UGANDA CHRISTIAN UNIVERSITY

MUKONO

NAME: ATENIA STUART

REG.NO: AS18B11/233

ACCESS NO.: A86000

COURSE: LLB3 A

COURSE UNIT: BUSINESS ASSOCIATIONS 1

LECTURER: Mr. ALBERT KYEYUNE

TUTOR: Mr. SAMSON WANAMBUKO

QUESTION
It is an elementary principle in the field of company law that “the proper plaintiff for
a wrong done to a company, is the company itself”. On the flip side of the principle
have always lain the minorities, commonly protected by derivative claims and unfair
prejudice remedies.
How have the courts in Uganda tried to mitigate the restrictive approach of the rule
in Foss v Harbottle while being reluctant to interfere with the internal management
of a company?
Company means a company formed and registered under this Act or an existing company or a re-
registered company under this Act.1 In Nahurira V Baguma & 2 Ors2 it was stated that a company
is a legal person with its own corporate entity, separate and distinct from its shareholders and with
its own property, rights and interests which alone is entitled to. Where a company is defrauded by
a wrongdoer, the company itself is the proper person to sue for damages. A suit would be brought
by individuals asking for the protection of rights to which their corporate character they were
entitled.

In Foss v Harbottle3 , two shareholders Richard Foss and Edward Turton 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, thus the property of the company was
misapplied and wasted. They also prayed that the defendant might be decreed to make good to the
company the losses. 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 and not the two individual
shareholders. The company is the proper plaintiff to sue for wrongs done to it. Secondly, the courts
will not ordinarily intervene in a matter which the company can settle through its internal
mechanism.

The principle of Foss v Harbottle4 only applies where a corporate right of a member is infringed.
The rule does not apply where an individual right of a member is denied.

In Uganda this was expounded on in the case Nahurira V Baguma & 2 Ors5 where it was stated
that if a company is defrauded by a wrong doer, the company itself is the proper person to sue for
damage. The rule is to the effect that where a wrong is done to the company, it is the company
alone to decide to sue and that decision is made by the majority. Members or shareholders have a
limited right to bring a derivative action on the plaintiffs own behalf and on behalf of the company.

In Rai and Others V Rai and Others6 Shah JA held that shareholders have a limited right to bring
an action for wrongs done to the company and relied on Edwards v Halliwell7 Jenkins L.J
observed that firstly the proper plaintiff in an action in respect of a wrong alleged to be done to
the company is the company itself. Secondly where the alleged wrong is a transaction which might
be made binding on the corporation and on its’ members by a simple majority of the members, no
individual member of the corporation is allowed to bring an action in respect of that matter,
because, if the majority challenge the transaction, there is no reason why the company should not
sue:

1
Section 2 of the Companies Act 2012
2
Nahurira V Baguma & 2 Ors [2015] UGCommC 76
3
Foss v Harbottle (1843) 67 ER 189
4
Foss v Harbottle (1843) 67 ER 189
5
supra
6
Rai and Others V Rai and Others [2002] EA 537
7
Edwards v Halliwell [1950] 2 ALL ER 1064
Thirdly there is no room for the operation of the rule if the alleged wrong complained of is ultra
vires the corporation, because the majority members cannot confirm the transaction. Lastly, there
is no room for the operation of the rule if the transaction complained of could be validly sanctioned
only by a special resolution or the like because a simple majority cannot confront a transaction
which requires the concurrence of a greater majority.

There is an exception to the rule where what has been done amounts to fraud and the wrong doers
are themselves in control of the company. In this case the rule is relaxed in favor of the aggrieved
minority, who are allowed to bring a minority shareholders action on behalf of themselves and all
others. The reason for this is that, if they were denied that right, their grievance could never reach
the court because the wrong doers themselves, being in control, would not allow the company to
sue.

The basis for the doctrine is apparently the principle of democracy in the company that advances
the principle that the person or persons with majority shareholding have a proportionate voting
power by which they can outvote any minority on any issue subjected to a vote and therefore have
control over the company. Where the majority have made a decision the minority should not
challenge it except under grounds which are exceptions to the general rule.

