Financial Training Company

Corporate and
2007 Business Law- F4
(Zimbabwe)
Casebook

Supremacy of the majority rule principle

The majority rule position in relation to a company’s governance is as captured by the Foss v
Harbottle principle. The rule of law known as the Foss v Harbottle rule has resulted from the
refusal of the court to interfere with the management of the company at the instance of minority
shareholders who for one reason or the other are dissatisfied with the conduct of the company’s
affairs by the majority or by the board of directors. The Foss v Harbottle principle was first
clearly articulated in 1843 in the case from which it takes its name and it has since spawned an
immense volume of case law and legal literature.
In practical business terms it is generally the directors who run the company and make business
decisions but the general meeting of the company is the ultimate authority of the company.
Major decisions regarding the structure and fate of the company such as alterations in the
memorandum or articles, increase and reductions of capital, change of name, variations of
shareholders’ rights, disposal of the undertaking or major assets of the company, compromises,
amalgamation and reconstructions and the voluntary winding up of the company have to be
taken or approved by the majority in many instances by way of special resolution.

The majority rule concept applies also where a wrong is done to the company. The rule is that
where a wrong is done to the company, for example by its directors failing to fulfill their duties it
is the company alone, through its majority that can sue for the injury inflicted.
The proper plaintiff is thus the company itself. Individual members cannot sue even though their
shares have fallen in value because of the wrong done to the company. The power to decide
whether to use in the company’s name is usually delegated to the directors by the articles but
should they decline to sue a general meeting of the company may resolve that an action shall
be instituted.
In Foss v Harbottle (1943) an action was brought by two shareholders in a company on behalf
 Financial Training Company

of themselves and all other shareholders except the defendants who were the directors and
promoters of the company to which they had sold the company at an undisclosed profit. The
action was dismissed because the shareholders were not the proper plaintiffs. The company
itself was the proper plaintiff unless the act complained of was ultra vires.
In the case of Edwards v Halliwell Jenkins L.J summarised the position in a very lucid manner
and two of the propositions that he underlined bear repeating. These are:

1. The proper plaintiff in an action in respect of a wrong alleged to be done to a company is

prima facie the company itself.
2. Where the alleged wrong is a transaction which might be made binding on the company and
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 because if the majority confirms the
transaction, the question falls away or if the majority challenges the transaction, there is no valid
reason why the company should not sue.
In terms of the current law there are limitations which exist on the majority rule principle. In
appropriate cases (where justice so demands) the courts will depart from the majority rule
principle.
There is no room for the operation of the rule if the alleged wrong is ultra vires the
memorandum or articles of association of the company. This clearly seems to be the intention of
the legislature despite the existence of section 10 of the Companies Act which modifies the
operation of the ultra vires rule in Zimbabwean law. Section 10(2)(a) entitles a member to bring
proceedings to restrain the company from making or entering into any transaction which
exceeds its objects.

There is also no room for the operation of the rule if the transactions complained of could be
validly done or sanctioned only by a special resolution or the like because a simple majority
cannot confirm a transaction which requires the concurrence of a greater majority. There are
many sections of the Act that require prescribed majorities, not a mere simple majority (For
example s. 20, 25, 75, 78, 242 etc). In certain cases, the authority of the courts is required. For
example s.91 which relates to variation of
rights attaching to shares and s.92 which makes reduction of share capital subject to both
confirmation by the court and a special resolution. One of the most important common law
exceptions to the majority rule principle applies where what has been done amounts to fraud
and the wrongdoers themselves are the controlling majority. In that case the rule is relaxed in
favour of the aggrieved minority who are allowed to bring a minority shareholders’ action on
behalf of themselves and all others. The practical reason for this is that if they were denied that
right, their grievance would never reach the courts because the wrongdoers themselves, being
in control, would not allow the company to sue.

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In Burland v Earle (1902) the court made the following observation (in part)
‘. . . where the persons against whom the relief is sought themselves hold and control the
majority of the shares in the
company and will not permit an action to be brought in the name of the company. In that case
the courts allow the
shareholders complaining to bring an action in their own names . . . .

The principle of majority rule in corporate

governance.

The majority rule principle in relation to a company’s governance is that captured by the Foss v
Harbottle principle. The rule of law known as the Foss v Harbottle rule has resulted from the
refusal of the court to interfere with the management of the company at the instance of minority
shareholders who for one reason or the other are dissatisfied with the conduct of the company’s
affairs by the majority or by the board of Directors. The Foss v Harbottle principle was first
clearly articulated in 1843 in the case from which it takes its name and it has since spawned an
immense volume of case law and legal literature.

