MINORITY SHAREHOLDERS AND CORPORATE IRREGULARITIES
| Published date | 01 March 1978 |
| Author | R. J. Smith |
| DOI | http://doi.org/10.1111/j.1468-2230.1978.tb00793.x |
| Date | 01 March 1978 |
MINORITY SHAREHOLDERS AND CORPORATE
IRREGULARITIES
A.
INTRODUC~ION
THE
ability
of
an individual shareholder to complain
of
an irregu-
larity in the conduct of corporate affairs has long been
a
source
of
controversy. The reports are replete with examples
of
successful
and unsuccessful actions-reconciling them has proved extraordi-
narily difficult.
The basic problem is that the area represents
a
conflict between
two principles
of
company law. The first
is
that the articles
of
association constitute
a
contract between the shareholders and the
company,
so
that failure to observe the articles is, prima facie,
actionable at the instance of
a
shareholder:
s.
20
(1)
of the
Companies Act
1948.
On the other hand, the rule in
Foss
v.
Har-
bottZe
requires that corporate litigation be in the company's name.
It
is
not possible to sidestep
Foss
v.
Hurbottle
by simply saying that
the shareholder's
personal
right under section
20
(1) takes the case
outside the concept
of
corporate litigation:
Motley
v.
Alston.'
This
may be justified by the modern explanation
of
Foss
v.
Harbottle
as
being based on the ratifiability
of
the irregularity complained
of.3
Corporate irregularities may be regarded
as
ratifiable by
a
majority
in general meeting and therefore a matter
of
internal management
only.
The problem is illustrated by contrasting two well known leading
cases.
Perhaps the clearest example
of
a
successful personal action
is
Pender
v.
L~hington,~
in which the plaintiff's vote
was
wrong-
fully excluded. Jesse1
M.R.
had no difficul'ty in holding that the
consequent rejection
of
the resolution in question was bad and he
issued an injunction to prevent the directors from acting inconsist-
ently with the terms of the resolution. Yet two years earlier, in
MacDougall
v.
G~rdiner,~
a
very different approach had been taken
when the plaintiff's call for
a
poll (on an adjournment resolution)
was improperly rejected.
As
in
Pender
v.
Lushington,
if
the irregu-
larity had not taken place the result
of
the vote would have been
different. Yet the Court
of
Appeal stressed that the irregularity was
a
wrong to the company and could be ratified by
a
majority in
general meeting, being merely
a
matter
of
internal management.
Therefore the plaintiff's action
was
dismissed.
One could postulate three possible solutions to these divergent
approaches. First, that no personal action can survive the effect
of
Foss
v.
Harbottle.
This is clearly untenable: there are innumerable
1
(1843)
2
Hare
461.
2
(184%
1
Ph.
790;
also
Lord
v.
Copper
Miners'
Company
(1848)
2
Ph.
740.
3
e.g.
Wedderburn
[19571
C.L.J.
lW,
197-199.
4
(1877)
6
Ch.D.
70.
5
(1875)
1
Ch.D.
13.
147
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