Company Law

Foss v. Harbottle

(1843) 2 Hare 461

Facts

Foss and Turton were minority shareholders in the Victoria Park Company.
The company had been formed to acquire and develop land as an ornamental park.
They alleged that directors and other persons had:
misapplied or improperly sold company property;
entered questionable transactions;
granted invalid mortgages; and
caused loss to the company.
Rather than causing the company itself to sue, the two shareholders brought proceedings in their own names.
They sought relief for injury principally suffered by the company.
The alleged wrongdoers remained influential in the company, but the complaint also concerned acts that the shareholder majority could potentially approve or ratify.
The Court of Chancery had to decide whether individual minority shareholders were the proper claimants.

Who is the proper plaintiff where a wrong is done to the company?
Whether minority shareholders may sue personally for loss belonging to the company.
Whether courts should intervene in internal matters capable of ratification by the shareholder majority.

A company is a legal person separate from its shareholders.
Where a wrong is done to the company, the company is the proper plaintiff.
An individual shareholder cannot ordinarily recover for:
loss of corporate property;
reduction in company value; or
injury merely reflected in the value of their shares.
Courts generally will not interfere with an internal irregularity that a simple majority can lawfully ratify.
Recognised exceptions later developed where:
the act is illegal or ultra vires;
a special majority is required but avoided;
a shareholder’s personal right is infringed; or
fraud is committed against the minority and wrongdoers control the company.

The property allegedly misused belonged to the Victoria Park Company.
Any right to cancel transactions, recover property or obtain compensation therefore belonged primarily to the company.
Foss and Turton could not transform corporate loss into personal claims merely because their shares became less valuable.
Allowing each shareholder to bring separate litigation over the same corporate injury would:
create multiple proceedings;
expose defendants to repeated claims;
undermine majority decision-making; and
disregard the company’s separate personality.
The Court also considered whether the complained-of acts could be approved by the company’s majority.
Where shareholders acting through the proper corporate organ could ratify the matter, judicial intervention at the request of a minority would be premature.
The majority, not the court, ordinarily controls the company’s decision whether to litigate.
The case therefore protects both separate personality and corporate democracy.
However, the rule cannot be used to give controlling wrongdoers immunity.
Later derivative-action principles allow minority proceedings where those responsible for the fraud prevent the company from suing.
The present claim was not framed within a recognised basis permitting the shareholders to replace the company as claimant.

The shareholders’ action was dismissed.
The Court held that the company was the proper plaintiff for wrongs done to its property and affairs.
It also affirmed that courts ordinarily do not interfere in internal matters which the majority can lawfully confirm.
Use this case for: corporate wrongs must normally be enforced by the company, subject to minority-protection and derivative-action exceptions.