The Majority Rule and the Minority

• As a rule, the majority has its way in the

management of a company. It means that the
will of the majority shall prevail and will bind
the minority. The principle is known as the
principle of majority rule as was established in
the leading case of Foss v. Harbottle (1843)
 Facts of the case:
• two shareholder of the company bought an
action against the directors, alleging that they
were guilty of causing loss to the company by
selling their own property to the company at
an exorbitant price. However the majority of
the shareholder in the general meeting
decided not to take any action.
 Decision:
• the court dismissed the case on the ground
that the company alone could bring the action
and not the plaintiff. The court presumed that
the conduct complained of is not an injury to
the minority shareholders alone but to the
whole corporation.
Thus the judgement in foss v. harbottle case
established that the court will not interfere
with the internal management of the
company acting within their powers even if
the management is found guilty of
negligence and inefficiency. There is no use in
taking legal action on matter which the
general meeting is empowered to ratify.
 Protection of Minority
If the rule in Foss v. Harbottle is allowed to be
applied strictly, the majority can exploit the
minority even as great as 49.9%. the law,
whose object is to protect the shareholders
cannot be silent spectator to this whole game.
However the law recognizes certain exception
in the interest of justice and fair play to the
rule in foss v. Harbottle i.e., the rule of
supremacy of the majority.
 Exceptions to the rule of Majority
• Where the act done is ultra vires or illegal
• Where special resolution is required but the act is
done by simple majority
• Where the act of majority constitutes a fraud on
minority
• Where the act done is against the Articles
• Where the personal rights of a members are infringed
• Where there is oppression of minority or
mismanagement
Where the act done is ultra vires or illegal

• Where the directors representing the majority

of shareholders perform an illegal or ultra vires
act for the company, an individual shareholder
has right to bring an action. The majority of
shareholders have no right to confirm an illegal
or ultra vires transaction of the company. In
such case a shareholder has the right to restrain
the company by an order or injunction of the
court from carrying out an ultra vires act.
• “In all matters of internal management, the
company itself is the best judge of its affairs
and the Court should not interfere. But
application of assets of a company is not a
matter of internal management. As directors
are acting ultra vires in the application of the
funds of the company, a single member can
maintain a suit”.
Where the act of majority constitutes a fraud
on minority
• Where an act done by the majority amounts
to a fraud on the minority; an action can be
brought by an individual shareholder.
• Though there is no clear definition of the
expression “fraud on the minority”, but the
court decides a particular case according to
the surrounding facts
• The general test which is applied to decide
whether a case falls in the category of fraud
on the minority or not is whether a resolution
passed by the majority is “bona fide for
benefit of the company as a whole”
• "It mean that the shareholder must proceed
on what, in his honest opinion, is for the
benefit, of the company as a whole.
• Secondly, the phrase ‘the company as a
whole’ does not... mean the company as a
commercial entity as distinct from the
corporators. It means the corporators as a
general body.”
Resolution requiring Special Majority but is
passed by a simple majority
• A shareholder can sue if an act requires a
special majority but is passed by a simple
majority. An individual shareholder has the
right of action to restrain the company from
acting on a special resolution to which the
insufficient notice is served.
 Personal Actions
• Individual membership rights cannot be
invaded by the majority of shareholders. He
is entitled to all the rights and privileges
appertaining to his status as a member.
• Provisions in the memorandum and the
articles are mandatory in nature and cannot
be waived by a bare majority of shareholders
• Where the candidature of a shareholder for
directorship is rejected by the Chairman, it is
an individual wrong in respect of which a suit
is maintainable
 Prevention of Oppression and
Mismanagement
• A company is managed by the decision taken
by the majority shareholders. However.
Sometimes majority may exploit the minority
by running the company, in a manner
prejudicial to the interest of minority
shareholders of the company
• For example: majority shareholders may pass a
resolution that the shares of the minority
shareholders be purchased by the majority
shareholders, at half of their market value and
the minority shareholders should be expelled
from the company. In such a case the law cannot
be a silent spectator. Hence the companies Act
2013 has made elaborate provisions to prevent
oppression of minority and mismanagement.
 Prevention of Oppression
An application for relief may be made by the
requisite number of members, who complain
that the affairs of the company are being
conducted in a manner prejudicial to the
public interest or in a manner oppressive to
any member.
 What is oppression?
• The dictionary meaning of oppression means
cruel treatment to any person. In common
parlance it means unfair or unjust conduct
resulting in unjust or harsh burden. In relation
to a company, the meaning of the term
‘oppression’ was well explained in Elder v
Elder and Weston Ltd (1952)
• “ the essence of the matter seems to be that
the conduct complained off should at the
lowest involve a visible departure from the
standards of fair dealing, and a violation of the
condition of fair play on which every
shareholder who entrust his money to the
company is entitled to rely”
• Similar observations were made by the
supreme court in Shanti Prasad Jain v. Kalinga
tubes Ltd (1965)
• “ there must be continuous acts on the part of
the majority shareholders, continuing up to
the date of petition, showing that the affairs of
the company were being conducted in a
manner oppressive to some parts of the
members.
• For example: depriving the members from
attending meetings, casting their votes or
compelling members to buy additional share
failing which their existing shares will be
forfeited will amount to acts of oppression.
One single instance of oppression will not
constitute oppression to attaract.
Oppression may be in a manner prejudicial to
public interest
• It is not necessary that oppression should be against a member
or members. It may be in a manner prejudicial to public interest.
• The term public interest is very vague. As it cannot be defined
precisely. It means something done for the welfare of the general
public. It is not static concept. It keeps on changing with the
passage of time. It depends upon the facts of each case and
circumstances of each case.
• For example: in past for protection of home Industry against
Foreign competition was considered as public interest in india.
However in the wake of liberaised economic policy of the
government of india, now foreign participation is considered
essential in pubic interest.
 Some examples of Oppression
• Where the majority shareholders tried to force new and more risky
business on unwilling minority.
• Where members are deprived right to vote, to call meeting, to elect
directors and receive dividend.
• Where directors wrongfully refuse to register transfer of shares.
• Where a director holding majority shares, persistently flouted the
decision of the Board making it impossible for the company to function.
• Where the directors issued and allotted shares with malafide intention
to reduce existing majority of shareholder to minority.
However if the allotment were not made with malafide intention, it is not
questionable.
For example : where expansion scheme requires huge amount of capital
etc
Some examples where relief was refused:

• Where the relief claimed by a person is not in his

capacity as a member.
• Relief cannot be granted for mere inefficiency or error of
judgment on the part of management.
• Where a member holding even 30% shares of a company
is not allowed inspection of the books of accounts of the
company, as the shareholder does not have a legal right.
• Where the company does not declare any dividend, the
shareholders cannot insist on the payment of dividend.
There is no oppression