A derivative action is essentially an action of the minority. It is a rule that gives remedies to
minorities against the oppression of the majority on exceptional grounds8. Section 248 (1)9
provides for protection of members against prejudicial conduct where company affairs are being
conducted in a manner unfair and prejudicial to the interests of its members.

According to Halsbury’s Laws of England Volume 7(2) Reissue paragraph 1408 thereof the
conduct complained of in a derivative action must be unfairly prejudicial to the interests of the
petitioner in his capacity as a member of the company as opposed to any other interests which he
may possess. This was the holding in Re a company10.

EXCEPTIONS
Moir V. Wallersteiner11 illustrates how the law can go behind the corporate personality of a
company to the individual member to allow the member to bring a derivative action. Derivative
action is a suit by a shareholder to enforce a corporate cause of action. The corporation is
a necessary part and the relief which is granted is a judgement against a third party in favor of the
corporation. An action is derivative when the action is based upon a primary right of the

8
Nahurira V Baguma
9
The Companies Act, 2012
10
Re a company [1983] 2 All ER 36 per Lord Grantchester QC at page 44
11
Moir V. Wallersteiner (1975) 1 All. E.R. 849
corporation but is asserted on its behalf by the shareholder because of the corporation’s failure,
deliberately or otherwise, to act upon the primary right.

In Jamal and Others V Uganda Oxygen Ltd and Others12 the judge relied on Gower’s Principles
of Modern Company Law13 to give circumstances that justify a derivative action. Not every wrong
to the company will justify a derivative action to remedy it. Normally the wrong complained
of must be such as to involve fraud on the minority, which could not be validly waived by
the company in a general meeting, such conduct includes:

Expropriation of the property of the company or, in some circumstances, that of the minority;

Breach of the director’s duties of subjective good faith

Voting for company resolutions not bona fide in the interests of the company

It must be shown that the alleged wrong doers control the company and the company must be
a defendant in the action; in effect, a nominal defendant. The shareholder must sue in a
representative capacity or behalf of himself and all the other members other than the
real defendants who are bound by the decision.

These grounds can further be discussed as;

Ultra vies and mismanagement

Ultra vies acts are any acts that lie beyond the authority of a corporation to perform. Such acts fall
outside the powers that are specifically listed in the Companies Act and also outside those
mentioned in Articles of Association and Memorandum of Association and the Articles of
Association. Such actions are void and cannot be made legal through ratification by majority
members. In National Enterprises Corporation & Others V. Nile Bank Ltd14 it was held that
misuse of authority and company property cannot be allowed otherwise it defeats justice.

Fraud on minority
Fam International Limited & Another V. Mohamed Halid El. Fatih15 discussed the concept of
fraud. Where the majority of a company’s members use their power to defraud or oppress the
minority, their conduct is liable to be impeached even by a single shareholder. The act of majority
is such that it is the failure of the majority to act in the interest of the company as a whole, which

12
Jamal and Others V Uganda Oxygen Ltd and Others (Civil Appeal 1995/ 64) [1997] UGSC 4
13
L.C.B Gower, Gowers’ Principles of Modern Company Law, (Stevens; 3rd Edn) p.588
14
National Enterprises Corporation & Others V. Nile Bank Ltd: Civil Appeal No. 17 of 1994
(SCU) (unreported).
15
Fam International Limited & Another V. Mohamed Halid El. Fatih, Civil Appeal No. 16/93, (SCU)
(unreported).
will include the court to annul a resolution altering the company’s memorandum or articles. Any
breach of duty which causes loss to the company should be regarded as a fraud on the minority.

In Nahurira v Baguma & 2 Others16 these two exceptios were discussed as those that are used to
mitigate the rule in Foss V Hobottle. There is no room for the operation of the rule if the alleged
wrong complained of is ultra vires the corporation, because the majority members cannot confirm
the transaction. There is no room for the operation of the rule if the transaction complained of
could be validly sanctioned only by a special resolution or the like because a simple majority
cannot confront a transaction which requires the concurrence of a greater majority.

