FOSS V. HARBOTTLE (1843) 2 HARE 461
FACTS
- Petitioner: Richard Foss and Edward Starkie Turton and Defendants: Thomas Harbottle & Others
- In September 1835, the Victoria Park Company was established to acquire 180 acres of land near Manchester (later known as Victoria Park, Manchester, after incorporation by an Act of Parliament).
- However, instead of fulfilling the company’s objectives of developing the land for ornamental and park-like purposes, constructing houses with gardens and fields and then selling or renting them, certain individuals, including the directors and others, engaged in unlawful misappropriation of the company’s property.
- Richard Foss and Edward Starkie Turton, both minority shareholders, brought attention to this matter. They reported that Thomas Harbottle, Joseph Adshead, Henry Byrom, John Westhead, Richard Bealey (the five directors of the company), as well as lawyers and architects Joseph Denison, Thomas Bunting and Richard Lane, along with H. E. Lloyd, Rotton, T. Peet, J. Biggs and S. Brooks (Byrom, Adshead and Westhead’s assignees), were involved in misapplying and falsely mortgaging the company’s assets, thus deviating from the company’s intended purpose.
- They argued that these wrongdoers should be held accountable for their actions and appointed a responsible receiver.
- Their arguments in the case were based on three grounds. Firstly, they pointed out fraudulent practices that misused the company’s funds. Secondly, they highlighted the lack of qualified directors on the company’s board. And thirdly, they emphasised the absence of a company clerk or office. These conditions left the owners with no recourse but to pursue legal action against the directors instead of reclaiming their property directly.
ISSUE
- Whether the company members had the authority to bring a lawsuit on behalf of the company, in other words, could the shareholders or members of the Victoria Park Company legally file a lawsuit to address the alleged misappropriation of the company’s property and funds?
- Whether the individuals responsible for the wrongdoing could be held accountable for their actions pertains to whether the directors, lawyers, architects and other involved parties could be held legally liable and face consequences for their misapplication and fraudulent mortgage of the company’s assets.
HELD
In Foss vs Harbottle, Wigram VC, the judge, ruled in favour of the defendants and dismissed the shareholders’ claims. The court held that individual shareholders or outsiders of the company could not bring legal action against wrongs done to the corporation, as the company and its shareholders are considered separate legal entities.
- 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).
The court emphasised that shareholders cannot sue because the company has suffered the injury, not its individual members. Therefore, the company should be the one to initiate legal action against those who misappropriated its property.
- The judge based his decision on previous judgments regarding unincorporated companies and stressed that the minority shareholders must demonstrate that they have exhausted all possibilities for redress within the internal forum. Suppose the majority of shareholders can ratify the irregular conduct. In that case, the courts will not intervene, which some consider unfavourable to the minority, as it restricts their ability to take legal action in cases where misconduct can be ratified.
COMMENTARY
“The basic principle relating to the administration of the affairs of a company is that "the courts will not, in general, intervene at the instance of shareholders in matters of internal administration; and will not interfere with the management of a company by its directors so long as they are acting within the powers conferred on them under the articles of the company". Nothing connected with the internal disputes between the shareholders is to be made the subject of an action by a shareholder. This rule was laid down as early as 1843 in the celebrated case of Foss v Harbottle:
In this case the action was by two shareholders in a company against the directors charging them with concerting and effecting various fraudulent and illegal transactions whereby the property of the company was misapplied and wasted, and praying that the defendants might be decreed to make good to the company the losses. The action was rejected in respect of those transactions which a majority of the shareholders had the power to confirm. Briefly, the opinion of the court was this: The conduct with which the defendants are charged is an injury not to the plaintiffs exclusively, it is an injury to the whole corporation. In such cases the rule is that the corporation should sue in its own name and in its corporate character. It is not a matter of course for any individual members of a corporation thus to assume to themselves the right of suing in the name of the corporation. In law the corporation and the aggregate of members of the corporation are not the same thing for purposes like this.”