The Rule in Foss V Harbottle: Examining the current position of the rule under Ghanaian Company Law
The Rule in Foss V Harbottle: Examining the current position of the rule under Ghanaian Company Law
The Companies Act 2019 (Act 992) is the law that governs companies in Ghana. The Companies Act 2019, (Act 992) came into force in 2019 to repeal the Companies Act, 1963 (Act 179) in order to improve the existing corporate governance standards in Ghana and as well as to conform with international standards.
The rule in Foss v Harbottle which is otherwise known as the Majority Rule has its roots in a landmark case in English law dating back to 1843. The case of Foss v Harbottle, is an established company law principle that governs the proper plaintiff rule in a legal action where a wrong has been done to a company.
The rule which is a well established principle in the area of company law and it is applicable in most Anglo common law jurisdictions, including Ghana. The rule has its foundation rooted in the history of Ghanaian Company Jurisprudence has been manifestly seen to be applied in a plethora of local cases under the dispensation of the Companies Act, 1963 (Act 179) which was in operation for 57 years.
Notwithstanding the repealed Companies Act, 1963 (Act 179) the rule is still applicable today by virtue of Section 5 of the Companies Act 2019, Act 992 and the Supreme Law being Article 11(1)(e) of the Constitution, 1992 which paves way for the inclusion of the rules of common law part of the laws of Ghana.
Section 5 of the Companies Act 2019 provides that
“the rules of equity, and of common law, applicable to companies shall continue in force unless they are inconsistent with the provision of this act”
Article 11(1)(e) of the Constitution, 1992 being the mother provision that justifies the inclusion of Rules of Common law and equity as part of the rules applicable to Companies provides that
“the laws of Ghana shall comprise-
(e) the common law”.
In this essay, I seek to delve into the realms of the common law rule of FOSS v HARBOTTLE, discussing its development and dissecting it’s efficacy under the Companies Act, 2019 (Act 992). As I navigate the nuances of this Common law rule of Foss V Harbottle, I would throw more light on the current position on the efficacy of this principle.
Fact of the case
Richard Foss and Edward Starkie Turton were two minority shareholders in the “Victoria Park Company”. The company had been set up in September 1835 to buy 180 acres (0.73 km2) of land near Manchester to transform it into a Park known as Victoria Park, Manchester. Subsequently, an Act of Parliament incorporated the company.
The claimants sued five Directors of the company (Thomas Harbottle, Henry Byrom, John Westhead, Richard Bealey and Joseph Denison) alleging that the property of the company had been misapplied and wasted and various mortgages were given improperly over the company’s property and sought for damages. The defendant argued that the plaintiffs did not have any right to bring the legal action against them on behalf of the company.
Judgement and Rationale
The issue set down for determination was whether or not the Plaintiffs being members of the company could maintain an action on behalf of the Company. Wigram VC dismissed the claim of the plaintiffs and held that shareholders of a company are not the proper person to bring legal action for or on behalf of the company. The reason that shareholders of the company cannot sue is that since Victoria Park Company is an incorporated body and it is the one who has actually suffered injury and not its members, it is only the company that can sue or take any legal action against those directors who have misappropriated and misapplied its property.
He followed the judgements passed in older cases on the unincorporated companies and insisted the minorities to show that they have exhausted all the possibilities of avenues for redress within the internal forum as he has stated that the courts will not intervene in those cases where majority of the shareholders can ratify the irregular conducts, but this rule was considered as unfavorable for the minorities because it barred them from taking any legal action whenever the alleged misconduct was in law capable of ratification.
This case brings into life, two principles and they are; the PROPER PLAINTIFF RULE and the MAJORITY RULE.
Application and Impact of the rule under Ghanaian Company Jurisprudence
The rule in Foss V Harbottle has been applied repeatedly in a plethora of Ghanaian cases since the coming into force of the Companies Act, 1963 (Act 179) which in effect has had a great impact in the evolving landscape and development of company law in Ghana. Save to say that, the rule in Foss V Harbottle has enjoyed absolute dominance and application during the dispensation of the Companies Act, 1979 (Act 179) which was in operation for 57 years.
PROPER PLAINTIFF RULE
I would begin to discuss the first rule which is; the PROPER PLAINTIFF RULE. This rule in effect connotes that where a wrong is perpetuated against a company, it is only the injured company that can bring an action against the tortfeasor or wrongdoer. The rationale of this leg of the rule can be seen to have been the basis for the decision in the earlier case of Salomon V. Salomon & Co. Ltd [1897] AC 22, which is to the effect that once a company is incorporated it assumes a legal personality separate and independent from the identity of its shareholders.
