Rule of Majority.
The principle of rule by majority is made applicable to the management of
affairs of the company. The shareholders pass resolutions on various subjects
either by simple majority or by three-fourths majority. Once a resolution is
passed, then it is binding on all the members of the company. As a resultant
corollary, the court will not intervene to protect minority against the
resolution, as on becoming a member, the shareholder agrees to submit to the
will of the majority of the members. Thus, if a wrong is done to the company,
it is the company which is legal entity having its own personality, which can
institute a suit against the wrongdoer; and shareholders do not have a right to
do so. This rule was laid down in the leading case of Foss v. Harbottle the
facts of this case were as follows:
F and T brought an action on behalf of themselves and all
other shareholders against the defendants who consisted of 5 directors, a
solicitor and an architect of the company alleging that by concerted and
illegal transactions they had caused the company’s property to be lost to the
company. It was also alleged that there was no qualified Board. F and T claimed
damages from the defendants to be paid to the company. The Court Held, that the action could not be
brought by the minority shareholders. The wrong done to the company was one
which could be ratified by the majority of members. The company was the proper
plaintiff for wrongs done to the company and the company can act only through
its majority shareholders. The majority of the members should be left to decide
whether to commence proceedings against the directors.
The principle of majority rule has since then been applied
to a number of cases. In Mac Dougall v.
Gardiner (1975) 1 Ch. D. 13, Mellish, L.J. observed: If the thing
complained of is a thing which, in substance, the majority of the company is
entitled to do, or if something has been done irregularly which the majority of
the company are entitled to do regularly, or if something has been done
illegally which a majority of the company are entitled to do legally, there can
be no use in having litigation about it, the ultimate end of which is only that
a meeting has to be called and then ultimately end of which is only their
wishes.
Similarly, in Rajamhmundry
Electric Supply Co. v. Nageshwara Rao, AIR (1956) S. C. 213, the Supreme
Court observed that; The Courts will not, in general, intervene at the instance
of shareholders in matters of internal administration and will not interface
with the management of the company by its directors so long as they are acting
within the powers conferred on them under articles of the company. Moreover, if
the directors are supported by the majority shareholders in what they do, the
minority shareholders can, in general, do nothing about it.
One may notice that the aforesaid decisions are essentially
a logical extension of the principle that a company is a separate legal person
from the members who compose it. Once it is admitted that a company is a
separate legal person, it follows that ‘if a wrong is done to it, the company
is the proper person to bring an action. This is a simple rule of procedure
which applies to all wrongs, viz., only the injured party may sue. If, for
instance, X intentionally pushes Y down the stairs and Y breaks his leg in
consequence, C, who has seen the whole incident can not bring an action against
X. C has not been hurt; he is not the injured party; he is the wrong plaintiff.
The right plaintiff is Y.
The rule, as applied to companies, however, appears a little
more complicated. After all, the directors who have been fraudulent have
injured the company. The company is composed of members. Losses to the company
affect all the members, not simply the majority or the minority or any
particular member. Why then, should an individual member not sue, since he has
been injured?
The answer is that injury is not enough. The plaintiff must
show that the injury has been caused by a breach of duty to him. In the course
of existence a person suffers many injuries for which no action can be brought,
for no duty owned to him has been broken. The individual shareholders or even
the minority shareholders who try to show that the directors owe a duty to them
personally in their management of the company’s assets will definitely fail.
The directors own no duty to the individual members, but only to the company as
a whole. A company is a person and if it suffers injury through breach of duty
owed to it, then the only possible plaintiff is the company itself acting, as
it must always act, through its majority.
It should, however, be noted that the aforesaid principle of
Foss v. Harbottle applies only where
a corporate right of a member is infringed. The rule doesn’t apply where an
individual right of a member is denied. The shareholder, by his contract with
company undertakes with respect to his rights which his membership carries to
accept as binding upon him the decisions of the majority of shareholders, if
arrived at in accordance with the law and the articles; these membership rights
are referred to as corporate membership rights, Other rights of the
shareholder, such as right to vote, or right to receive dividend are his
personal or individual rights and cannot be taken away by the majority and if
the company refuses to record his vote or pay him the dividend, he can sue in
his own name and this right of action is unaffected by any decision of the
majority .
