Majority rule and protection of minority under company laws in Tanzania.

MAJORITY RULE AND THE PROTECTION OF MINORITY

Supremacy of the majority is the fundamental principal of Company law. Generally, a majority of members of a company is entitled to exercise powers of the company and generally to control its affairs. There is no doubt that directors enjoy wide powers in respect of controlling, direction and managing the affairs of the company but one must not forget the fact that directors are elected by majority shareholders. The Companies Ordinance lays down some matters which can be decided by the shareholders at general meeting by simple majority, whereas certain more important matters can be decided by a special majority  of the three-forth of the shareholders. It is therefore, obvious that in the administration of the affairs of the company, it is the wish of the majority shareholders that prevails. Majority shareholders determine the fate of the company.

The principle of majority rule

The principle rule was recognized in Foss v. Harbottle (1843) Hare 461. The rule in Foss v. Harbottle is known as the ‘Majority rule’ or the ‘Proper plaintiff principle’. The rule is that the proper plaintiff in an action to redress an alleged wrong to a company on the part of any one, whether director, member or outsider to recover money or damages alleged to be done to it, is prima facie the company and, where the alleged wrong is any irregularity which might be made binding on the company by simple majority of members, no individual member can bring an action in respect to it.

In Foss v. Harbottle two minority shareholders in a company alleged that its directors were guilty of buying their own land for company’s use and paying themselves a price greater than its value. This act of the directors resulted in a loss to a company. The majority shareholders, therefore, decided to take action for damages against the directors. The majority shareholders in general meeting resolved not to take any action against the directors alleging that they  were not responsible for the loss which has been incurred. The court dismissed the suit on the ground that the acts of the directors were capable of confirmation by the majority of members and held that the proper plaintiff for wrongs done to the company is the company itself and not the majority shareholders and the company can act only through its majority shareholders.

The rationale of the above rule is that a company is a separate legal entity from the members composes it. As such, if any right of the company is violated, it is the company which can bring an action.

The principle laid down in Foss v. Harbottle was stated by Mellish L. J in Macdougall v. Gardiner (1875) 1 Ch. D 13 in these words If the thing complained is the thing which, in substances, the majority of the company are entitled to do, or something has been done irregularly which the majority of the company are entitled to do so regularly 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 legally, there can be no use in having litigation about it, the ultimate end  of which is only that a meeting has to be called and then ultimately the majority gets wishes.

In Macdougall v. Gardiner (1985) 1 Ch. D 13, the article of a company empowered the chairman, with the consent of the members in a meeting to adjourn a meeting and also provided for taking a poll, if demanded by the shareholders. The adjournment was moved and declared by the chairman. A shareholder brought an action for declaration action that the chairman’s conduct was illegal. It was held that the action could not be brought by the shareholder. If the chairman was wrong only the company could sue.

Advantages of Rule in Foss v. Harbottle 

1. Recognition of the separate legal personality of a company i.e. if a company has suffered some injury, and not the individual members, it is the company itself which can seek redress. 

2. Need to preserve the right of majority to decide i.e. the principle in Foss v. Harbottle preserves the right of the majority to decide how affairs of the company shall be conducted. It is fair that the wish of the majority should prevail.

3. Multiplicity of futile suits avoided i.e. clearly, if every individual member were permitted to sue anyone who was injured the company through a breach of duty there could be enormous waste of time and resources.

4. Litigation at the suit of minority is futile if majority do wish it. If the irregularity complained of is one which can be subsequently ratified by the majority, it is futile to have litigation about it except with the consent of the majority in general meeting.

Protection of minority Shareholders (Exception to the rule in Foss v. Harbottle)

It has become clear from the Rule in Foss v. Harbottle that is the majority rule that prevails in company management. Such wide powers concentrated in their hand may be misused to exploit the minority shareholders and serve their personal ends. The possibility of such domination will be even more in case of private companies where a majority of shares may be held by few individuals. It is therefore,  rightly pointed out by  Palmer that “a proper balance of the rights of majority and minority shareholders is essential for the smooth functioning of the company. 

In order to prevent the majority from misusing this privilege and at the same time to ensure justice to minority shareholders, certain exceptions to Foss v. Harbottle have been admitted which are as follows  

1. Acts which are ultra vires-

It may be noted that the rule in Foss v. Harbottle will apply only when the act done by the majority is one which the company is authorized by its memorandum to do. Any act done by the majority beyond the object clause is ultra vires and it can not be ratified even if every shareholder is willing to do so. In the case of ultra vires acts even a single shareholder can restrain the company from committing those acts by filling a suit for injunction. Similarly the majority rule will not apply if the act is illegal.

2. Acts Supported by insufficient majority

For Certain acts, the companies Ordinance or the articles of accompany require a special majority of three-forth of the shareholders. The Rule in Foss v. Harbottle cannot be invoked to override these requirements by a resolution passed by a simple majority. If the requirements of a special majority are not fulfilled, any shareholder can restrain the company from acting on the resolution.

3. Where the act of majority constitute fraud on Minority

The rule in Foss v. Harbottle will not apply to such acts of majority which constitute fraud on majority. Majority powers must be exercised bona fide for the benefit of the company as whole. A resolution would constitute a fraud on minority if it is not bona fide for the benefit of the company as whole. In such case the decision of the majority can be challenged by the minority. In Menier v Hooper’s Telegraph works Ltd. (1874) Companies A and B were rivalry. The majority shareholders of company A were also the shareholders of company B. Company A had filed a suit against company B. later, shareholders of a company. A passed a resolution to compromise the action against company B in such a manner that the terms of compromise were favorable to company B and unfavorable to company A. The minority shareholders questioned the power of the majority to make said compromise and the court set aside the same. It was observed that “it would be a shocking thing if that could be done….then the majority have put something in their pockets at the expenses of the majority.”

4. Where it is alleged that the personal membership rights of the plaintiff shareholders have been infringed

Every shareholder has individual membership rights against the company, conferred either by the Companies Ordinance Cap. 212. or the articles of the company. Such individual rights include the right to attend meetings, the right to receive dividends etc. If such right is in question, a single shareholder can on principle defy the majority consisting of all the shareholders

5. Where there is a breach of duty 

 The minority shareholders may bring an action against the company where there is a breach of duty by the directors and majority shareholders to the detriment of the company. In Daniels v. Daniels (1978) Ch 406 a company on the instruction of the two directors (who were husband and wife) having majority shareholding sold the company’s land to one of them at gross undervalue. The minority shareholders brought an action against the directors and the company, it was held that the company and minority shareholders had a valid cause of action as the directors knew or ought to have known that the sale was at gross undervalue.

6. Oppression and mismanagement.

Where there is oppression of minority or mismanagement of the affairs of the company, the rule in Foss v. Harbottle does not apply. Oppression refers to an act performed in a burdensome, harsh and wrongful manner. A shareholder can bring an action against the management of the company on the grounds of oppression and mismanagement.  

MINORITY PROTECTION UNDER COMPANIES ACT  

There are number of sections under the companies Act which enable a number of shareholders to defy the majority. For example under s 8 dissentient holders of 10 per cent of issued shares or if the company is not limited by shares not less than ten per cent can apply for cancellation of an alteration of objects. Furthermore under s 73 where the class rights are varied in pursuance of a clause in the memorandum or articles dissentient holders of 10 per cent of the issued shares of the class can apply for cancellation of the variation. Under s 8 where a public company passes a special resolution to register has a private company or where a private company passes a special resolution to register as a public company, holders of 10 per cent in nominal value of the company’s issued share capital or any class thereof or 10 per cent in number of the members of the company.

Read also derivative rights u/s 233(1)