CHAPTER SEVEN: Majority Rule and Minority Protection
7.1 Introduction
The starting point for any consideration of the position of minority shareholders is the rule in Foss v
Harbottle (1843). This rule, which has two strands, precludes a shareholder from bringing an action
to pursue wrongs which have been done to the company.
First, the directors have been appointed to manage the company’s affairs and they owe their duties to
the company; any misfeasance (wrong), appropriation of corporate property or breach of duty on
their part is a wrong done to the company and, as a separate legal person, the company is the proper
plaintiff in any subsequent legal proceedings.
Secondly, where there are irregularities in the way the company is run and, also, in many cases
where directors are in breach of their duties to the company, the majority of shareholders in general
meeting may, by ordinary resolution, ratify and adopt what has been done.
In those circumstances, the courts will not allow a minority shareholder to bring an action pursuing a
matter which it is competent for the majority to approve on behalf of the company. The majority
rule holds that a shareholder who buys shares in a company must accept that the majority
(controllers) will prevail.
There are however certain situations where the law will depart from the majority rule and protect
the minority. These situations are exceptions to the rule in Foss v Harbottle which is also called the
majority rule or the proper plaintiff rule.
7.2 The Rule in Foss vs Harbottle [alias majority rule or “proper plaintiff” rule]
The Rule as eluded to above states that directors owe their duty to the company. If the duties are
broken it is the company which suffers and so it should be the company itself seeking redress and not
any of its members or creditors. The company itself means the general meeting and not an individual
shareholder or group of shareholders.
Rationale/reason for the rule/practical advantages: in the first place the rule promotes proper
management of a company; there would be chaos if the law allowed every member the right to
complain i.e. there would be multiple actions leading to loss of time and money. In the second place,
the rule supports the fundamental rule in Salomon v Salomon i.e. since a company is a separate legal
entity, once a wrong is done to it, it is the company which suffers therefore the proper plaintiff will be
the company itself. Lastly, if a member who could sue a person who had caused loss to the company
and the company then ratified that person’s act at a general meeting, the legal proceedings would be
quite useless for the court will naturally hold that the will of the majority prevails.
Facts: Directors of a company bought their own land for the company and paid themselves an
exorbitant price for it. Two members brought an action on behalf of themselves and other members,
except the directors, against the directors to compel them to reimburse the money to the company.
It was held that as there was nothing to prevent the company from suing the directors if it so wished,
the action would fail i.e. the company (general meeting) had to sue by itself and not through
individuals.
7.3 Limits to the Majority Rule
The problem with the rule is that it may lead to remedial action not being taken for abuse of power
by the majority or the board of directors hence there are several exceptions, both statutory and
common law, to the application of the rule.
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There are five common law exceptions as follows:-
(a) Where the abuse infringes the personal rights of a shareholder the majority rule will not
apply. Examples are contravention of any provision of the articles or their alteration which
requires him to take more shares in the company than those which he already holds.
(b) Where the abuse amounts to an illegal act the rule in Foss vs Harbottle will also not apply.
(c) The rule will not apply where the wrong amounts to a non-compliance with the company’s
procedure, for example requirements of a special resolution. In Baille vs Oriental
Telephone & Electrical Co. Ltd [1915] an extraordinary general meeting was convened to
pass special resolutions to effect alteration of the articles by increasing the director’s
remuneration. The notice did not give particulars of the remuneration as required by the
company’s procedures. Mr Baille a shareholder sued on his own behalf and on behalf of
other shareholders. The lower court applied the rule in Foss vs Harbottle and dismissed
the case but on appeal it was held that the action was maintainable by him and the
resolutions increasing the remuneration were declared not to be binding on the company.
Rationale: the law will not allow those in control of a company to violate the
company’s own procedure without remedy.
(d) A shareholder can also bring an action for the controllers’ or directors’ abuse which
constitutes “fraud on the minority”. “Fraud”: includes appropriation by the controllers or
directors of money, property or any benefit belonging to the company since the same is
owned together with the minority shareholders. In Cook vs Deeks [1916] directors took in
their names a construction contract which they should have taken up on behalf of the
company. By the reason that they had controlling interest they secured an approval for
their action in the general meeting. A shareholder sued them to account. It was held that
the benefit which the directors obtained from the contract was held on trust for the
company and so they had to account for it.
