITY, KOLKATA
FOURTH YEAR (B.COM-LLB)
15