Foss v Harbottle

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Foss v Harbottle (1843) 2 Hare 461, 67 ER 189 is a famous decision English precedent on 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 rule in Foss v Harbottle.

Two minority shareholders initiated legal proceedings against, among others, the directors of the company. They claimed that the directors had missapplied the company's assets. The court dismissed their 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:

First, the "proper plaintiff rule".

The Court stated as such:

“

First, the proper plaintiff in an action in respect of a wrong alleged done to a company ... is prima facie the company itself. Secondly, where the alleged wrong is a transaction which might be made binding on the company ... on all its members by a simple majority of the members, no individual member of the company is allowed to maintain an action in respect of that matter for the simple reason that if a mere majority of the members of the company ... is in favour of what has been done then cadit quaestio – the matter admits of no further argument.

”

The second rule derived from this case was the "majority rule principle". It 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.

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.

The rule in Foss v Harbottle has another important implication. A shareholder cannot generally bring a claim to recover any 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.

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 protections are to be found in sections 459-461 of the Companies Act. However, the usefulness of section 459 can only be fully understood against the background of common law shareholder remedies. Moreover, despite their acknowledged ineffectiveness, remedies at common law remain available.