(e) A majority decision which unjustifiably disadvantages minority shareholders may also be
challenged in court by the latter if it is not taken in the bona fide interest of the company
as a whole. See Brown vs British Abrasive Wheel Co. Ltd [1919] (Discussed in chapter
two)
There are four statutory exceptions as follows:-
(a) Court Injunction under Section 22 (2): Section 22 (1) says that a company must act
within its constitution. If a company acts outside its constitution (utra vires) section 22 (2)
allows an individual shareholder to bring an action against the company i.e. he can obtain an
injunction against the decision which is utra vires.
(b) Court order under Section 203: an individual shareholder can apply to Court for an order
under S.203 if (a) directors exercise their powers in an oppressive manner or (b) if other
shareholders’ resolutions are unfairly discriminatory or prejudicial.
What is oppressive is such conduct as to warrant the inference that there has been, at least,
an unfair abuse of power and an impairment of confidence in the probity or integrity with
which the company’s affairs are being conducted (Elder vs Elder). Mere lack of wisdom,
inefficiency or carelessness on the part of the controlling shareholders or board of directors
is not enough. In Re H.R. Harmer Ltd [1959], Harmer founded a firm which he later
incorporated as a company. He and his wife held a majority of shares and so run the
company as if it was his exclusive property. He disregarded board of directors and general
meetings’ resolutions. Shareholders sued the majority shareholders under a section similar
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to section 203. The court granted an order restraining the Harmer from interfering in the
company’s affairs except in accordance with decisions of the board of directors.
What is unfairly prejudicial comprises conduct which is unjust and detrimental to the
petitioner’s interests as a member of the company. To constitute unfair prejudice, the board
of directors’ and the controlling shareholders’ action must adversely affect the quality or
value of the complainant’s interest in the company.
Orders that may be made by the court under S. 203:-
(a) The court may direct or prohibit any act or cancel or vary any transaction or
resolution;
(b) The court may regulate the future conduct of the company’s affairs;
(c) The court may provide for the purchase of the shares of any member by the
company.
(d) The court can make any order deemed fit.
(c) Compulsory winding up under Section 213(1): the minority shareholders may petition the
court for an order under section 213 (1) that it is just and equitable that the company
should be compulsorily wound up. This is clearly illustrated by Ebrahimi vs Westbourne
Gallaries [1973] where E & N carried on business as partners and later incorporated the
partnership, the two of them being directors. Later N’s son became an additional director. E
& N were involved in a dispute and N and his son (the majority) removed E from his position
as director. E sued that it was just and equitable for the company to be wound up. It was
held that the company should be wound up because the past relationship between E & N and
subsequent events made it unjust that N and his son should remove E from his post.
Note that the petitioner will not be granted a winding up order if he has an alternative
remedy. The order is discretionary and this happened In the matter of Mapanga Estates
Ltd [1988] where a company had shareholders who held 49% and 51% of its shares.
Differences arose between them and the minority sought an order winding up the company.
The court dismissed the petition on the ground that the company was viable and prosperous
and instead ordering the minority to sell her shares to the majority.
(d) Annulment of the majority decision under Sections 10 and 48:- the minority of 5% can
challenge decisions of the majority for instance on alteration of the business clause of the
memorandum under section 10 or variation of class share rights under section 48.
Lastly there are three ways of bringing a minority action by a shareholder as follows:-
(a) He may commence a derivative action on behalf of the company therefore any benefit
recovered will accrue to the company.
(b) He may combine a derivative action with a representative action. In this case he
represents both the company and all shareholders.
(c) He may combine a representative action with a personal claim for damages if he
has personally suffered some injury.
