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Published online by Cambridge University Press: 16 January 2009
Recently, addicts of the Foss v. Harbottle rule have had plenty to think about. First there was the epic battle in Prudential Assurance Co. Ltd. v. Newman Industries Ltd. (No. 2), culminating in the mangling of Vinelott J.'s mammoth judgment by the Court of Appeal. While this was in train, there was Cane v. Jones and before it was fully reported there came the decision of Megarry V.-C. in Eastmanco (Kilner House) Ltd. v. G.L.C. One disappointing feature of this feast of litigation is that it should end with so many basic issues seemingly at large. According to Megarry V.-C, it “may be” that the test of whether an individual can sue about an intracorporate dispute “will come to be” whether an ordinary resolution of the shareholders can validly carry out or ratify the acts in question. It was clear, however, that the “justice” of the case was not a practical test of an individual's competence to sue, but merely a reason for creating exceptions to the basic rule.”
1 [1982] Ch. 204, reversing in part [1981] Ch. 257. For comments, see Sealy, L. S. (1981) C.L.J. 29; [1982] C.L.J. 247Google Scholar; Lord Wedderburn, (1981) 44 M.L.R. 202; R. Gregory (1982) 45 M.L.R. 584. The case mainly concerned the conditions entitling an individual shareholder to complain about what was unequivocally a wrong to the company, and is therefore only tangentially connected with the theme of this work.
2 [1980] 1 W.L.R. 1451. For a discussion of other interesting aspects of the decision, see L. S. Sealy [1981] C.L.J. 224.
3 [1982] 1 W.L.R. 2; noted along with the decision of the Court of Appeal in the Prudential case by Sealy [1982] C.L.J. 247; Gregory (1982) 45 M.L.R. 584. Like the Prudential case, this also involved a corporate injury, the main argument concerning the right of controllers to pursue injurious policies.
4 Ibid., at pp. 10–11. The latter sentiment is an echo of a criticism of Vinelott J.'s views expressed by the Court of Appeal in the Prudential case [1982] Ch. 204, 221.
5 [1982] Ch. 204, 211–212, 221. While it was perhaps unforeseeable that the cost of a 70-day action would be incurred, the Court of Appeal thought that the anticipated 30 days in court should have prompted a different approach by the trial judge.
6 (1875) 1 Ch.D. 13.
7 (1877) 6 Ch.D. 70.
8 [1980] 1 W.L.R. 1451, 1455. The jest should not be pressed too far. In Baillie v. Oriental Telephone and Electric Co. [1915] 1 Ch. 503, 515, Cozens-Hardy M.R., speaking of Kaye v. Croydon Tramways Co. [1898] 1 Ch. 358, said that no one would suggest that the counsel who argued that case—Buckley and Warrington L.JJ.—had never heard of the contrary doctrine. An outstanding example of the problem is the recent case of Heron v. A.C.C. (discussed by L. S. Sealy in (1982) 3 Co.Law. 106). The plaintiff complained successfully about breaches of his company's articles. His entitlement to sue, however, was discussed in connection with certain alleged breaches of duty by the directors which were eventually found not to have taken place. Was his entitlement to pursue the successful claim too obvious to mention, or did it pass by default?
9 The problem is, as the writer once heard a farmer Tory candidate say of his Liberal opponent, “like wrestling with a greasy pig.” The best recent attempt to grapple comprehensively with the rival notions is by R. J. Smith (1978) 41 M.L.R. 147.
10 See Wedderburn [1957] C.L.J. 194, 214–215.
11 Smith, op. cit., pp. 148, 149–150, 159–160.
12 Particular sources of muddle, which will not even be mentioned again, are: (i) the tendency (described by Smith, op. tit., p. 160) to link the idea that an individual cannot sue about a matter which is ratifiable by a straight majority with the concept of the majority controlling corporate litigation, and (ii) the use of the word “ratify” to mean almost anything: e.g., formally or informally adopting, or deciding to do nothing about, some voidable or unauthorised act of an official; or complying with, or formally or informally deciding to waive, a prescribed procedure.
