Foss v. Harbottle (1843)

Everything in the law of minority protection is measured from this decision — the exceptions to the rule, the derivative action, the statutory remedies for oppression and mismanagement in ss. 241-242 of the Companies Act 2013, and the class action in s. 245. You cannot state any of them accurately without first stating what Foss v. Harbottle actually decided, and the case is very often mis-stated as though it were a rule that minorities can never sue. It is not. Wigram V.C. expressly said the contrary; his decision turned on the fact that on this bill the general meeting could still act.

In September 1835 certain persons conceived the design of associating to buy about 180 acres of land in the parish of Manchester, to enclose and plant it in an ornamental and park-like manner, to erect houses with gardens and pleasure-grounds, and to sell or let them. They agreed to form a joint stock company for the purpose.

Before incorporation, the projectors bought the land themselves. Denison bought a considerable portion from the other original owners with the object of reselling at a profit; and several of the promoters purchased land in parcels, so that by the time the Act of incorporation was passed they owned more than half of the land in question, and had already made considerable profits by reselling parts of it at increased chief rents.

Advertisements were published in April 1836 describing the objects and the probable profits; the association was proposed on the principle of a tontine. The plaintiff Foss subscribed for two shares and the plaintiff Turton for twelve shares of £100 each, paying the deposit of £5 per share. At a public meeting in May 1836 directors, auditors, an architect (Lane) and a solicitor (Bunting) were appointed.

To avoid the responsibilities of an ordinary partnership, an Act of incorporation was sought, and on 5 May 1837 the subscribers were incorporated as "The Victoria Park Company", with perpetual succession, a common seal, and power to sue and be sued.

The complaints. The bill, filed in October 1842 by two shareholders on behalf of themselves and all other shareholders except the defendants, charged the five directors, a shareholder who was not a director, and the company's solicitor and architect with "concerting and effecting various fraudulent and illegal transactions, whereby the property of the company was misapplied, aliened and wasted". In substance there were two heads:

1. The directors sold their own land to the company at a profit and at a price considerably exceeding its real value, the solicitor and architect having counselled the transactions and taken a personal benefit from them;
2. The company's property was mortgaged in a manner not authorised by the Act.

The state of the company. Three of the directors had become bankrupt. On Westhead's bankruptcy there ceased to be a sufficient number of directors to constitute a board, and no one had been appointed to fill the vacancies. Around the end of 1839 the directors discharged the secretary, gave up the company's Manchester office, and moved the title deeds, books and papers to the solicitor's office; from then on the company had no office of its own. The defendants had refused to allow the plaintiffs to inspect the books, accounts or papers.

The bill prayed that the defendants be decreed to make good to the company the losses and expenses occasioned by their acts, and that a receiver be appointed to take and apply the company's property in discharge of its liabilities.

The defendants demurred — that is, they did not deny the facts, but said that even if true they disclosed no case the plaintiffs could bring in this form.

The demurrers were allowed. On the facts stated, the continued existence of a board of directors de facto must be intended; the possibility of convening a general meeting of proprietors capable of controlling the acts of the existing board was not excluded by the allegations of the bill; there was therefore nothing to prevent the company from obtaining redress in its corporate character; and the plaintiffs could not sue in a form of pleading which assumed the practical dissolution of the corporation.

Where the wrong complained of is a wrong done to the corporation, the corporation is prima facie the proper plaintiff, and must sue in its own name and corporate character or through the person the law appoints to represent it. Individual members may sue in their own names on the corporation's behalf only where the facts alleged justify a departure from that rule — in particular, where the transaction complained of is one which the majority cannot lawfully confirm, or where it is shown that the general body of members can no longer be set in motion. A suit which merely alleges wrongdoing that the members in general meeting could still ratify, and which does not show that all means of setting that body in motion have been tried and have failed, is demurrable.

The rule is not that minorities never sue

Wigram V.C. rejected the defendants' broad proposition at once. It was said that individual members could never sue in this form; he intimated an opinion, to which on further consideration he fully adhered, "that the rule was much too broadly stated on the part of the Defendants. I think there are cases in which a suit might properly be so framed."

His reason is worth keeping, because it explains the whole later law of exceptions. Corporations of this private kind "are in truth little more than private partnerships", and it would be too much to hold that a society of private persons is "to be deprived of their civil rights, inter se" merely because the Crown or the Legislature has conferred on them the benefit of a corporate character. If a case arose of injury to a corporation by some of its members "for which no adequate remedy remained, except that of a suit by individual corporators in their private characters", the claims of justice "would be found superior to any difficulties arising out of technical rule respecting the mode in which corporations are required to sue."