In practical business terms it is generally the directors who run the company and make business
decisions but the general meeting of the company is the ultimate authority of the company.
Major decisions regarding the structure and fate of the company such as alterations in the
memorandum or articles, increase and reductions of capital, change of name, variations of
shareholders’s rights, disposal of the undertaking or major assets of the company,
compromises, amalgamation and reconstructions and the voluntary winding up of the company
have to be taken or approved by the majority in many instances by way of a special resolution.

The majority rule concept applies also where a wrong is done to the company. The rule is that
where a wrong is done to the company, for example by its directors failing to fulfil their duties, it
is the company alone, through its majority that can sue for the injury inflicted.
The proper plaintiff is thus the company itself. Individual members cannot sue even though their
shares have fallen in value because of the wrong done to the company. The power to decide
whether to sue in the company’s name is usually delegated to the directors by the articles but
should they decline to sue, a general meeting of the company may resolve that an action shall
be instituted.
In Foss v Harbottle (1843) an action was brought by two shareholders in a company on behalf

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 Financial Training Company

of themselves and all other shareholders except the defendants who were the directors and
promoters of the company to which they had sold the company at an undisclosed profit. The
action was dismissed because the shareholders were not the proper plaintiffs. The company
itself was the proper plaintiff unless the act complained of was ultra vires.
In the case of Edwards v Halliwell (1950) Jenkins L. J summarised the position in a very lucid
manner and two of the propositions that he underlined bear repeating. These are:

1. The proper plaintiff in an action in respect of a wrong alleged to be done to the company is
prima facie the company itself.
2. Where the alleged wrong is a transaction which might be made binding on the company and
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 because if the majority confirms the
transaction, the question falls away or if the majority challenges the transaction, there is no valid
reason why the company should not sue.
In terms of the current law there are limitations which exist on the majority rule principle. In
appropriate cases (where justice so demands) the courts will depart from the majority rule
principle.
There is no room for the operation of the rule if the alleged wrong is ultra vires the
memorandum or articles of association of the company. This clearly seems to be the intention of
the legislature despite the existence of s.10 of the Companies Act which modifies the operation
of the ultra vires rule in Zimbabwe. Section 10(2)(a) entitles a member to bring proceedings to
restrain the company from making or entering into any transaction which exceeds its objects.

There is also no room for the operation of the rule if the transactions complained of could be
validly done or sanctioned only by a special resolution or the like because a simple majority
cannot confirm a transaction which requires the concurrence of a greater majority. There are
many sections of the Act that require prescribed majorities, not a mere simple majority (For
example ss.20, 25, 75, 78, 242 etc). In certain cases, the authority of the courts is also required.
For example s.91 which relates to variation of rights attaching to shares and s.92 which makes
reduction of share capital subject to both confirmation by the court and a special resolution. One
of the most important common law exceptions to the majority rule principle applies where what
has been done amounts to fraud and the wrongdoers themselves are the controlling majority. In
that case the rule is relaxed in favour of the aggrieved minority who are allowed to bring a
minority shareholders’ action on behalf of themselves and all others. The practical reason for
this is that if they were denied that right, their grievance would never reach the courts because
the wrongoers themselves, being in control, would not allow the company to sue.
In Burland v Earle (1902) the court made the following observation (in part)
‘. . . where the persons against whom the relief is sought themselves hold and control the

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majority
of the shares in the company and will not permit an action to be brought in the name of the
company, in that case the courts will allow the shareholders complaining to bring an action in
their
own names . . .’

One of the principal exceptions to the rule in Foss v Harbottle is that the principle of majority
control does not apply
when there is fraud by a controlling majority. The most common type of this case involves
members of the company
who are in a majority depriving the company of its own property for their personal gain and then
using their votes to
prevent the company from taking any action against them. In such a situation the minority of the
company who are not involved in the fraud are allowed to bring proceedings on behalf of the
company.
To succeed in an action that is based on the fraud of a controlling majority the aggrieved
minority would have to establish

the following points:

(i) that the property that belongs to the company had been taken away from it by the defendants
(ii) that the defendants are the controlling majority.
In Cooks v Deeks (1916) the defendants were the controlling shareholders and directors of the
company. They had
negotiated the contact on behalf of the company and then made it for themselves and passed a
resolution to the effect that it belonged to them. It was held by the court that in law the contract
belonged to the company and that in the circumstances of the case the minority could sue on
behalf of the company.

