Majority Rule and Minority Protection

Introduction:
The rule has two components:
A company is a separate legal entity from its shareholders. In general any loss
caused to the company must be recovered by the company and not by its
shareholders, based on the diminution in the value of their shares or the loss of
anticipated dividends.
The need for exceptions to this principle to avoid oppression. Shareholders are
permitted to recover loss caused to the company by way of what is termed a
derivative action. In certain circumstances it also permits recovery of the
shareholder’s own loss.
It is a general principle of company law that an individual shareholder cannot sue
for wrongs done to a company or complain of any internal irregularities. This
principle is commonly known as the rule in Foss v Harbottle.

Rule in Foss v Harbottle:

In Foss v Harbottle (1842), two shareholders commenced legal action against the
promoters and directors of the company alleging that they had misapplied the
company assets and had improperly mortgaged the company property. The Court
rejected the two shareholders' claim and held that a breach of duty by the directors
of the company was a wrong done to the company for which it alone could sue. In
other words, the proper plaintiff in that case was the company and not the two
individual shareholders.
Reasons:
This rule is derived from two general legal principles of company law.
Firstly, a company is a legal entity separate from its shareholders.
Secondly, the Court will not interfere with the internal management of companies
acting within their powers. Where an ordinary majority of members can ratify the
act, the Court will not interfere. This simply means, if the majority can ratify an
act, the minority cannot sue.
Issue:
The only issue dealt with was that of maintainability.
Exceptions:
However, there are few exceptions to the rule in Foss v Harbottle,
Acts ultra vires – A shareholder can bring an action against the company in
matters which are ‘ultra vires’ and which no majority shareholders can sanction.
The rule from Foss v. Harbottle is not applicable in cases where the company
exceeds its powers.
Fraud on minority – A majority carrying out a fraud on the minority is also an
exception to the majority rule.
Acts requiring special majority – Certain acts call for passing of a special
resolution (i.e. at least 75% majority) at a general meeting of shareholders. In such
a case, if the majority purport to do any act by merely passing an ordinary
resolution or do not pass a special resolution in keeping with the law, the majority
cannot enforce their decision on others and any member may bring an action
restraining the majority. The reasoning behind this is that if such an act is
permitted, the statutory requirement of 75% majority is defeated.
Wrongdoers in control – If wrong doers to the company are in control of the
company, they will certainly not allow the company to file an action against such
wrong doers. To safeguard the interest of the minority or the company in such
cases, any member may bring an action in the name of a company. For example, if
a company was controlled equally by two defendants and plaintiffs, and an action
arose against the defendants for fraudulent conversion of the company’s assets, the
plaintiffs could bring an action on behalf of the company even though the
defendants had the control to prevent an action against them. The underlying
principle being followed is that “control" no longer necessarily means the ‘majority
power’. Otherwise, the majority by virtue of its position could easily manipulate
the situation and avoid any action brought against it by the company.
Individual Membership rights – Every shareholder has vested in him certain
“individual membership rights" against the company, some of which are vested in
him by the Companies Act itself. The majority rule finds applicability only in cases
of rights of the company or wrong against the company and not with respect to
personal rights of the shareholder.

Edwards V Halliwell:
Case:
Edwards v Halliwell [1950] 2 All ER 1064 is a UK labor law and UK company
law case about the internal organization of a trade union, or a company, and
litigation by members to make an executive follow the organization’s internal
rules.
Facts:
Some members of the National Union of Vehicle Builders sued the executive
committee for increasing fees. Rule 19 of the union constitution required a ballot
and a two third approval level by members. Instead a delegate meeting had
purported to allow the increase without a ballot.
Judgment:
Jenkins LJ granted the members' application. He held that under the rule in Foss v
Harbottle the union itself is prima facie the proper plaintiff and if a simple majority
can make an action binding, then no case can be brought. But there are exceptions
to the rule. First, if the action is ultra vires a member may sue. Second, if the
wrongdoers are in control of the union's right to sue there is a "fraud on the
minority", and an individual member may take up a case. Third, as pointed out by
Romer J in Cotter v National Union of Seamen a company should not be able to
bypass a special procedure or majority in its own articles. This was relevant here.
And fourth, as here, if there is an invasion of a personal right. Here it was a
personal right that the members paid a set amount in fees and retain membership as
they stood before the purported alterations.

Statutory rights of minority shareholders:

A dissatisfied minority shareholder has three general statutory remedies against
mismanagement or unfairness on part of those who control the company under the
amended Companies Act of 1985. These are as follows:
Firstly, it gives minority shareholders a special remedy in situations where they
have been treated unfairly and harmfully.
Secondly, minority shareholders are permitted to enforce certain claims of the
company free from the restrictions imposed by the rule of majority when the
company is wound up.
Lastly, the minority shareholders are permitted to obtain remedies indirectly
through an investigation of the company’s affairs by the inspectors appointed by
the Secretary of State for Trade and Industry, who may follow up the inspector’s
report by taking remedial action.
With respect to unfair treatment, an aggrieved member can present a relief petition
to any court, (in practice, all petitions are presented to the Companies Court),
which can order for the winding up of the company, on the ground of conduct that
has proved to be unfair and prejudicial to the interest of the members in general or
a minority of the members, including the petitioner.
In the second case, of winding up of a company, an application may be made to the
court by the official receiver, the liquidator or by any creditor of the company or
with leave of the court, by any present or past member of the company, for an
order against any present or past officer of the company, any person who has acted
as a liquidator, administrator or administrative receiver of the company or any
other person who has been concerned or taken part in the promotion, formation or
management of the company, and who in the case of any such person has
misapplied or retained or become accountable for any money or property of the
company, or has been guilty of any misfeasance or breach of any fiduciary or other
duty in relation to the company.
Finally, under the third remedy available to the minority shareholders, the
Secretary for Trade and Industry may appoint one or more inspectors to investigate
the affairs of the company. The Secretary of State has the freedom to appoint
inspectors under any of the available grounds of appointment without having to
specify which of the ground has been relied on. Moreover, he is under no
obligation to disclose the evidence or information that initiated the investigations
or the reasons for ordering the investigations.
With these statutory rights, the minority has been given more power than before to
seek remedy for any violation of their rights by the majority. The minority can now
seek redressal form the court for any violation of their rights and are duly protected
under the laws governing the functioning of companies.
References:
 Foss v Harbottle
https://www.revolvy.com/Foss_v_Harbottle

 Edwards v Halliwell
https://en.wikipedia.org/wiki/Edwards_v_Halliwell

 Protecting rights
https://www.lawteacher.net/protecting-minority-shareholders

 Shareholders rights
http://www.hwg-law.com/articles/shareholders-rights