Purpose of the rule - statutory provisions, Business Law and Ethics

Purpose of the rule:

It has been stated by various English judges that without the rule in Foss v Harbottle

(i)            There would be futile actions.

 A court order made on an application by an aggrieved minority of members (such as the two members of the Victoria Park Co.) would be made redundant by a resolution passed later on at the company's meeting confirming or ratifying what the minority had complained of in court.

 (ii) There is a likelihood of multiplicity of suits if each and every shareholder were to institute proceedings without any co-ordination with the others.

 (iii) The principle of corporate personality enunciated in Salomon v Salomon and Co. Ltd would be undermined.  Since a company is a separate legal person it is the company that has suffered a wrong but not its members.

(iv) The principle of majority rule would be violated.

 The law views companies as democracies of the majority shareholders. On the other hand whereas the thing complained of is a thing which in substance the majority of the company are entitled to do, or whether something has been done irregularly that the majority of the company are entitled to do regularly, or whether something has been done illegally that the majority of the company are entitled to do legally, there can be no utilize in having litigation about it, the ultimate end of that is only like a meeting has to be recognized, and then ultimately the majority gets its wishes" (per Mellish, L.J. in MacDougall v Gardiner).

Posted Date: 1/15/2013 2:59:13 AM | Location : United States

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