Overtraining a majority resolution

In cases like this, the law was clearly stated in Cooks v Deeks 1916 by the Privy Council. This is
a case where the plaintiff, on behalf of himself and other minority shareholders, sued the
directors of the company. The plaintiff claimed a declaration that the respondents were trustees
of the company of the benefit of a contract made between the respondents and another
company for construction work. It appeared that the respondents, while acting on behalf of the
company in negotiating the contract, actually made it for themselves and not for the company.
By their votes as holders of three quarters of the issued share capital, they subsequently
passed a resolution at a general

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meeting declaring that the company had no interest in the contract. The court held that the
contract belonged, in equity, to the company, and the directors could not validly use their voting
powers to vest the contract in themselves, in fraud of the minority. The court went on to say that
in cases of breach of duty of this sort, the rule in Foss v Harbottle (supra) did not bar the plaintiff
’s claim.

Capacity of members

The debate surrounding the effect of s.27 of the Companies Act. This section states that the
memorandum and articles shall, when registered, bind the company and the members as
though signed by each member and contained undertakings on the part of each member to
observe all the provisions of the memorandum and the articles.

The effects of this provision, it has been suggested, are as follows:

(i) the company is bound to the members in their capacity as members;
(ii) the members in their capacity as members are bound to the company;
(iii) the members are contractually bound to each other.

Nevertheless, the principle which was established in Eley v Positive Life Ass. Co. Ltd 1875 and
followed by our courts in Miller v Miller 1963 is that the articles are not a contract between the
company and any other
person in a capacity other than that of a member. In this case the articles provided that Eley
should be the company solicitor for life. He was employed by the company but later the
company dismissed him from his employment. He sued the company for breach of contract.

His action failed because the court said that the articles on which he relied were not a contract
between the company and any other person, except in respect of their membership rights and
Eley had not sued as a member.

Take- off bids

The offer, in a take-over bid, is generally treated as prima facie a fair one. The burden of
showing otherwise is on the dissentient who seeks relief. In discharging it he must show
unfairness to the shareholders as a body, so that while the market price of the shares is a
relevant factor, the personal circumstances of the dissentient are not: Re F Grierson Oldham

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and Adams 1968 Ch. 17 and Sammel v President Brand Gold Mining Co Ltd 1969.

Where, however, the offer is in reality being made by the same majority shareholders who have
accepted it, the burden of proof is reversed and it is up to the offeror to show that the scheme is
fair. This is a perfect example of what is meant by ‘lifting the veil’ of incorporation and the facts
of Re Bugle Press, Ltd 1961 and Sammel’s case above are interesting in this connection.

Majority status
A minority shareholder is one who controls 25% of the issued share capital of the company
whereas majority shareholders among them control 75% of the shares. As a shareholder
Jeremiah enjoys a numbers of rights and privileges and some of them are:
(i) the right to be included on the register of members;
(ii) the right to receive notices of meetings, to attend meetings and to be represented by proxy if
the articles so permit;
(iii) the right to vote at meetings;
(iv) the right to receive a dividend if one is declared;
(v) the limited right to sue for a wrong done to the company and finally
(vi) the right to resist oppression.

It is the last two rights which fall under the ambit of the rule in Foss v Harbottle.
The general principle of majority control as espoused in Foss v Harbottle is that where a wrong
is done to the company, for example by its directors failing to fulfil their duties, it is the company
alone through its majority that can sue for the injury inflicted. Thus the proper plaintiff is the
company itself and individual members cannot sue. The court will not interfere with the internal
machinery of the company which is under majority control and the internal affairs or
management of the company are for the majority to decide.

Among the many exceptions of the rule, where there is fraud on a minority and the wrongdoers
are themselves in control of the company the Foss v Harbottle rule is relaxed in favour of the
aggrieved minority who are allowed to bring what is known as a minority shareholder.s action on
behalf of themselves and all the others in their situation.
It is a matter of justice and equity in that if they were denied that right, their grievance could
never reach the court because the wrongdoers themselves being in control would not allow the
company to sue. As was said by the court in Burland v Earle (1902)
.It is an elementary principle of law to . . . companies that the court will not interfere with the

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internal management of the companies acting within their powers . . . But an exception is made
where the persons against whom the relief is sought themselves hold and control the majority of
the shares in the company and will not permit an action to be brought in the name of the
company. In that case the courts allow the shareholders complaining to bring an action in their
names..

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