Hence, any rights, obligations or liabilities of a company are discrete from those of its shareholders, where the responsibility of the Shareholders are only limited to their capital contributions, known as “limited liability” whiles incorporated body assumes a legal personality which makes it distinct and separate from it members.
In SUIT NO. 2/61: APPENTENG v. BANK OF AFRICA LTD. [1961] G.L.R. 196; the plaintiffs, who were shareholders of the Mpotimma Ltd, brought an action against the defendant bank in their capacity as shareholders, seeking damages for negligent financial advice provided by the bank, which resulted in significant financial loss of the company. The defendant contended that the plaintiff were not the proper persons to bring the action since the negligent financial advice, was given to the company and not the plaintiff.
In that case, which went before Ollennu J. (as he then was) held at p. 203 that “a shareholder has no legal right that a company should always be a going concern.” That was basis for holding against the plaintiffs and subsequently the dismissal of their action. He further stated at p. 203; “that loss of business interests and yearly profits and dividends do not constitute an invasion of any legal rights of the plaintiffs, shareholders of Mpotima Ltd.”
Also, the PROPER PLAINTIFF RULE was also applied in the case of AFRICAN TRADING FZC v. H. R. MINERALS & MINE LTD. (2017) JELR 64157. This was application for intervener by a director of the defendant company who held 50% shares to be joined to the suit as an intervener or have the suit dismissed.
The applicant alleged that the managing director commenced this suit without authorization by the shareholders of the plaintiff company.
The court in dismissing the application for intervener held inter alia that “even though the Applicant accuses the Managing Director of acting without authority, he on the other hand has not demonstrated that he is acting for and on behalf of other Shareholders/Directors. The question therefore is who made him the agent and spokesperson for the others?
Clearly, in my view this is a case of the proper Plaintiff rule which is that when a wrong is done to a company, it is only the Company and not the members who can bring an action to remedy the wrong. It is trite that a Company acts through its Officers and in this case the Managing Director clothed with authority has acted. I note that at the hearing of the application when the Court asked Counsel for the Applicant if the instant suit was not in the interest of the Company and to its benefit he answered in the affirmative, that it was but the MD is acting without authority”.
The Ghanaian land case of KWAN v. NYIENI (1959) GLR 67 CA, also brings into play the PROPER PLAINTIFF RULE. In that case, the court held as a general rule for the recovery of family land, it was the head of family who is the proper person to institute an action for the recovery of family land. The Court of Appeal further laid down three exceptions to the general principle as follows;
(i) where the family property is in danger of being lost to the family, and it is shown that the head (either out of personal interest, or otherwise) will not make a move to save or preserve it; or
(ii) where, owing to a division in the family, the head and some of the principal members will not take any step; or
(iii) where the head and the principal members are deliberately disposing of the family land.
MAJORITY RULE
The second rule is the MAJORITY RULE which emphasizes that the majority shareholders or those with majority of shares hold the decision-making power of the company. By the majority rule, any decision taken or resolution reached by the majority binds the company, its officers and the minority even if they disagree with the decision.
This rule echoes where there is an alleged wrong which can be confirmed or ratified by a simple majority of members in the general meeting, then under such circumstances, the courts will not interfere.
This rule was reiterated in the case of McDOUGALL v GARDINER (1875) 1 Ch D 13, 25, per Mellish LJ.
In my opinion, if the thing complained of is a thing which in substance, the majority of the company are entitled to do, or if something has been done irregularly which the majority of the company are entitled to do regularly, or if something has been done illegally which the majority of the company are entitled to do legally, there can be no use in having a litigation about it, the ultimate end of which is only that a meeting has to be called, and then ultimately the majority gets its wishes”.
Also, this rule was given judicial blessings in the case of PINNAMANG v ABROKWA (1991) 2 GLR 384 (CA). This case involves two applicants, Michael Kwaku Abrokwa and James Adona Mensah, shareholders in Ashanti Furniture Co. Ltd., who sought the removal of Francis Kwaku Pinamang, the managing director of the company, under section 218 of the Companies Code, 1963 (Act 179).
The applicants alleged that Pinamang was conducting the affairs of the company in a manner oppressive to them and sought his removal from the board, among other things. The trial judge ordered an investigation into the company’s affairs, continuation of the acting managing director in office, payment by Abrokwa for services rendered by the company, accounting by Pinamang for all moneys collected without proper receipts, valuation of the company’s shares, and opportunity for Abrokwa and Mensah to buy out Pinamang.
On appeal, the appellant argued that the trial judge erred in inquiring into matters of internal management and disregarding the rule in Foss v. Harbottle. The appeal court found that the applicants failed to prove that Pinamang’s conduct was oppressive within the meaning of section 218 of Act 179.
