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Shareholders' Rights and the rule in Foss v. Harbottle (continued)*

Published online by Cambridge University Press:  16 January 2009

K. W. Wedderburn
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Extract

Heading 4. “Fraud on a Minority,” where the Wrongdoers have “Control.”

It was stated above, in the discussion of ultra vires, that actions falling under the fourth Heading of the “exceptions” to Foss v. Harbottle must be “corporate” and not “personal” actions. That is why a minority action brought on the grounds of “fraud” has usually been regarded as a real “relaxation” of the Rule. It is a special procedure, only allowed to the minority in order to avoid “an action in the name of the company, and then a fight as to the right to use its name” in which the minority must lose because the wrongdoers control the company. As such, it is “an excellent illustration of the golden principle that procedure with its rules is the handmaid and not the mistress of justice.” The representative form of the minority shareholders' action must not be permitted to obscure the fact that the “only relief possible in this action is corporate relief.” For this reason, those cases establishing a personal right to prevent any alteration of the articles which would be a fraud on the minority, do not fall under this Heading, and were placed under Heading 3. In the cases now to be discussed, all the rules appropriate to corporate actions apply —notably, that the plaintiff must sue in representative form and cannot join a personal claim; can attack wrongs anterior to his own membership; must join the company as a party; and can join the wrongdoers to assert the company's rights against them.

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Research Article
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The Cambridge Law Journal , Volume 16 , Issue 1 , April 1958 , pp. 93 - 106
Copyright
Copyright © Cambridge Law Journal and Contributors 1958

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References

39 Lindley, M.R., Alexander v. Automatic Telephone Co. [1900] 2Google ScholarCh. 57, 69.

40 Lord, Blanesburgh, Ferguson v. Wallbridge [1935] 3Google ScholarD.L.R. 66, 81, 83 (P.C.). The standard of service has not, however, been very high.

41 Greenhalgh v. Arderne Cinemas [1951] Ch. 286; Sidebottom v. Kershaw, Leese & Co., Ltd. [1920] 1 Ch. 154 (applying a restrictive interpretation of “fraud” here; but the form of the actions was unchallenged): ante [1957] C.L.J. p. 211, n. 14. See, too, infra, p. 102, n. 97.

42 See the “fraud” cases cited under Heading 1, in the discussion of “corporate actions” brought by a minority: ante, p. 205 and Duckett v. Gover (1877) 6 Ch.D. 82 (on which see Tryon's Case (1386) 16 Q.B.D. 678); and Silber Light v. Silber (1879) 12 Ch.D. 717.

43 Cairns, L.J., Ferguson v. Wilson (1866) 2Google ScholarCh.App. 77, 90. See, too, Greene, M.R. in Beattie v. Beattie [1938] Ch. at p. 718.Google Scholar

44 See Lord v. Copper Miners Co. (1848) 2 Ph. 740.

45 Burland v. Earle [1902] A.C. p. 93.

46 See Menier v. Hooper's Telegraph Works (1874) 9 Ch.App. 350, 353; Mason v. Harris (1879) 11 Ch.D. 97, 108; Alexander v. Automatic Telephone Co. [1900] 2 Ch. 56, 69; Cook v. Deeks [1916] 1 A.C. 554 (P.C.).

47 See Gower, , op. cit. 204–205Google Scholar, discussing s. 154, Companies Act, 1948, which also recognises control of “the composition of its board of directors” as a mark of the “subsidiary company.” See, too, Hornsey, (1950) 13 M.L.R. 470–474.

48 [1956] Ch. 565, 577 (dicta).

49 Largely because he thought that the majority of X Co. could overrule a decision of the directors as to the use of voting rights on matters concerning action by W. Co. which would not seem to be the approach in cases like Shaw & Sons (Salford), Ltd. v. Shaw (supra). Does “control” of W Co. depend, then, on the exact terms of X Co.'s articles? Cf. Gower (1956) 19 M.L.R. 539.

50 See, e.g., Re Darby [1911] 1 K.B. 95; Gower, , op. cit., 208Google Scholaret seq. The reasoning of Danckwerts J. is hardly consistent with the approach apparent in Menier v. Hooper's Telegraph Works (1874) 9 Ch.App. 350. Furthermore, the position in the tax cases seems to be exactly the opposite to that which he took up in Pavlides' case. The Court of Appeal, in Berendsen, Ltd. v. I.R.C. [1957] 2 All E.R. 612, in deciding whether directors had a “controlling interest” for the purposes of the Finance Acts, was prepared to go behind the veil of a corporate shareholder, to see whose “voice” was really speaking; but the judgments make it clear that (because of an odd line of previous cases) most other nominee shareholding could not be similarly investigated for this purpose.