13 (1843) 2 Hare 461.
14 Wallworth v. Holt (1841) 4 Myl. & Cr. 619; Fainhorne v. Weston (1844) 3 Hare 387. See generally A. J. Boyle (1965) 28 M.L.R. 317.
15 Carlen v. Drury (1812) Ves. & B. 154.
16 (1843) 2 Hare 461, 491.
17 (1847) 1 Ph. 789.
18 (1843) 2 Hare 461, 492.
19 See Atwool v. Merryweather (1867) L.R. 5 Eq. 464n.
20 Simpson v. Westminster Palace Hotel Co. (1860) 8 H.L.C. 712, 714 (widely cited, though, of course, the ultra vires allegation was not sustained); Bagshaw v. Eastern Union Ry. (1850) 2 M. & G. 389; Clinch v. Financial Corporation (1868) L.R. 5 Eq. 450; Tomkinson v. S.E. Ry. (1887) 35 Ch. 675.
21 Where the plaintiff sues to defend his personal rights he will generally sue on behalf of himself and all other shareholders, except any named as defendants, against the company and the alleged wrongdoers. Where he seeks to pursue his company's claim against the wrongdoers, the difficulty is that the company cannot be made plaintiff without its consent. The law does the next best thing and makes it a nominal defendant, but the result is that, in form, this second type of action is identical to the first. While it is usual in a case in the second class for the court expressly to mention the need for the action to proceed in this way, and while it is obvious that if an action seeks damages or a return of corporate property (e.g., Whitwham v. Watkin (1898) (78 L.T. 188), it has to be one of the second class, a problem arises if the plaintiff seeks a declaration or injunction.
22 Holmes v. Newcastle upon Tyne Abattoir Co. (1875) 1 Ch.D. 682; Hope v. International Financial Soc. (1876) 4 Ch.D. 327; Ooregum Gold Mining Co. v. Roper [1892] A.C. 125; Bellerby v. Rowland & Marwood's [1902] 2 Ch. 144; Towers v. African Tug Co. [1904] 1 Ch. 558. See Horrwitz (1946) 62 L.Q.R. 66.
23 Dumvile v. Birkenhead … Ry.Co. (1850) 12 Beav. 444; Smith v. Duke of Manchester (1883) 24 Ch.D. 611; Studdert v. Grosvenor (1886) 31 Ch.D. 528; Stroud v. Royal Aquarium Society (1903) 89 L.T. 243; Re Jon Beauforte (London) Ltd. [1953] Ch. 131; Parke v. Daily News Ltd. [1961) 1 W.L.R. 493; [1962] Ch. 927; C. Baxter (1970) 28 C.L.J. 280.
24 Gregory v. Patchelt (1864) 33 Beav. 595. For an illustration of the phrase being used within the same judgment to describe conceptually different issues, see Hoole v. G.W. Ry. (1867) 3 Ch.App. 262.
25 (1869) L.R. 7 Eq. 324. See also G.W. Ry. v. Rushout (1852) 5 De G. & Sm. 290; and Re Direct East and West Junction Ry. (1855) 3 Eq.Rep. 479.
26 (1875) L.R. 20 Eq. 383, 394–395.
27 See (1875) 1 Ch.D. 13, per Baggallay J.A. at p. 26, per James L.J. at p. 24.
28 Ibid., at p. 24 (per James L.J.). P- 27 {per Baggallay J.A.).
29 Ibid., at p. 24 {per James L.J.), p. 26 {per Baggallay J.A.).
30 Ibid., at p. 24 {per James L.J.), p. 27 {per Baggallay J.A.).
31 (1875) L.R. 20 Eq. 383, 396, and para. 26 of claim.
32 A possible weakness in this argument is that this fact only receives the briefest mention in one of the judgments: see (1875) 1 Ch.D. 13, 24, per James L.J.
33 It is interesting to observe that the significance of the decision was seen differently by the writer of the Chancery Appeal report ((1875) 10 Ch.App. 606), which is concerned merely with the court's refusal to summon a new meeting.
