Majority and Minority:

INTRODUCTION: The structure of democracy is as such that the majority has the supremacy,
and thus the power to make decisions. This holds true for the corporate world as well where the
majority makes all the important decisions. The court also tries to avoid interfering with the
internal affairs of the shareholders. Now, the superiority of the majority also indicates the
inferiority among the minority, which disrupts the balance in the company. The Companies Act,
2013 aims to reduce this inferiority of the minority, as the protection of the minority shareholders
constitutes one of the most difficult problems facing modern company law. There is a need to
strike a balance between the effective control of the company and the interests of the small
individual shareholders, as a proper balance of the rights of majority and minority shareholder’s
is essential for the smooth functioning of the company.

FOSS V. HARBOTTLE:

Foss v. Harbottle lays down the basics of the non-interference principle. According to this
principle, the courts will not, in general, intervene at the instance of shareholders in matters of
internal administration; and will not interfere with the management of a company by its directors
so long as they are acting within the powers conferred on them under the articles of the company.
And thus, a shareholder cannot bring an action for internal disputes between the shareholders.

Background of the case: In the case, a legal action was pursued by two minority shareholders
(Richards Foss and Edward Starkie Turton) on their own, against the directors of a company
alleging conduct of concerted and illegal transactions resulting in the loss of the company’s
property. It was alleged that the directors had misappropriated the company assets and had
falsely mortgaged the company property thereby adversely affecting the company and its original
purpose of “laying and maintaining an ornamental park” as laid down in the Act for its
incorporation by the parliament (“Act”). The main issue in the case thus was whether a
company’s right to sue can be exercised by its shareholders on their own, that is, whether the
shareholders could file an action for a wrong done to the company.

The Court of Chancery rejected the claim of the petitioners and held that since the impugned
actions had caused loss to the company, only the company had the right to sue, that is to say that,
the company was the ‘proper plaintiff’ in the given case and not the shareholders. It was further
held that the minority shareholders could not bring action for a wrong which could be ratified by
the majority shareholders. In the process, two rules were propounded – (1) ‘proper plaintiff rule’
which provides that in case of any wrong done to a company, only the company has the right to
sue for it, that is, only the company is the proper plaintiff; and (2) ‘majority rule’ which provides
that decisions of the majority shareholders are binding on the company and the court would not
interfere in case of a wrong which could be ratified by the majority shareholders.
This rule has further been applied in MacDougall v Gardiner, where the judge opined that if the
thing complained is a thing which, in substance, the majority of the company are entitled to do,
or something has been done irregularly which the majority of the company are entitled to do
regularly, or if something has been done illegally which the majority of the company are entitled
to do legally, there can be no use in having litigation about it, the ultimate end of which is only
that a meeting has to be called, and then ultimately the majority gets its wishes.”

Indian Cases:

In Rajahmundry Electric Supply Corpn. v. A. Nageshwara Rao, the Court observed that the
conduct with which the defendant is charged is an injury not to the plaintiffs exclusively, it is an
injury to the whole corporation. In such cases, the rule is that the corporation should sue in its
own name and its corporate character. It is not a matter of course for individual any members of
a corporation thus to assume themselves the right of suing in the name of the corporation. In law,
the corporation and the aggregate of members of the corporation are not the same things.

In ICICI v. Parasrampuria Synthetic Ltd, the Delhi High Court has held that a mechanical and
automatic application of Foss v. Harbottle rule to the Indian situations, Indian conditions, and
Indian corporate realities would be improper and is misleading. The principle, in the countries of
its origin, owes its genesis to the established factual foundation of shareholder power and
majority shareholder power centred around private individual enterprise and involving a large
number of small shareholders, is vastly different from the ground realities.

Exceptions:

The majority supremacy, however, does not prevail in all situations. The operative field of the
rule in Foss v Harbottle extends to cases in which the corporations are competent to ratify
managerial sins. But there are certain acts which no majority of shareholders can approve or
affirm. In such cases each and every shareholder may sue to enforce obligations owed to the
company.

1. Acts “ultra vires”: A shareholder is entitled to bring an action against the company and its
officers in respect of matters which are ultra vires the company and which no majority of
shareholders can sanction. The rule in Foss v Harbottle applies only as long as the company is
acting within its powers. In Bharat Insurance Co Ltd v Kanhaiya, the court observed that the
broad rule remains that the company itself is the best judge of its affairs and the court should not
interfere. But where it is alleged that directors are acting ultra vires, even a single member can
maintain a suit for a declaration as to the true construction of the article in question. 

2. Fraud on minority: The conduct of a majority of shareholders can also be impeached if it

constitutes a “fraud on the minority”. The meaning of this phrase is not very clear. But, speaking
very briefly, it means a discriminatory action. In Greenhalgh v Arderne Cinemas Ltd, it was
held that “a special resolution would be liable to be impeached if the effect of it were to
discriminate between the majority shareholders and minority shareholders, so as to give to the
former an advantage of which the latter were deprived”. We can also understand this better with
the help of an example based on the Menier v Hooper’s Telegraph Works case. Two companies
A and B were in rivalry. The majority of the members of company A were also the members of
company B. Company A had commenced an action against company B. At a meeting of
company A, the majority passed a resolution to compromise the action in a manner favourable to
company B and unfavourable to A. Thus they attempted to deprive the company of the benefits
which could have been recovered from company B. Consequently, in an action by the minority,
the resolution was held invalid. “It would be a shocking thing”, the court observed, “if that could
be done, because the majority have put something into their pockets at the expense of the
minority.”

3. Acts requiring special majority: There are certain acts which can only be done by passing a
special resolution at a general meeting of shareholders. Accordingly, if the majority purport to do
any such act by passing only an ordinary resolution or without passing special resolution in the
manner required by law, any member or members can bring an action to restrain the majority.
Such actions were allowed in Dhakeswari Cotton Mills Ltd v Nil Kamal Chakravorty and
Nagappa Chettiar v Madras Race Club.

4. Wrongdoers in control: Sometimes an obvious wrong may have been done to the company,
but the controlling shareholders would not permit an action to be brought against the wrongdoer.
In such cases, to safeguard the interest of the company, any member or members may bring an
action in the name of the company. This was recognised in Foss v Harbottle itself.

5. Individual membership rights: Lastly, every shareholder has, vested in him, certain personal
rights against the company and his co-shareholders. A large number of such rights have been
conferred upon shareholders by the Act itself, but they may also arise out of articles of
association. Such rights are commonly known as “individual membership rights” and respecting
them the rule of majority simply does not operate. For example in Nagappa Chettiar v Madras
Race Club, the court held that a shareholder is entitled to enforce his individual rights against the
company, such as his right to vote, the right  to have his vote recorded, or his right to stand as a
director of a company at an election.

6. Oppression and mismanagement: It has been stated in Kanika Mukherji v Rameshwar

Dayal Dubey that the principle of the sections embodied in Companies Act which provide for
prevention of oppression and mismanagement, is an exception to the rule in Foss v Harbottle
which lays down the sanctity of the majority rule.