Rules in Foss v Harbottle

The rule in Foss v Harbottle contains two principles.

The first principles is the proper plaintiff principle, also referred to as proper plaintiff rules. This means where a wrong is done to the company, only the company itself can sue to remedy it. Therefore, an individual member is not allowed to sue in the name of company.

The second principles is the majority principle, also referred to as majority rules. This mean where an alleged wrong is made binding on the company by a simple majority of the members, the minority must abide by that majority decisions.

This rule is a very important one because it upholds the status of the company as a separate legal entity with the power to sue and being sued in its own name. Further, it recognize that as a company is an artificial entity without its own will and mind, its decision would have to be the decisions of the members themselves. Therefore, the decisions of the majority of the members will prevail.

The following are the advantages of the rule in Foss v Harbottle:

1. It prevents multiplicity of suits.

-This means where a wrong is done to the company, this rule would enable the company to institute one action to remedy it instead of allowing members themselves to sue resulting in numerous action being brought to remedy the same wrong.

2. It prevents wasteful actions.

-As the courts are likely to accept the decision of the majority, actions brought by the minority may be a mere waste of their time, energy and money. It may also be a waste of the court's time as well.

3. It prevents vexatious actions.

-Sometimes, the actions brought solely for the purpose of harassing and embarrassing the company. This rule will eliminate this action.

Despite these advantages, this rule brings at least one major disadvantages. It gives room to the majority who are in control of the company to abuse their superior position to cause grave hardship and injustice to the minority.

In order to alleviate this problem, several exceptions have been developed by the courts as following:

1. where the wrong complained of amounts to a fraud to the minority.

-In such a case, if the wrongdoers are themselves in control of the company, the minority may be permitted to bring a derivative action in the name of the company.

2. where the act complained of is ultra vires the company.

3. where there was a special resolution required for the act complained of, but was not complied with.

4. where there was an infringement of a member's personal right.

5. possibly, where the justice of the case so requires.