But the departure must be justified: "it must not be without reasons of a very urgent character that established rules of law and practices are to be departed from, rules which, though in a sense technical are founded on general principles of justice and convenience".

The proper plaintiff

The starting point is corporate personality itself: "In law the corporation and the aggregate members of the corporation are not the same thing for purposes like this; and the only question can be whether the facts alleged in this case justify a departure from the rule which, prima facie, would require that the corporation should sue in its own name and in its corporate character, or in the name of someone whom the law has appointed to be its representative."

The two grounds of complaint, and why the distinction matters

Wigram V.C. divided the case, and the division is the origin of one whole family of exceptions.

The first ground — the sales of land by directors to the company. These transactions might prima facie entitle the corporation to rescind, but they were not void: "The corporation might elect to adopt those transactions, and hold the directors bound by them. In other words, the transactions admit of confirmation at the option of the corporation."

That is decisive of who may sue. The bill was in substance a suit by beneficiaries complaining that trustees had sold land to themselves. But who is the beneficiary? "The corporation, in a sense, is undoubtedly the cestui que trust; but the majority of the proprietors at a special general meeting assembled" had, by the very terms of the incorporation, "power to bind the whole body, and every individual corporator must be taken to have come into the corporation upon the terms of being liable to be so bound."

The consequence is a problem of futility: while the court was declaring the acts void at the suit of the plaintiffs, "who in fact may be the only proprietors who disapprove of them", the general meeting "may defeat the decree by lawfully resolving upon the confirmation of the very acts which are the subject of the suit." Hence the governing sentence: "The very fact that the governing body of proprietors assembled at the special general meting may so bind even a reluctant minority is decisive to show that the frame of this suit cannot be sustained whilst that body retains its functions."

He then set the two conditions on which such a suit could be brought: it must be shown "either that there is no such power as I have supposed remaining in the proprietors, or, at least, that all means have been resorted to and found ineffectual to set that body in motion". Neither was pleaded — "there is no suggestion that an attempt has been made by any proprietor to set the body of proprietors in motion, or to procure a meeting to be convened for the purpose of revoking the acts complained of."

The second ground — the unauthorised mortgages. Here Wigram V.C. accepted the principle that founds the ultra vires exception, following Preston v. The Grand Collier Dock Company: "if a transaction be void, and not merely voidable, the corporation cannot confirm it, so as to bind a dissenting minority of its members."

But that did not save this bill, for a reason of pleading rather than of principle. The mortgagees were not defendants; the bill did not seek to avoid the securities. Its object was "to make them individually and personally responsible to the extent of the injury alleged" — and the money raised by the mortgages had been spent on the very transactions under the first head. The company could not confirm those transactions, keep the benefit of the money raised, and still sue the directors personally for raising it. The question of confirmation or avoidance could not properly be litigated on this record.

The judge also explained why he construed the bill strictly against the plaintiffs: the shareholders had had, or might have had, means of seeing the books since 1835, so many of the transactions might have been known sooner.

The exceptions the syllabus lists are not later inventions bolted on to the rule; each is the negative of something Wigram V.C. said.

| Exception | Its root in the judgment | |---|---| | Acts ultra vires or illegal | A void transaction cannot be confirmed by the corporation so as to bind a dissenting minority | | Acts requiring a special majority | The rule rests on what the majority in general meeting can lawfully do; where the Act or the articles require more than a bare majority, a bare majority cannot ratify | | Fraud on the minority / wrongdoers in control | The rule applies "whilst that body retains its functions"; where those who did the wrong control the votes, the body cannot be set in motion against them | | Individual membership rights | The corporation is the proper plaintiff only for wrongs to the corporation; a personal right of a member is his own to enforce | | Where the interests of justice require it | The claims of justice are "superior to any difficulties arising out of technical rule" where no adequate remedy otherwise remains |

The Act does not abolish the rule; it supplements it with statutory routes that do not depend on it.

• Sections 241-242 allow a member complaining that the affairs of the company are being conducted in a manner prejudicial or oppressive to him or to any member, or prejudicial to the public interest or to the interests of the company, to apply to the Tribunal, which has wide powers to make such order as it thinks fit. This is a remedy for the member in his own right, and so escapes the proper-plaintiff objection.
• Section 244 fixes who may apply — in a company having a share capital, not less than one hundred members or not less than one-tenth of the total number of members, whichever is less, or any member holding not less than one-tenth of the issued share capital — and empowers the Tribunal to waive those requirements.
• Section 245 gives a class action to members or depositors, including a claim to restrain the company from committing an act "ultra vires the articles or memorandum of the company", which is the Foss exception in statutory form.