Foss v Harbottle 67 ER is a leading English precedent in corporate law. In any action in which a wrong is alleged to have been done to a company, the proper claimant is the company itself. This is known as "the rule in Foss v Harbottle ", and the several important exceptions that have been developed are often described as "exceptions to the rule in Foss v Harbottle ". Amongst these is the " derivative action ", which allows a minority shareholder to bring a claim on behalf of the company. This applies in situations of "wrongdoer control" and is, in reality, the only true exception to the rule.
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As a general rule, Irish law does not permit a shareholder to bring an action on behalf of the company in which it holds shares and treats the company itself as the proper plaintiff. This originates from Foss v Harbottle 1 and derives from the fact that a company has separate legal personality. However, through four recognised exceptions to that rule, a shareholder can bring proceedings on behalf of the company in a derivative action.
In Connolly v Seskin Properties Limited 2 Judge Kelly examined the rule in Foss v Harbottle and whether a fifth exception existed — and, if so, on what terms. The Foss v Harbottle rule reflects the principle that where damage is done to the company itself, it is the company that should bring any claim:.
As stated above, there are exceptions to the rule and, in order for a minority shareholder to bring a derivative action on behalf of the company, it must show " i that the company is entitled to the relief claimed and ii that the action falls within the proper boundaries of an exception to the rule in Foss v. Harbottle ". In Fanning v Murtagh 6 Judge Irvine identified that, as a matter of Irish law, there are four recognised exceptions to the Foss v Harbottle rule, which she summarised as comprising the following categories of wrongdoing:.
In the case at hand, the judge recorded that the applicant had invited him to accept a fifth exception, relying on a Supreme Court of Western Australia decision 7 and an Irish High Court decision. Judge Ipp quoted from Foss v Harbottle , where remarks made by Sir James Wigram VC were indicative that there should be a general power of interference by the courts where justice demands that such a power be exercised.
Judge Ipp stated that:. In Glynn v Owen Judge Finlay Geoghegan acknowledged that although the Supreme Court in Crindle Investments v Wymes 9 did not have to opine on the existence of the fifth exception for the purposes of that appeal, Judge Keane did refer to "the less solidly based fifth exception which suggests that the rule may be relaxed where the interests of justice so require", and also recorded his extra-judicial writings which were more positive as to its existence.
Nevertheless, the entitlement of a shareholder to pursue by way of derivative action a claim for and on behalf of a company is an exception to the elementary principle As such, it should broadly or liberally applied. A very strong case would have to be made out. It would have to be consistent with the principles underlying the rule in Foss v. Harbottle and the exceptions to it. These include the reluctance of the courts to interfere in the internal management of a company.
In the case at hand the applicant contended that he fell within the fourth exception — namely, that the matters about which he complained constituted a fraud against the minority and the wrongdoers themselves were in control of the company.
In the alternative, he relied on the fifth exception. In considering whether to give leave, Judge Kelly recorded that the applicant accepted that the onus was on him to demonstrate that he could pursue a derivative action — namely, that he must show that he had a realistic prospect of success in establishing that the company was entitled to the remedy involved and that he fell within one of the exceptions.
Judge Kelly felt that the prospects of succeeding in the underlying claim were poor and, in fact, the potential counterparty had a good prospect of succeeding in its counterclaim.
Even if he were wrong in that, the judge felt that any judgment against the counterparty would be hollow, in that it would have insufficient assets. Notwithstanding that, he went on to consider whether the applicant fell within any of the exceptions to the Foss v Harbottle rule.
On the fourth exception, he felt that the directors had a reasonable basis for believing that there was no claim against the counterparty and that they had not acted with a degree of fraudulent character or moral turpitude. With regard to the fifth exception, he noted that:. Thus, Kelly ruled that there was no case to warrant the court's intervention, much less a very strong one.
The decision usefully confirms that the rule in Foss v Harbottle still limits shareholder claims on behalf of the company, except where recognised exceptions apply.
Although the 'justice of the case' may permit a derivative action, it is only grudgingly acknowledged and an applicant would be better served to rely on one of the other exceptions than to hope that leave to commence a derivative action might be granted on that basis alone. The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. All Rights Reserved.
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Learn More Accept. To print this article, all you need is to be registered or login on Mondaq. Introduction As a general rule, Irish law does not permit a shareholder to bring an action on behalf of the company in which it holds shares and treats the company itself as the proper plaintiff.
Rule and its exceptions The Foss v Harbottle rule reflects the principle that where damage is done to the company itself, it is the company that should bring any claim: " the proper plaintiff in an action in respect of a wrong alleged to be done to a company or association of persons is, prima facie, the company or association of persons itself Civil penalties were introduced to Jersey in The Court of Appeal has provided helpful guidance on the circumstances in which a law firm can be restrained from acting for a defendant where, in earlier similar litigation, the same firm has Two important judgements have recently been handed down in the UK in relation to vicarious liability.
The law in this area had been in a state of A recent case in which the enjoyment of property has been allegedly disturbed by actions taking place on a neighbouring property may pique the interest.
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The Fact Factor
Please contact customerservices lexology. Introduction Rule and its exceptions Determination Comment. As a general rule, Irish law does not permit a shareholder to bring an action on behalf of the company in which it holds shares and treats the company itself as the proper plaintiff. This originates from Foss v Harbottle 1 and derives from the fact that a company has separate legal personality. However, through four recognised exceptions to that rule, a shareholder can bring proceedings on behalf of the company in a derivative action. In Connolly v Seskin Properties Limited 2 Judge Kelly examined the rule in Foss v Harbottle and whether a fifth exception existed — and, if so, on what terms. The Foss v Harbottle rule reflects the principle that where damage is done to the company itself, it is the company that should bring any claim:.
Foss v Harbottle: 25 Mar 1843
Derivative actions and exceptions to Foss v Harbottle
It is a general principle of company law that an individual shareholder cannot sue for wrongs done to a company or complain of any internal irregularities. This principle is commonly known as the rule in Foss v Harbottle. In Foss v Harbottle , two shareholders commenced legal action against the promoters and directors of the company alleging that they had misapplied the company assets and had improperly mortgaged the company property. The Court rejected the two shareholders' claim and held that a breach of duty by the directors of the company was a wrong done to the company for which it alone could sue. In other words, the proper plaintiff in that case was the company and not the two individual shareholders. This rule is derived from two general legal principles of company law. Firstly, a company is a legal entity separate from its shareholders.
Rule in Foss v Harbottle Law and Legal Definition
In this article, we are going to study the Foss v Harbottle case, which introduced the concept of the rule of the majority. A company is a juristic person which is conferred a separate legal entity different from the members who form it i. Decisions of the company are taken by the Member Shareholders and the Board of Directors on behalf of the Company. The company also takes decisions regarding pursuing litigation. As per the Companies Act , shareholders who hold the majority of shares, rule the company. This majority principle is recognized in a landmark case Foss v Harbottle.