Lamptey J.A in his judgment held “In this respect the courts have held that the rule in Foss v. Harbottle (1843) 67 E.R. 189 must be observed by the trial court and it must not inquire into matters of internal management or, at the instance of a shareholder, interfere with transactions which though prima facie irregular and detrimental to the company, are capable of being rectified by an ordinary resolution of the company in a general meeting. It will be shown in due course that the learned trial judge fell into the error of inquiring into matters of internal management such as, for instance, as the complaint by one of the applicants that he has been demoted and that his post had been downgraded.”
From the foregoing cases, it is without doubt that under the dispensation of the Companies Act, 1963 (Act 179) the rule in FOSS v HARBOTTLE gained dominance and enjoyed under the unction of our Ghanaian Court and statutory blessing bestowed upon it by virtue of Section 7 of the Companies Act, 1963 (Act 179).
Exceptions to Rule
The strict application of the rule in FOSS v HARBOTTLE appeared to be very harsh and unjust for the minority shareholders, as although a substantive right has been provided to them, they were barred from obtaining justice under the rule and have to submit to the wrongs done by the majority as they were the ones who control the company and minority members have no say due to their small strength.
Under this sub heading, I would proceed to dovetail into the exception created to the rule in FOSS v HARBOTTLE in two folds;
- Exceptions under common law
- Exceptions under the Companies Act, 2019.
EXCEPTIONS UNDER COMMON LAW;
- The first exception deals with the situation where fraud has been committed on the minority. In the case of Menier v Hooper’s Telegraph Works(1874) LR 9 Ch App 350 , where Menier was a minority shareholder who complained that there were self-interested transactions between a majority member and the company. The main issue here on fraud is about misappropriation of corporate assets. The court then held that a minority shareholder’s action was properly given in such circumstances.
Again, In Daniels v Daniels(1978) 2 All ER 89, another example of fraud can be seen on the issue of negligence which becomes beneficial to the wrongdoers. In this case there were three minority shareholders who claimed that the two directors and majority shareholders had been negligent in making the company sell land to Mrs. Daniels at a lower price although it was worth more. It was held that it was right to sue in such a situation.
- The second is where an act requires a special In the case of Edwards v Halliwell (1950) 2 ALL ER 1064, there were two members of trade union who obtained a declaration that a resolution increasing members’ subscriptions was invalid because the required two-thirds majority for such a resolution was not obtained. It was held by Jenkins LJ that the stated act could have been done only by two-thirds majority and not by a simple majority, therefore the rule in Foss v Harbottle cannot be relied upon as the members were suing only to protect their own rights in their capacity as members and not suing in the right of the union because the wrong had not been done against them.
Also, in that case Jenkins LJ in his judgment noted the exception pointed out by Romer J. in COTTER v NATIONAL UNION SEAMEN as follows; “he pointed out that the rule did not prevent an individual member from suing if the matter in respect of which he was suing was one which could validly be done or sanctioned, not by a simple majority of the members of the company or association, but only by some special majority, as, for instance, in the case of a limited company under the Companies Act, a special resolution duly passed as such. As Romer J. pointed out, the reason for that exception is clear, because otherwise, if the rule were applied in its full rigour, a company, which, by its directors, had broken its own regulations by doing something without a special resolution which could only be done validly by a special resolution could assert that it alone was the proper plaintiff in any consequent action and the effect would be to allow a company acting in breach of its articles to do de facto by ordinary resolution that which according to its own regulations could only be done by special resolution. That exception exactly fits the present case inasmuch as here the act complained of is something which could only have been validly done, not by a simple majority, but by a two-thirds majority obtained by ballot vote. In my judgment, therefore, the reliance on the rule in Foss v Harbottle in the present case may be regarded as misconceived on that ground alone.”
- The third exception is where the company acts ultra vires or illegal. In the case of Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) 1982 ) Ch 204 the Court of Appeal said that where the wrongful act is ultra vires the company, then the rule will not operate because the majority of members cannot confirm the transaction.
- The fourth exception to the rule in FOSS v. HARBOTTLE is where the majority infringes on the personal rights of the minority.
STATUTORY EXCEPTIONS TO THE APPLICATION OF THE RULE;
It is worth reiterating that the rule in Foss v. Harbottle is applicable in Ghana by virtue of Section 5
of the Companies Act, 2019 (Act 992) which provides that
“the rules of equity, and of common law, applicable to companies shall continue in force unless they are inconsistent with the provision of this act”
1.The first exception to the rule is provided for under Section 19(5) of Act 992. It states as follows
On the application of
(a) a member of the company, or
(b) the holder of debenture holder secured by floating charge overall or any of the property of the company or the trustee for the holders of those debentures,
the court may prohibit, by injunction, the doing of an act or the conveyance or transfer of a property in breach of subsection (1).
