THE RULE OF MAJORITY IN COMPANY LAW

INTRODUCTION

In the modern world, where the companies are the new countries, like any other democracy it
is important to strike an equilibrium amongst the minority and the majority members of the
company. The common law has enshrined the rule of majority as an imbedded aspect of the
company with almost all the major developing legal system following the same. The rule of
majority has tipped the scales in the favour of the majority equity shareholders of the company
in a dominating position as against the vulnerable minority members. The protection of the
minority members in the domain of company administration is a major challenge before the
modern company law1 and the goal of the legislations must be to strike an equilibrium between
the rights of majority and minority shareholder‘s which is paramount for the better orientation
of the company.2 The notion of balancing the interests generates from the core principle of
greatest good to the greatest majority of people. In concurrence with the general policy to
protect the minorities interests from the unjust behaviour of the majority members, it shall be
exercised to curb the misuse of power & dominance by the majority members.

It is a settled preposition in law that rule of majority shall prevail if the decision of the majority
members of the company is in the scope of the provisions of the company legislations. The
evolution of the principle regarding the majority rule in the common law was developed in the
case of Foss v. Harbottle,3 in this case, a suit was instituted by two shareholders of the company
at behest of all the other shareholders against the directors and solicitor of the company,
alleging that they have caused loss to the company‘s property by concerted and illegal
transactions. The directors were alleged to commit serious fraudulent and illegal transactions
and it was prayed by the plaintiff that the defendant be decreed to make good of the loses.4
The primary question before the Hon‘ble Court of law was the maintainability of the suit. The
Hon‘ble Court refused to interfere in the internal management of the company and held that
the action could not be brought by the minority shareholders against the wrongful act done to
the company by the ratification of majority shareholders.

The rule of majority was further elaborated in the case of Edwards v. Halliwell, 5 the Hon‘ble
Court upheld that The rule of majority was further elaborated in the case of Edwards v.
Halliwell,5 the Hon‘ble Court upheld that "when a wrong is alleged to be done against a
company, the proper plaintiff in an action shall be the company itself and when such alleged
wrong is a transaction which might be binding on the company or all its shareholders by the
special majority of the members, no individual shareholder of the company is allowed to
maintain an action in respect of such matter because if the majority members of the company
are in favour of what has been done, then it cannot be questioned." The Courts in general, shall
not at intervene at the instance of shareholders in the matters relating to internal administration
and the management of the company by the directors as long as they are acting under the ambit
of articles of the company.6

In toto the rule of majority is based on two major prepositions of law, first, the court will not
intervene in the internal irregularities if the same can be ratified or condoned by the internal
process of the company, second, if the alleged wrong is done against the company, then
generally the plaintiff is company itself.7

BASIS OF RULE

The right of the majority to rule.

The court has ruled in plethora of cases that an action brought by an individual shareholder
cannot be entertained because the it does not involve ethe consent of majority of the
shareholders, and the majority of the shareholders may waive off their right to sue. 8
Therefore, a company can only bring a legal action (I) if the directors of the company pass a
resolution to that effect; or (II) if the company expresses its desire to sue by an ordinary
resolution in general meeting, since the power of the shareholders to drag the company in a
court of law as a claimant is concurrent with the powers of the directors of the company, and
if the shareholders wants to bring the company into a court of law and the directors do not,
the demands of the shareholders by passage of a ordinary resolution shall prevail but in either
case the right of the majority shareholder shall be upheld.9 The company is a legal person.

Under the Section 910 of the Act, a company incorporated under law has 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" as it is a separate legal entity. The court time
and again in plethora of cases held that since a company is a persona in the eyes of law, the
action is vested in it altogether, and cannot be exercised by a single individual member.

The prevention of a multiplicity of actions.

If an individual shareholder is permitted to bring action for the wrongful acts of the company,
then in that case there can be a high possibility of multiplicities of claims by the individual
shareholder which will ultimately burden the judiciary and legal system.11

The court‘s order may be rendered ineffective

An interesting aspect of a company matter that is often not looked at it is that the order of the
Hon‘ble Court can be overruled through an ordinary resolution of the shareholders of the
Company, provided that the general meeting convened in this regard is not controlled by the
wrongdoers

HOW FAR THE FOSS RULE IS RELEVANT IN INDIAN CONTEXT.

To analyse and compare the application of the Foss rule in the Indian context to that its origin
countries, we need to examine the principle, in the countries of its origins. The genesis of this
rule was to establish a ground basis for the shareholder‘s power revolving around single
individual enterprise and including a huge chunk of small shareholders. The Hon‘ble Court in
the case of ICICI v. Parasrampuria Synthetic Ltd. SCL13 held that, in India the circumstances
are different from the other countries. In India, the corporate enterprises are not the result of
different investments of small and medium investors but majorly state-sponsored funding
structure that procures funds from financial institutes. If the rule laid in the Foss case is
applied as it is in India, it may lead to submitting weightage to the majority of the
shareholders holding more percent shares, over the financial institutions which might have a
lesser percent of shares even though contribution majority in terms of the finances. Such
financial institutions actually procure and bring in the finance for the functioning of the
company and, thus, to render such institutional investors voiceless on a mechanical
application of the rule laid in Foss could be unfair and unjust in India.14