51 Fairweather, J. in Fisher v. St. John Opera House Co. [1937] 4Google ScholarD.L.R. 337, 342 (italics supplied).

52 (1875) 20 Eq. 474, 482.

53 [1935] 2 K.B. 113, 134, 142; see ante, p. 201

54 Morris v. Morris (1877) W.N. 6; Ferguson v. Wallbridge [1935] 3 D.L.R. 66, 83, 84 (P.C.).

55 Under s. 132, Companies Act, 1948: and see s. 134 (b): but this takes at least 14 days: s. 133. See H. Salt q.c. (1957) Jo.Business Law 248, on the weakness of the shareholder's position.

56 Under s. 184, ibid.: (at least 28 days needed, see s. 142).

57 Burland v. Earle [1902] A.C. p. 93.

58 Lindley, M.R., Kerry v. Maori Dream Gold Mines, Ltd. (1898) 14Google ScholarT.L.R. 402.

59 See the cases cited ante, p. 200, and, especially, North-West Transportation, Ltd. v. Beatty (1887) 12 App.Cas. 589.

60 [1951] Ch. p. 291 (“whether” should obviously be deleted).

61 Of course, there might well occur circumstances in which the nature of the transaction was such that it constituted an obvious fraud on the company by the majority: e.g., Menier v. Hooper's Telegraph Works (1874) 9 Ch.App. 350; Cook v. Deeks [1916] 1 A.C. 554, discussed infra.

62 Romer, J., Re City Equitable Fire Insurance Co. [1925]Google ScholarCh. 407, 426 and see other cases cited in Regal (Hastings) Ltd. v. Gulliver [1942] 1 All E.R. 378 (H.L.).

63 s. 199 (but disclosure only to the other directors); and see s. 198.

64 But the court may on terms relieve him from liability, under s. 448, if he acted honestly and reasonably and ought fairly to be excused.

65 Buckley, , op. cit. p. 876.Google Scholar

66 Compare Arts 84 (2) and (4); and Costa Rica Ry. v. Forwood [1901] 1 Ch. 746. Modification of duties by the articles seems, in view of Beattie v. Beattie, to operate by way of waiver, and not of contract, since it is undoubtedly effective whether or not the terms of articles are “incorporated” into the director's contract. (As to promoters, see Omnium Electric Palaces, Ltd. v. Baines [1914] 1 Ch. 332, and cases there cited.)

67 Buckley, , op. cit. 878Google Scholar: as to “competition” by directors, see 868.

68 Re Smith and Fawcett, Ltd. [1942] Ch. 304, 306, Lord Greene M.R. See, too, Piercy v. Mills [1920] 1 Ch. 77. It has been suggested (e.g., in the Report on the Savoy Hotel, Ltd. (H.M.S.O. 1954), p. 27) that “collateral purpose” introduces a separate test different from that of ultra vires, if the acts are bona fide; but the writer has elsewhere suggested that this is not so: [1955] Camb.L.J. 37. (Cf. Legion Oils, Ltd. v. Barrow [1956] 2 D.L.R. (2d) 505, 516.) See, too, that note, and Prof. Gower in (1955) 68 Harv.L.R. 1176, 1185 et seq. on the meaning of the “interests of the company.”

69 Cannon v. Trask (1875) 20 Eq. 669; and see Ngurli, Ltd. v. McCann (1953) 90 C.L.R. 425, 438–440.

70 Mason v. Harris (1879) 11 Ch.D. 97; and Atwool v. Merryweather (1867) 5 Eq. 464 n.; Menier v. Hooper's Telegraph Works (1874) 9 Ch.App. 350; Cook v. Deeks [1916] 1 A.C. 554; but see infra, p. 101 on these cases, which may go further than mala fides.

71 Lagunas Nitrate Co. v. Lagunas Syndicate [1899] 2 Ch. 392, 435; and see Re City Equitable Fire Insurance [1925] Ch. 407, where the matter is exhaustively discussed.

72 See Marquis of Bute's Case [1892] 2 Ch. 100.

73 Turquand v. Marshall (1869) 4 Ch.App. 376, 386.

74 A claim for negligence was dropped in Regal (Hastings) Ltd. v. Gulliver [1942] 1 All E.R. 378. Quaere: is the claim quite one for “common law negligence”?: Evershed, M.R., Re B. Johnson [1955]Google ScholarCh. 634, 648.