34 It is an odd paradox that these ideas were put forward in a case where the judges still clung to the old usage whereby the word “company” took the plural verb.
35 (1875) 1 Ch.D. 13, 22.
36 [1982] Ch. 204, 222–223: “the plaintiff's shares are merely a right of participation in the company on the terms of the articles of association.”
37 It is unclear whether a party in the same faction as the one so interfered with can also complain. In Sweny v. Smith, Romilly M.R., dismissing an objection that the plaintiff should not have brought a representative action for something as personal as the improper forfeiture of his shares, said ((1869) L.R. 7 Eq. 324, 333) that it was in the interests of all that shares were not improperly forfeited. While this is not entirely convincing, extreme care is necessary in handling an apparent rival authority, Pulbrook v. Richmond Consolidated Mining Co. (1878) 9 Ch.D. 610. The important point there was that the plaintiff was not complaining as shareholder about the exclusion of himself as director, but as director, about losing the benefits of and attracting the penalties for not performing his office. See Cotton L.J. in Harben v. Phillips (1883) 23 Ch.D. 14, 41. Cf. Smith, op. cit., p. 149. It appears from Heron v. A.C.C. (see n. 8, supra) that, in order to sue, a shareholder need not be motivated by a desire to defend his interests as a shareholder.
38 (1875) 1 Ch.D. 13, 25.
39 Ibid., at p. 23.
40 This point was robustly expressed by Kekewich J. in Tiessen v. Henderson where ( [1899] 1 Ch. 861, 866) he said that the Foss v. Harbottle doctrine involved as a necessary corollary the proposition that before the principle of majority rule could operate the subject-matter of a vote had to be brought fairly before a properly conducted meeting.
41 Apart from cases considered below, see Stecle v. South Wales Miner's Federation [1907] 1 K.B. 361, where it would have been easier to hold that the plaintiff did not have a case. This explanation also fits Campbell v. Australian Mutual Provident Society (1908) 77 L.J.P.C. 117.
42 (1877) 6 Ch.D. 70, 80.
43 [1950] 2 All E. R. 1064, 1066–1067.
44 Smith, op. cit., p. 154, acknowledging these problems, valiantly contends that the critical factor is whether there is an impact upon him personally. Thus he could sue on account of an irregularity in a resolution increasing his subscription, but not where the resolution concerned the spending of corporate money. Unfortunately, however, it is difficult, even in relation to the given example, to face the eristic criticism that there should not be a personal right when all suffer equally: cf. the C.A. in Prudential v. Newman (n. 36, supra). Excellent papers on other problems relating to the enforceability of company articles have been written by G. Prentice (1980) 1 Co.Law. 179 and R. Gregory (1981) 44 M.L.R. 526. In relation to the enforceability of third party rights see n. 37, supra.
45 Cannon v. Trask (1875) L.R. 20 Eq. 669; Second Consolidated Trust Ltd. v. Ceylon Amalgamated Tea Ltd. [1943] 2 All E.R. 567; Hogg v. Cramphom Ltd. [1967] Ch. 254; Howard Smith Ltd. v. Ampol Petroleum Ltd. [1974] A.C. 821. For a recent article see S. Burridge, (1981) 2 Co.Law, 107. There is considerable doubt in the literature (discussed by Smith, op. cit., p. 151) whether these cases ought to be regarded as corporate or personal actions. In some of the cases, e.g., Henderson v. Bank of Australasia (1890) 45 Ch.D. 330, where a chairman improperly disallowed an amendment proposal, there is a particularly severe occurrence of the allied difficulty whether the wrong is an excess of authority or the abuse of a discretion.
46 Clemens v. Clemens Bros. Ltd. [1976] 2 All E.R. 268.
47 See n. 21, supra. Wedderburn (1981) 44 M.L.R. 202, n. 6, suggests that the nature of the action should be specified on the writ.
48 McMillan v. U Roi Mining Co. [1906] 1 Ch. 331; Siemens Bros. & Co. Ltd. v. Burns [1918] 2 Ch. 324; Oliver v. Dalgleish [1963] 1 W.L.R. 1274; Marx v. Estates and General Investments Ltd. [1976] 1 W.L.R. 380.