DERIVATIVE ACTION
The rule of majority is not an absolute bar, in some circumstances an individual member may
initiate a suit for remedy against any wrong committed to the company or to force the
company to manage its internal affairs as per the memorandums and the legislation governing
the company, even though no specific individual wrong has been done to them, and the
majority members do not want the action to be brought.15

If a shareholder sues for relief against the company itself, it shall be made a defendant; if the
shareholder wants to bring a corporate claim against other entity, then also the company must
be joined as a co-defendant so that it may be bound by the judgment, and so that it may
enforce any order giving relief against the substantive defendants. 16 The individual
shareholder‘s action in such special cases is known as representative, because it is brought on
behalf of the shareholder himself and members other than himself who would go with him to
protect their legitimate rights. When the action is initiated against third parties for the
company‘s benefit, such action is known as derivative, because the individual member sues
to enforce a claim which belongs to the company, and this right to sue is derived from it. If
the action is successful, any damages recovered, shall not go to the plaintiff, but to the
company.17 The courts only allow a derivative action if it is brought for the benefit of the
company.18

EXCEPTION TO THE MAJORITY RULE

The rule in Foss v. Harbottle19 is not absolute but is subject to certain exceptions. In other
words, the rule of supremacy of the majority is subject to certain exceptions and thus,
minority shareholders are not left helpless, but they are protected by:

a. the common law; and

The cases in which the majority rule does not prevail are commonly known as exceptions to
the rule in Foss v. Harbottle20 and are available to the minority. In all these cases an
individual member may sue for declaration that the resolution complained of is void, or for an
injunction to restrain the company from passing it. The said rule will not apply in the
following case:

Ultra Vires & Illegal Acts

The Foss rule is not applicable where the act against which the suit is institutes is ultra vires
the company,21 because not even a majority vote of the shareholders can approve an act that
is ultra-vires. In these cases, the plaintiff member of the company may institute either an
individual suit, for the company‘s violation of its memorandum, or a collective derivative
action, for the wrong committed against the company for the violators who have committed
the ultra vires act.22

Breach of Fiduciary Duty

A derivative action may be brought up by the minority shareholder against the directors of
the company who have been found guilty of a breach of their fiduciary duties to the company,
if they are able to stall the company from litigating against them in the company‘s name as
the director control a majority of the votes of shareholder at a general meeting, or if the
directors are able to prevent a general meeting from passing a resolution that the company
shall sue them. Therefore, the derivative actions have been allowed against the directors who
are in control of the company for misappropriating the property of the company 23 or
misapplying it in breach of the Companies Act,24 to hold such directors accountable to the
company for profits made by misappropriating for themselves a business opportunity which
the company and other shareholders would have enjoyed.25 In the case of, Satya Charan Lal
v. Rameshwar Pd. Bajoria,26 it was held by the Hon‘ble Court that when a director breaches
the fiduciary duty, every shareholder of the company has as an authorised organ to bring the
action.

Fraud or Operation against Minority

In the case of Edward v. Halliwell,27 the Hon‘ble Court held that, "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."28 The oppression or fraud should
involve an unconscionable use of the majority‘s power resulting, either in in unfair or
discriminatory treatment of the minority or financial loss, and the same shall be grave than
the mere failure of the majority members to do something for the interest of the company as a
whole.29 Fraud includes all such cases where the perpetrators are endeavouring, directly or
indirectly, to appropriate to themselves money, property or advantages which belong to the
company or in which the other shareholders are entitled to participate. 30

Inadequate notice for a Resolution passed at a meeting of members

It is held in plethora of judgments that if an insufficiently informative notice is given of a

Qualified Majority

When the Act or the articles mandates a qualified (special) majority for passing of a
resolution, the rule of majority cannot be invoked to override these requirements. If not for
this, the provisions of qualified majorities would be of no value as a simple majority can
always concur a special resolution passed irregularly. 32

STATUTORY PROTECTIONS IN THE COMPANIES ACT, 2013

The C0mpanies Act, 2013, through certain specific pr0visions, pr0vides pr0tection to the
min0rity shareh0lders against the majority rule by conferring certain rights 0n them:

 Variation of class rights - When the share capital of a c0mpany is fragmented int0
different types of shares, the rights that belong to the shares of any class can be
changed as per the process in the mem0randum or articles of the company. When
such alteration is made, as per the Section 4833 of the act, states that "the holders of
not less than ten per cent of the issued shares of that class who had not assented to
the variation may apply to the Tribunal for cancellation of the variation".
 Request for investigation - As per the Section 21334 of the act, "one hundred or more
members or members holding not less than one-tenth of the total voting power" may
apply to the Tribunal for c0nducting an investigati0n int0 the affairs of the c0mpany.
 Such application must be accompanied by evidence to prove that there are substantial
reasons for an 0rder to conduct an investigation.
 Oppressi0n and mismanagement - The majority rule d0es not apply t0 cases where
Section 24135 of the act is operational f0r prevention of 0ppression and
mismanagement. A shareholder, who alleges that the acts of the c0mpany is being
c0nducted, in an oppressive manner to s0me members including himself, or even in
contrary to the public interest, he may file a complaint before the Tribunal under the
said provision of the act.36
 Class action-A member of a company can file an application before the Tribunal
under Section 24537 seeking certain reliefs on the grounds that the internal affairs of
the company are being conducted in a manner prejudicial to the interest of the
company or its members. The Tribunal may order reliefs as it may find appropriate
which may even include restraining the company from performing an act that is ultra
vires the Memorandum or Articles or is violative of any law.