Exceptions to ‘The Majority Rule’ (Protection of Minority Rights).
In the following cases the rule of Foss
v. Harbottle does not apply, i.e., the minority the shareholders may bring
an action to protect their interest:
1 . Where the act done is illegal or ultra-vires
the company . A shareholder is entitled to bring an action against the
company and its officers in respect of matters which are illegal or ultra-vires
the company since no majority of shareholders (not even the entire body of
shareholders) can sanction such matters .[Burland
v. Earle (1902) A.C.83].
2. Breach of fiduciary duty. Whena director
is in breach of fiduciary duty, every shareholder may be regarded an authorised
organ to bring the action [Santya Charan
Lal v. Rameshwar Prasad Bajoria (1950) S.C.R. 394]. In Blakesly v. Johnson (1980), a U.S. case, the President Director
of a corporation who was also the majority stockholder did not make adequate
disclosure to the minority shareholder of facts concerning the sale of the
business and as a result the latter allowed his stock to be redeemed by the
corporation for an inadequate price. Held,
the president was guilty of breach of fiduciary duty.
3. Where the act complained of constitutes a
fraud on the minority. Where the majority of a company’s members use their
power to defraud or oppress the minority, their conduct is liable to be
impeached even by a single shareholder. Justice Evershed, M.R. in Greenhalgh v. Ardene Cinemas Ltd. (1951)
said, "a special resolution would be liable to be impeached if the effect
of it were to discriminate between the majority shareholders and minority
shareholders, so as to give the former an advantage of which the latter were deprived."
Thus, where the majority of members of company ‘A’, who were
also members of
company ’B’, passed a resolution to compromise an action
against company ’B’. The resolution was charged to be favourable to company ‘B’
but unfavourable to company ’A’ . Held,
the minority of company ‘A’ could get the compromise set aside (Menier v. Hooper’s Telegraph Works Ltd.)
4. Where an act
which requires special resolution to be effective but has, in fact, been done
by a simple majority.
5. Where the personal
rights of an individual member have been infringed. As already noted, the
principle of majority rule is applicable only to the corporate membership
rights of a member. Infringement of a member’s individual rights like right to
vote, right to receive dividends, etc., entitles him to proceed in his own
name.
6. Protection under the Companies Act. The
Companies Act,1956, vide certain specific provisions, extends protection to the
minority shareholders by conferring certain rights on them:
affairs of the company will be conducted in a manner
prejudicial to public interest or in a manner prejudicial to the interests of
the company.
After hearing the petition, the CLB may pass such
order as it thinks fit.
Persons entitled to complain. Section 399 specifies the persons
who are entitled to apply to the CLB, for relief in cases of oppression and
mismanagement complained of in pursuance of Ss.397-398. The numbers necessary
to make such application is: (i) in the case of a company having a share
capital, 100 members or 10 per cent of the total number of its members
whichever is less, or members holding 10 per cent of the issued share capital;
(ii) in the case of a company not having a share capital, 20 per cent (one
fifth) of the total number of its members. The Central Government is empowered
in an appropriate case to authorise any lesser number of members to make such
application to the CLB.
Section 402 provides for the relief that can be
provided by the CLB and the CLB’s order may include: (a) the regulation of the
conduct of the company’s affairs in future; (b) the acquisition of the shares
or interests of any members by other members or by the company; (c) the
consequent reduction of the share capital in case of (b) above; (d)
termination, setting aside or modification of any agreement, however arrived
at, between the company and the manager, managing director or any other
director; (e) termination, setting aside or modification of any agreement
between the company and any other person with the latter’s consent; (f) setting
aside of any transfer, delivery of goods, payment, execution or other act
relating to the property made or done by or against the company within three
months of the application which would amount to fraudulent preference in case
of an individual’s insolvency; (g) any other matter for which, in the opinion of
the CLB, it is just and equitable that provision should be made.
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