49 Alexander v. Simpson (1889) 43 Ch. D. 139; Henderson v. Bank of Australasia (1890) 45 Ch.D. 330; Kaye v. Croydon Tramways Co. [1898] 1 Ch. 358; Tiessen v. Henderson [1899] 1 Ch. 861; Shaw v. Tati Concessions Ltd. [1913] 1 Ch. 292; Baillie v. Oriental Telephone and Electric Co. [1915] 1 Ch. 503; MacConnell v. Prill (E.) & Co. [1916] 2 Ch. 57; Musselwhite v. C. H. Musselwhite & Son [1962] Ch. 964.
50 [1974] 1 W.L.R. 638.
31 (1887) 37 Ch.D. 1.
52 [1974] 1 W.L.R. 638, 641. Smith, op. cit., p. 153 objects to similar remarks made by Cotton L.J. in the Browne case on the ground that they could apply equally to special resolutions (considered below) and that they could be taken to justify any irregularity, e.g., a failure to hold meetings altogether.
53 (1887) 37 Ch.D. 1, 10.
54 Ibid., at p. 17.
55 Observing that there are similar cases in which the action failed in spite of being brought by the company (Boschoek Proprietary Co. v. Fuke [1906] 1 Ch. 148; Southern Counties Deposit Bank v. Rider (1895) 73 L.T. 374), Smith, op. cit., p. 150, concludes that reliance on Foss principles was unnecessary (in fact the only mention of Foss v. Harbottle was by counsel in the Browne case) and that the decision was governed by the law of meetings. The courts have not been entirely consistent in this line of cases and on a couple of occasions, raising issues going beyond an intra-corporate dispute, they have seized upon such technicalities: Re Haycroft Gold Reduction and Mining Co. [1900] 2 Ch. 230; Re State of Wyoming (Syndicate) [1901] 2 Ch. 431.
56 [1929] 2 Ch. 58. Similar is Amalgamated Society of Engineers v. Jones (1913) 29 T.L.R. 484.
57 [1929] 2 Ch. 58, 104.
58 Ibid., at p. 107, Lord Hanworth M.R. spoke to the same effect, saying at p. 100 that they were irregularities and no more. Cf. Bowen L.J. in Alexander v. Simpson who stressed ((1889) 43 Ch.D. 139, 149) that the irregularity before him was not to be regarded as a technical point.
59 (1928) 48 T.L.R. 345.
60 [1908] 1 Ch. 84.
61 See Smith, op. cit., p. 159.
62 (1875) 1 Ch.D. 13, 23. It is possible that the concluding words were merely a fancy way of saying that there ought not to be an action at all.
63 [1950] 2 All E.R. 1064, 1067.
64 Ibid., at p. 1067.
65 [1915] 1 Ch. 503, 515. It is surprising that the fact that the operative resolution was a special resolution is hardly ever mentioned.
66 Cf. his approach in Tiessen v. Henderson [1889] 1 Ch. 861 and that of others in Alexander v. Simpson (1889) 43 Ch.D. 139; Henderson v. Bank of Australasia (1890) 45 Ch.D. 330; and MacConnell v. Prill (E.) & Co. [1916] 2 Ch. 57. It is arguable that the Court of Appeal in the Baillie case went further than was necessary in granting an injunction forbidding reliance on the "new" article, which had not come into being: cf. Buckley J. in Oliver v. Dalgleish [1963] 1 W.L.R. 1274.
