In the case of Foss V Harbottle4 , where the facts are that Richard Foss and Edward Starkie

Turton were two minority shareholders in the “Victoria Park Company” which was set up in
1835 to buy 180 acres of land near Manchester and its business was to enclose and plant
ornamental parks, erect houses, sell, let or otherwise dispose thereof. In 1837, this company was
incorporated in an Act of Parliament to evolve decorative parks and gardens. Two minority
shareholders of the company, Richard Foss and Edward Starkie Turton, brought a derivative suit
against the five directors and promoters of the company alleging that they had misapplied
numerous company assets and had unsuitably mortgaged its property. The claimants sought the
guilty parties to be found accountable to the company and they requested the appointment of a
receiver. Court dismissed the claim and held that only the company has the right to sue when the
company is suffered by its directors. At that point, the court founded a fundamental company law
rule which is divided into two limbs. The first is the ‘proper plaintiff rule’ which indicates that a
wrongdoing affected the company can be sued only by the company itself and in its separate
legal entity. The second is known as the ‘internal management rule’ which notifies that when the
alleged wrongdoing is approved or established by the members’ majority in a general meeting,
then the court can be reluctant to intervene where the matter is capable of being resolved within
the internal mechanisms of the company. The case of Foss V Harbottle introduces some rules
which are;

1. The proper plaintiff rule.

2. Separate legal entity rule and

3. Majority rule.

he proper plaintiff rule. This is to effect that if a wrong is done to a company by its directors or
members, it is the company alone to decide to sue or not and that is made by the majority shareholders.
In the case of Edwards v Halliwell5 , LJ Jekins stated that firstly, “the proper plaintiff in an action in
respect of a wrong alleged to be done to a company or association of persons is prima facie the
company or the association of persons 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. This was
reaffirmed in the case of Nahurira v Baguma & 2 Ors6 .
Separate legal entity rule. In the case of Salim Jamal V Uganda Oxygen Ltd7 , Justice Oder (as he then
was) quoted Lord Denning and said “it is a fundamental principle of law that a company is a legal person
with its own corporate entity, separate and distinct from its directors or shareholders and with its own
property rights and interest which is alone entitled to”. Lord Halsbury LC affirmed the position in Foss V
Harbottle in the pivotal case of Salomon v Salomon & Co Ltd8 that once the company is legally
incorporated it must be treated like any other independent person with its rights and liabilities
appropriate to itself. The common law designates that the rights and liabilities of a company are
retained to the company itself and it is up to the company to settle its liabilities and pursue its rights.

The majority rule. this rule stands for the proportion that the decisions and choices of the majority will
always prevail over those with minority shares. This rule states that if the alleged wrong can be
confirmed or rectified by a simple majority of members in a general meeting, then the court will not
interfere. Here courts will not interfere with the internal management of companies where those acting
in management do so acting within their powers.

However, there are circumstances when the company’s rights are incapacitated due to the involvement
in wrongdoing by the relevant organ that would have instituted an action for the company. This is where
the right to sue by the minority is triggered, considered as exceptions to the proper plaintiff and
majority rule in Foss v Harbottle.

In Uganda, like in other jurisdictions observe that the rule is highly restrictive. That if a company is
harmed; it is the right person to sue for the damage. Such a rule is easily applicable where the
wrongdoer is an outsider or the minority inside. How about the wrongdoers being the majority in the
company?9 In Soon Production Limited v Soon Yeong and Kim Dong Yun 10 , the defendants held 60%
shares, they could not pass a resolution to file a suit against themselves. The court observed that it is
settled law that it does not require a board of directors or even a general meeting of members to sit and
resolve institution of proceedings for a company. Any director who is authorized to act on the
company’s behalf, unless the contrary is shown, can. Justice Odoki observed that corporate personality
cannot be used as a cloak for improper conduct. 11 Courts in Uganda have therefore mitigated this
restrictive approach by allowing minority shareholders to sue, while at the same time avoiding
interfering in companies’ internal management as discussed in the following essay. It is crucial to note
that where such an act is allowed, the shareholder is neither really suing on his behalf nor of the
members generally, but on the company’s behalf. 12 He/she is not acting as a representative of the
other shareholders but as a representative of the company.13 This is the reason why the court in Salim
Jamal, Shabir Abji and Alnoor Jamal v Uganda Oxygen Ltd, Oxyco Holding Ltd and BE Shamji 14 , court
observed that it is an exercise of judicial discretion or following the principles of equity that courts
should order the company to pay the plaintiff’s costs down to the judgment whether the suit succeeded
or not. Derivative claims. In the Uganda Oxygen Case 15 , the court held that an action is derivative
when based upon a primary right of the corporation but asserted on its behalf by a shareholder because
of the corporation’s failure, deliberately or otherwise to act upon the primary right. It is a common-law
device by which a shareholder can be allowed to seek redress for and on the company’s behalf for an
injury to it. It was expounded in Prudential Assurance Company Ltd v Newman Industries Ltd and Others
16 that a derivative action is an exception to the elementary principle that A cannot as a general rule,
bring an action against B to recover damages or secure other relief on behalf of C for injury done by B to
C. C is the proper plaintiff because C is the injured party, therefore the person in whom the cause of
action is vested. In Joel Odong Amen and Another v Drocero Andrew and Another 17 , the plaintiffs held
40% and the defendants 60% shares of Rhino Communication Company and agreed to sell it. The
defendants however on receiving sale proceeds refused to hand over the 40% held by the plaintiffs and
went ahead to appropriate company money from two accounts. Referring to Foss v Harbottle, the
defendants argued that the plaintiffs, being minority shareholders had no cause of action and were not
the ones to institute the suit but the company itself.

This argument was however rejected by the court, citing Gower’s Principles of Modern Company Law 18
, observing that the exception to the rule in Foss v Harbottle include; (i) Where it is claimed that the
company is acting ultra vires (ii) When the act complained of though not ultra vires, could be effectively
resolved by more than a simple majority vote, say where an extraordinary resolution is required and it is
alleged that it has not been validly passed (iii) It is alleged that the personal rights of the minority have
been infringed or are about to be infringed at any rate if the wrong is not rectified. (iv) The Controllers
perpetrated a fraud on the minority. (v) Any other case where the interests of justice require that the
general rule be disregarded