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CHAPTER SEVEN: Majority Rule and Minority Protection
(A selection of past questions)
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1. Outline/describe/explain the rule in Foss v Harbottle (5 marks- June 2001, Dec 2001, Dec 2002,
June 2003, June 2005, Dec 2005, Dec 2009)
2. State two main advantages of the rule in Foss v Harbottle (2 marks- Dec 2009)
3. What are the exceptions to the rule in Foss v Harbottle? (6 marks- June 2001, Dec 2001, June
2005)
4. State the principles which have led the courts in relaxing the ‘proper plaintiff’ rule. (5 marks Dec
2000)
5. Without outlining its exceptions, state the facts and rule in the case of Foss v Harbottle (8
marks- Dec 2007)
6. The main point of the ‘majority rule’ with regard to company decisions is that if the majority of
members take a decision that is merely foolish, then only the majority can reconsider the matter.
Discuss with reasons, the effect of this rule. (8 marks- Dec 2005 & Dec 2007)
7. State three things that may be done by a shareholder in bringing a minority action (6 marks Dec
2000)
8. How are minority rights enforced through the following circumstances;
(i) variation of class rights
(ii) alteration of authorised business
(iii) compulsory winding up (9 marks Dec 2000)
9. The majority of shareholders of Vision Breweries Ltd entitled to attend and vote at an
extraordinary general meeting convened to decide the removal of Chibwe, Company Secretary of
the said Vision Breweries Ltd, voted in favour of the proposal for his removal. The procedural
requirements for holding such an extraordinary general meeting as outlined in the articles of
association were, however, flouted. The notice of the extraordinary general meeting was only
signed by one director instead of all the three directors and further the directors themselves had
not held a meeting prior to the preparation of the notice. There was, however, no indication that
had the procedure been followed, the result of the poll would have been otherwise.
Chibwe now contemplates seeking a court injunction restraining Vision Breweries Ltd from
acting on their decision to remove him because the correct procedure was not followed.
The news has reached Vision Breweries Ltd and it has approached you for advice.
Required
Advise Vision Breweries Ltd whether Chibwe can successfully obtain the contemplated court
injunction. Give reasons for your advice. (12 marks- Dec 2007 & June 2009)
10. Maliro was company secretary of Zipatso Canners Ltd. A majority of the shareholders of Zipatso
Canners Ltd entitled to attend and vote at an extraordinary general meeting convened to decide
the removal of Maliro, voted in favour of the proposal for his removal. The procedural
requirements for holding such an extraordinary general meeting as outlined in the articles of
association were, however, not adhered to. The notice of the extraordinary general meeting was
only signed by one director instead of all the three directors and further the directors themselves
had not held a meeting prior to the preparation of the notice. There was, however, no indication
that had the procedure been followed, the result of the poll would have been otherwise.
Maliro, now contemplates seeking a court injunction restraining Zipatso Canners Ltd from acting
on their decision to remove him because the correct procedure was not followed.
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The news has reached Zipatso Canners Ltd and it has approached you for advice.
Required
Advise Zipatso Canners Ltd whether, under the Companies Act, Maliro can successfully obtain
the contemplated injunction. Give reasons for your advice. (12 marks- Dec 2005)
11. Last month, Fwasani received an envelop from Mbambande Wholesalers Ltd of which he was a
minority shareholder. In it was a letter from the managing director of the said Mbambande
Wholesalers Ltd stating that in exercise of his powers of managing the affairs of the company and
upon consultation with the rest of the shareholders, he had considered it appropriate to decide
to compulsorily acquire all the shares held by Fwasani.
Fwasani was disturbed by the news. He had not given his consent to the compulsory acquisition
of shares as required by the articles of association and in any case he would not want to cease to
be a shareholder of Mbambande Wholesalers Ltd.
Required
Advise Fwasani on what to do, giving the grounds for his action and the expected results thereof.
(12 marks- Dec 2007)
12. Dziko, Makala and Chikopa formed a limited liability company named General Merchants Ltd
with 1,200,000 shares valued at K12.50 each. Dziko took 100,000 shares, Makala 108,000 shares
and Chikopa took 992,000 shares. Dziko and Chikopa later formed another company called
Kameza General Dealers which offered to take over General Merchants Ltd. Dziko and Chikopa
accepted the offer and gave notice to Makala of their intention to compulsorily acquire his shares
in the name of Kameza General Dealers. Makala objects to this compulsory acquisition.
Required
Advise Makala. (10 marks- Dec 2005)
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