The rule in Foss v.

Harbottle provides that individual shareholders have no cause of action in law for any
wrongs done to the corporation and that if an action is to be brought in respect of such losses, it must
be brought either by the corporation itself (through management) or by way of a derivative action. Foss
v Harbottle (1843) is a leading English precedent in corporate law. In any action in which a wrong is
alleged to have been done to a company, the proper claimant is the company itself. This is known as
"the proper plaintiff rule", and the several important exceptions that have been developed are often
described as "exceptions to the rule in Foss v Harbottle". Amongst these is the "derivative action", which
allows a minority shareholder to bring a claim on behalf of the company. This applies in situations of
"wrongdoer control" and is, in reality, the only true exception to the rule. The rule in Foss v Harbottle is
best seen as the starting point for minority shareholder remedies. Therefore, this essay is set to discuss
the rule in Foss v Harbottle.

Richard Foss and Edward Starkie Turton were two minority shareholders in the "Victoria Park Company".
The company had been set up in September 1835 to buy 180 acres (0.73 km2) of land near Manchester
and, according to the report, enclosing and planting the same in an ornamental and park-like manner,
and erecting houses thereon with attached gardens and pleasure-grounds, and selling, letting or
otherwise disposing thereof.(Beck, 1974).

This became Victoria Park, Manchester. Subsequently, an Act of Parliament incorporated the
company.The claimants alleged that property of the company had been misapplied and wasted and
various mortgages were given improperly over the company's property. They asked that the guilty
parties be held accountable to the company and that a receiver be appointed.(Beck, 1974).

The defendants were the five company directors (Thomas Harbottle, Joseph Adshead, Henry Byrom,
John Westhead, Richard Bealey) and the solicitors and architect (Joseph Denison, Thomas Bunting and
Richard Lane); and also H. Rotton, E. Lloyd, T. Peet, J. Biggs and S. Brooks, the several assignees of
Byrom, Adshead and Westhead, who had become bankrupts. (Beck, 1974).

Wigram VC dismissed the claim and held that when a company is wronged by its directors it is only the
company that has standing to sue. In effect the court established two rules. Firstly, the "proper plaintiff
rule" is that a wrong done to the company may be vindicated by the company alone. Secondly, the
"majority rule principle" states that if the alleged wrong can be confirmed or ratified by a simple
majority of members in a general meeting, then the court will not interfere (legal term). (Beck, 1974).

The rule in Foss v. Harbottle is well established in Ontario law. The rule prevents shareholders from
suing for a loss in the value of their shares brought about by a wrong done to the corporation. The rule is
a consequence of the separate legal personality of the corporation. Just as shareholders (subject to
limited exceptions) cannot be sued for the acts, debts, defaults or obligations of the corporation, only
the corporation has a cause of action for wrongs done to it.(Foss v. Harbottle, 1843).

First, the corporation is a separate legal entity from the shareholder(s), with the rights and obligations of
a person under the law. The corporation, and not its shareholders, is liable for the corporation’s acts and
defaults, and the corporation, not its shareholders, acquires causes of action when wrongs are
committed against it. (Foss v. Harbottle, 1843).
Second, the rule avoids a multiplicity of actions. Without the rule, individual shareholders would each be
able to sue on the basis that a wrong done to the corporation, and via that harm, indirectly caused harm
to the shareholder. (Foss v. Harbottle, 1843).

Claims by a shareholder are thus barred with respect to a wrong done to their corporation that causes a
diminishment in the value of their shares. Such claims offend the rule because a wrong done to the
corporation that results in a decreased share value is still the claim of the corporation as a separate legal
entity. The decreased share value is simply the consequence of the wrong done to the company. (Foss v.
Harbottle, 1843).

The rule was later extended to cover cases where what is complained of is some internal irregularity in
the operation of the company. However, the internal irregularity must be capable of being
confirmed/sanctioned by the majority. (Foss v. Harbottle, 1843).

The rule in Foss v Harbottle has another important implication. A shareholder cannot generally bring a
claim to recover any reflective loss – a diminution in the value of his or her shares in circumstances
where the diminution arises because the company has suffered an actionable loss. The proper course is
for the company to bring the action and recoup the loss with the consequence that the value of the
shares will be restored. (Foss v. Harbottle, 1843).

Because Foss v Harbottle leaves the minority in an unprotected position, exceptions have arisen and
statutory provisions have come into being which provide some protection for the minority. By far and
away the most important protection is the unfair prejudice action in ss. 994-6 of the Companies Act
2006 (UK) (s 232 Corporations Act 2001 in Australia). Also, there is a new statutory derivate action
available under ss 260–269 of the 2006 Act (and s 236 Corporations Act 2001). (Foss v. Harbottle, 1843).

Under the current circumstances, the rule in Foss v. Harbottle is not applicable to the acts of majority
shareholders done to oppress, suppress or depress the minority shareholders, that is, it is not applicable
in the case of “ultra vires and illegal acts; breach of fiduciary duties; fraud or oppression against the
minority shareholders; variation of class rights; scheme of compromise or arrangement; oppression and
mismanagement; rights of dissentient shareholders under takeover bids, and; class action suits”. (Foss v.
Harbottle, 1843).

Personal rights, also known as individual rights are the rights enjoyed by the members in their own
capacity with the right to apply for their infringement individually. The genesis of these rights lies in (1)
the implied contract between the member and the company as entered into at the time of becoming
the member of the company, and (2) the general law. These rights are contractual in nature and cannot
be taken away except with the written consent of the concerned member. Provisions in the
memorandum or articles of the company are said to confer personal rights on a member if the member
has special interest in compliance of the concerned provisions, which is distinct from the general
interest of the rest of the members.(Soni, 2018).
Following this, when the exception of personal rights under the rule is sought, the member is required
to show that the infringement of his right is the result of breach of the company’s constitution and not a
mere internal irregularity of the internal management of the company.(Soni, 2018).

Infringement or denial of personal rights of a member is not covered under the purview of the principle
of Foss v. Harbottle, that is to say, the principle of Foss v. Harbottle is not applicable to personal rights –
instead it is one of the exceptions. It is said that in case of question on personal rights, a member can, on
principle, go against the majority of all other shareholders. (Soni, 2018).

This case has reinforced the rule of majority as propounded in Foss v. Harbottle and discouraged the
shareholders from bringing to courts frivolous litigation relating to matters of internal management of
the company. (Soni, 2018).

Therefore, in conclusion The rule prevents shareholders from suing for a loss in the value of their shares
brought about by a wrong done to the corporation. The rule in Foss v. Harbottle is applicable only in
case of infringement of a democratic or corporate right of a member and is not applicable in case of
denial of his personal or individual right.

References

S., Beck, (1974). The Shareholder's Derivative Action, 52 Can. Bar Rev. 159

Foss v. Harbottle (1843), 2 Hare 460, 67 E.R. 189

Y., Soni, (2018). Exceptions to the Rule in Foss v. Harbottle: Indian Context, 4, International Journal of
Legal Developments and Allied Issues, 116, 121.