67 Johnson v. Lyttle's Iron Agency (1887) 5 Ch.D. 687; Re Cawley & Co. [1889] 2 Ch. 209.
68 Moffati v. Farquhar (1877) 7 Ch.D. 591.
69 Mutter v. E. Mid. Ry. (1888) 38 Ch.D. 92; Nebon v. Anglo-American Co. [1897] 1 Ch. 130.
70 Holmes v. Keyes [1959] Ch. 199; Kraus v. Lloyd (J. G.) Pty. Ltd. [1965] V.R. 232.
71 In the past, a problem commonly arose over the tenure of directors, since there was often no power to dismiss them by ordinary resolution. This did not mean, however, that the court would force directors on an unwilling majority in a case where their election had been accidental; Harben v. Philips (1883) 23 Ch.D. 14 and Cory v. Reindeer Steamship Co. (1915) 31 T.L.R. 530. Cf. McMillan v. Le Roi Mining Co. Ltd. [1906] 1 Ch. 331: although, in one sense the attempt to organise a postal ballot would probably have produced the best assessment of the majority will, it should be remembered that in those times the court looked with disfavour on “apathetic” absentees: see Studdert v. Crosvenor (1886) 31 Ch.D. 528.
72 Two exceptional cases, Catesby v. Burnett [1916] 2 Ch. 325 and Oliver v. Dalgleish [1963] 1 W.L.R. 1274, in which the court did rule on this issue are to be explained by the fact that once the court had decided, in the former, as to the eligibility of certain persons to be elected directors and as to the validity of the resolution electing them and, in the latter, as to the admissibility of certain proxies, it was clear that the plaintiff had majority support.
73 See Peterson J. in Foster v. Foster [1916] 1 Ch. 532, 547.
74 See Bamford v. Bamford [1970] Ch. 212, especially Plowman J. at first instance.
75 This creates a problem for those wishing to assert that a shareholder has a “personal right” to deny the validity of such unauthorised actions. Smith asks (op. cit., p. 155) how it is that ratification by the company can affect the personal rights of the individual. A possible answer is that his rights are limited to the right to participate in making the collective decision on the question of ratification.
76 Smith (op. cit., p. 148) points out that the courts seem keener to intevene in cases of threatened breaches, but attributes this to the fact that, as a matter of cold logic, future events cannot be ratified.
77 (1877) 6 Ch.D. 70, 79.
78 These views were adopted by Chitty J. at first instance in Harben v. Phillips (1883) 23 Ch.D. 14, 29–30. But the C.A. considered that immediate harm was unlikely.
79 [1898] 1 Ch. 358. This case has led to difficulties elsewhere. In the Baillie case, the M.R. said ( [1915] 1 Ch. 503, 515) that it concerned a special resolution. At first instance in the Cotter case, Romer J. said ( [1929] 2 Ch. 58, 70) that the Foss rule was probably not applied in it because the directors had voting control. There is no evidence supporting either of these views.
80 [1908] 1 Ch. 84, 108.
81 It should be noted that in many situations the issue whether or not an injury is irreparable may involve complex Royal British Bank v. Turquand problems. In Heron v. A.C.C. (n. 8, supra) the court stressed that it was impossible for the successful bidder to claim to be a bona fide purchaser.
82 In the Harben case (see n. 78, supra) Chitty J. expressly did not care how the form of action was perceived.
83 [1972] 1 W.L.R. 130.
84 Ibid., at p. 140.
85 Ibid., at p. 138. The tone of his remarks is in line with Smith's approach considered in n. 44, supra.
86 Woolfv. East Nigel Gold Mining Co. (1905) 21 T.L.R. 660.
87 This seems to be the best explanation of the Calesby and Oliver cases. See n. 72, supra.
88 [1962) Ch. 964.
89 Ibid., at p. 980.
90 Previously the author analysed this case as analogous to the special majority situation discussed above, in that the plaintiff having SO per cent, of the votes could block the defendants' resolutions but not rescind any that they did pass. Smith (op. tit., p. 153) correctly points out that this idea which, it is submitted, is still sound theory, did not fit the facts, inasmuch as, by the time the dispute arose, the defendants had issued more shares to themselves and their right to do this was not dependent on anything passing at the disputed meeting.
91 [1918] 2 Ch. 324.
92 (1877) 6 Ch.D. 70, 80.
93 Noted by J. Birds (1981) 2 Co.Law. 68.
94 This situation arose in the famous case of Morris v. Kanssen [1946] A.C. 459. The issue as to who controlled the company turned on the validity of certain share issues which depended on who was legitimately a director.