75 [1956] Ch. 565. But see, too, Alexander v. Automatic Telegraph Co. [1900] 2 Ch. 56, discussed infra.

76 Counsel's argument, ibid., p. 570. If the articles were infringed Heading 3 might, of course, be used; and see the discussion, infra, p. 102, of “fraud by appropriation of corporate advantages.”

77 Aberdeen Ry. v. Blakie (1854) 1 MacQ. 461, 471 (H.L.).

78 The fiduciary duty is not normally owed to the members.

79 i.e., to the members; quaere, now to an independent board of directors? Gray v. New Augurita Porcupine Mines [1952] 3 D.L.R. 1 (P.C.). But see Costa Rica Ry. v. Forwood [1901] 1 Ch. 746, 761.

80 Jacobus Marler v. Marler (1916) 85 L.J.P.C. 167 n. (Lord Parker's interesting review of fiduciary duties of directors and of promoters).

81 Gray v. New Augurita Porcupine Mines (supra), pp. 12–14 per Lord Radcliffe.

82 This must be the explanation of cases such as Re Cape Breton (1885) 29 Ch.D. 795 (affd. (1887) 12 App.Cas. 652); and the second point in Burland v. Earle [1902] A.C. 83: (company lost right to rescind sale; no right to recover profit made by director on property he had bought up earlier for himself). See, Ballem (1952) 30 Can.B.R. 179; and Marler's case (supra); Benson v. Heathorn (1842) 1 Y. & C.C.C. 326, 340; Peninsular & Oriental Steam Nav. Co. v. Johnson (1938) 60 C.L.R. 189, 212, 249, where Dixon J. discusses the suggestion, made in Marler's case, that an action for damages might lie if the company proved real damage. To the common lawyer, the claim might present itself as one merely for breach of the implied term of good faith in the contract ( cf. Boston Deep Sea Fishing Co. v. Ansell (1888) 39 Ch.D. 339); but possibly equity reaches the same result, apart from that ( Nocton v. Lord Ashburton [1914] A.C. 932; Re Leeds & Hanley Theatres of Varieties [1902] 2 Ch. 809, 825).

83 [1942] 1 All E.R. 378 (H.L.): earlier cases, see Buckley, , op. cit. 864–868.Google Scholar

84 The purchasers thus “receive in one hand part of the sum which has been paid by the other,” Lord Porter, p. 394.

85 Ibid. Viscount Sankey, 382; Lord Russell, 385–386; Lord MacMillan, 392. The company, therefore, could presumably have recovered any profit in Percival v. Wright [1902] 2 Ch. 421. See, too, the strict application of Regal in Zwicker v. Stanbury [1954] 1 D.L.R. 257; Smith v. Smith [1952] N.Z.L.R. 470; Canada Safeway v. Thompson [1951] 3 D.L.R. 295 (where third parties were made to account).

86 (1726) Sel.Cas.Ch. 61 (not quite the same situation).

87 [1942] 1 All E.R. p. 389. And see Viscount Sankey, 382; Lord Wright, 394. See the attempt to “marry” the trust, and the director, principles on disclosure, by Danckwerts, J. in Fine Industrial Commodities v. Powling (1954) 71Google ScholarR.P.C. 253, 261–262.

88 Re Transvaal Gold Exploration Co. (1885) 1 T.L.R. 604.

89 On the principle of North-West Transportation, Ltd. v. Beatty (1887) 12 App.Cas. 589 (P.C.). The Editor of [1942] 1 All E.R. 378, remarks at p. 379 that “they doubtless controlled the voting.”

90 [1900] 2 Ch. 56, especially Lindley M.R. at pp. 67–69. And see Shaw v. Holland [1900] 2 Ch. 305 (which may rest on ultra vires, p. 311); and Piercy v. Mills [1920] 1 Ch. 77 (which probably turns on mala fides).

91 (1874) 9 Ch.App. 350, 353; and see Atwool v. Merryweather (1867) 5 Eq. 464 n.; Kerry v. Maori Dream Gold Mines, Ltd. (1898) 14 T.L.R. 402; Mason v. Harris (1829) 11 Ch.D. 97.

92 Burland v. Earle [1902] A.C. 93.

93 [1916] 1 A.C. 554.

94 Foster v. Foster [1916] 1 Ch. 532, 549; and see the Cohen Report on Company Law Amendment, 1945, p. 30.

95 [1916] 1 A.C. 554.

96 (1887) 12 App.Cas. 589.