Section 18 of the companies act which provides that company shall have full capacity to carry on or undertake any business or activity. I must draw to your attention that this is one of the novelties introduced by Act 992.. The import of section 18 is that during the inception or incorporation of a company, one is not mandated to state or provide the nature or object of business of that company. However, section 19 (1) places limits on the authority of the company when it comes to businesses and transactions. Section 19(1) is to the effect that where the registered constitution of a company set out the nature of business or the object of business of the company, then there is deemed to be a restriction in the registered constitution on the business activities which the company can engage in.
The provision of Section 19(5) clothes a member or a debenture capacity to bring an application for injunction to restrain a company where the company acts ultra vires it stated objective(s).
- Another exception to the rule in FOSS v. HARBOTTLE is provided for under section 219 of the Companies Act, 2019(Act 992) which caters for the remedy against oppression.
Section 219(1) of Act 992 provides;
A member or debenture holder of a company or, in a case falling within section 234, the Registrar may apply to the Court for an order under this section on the ground that
(a) the affairs of the company are being conducted or the powers of the directors are being exercised in a manner oppressive to one or more of the members or debenture holders or in disregard of the proper interests of those members, share-holders, officers, or debenture holders of the company; or
(b) an act of the company has been done or is threatened or that a resolution of the members, debenture holders or a class of them has been passed or is proposed which unfairly discriminates against, or is otherwise unfairly prejudicial to, one or more of the members or debenture holders.
The provision cloths a member or debenture holder the rights to apply to the courts whenever the affairs of the company are conducted to oppress them. For a member or debenture holder to successfully invoke Section 219, that member or debenture holder must proof that the majority or affairs of the company is indeed oppressive. The standard of proof required of the member or debenture holder seeking to invoke Section 219(1) is the Civil standard.
The Marriam-Webster dictionary defines Oppression as “unjust or cruel exercise of authority or power”. In the case of MAHAMA v SOLI (1977) GLR 215 it was held that word “oppressive” in section 218 (1) of Act 179, now section 219(1) of Act 992 is not a term of art. The learned judge cited the case of In Re H. R. Harmer Ltd. [1958] 3 All E.R. 689 at p. 690, C.A. it was said the word must be construed in its ordinary sense and means, burdensome, harsh and wrongful.
Therefore, a member who fails to prove any of the elements of Section 219 would fail in his action. case in point is PINNAMANG v ABROKWA (1991) 2 GLR 384 (CA), supra.
Moreso, Section 218(1) also provides an exception to the rule in FOSS v HARBOTTLE which is to the effect that the court on the application of member may by injunction restrain a company for doing an act beyond the capacity of the company. It provides as follows;
The Court on the application of a member may by injunction restrain the company,
(a) from doing an act or entering into a transaction which is illegal or beyond the power or capacity of the company or which infringes a provision of the constitution of the company, or
(b)from acting on a resolution not properly passed in accordance with this Act or the constitution of the company, and may declare that act, transaction or resolution already done, entered into, or passed to be void.
This provision is similar to what has been discussed under point two (2) and pursuant 218(3), the whole of Section 218 is subject to Section 19 of the Companies Act, 2019, (Act 992)
A major distinction between Sections 19(5) and 218(1) is that the former can be invoked by a member and a debenture whiles the later can only be invoked by member.
Again, another exception to the rule in Foss v. Harbottle is provided for in section 200(1) of Act 992 which provides that a member may bring an action to enforce the liabilities of the director under section
199, restrain the directors from a threatened breach under section 190 to 192 or recover from any director any property belonging to the company.
Section 200(1) provides as follows;
Proceedings may be instituted by the company or by a member of the company to
(a) enforce the liabilities referred to in section 199;
(b) restrain a threatened breach of a duty under sections 190 to
192; or
(c) recover from a director of the company a property of the company.
Section 190 of Act 992 spells out the duties required of a director and they include; observing the utmost good faith towards the company in a transaction with or on behalf of the company, serve the best interests of company, exercise powers for which they are conferred and among others
Section 191 of Act 992 also provides that a director shall not, without the approval on an ordinary resolution of the company exceed the powers conferred on the director by this Act.
Section 192 also stipulates requires in a manner that is interest does not conflict with that of the company.