There is an exception to the rule where what has been done amounts to fraud and the wrong doers
are themselves in control of the company. In this case the rule is relaxed in favor of the aggrieved
minority, who are allowed to bring a minority shareholders action on behalf of themselves and all
others. The reason for this is that, if they were denied that right, their grievance could never reach
the court because the wrong doers themselves, being in control, would not allow the company to
sue.

Acts requiring special majority

There are several decisions which shareholders of a company cannot take by simple majority. For
such decisions, they are to be ratified by special majority that is to say they require the vote of
three –fourths of the members present and voting. For example, modification in memorandum of
association or articles of the company. If the majority purport to do any such act by passing only
an ordinary resolution or without passing a special resolution in the manner required by law, any
member or members can bring an action to restrain the majority.

In Nagappa Chettiar v Madras Race Club17, court held that 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.
Individual Membership Rights

A shareholder is entitled to enforce his individual rights against the company like the right to vote,
to stand in elections for director among others. An individual membership right implies that the
individual shareholders can insist on strict observance of the legal rules, statutory provisions and
the provisions in the memorandum and articles which cannot be waived by a bare majority of the
shareholder. Every shareholder can assert such a right in his own name.
In Henderson v Bank of Australasia18, the plaintiff moved an amendment to the proposed
resolution. The chairman refused to record the amendment in spite of the fact that it was seconded

16
Supra
17
Nagappa Chettiar v Madras Race Club, (1949) 1 MLJ 662
18
Henderson v Bank of Australasia (1890) 45 Ch D 330
and the original resolution was passed without amendments. No reasons were given for this
decision either. It was held that the shareholders have a right to move amendments to resolutions.

Class Action
A class action is a legal proceeding in which one or several plaintiffs bring suit on behalf of a
group. The judgment or settlement agreed to arise from the suit covers all members of the group
or class. Under Section 245 of the Companies Act, investors can file a class action suit in case they
feel that the management or conduct of the affairs of a company is prejudicial to their interests.
There is a provision in the Act for minimum numbers of members required to initiate class action.
They must total up 100 members or the prescribed percentage for a company having share capital
or for a company not having a share capital.

In conclusion, the rule in Foss V Harbottle is to the effect that where a wrong is done to the
company, the company is the proper plaintiff to sue for wrongs done to it. Secondly, the courts
will not ordinarily intervene in a matter which the company can settle through its internal
mechanism. However, this law has been mitigated through the derivative actions that allows
members especially minority to bring actions on behalf of the company as the plaintiffs on
exceptional grounds such as fraud. This is because the majority would not vote against them. This
was ably discussed in Jamal and Others V Uganda Oxygen Ltd.
BIBLIOGRAPHY
STATUTES
The Companies Act, 2012

CASE LAW
Edwards v Halliwell [1950] 2 ALL ER 1064
Fam International Limited & Another V. Mohamed Halid El. Fatih, Civil Appeal No. 16/93,
(SCU) (unreported).
Foss v Harbottle (1843) 67 ER 189
Henderson v Bank of Australasia (1890) 45 Ch D 330
Jamal and Others V Uganda Oxygen Ltd and Others (Civil Appeal 1995/ 64) [1997] UGSC 4
Moir V. Wallersteiner (1975) 1 All. E.R. 849
Nagappa Chettiar v Madras Race Club, (1949) 1 MLJ 662
Nahurira V Baguma & 2 Ors [2015] UGCommC 76
National Enterprises Corporation & Others V. Nile Bank Ltd: Civil Appeal No. 17 of 1994
(SCU) (unreported).
Rai and Others V Rai and Others [2002] EA 537
Re a company [1983] 2 All ER 36 per Lord Grantchester QC at page 44

TEXTBOOKS

L.C.B Gower, Gowers’ Principles of Modern Company Law, ( Stevens; 3rd Edn) p.588