97 Quaere whether the cases on fraudulent alterations in the articles take sufficient account of this principle. It may well be that the personal action can here succeed only upon proof of express “discrimination”: Greenhalgh v. Arderne Cinemas [1951] Ch. 286, 291. But it might be that in such a case a representative plaintiff could sue to protect some “corporate advantage” which had been squandered by the majority wholly or mainly for their own purposes, e.g., that of being “controlled” by a special group of persons, which the special resolution purports to destroy. Compare Clark v. Workman [1920] 1 Ir.R. 107, 117. “Corporate advantages” is a pregnant phrase and might be used to develop this Heading. Cf. Ngurli, Ltd. v. McCann (1953) 90 C.L.R. 425, 447, “The right to issue new capital is an advantage which belongs to the company.”

98 Supra, n. 93.

99 Supra, n. 92.

1 [1916] 1 A.C. 563.

2 [1900] 2 Ch. 56.

3 Supra, n. 93.

4 [1942] 1 All E.R. 378 (H.L.).

5 Mellish, L.J., Hay's Case (1875) 10Google ScholarCh.App. 593, 605.

6 Sargant, J., Omnium Electric Palaces, Ltd. v. Baines [1914] 1Google ScholarCh. 347.

7 Lord, Dunedin, Jubilee Cotton Mills, Ltd. v. Lewis [1924]Google ScholarA.C. 970.

8 Lord, Porter, the Regal Case [1942] 1Google ScholarAll E.R. 395.

9 Danckwerts, J., Fine Industrial Commodities v. Powling (1954) 71Google ScholarR.P.C. 253, 259; the secret benefit was there an invention developed by the director by use of his position in the company; the equitable interest was held to be in the company, even if the use of the invention would have been ultra vires; it was the director's duty to “exploit every opening” for his company “even if it involved alteration of the company's memorandum” under s. 5 of the Act (258)!

10 Imperial Mercantile Credit Association v. Coleman (1873) L.R. 6 H.L. 189, per Lord Cairns 209, and Lord Chelmsford 202, respectively.

11 [1916] 1 A.C. 554.

12 [1916] 1 A.C. 563.

13 e.g., Tintin Exploration Syndicate v. Sandys (1947) 177 L.T. 412. The relevant statute is now s. 19, Limitation Act, 1939. On the previous position, see Keeton, , Law of Trusts (7th ed.) 401–408Google Scholarand Ashburner, , Principles of Equity, 508–515.Google Scholar

14 Metropolitan Bank v. Heiron (1880) 5 Ex.D. 319, 324. “Bribes” are, of course, rather an oddity, in that the company can recover the specific sum from the director even if equivalent damages have already been recovered from the briber: Salford Corpn. v. Lever [1891] 1 Q.B. 168. Quaere, whether receipt by directors of “bribes” can be ratified by the majority?

15 I am much indebted to Mr. L. Sealy of Caius College for discussions on this area of law; but it would be wrong thereby to suggest that he agrees with the view advanced.

16 Lindley, L.J. in Re Sharpe [1892] 1Google ScholarCh. 154, 167.

17 See the cases discussed by Hanbury, Modern Equity (6th ed.), 354–356.

18 Henry v. Hammond [1913] 2 K.B. 515, 522. The test used there for distinguishing between types of agents is whether the agent is under a duty to keep the property separate from his own property. Will the law not impose that duty upon a profiteer director? (For a strong decision upon profits acquired by an agent by use only of opportunities afforded by his position, or “status.” see Reading v. Att.-Gen. [1951] A.C. 507, especially Lord Porter at pp. 514–515, and Lord Normand at p. 517.)

19 e.g., in Fine Industrial Commodities v. Powling (supra, n. 9). And see Zwicker v. Stanbury [1954] 1 D.L.R. 257, where the “profits” included some of the company's own shares, and the directors were held liable by a strict application of Regal, there being much talk of “trusts” on the way. This could not have been a case where they had appropriated the company's “property” in the usual sense; action by minority shareholders was, however, permitted. The decision is not, of course, binding on our courts. But such decisions make less attractive distinctions between Regal and Cook v. Deeks which rely heavily upon the inability of the company in Regal actually to pay for the shares itself. It must be stressed that nothing said above is meant to deny the distinction between the proprietary remedy against “trust property” and a personal remedy of account. But it may be questioned whether the case law has not unsettled the application of such distinctions in the area of law which we are discussing.

20 Gower, , op. cit., p. 499.Google Scholar

21 (1874) 9 Ch.App. 350.

22 It will be interesting to see how the courts adapt such policy if recent proposals for extensive “State” shareholding are put into effect.

23 Wigram, V.-C., Foss v. Harbottle (1843) 2Google ScholarHa. 461, 492.