Whenever there is a breach of any of the duties and responsibilities required of a director under Sections 190, 191 and 192 of the Companies Act, 2019 (Act 179), any member of the company may invoke Section 200(1) to institute legal proceedings against that director.
The fifth exception to rule is provided for under section 29. Section 29(1) stipulates that a company’s constitution has the same effect of a contract under seal between the company and each member or
officer of the company. In support of this, section 29(3) further cloths a member or an officer of the company the power to bring an action to enforce the obligation owed under the Constitution to that member.
Section 29(3) provides as follows;
In an action by a member or an officer to enforce an obligation owed under the constitution to that member or officer and any other member or officer, that member or officer shall, if any other member or officer is affected by the alleged breach of the obligation, sue in a representative capacity on behalf of that member or officer and all other members or officers who may be affected other than any who are defendants and the provisions of section 205 shall apply.
Furthermore, the Ghanaian case of P. S . INVESTMENT LIMITED v . CENTRAL REGIONAL DEVELOPMENT CORPORATION (CEREDEC) AND 13 OTHERS |2012] GHASC 21; The case involves a shareholder of Twifo Oil Palm Plantation Limited (TOPP) challenging the sale of shares by the Central Regional Development Corporation (CEREDEC) to Unilever Ghana Limited, alleging it was contrary to company regulations and the Companies Act, 1963 Act 179. The plaintiff argued that the shares should have been offered to existing shareholders first, but the trial judge and the Court of Appeal dismissed these claims. On further appeal, the Supreme Court discussed the rule in Foss v.
Harbotle which states that only the company, not its members, can bring an action to remedy an alleged wrong and also noted that exceptions to this rule exist, such as when there is an irregularity in passing a resolution or when a fraud has been committed on the minority. The Court held inter alia that, “P.S Investments Limited (15.53% shareholding) has the right to seek any legal redress if found necessary under the Laws of the Republic of Ghana in Court”. It was further ruled in favor of the plaintiff, declaring the sale of CEREDEC’s shares in TOPP to Unilever void due to a breach of Regulation 32(a).
This decision of the Supreme Court of Ghana in that case has whittled down significantly the efficacy of the PROPER PLAINTIFF LEG of the rule in FOSS v HARBOTTLE (1843).
The majority rule can be seen to have been given statutory blessings and still intact. Sections 144(3), 144(5)(c) and 5 of Act 992 and they provided as follows;
Section 143(3);
Subject to this act, the respective powers of the members in general meeting, and the board of directors may be determined by the constitution of a company.
Section 144(5)(c);
Subject to section 145, the members in general meeting may
(c) ratify or confirm an action taken by the board of directors;
Section 5;
The rules of equity and of common law, applicable to companies continue in force, unless they are inconsistent with the provision of this act.
The provisions discussed above under the Companies act, 2019 are the exceptions to the common law rule in FOSS v HARBOTTLE which cripples the rule. Section 19(5) and 218 of Act 992 sufficiently whittles down the scope and effect of the Rule, particularly the PROPER PLAINTIFF which is to the effect that where a wrong is done to a company, it is only the company that can bring action against the wrongdoer. The current position is that under the Companies Act 2019, (Act 179), a member is allowed to bring an action where it is alleged that the member’s right has been violated, where a wrong is done to a company, where the company acts ultra vires its constitution, where a director breaches his fiduciary duty owed to the good, where a director acts in bad faith and among others.
Notwithstanding the exceptions, the Companies Act, 2019(Act 992) provided the means a member of a company may commence an action under the auspices of the provisions that created the exceptions to the rule in FOSS v HARBOTTLE. Section 201 allows members and directors of a company after leave has been obtain in the court to bring proceedings in the name and on behalf of the company. Section 205 also clothes members with capacity to institute legal actions, in a representative capacity on behalf of the person and any of the member of a class. The act is silent of the class of members or persons who can bring an action under Section 205, thus clothing both preference and ordinary holders the capacity to bring an action.
As Ghanaian corporate law continues to develop, it becomes evident that this rule no longer meets with the demands under contemporary company jurisprudence, and thus has been rendered obsolete by the provisions of Act 992 with more suitable mechanisms.
Conclusion
The Companies Act, 2019(Act 992) has made various modifications to rule in FOSS v HARBOTTLE, thereby rendering it a toothless bulldog in the present Ghanaian Corporate Jurisprudence.
By the virtue of the combine effect of sections 19(5), 29(3), 200(1), 218, 219, 201, 205 together with the cases of PS Investment v CREDEC, it is the humble view of the author that the rule in FOSS v HARBOTTLE has been significantly whittled down.
By Darlington Amofa (darlnewsgh@gmail.com)
About The Author
