Majority Rule: But Not as You Know It

Majority Rule: But Not as You Know It

 In company law those who hold the majority of shares "rule" the company. This has been the case since the court in Foss v Harbottle (1843) 2 Hare 46 recognised the principle. If the majority have made a decision to take or not take certain action, that will be respected. Even if they are yet to make a decision no minority shareholder can take that action because the proper person to do so is the company which is recognised as the majority shareholders.

However, all that seems to have changed with litigation decisions concerning derivative claims. Derivative claims are in place where a minority shareholder is allowed to enforce the company's rights because those in control of the company were the wrongdoers themselves. Therefore the majority who "rule" the company are not going to sue themselves. If the minority could not enforce the company's rights there would be a wrong without a remedy. However, whether it is the majority or minority bringing the action the proper claimant is still the company. 

Before 2006, wrongdoer control needed to be proved before a claim would be allowed to proceed to an action. If wrongdoer control could not be established by the minority then the fundamental principle of majority rule would be respected since the majority had not taken any decision as to whether to enforce. If the illegal act could be rectified by the majority then litigation is pointless because 'the ultimate end will be that a meeting will be held, and the majority wishes will be granted'. MacDougall v Gardiner (1975-6) L.R. 1 Ch. D. 13 CA

The Companies Act 2006 now provides a statutory procedure for bringing a derivative claim. The requirement that there is wrongdoer control is not mentioned as a bar to a claim.

Therefore the legislator has chipped away at a fundamental principle of company law that majorities rule the company and no minority can interfere with their decision or lack of one. The Act's procedure now allows a derivative claim to be brought by a shareholder in respect of an action vested in the company.

Such a fundamental shift away from established principles certainly deserves attention and the courts have so far offered some insight in three cases since 2006, see herehere and here. Looking forward I hope to draw some analogies with the Unfair Contract Terms Act 1977 and the reasons behind the reform to explain this shift. 

   For more commentary on directors' duties and shareholder litigation, visit Gibbs: Law and Life, a blog centering on directors' duties and company law, particularly on interpretation and practicality of directors' duties in the 21st Century.

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