Table of ContentsHISTORICAL BACKGROUND2RULE OF MAJORITY: FOSS v. HARBOTTLE2Basis of the Rule3Exceptions to the Rule in Foss vs. Harbottle (Protection of the Minority)4Acts which are ultra vires or illegal4Acts supported by insufficient majority4Where the act of majority constitutes a fraud on the minority5Where it is alleged that the personal membership rights of the plaintiff shareholder has been infringed5Where it is alleged that the personal membership rights of the plaintiff shareholder has been infringed6Where there is breach of duty6CONCLUSION7

HISTORICAL BACKGROUND

Prior to the 1st of March, 2006, the main legislation relating to companies in Tanzania was the Companies Act Cap. 212 which was enacted in 1929. This legislation regulated trading companies and other associations including the imposition tax on nominal capital, regulation of dividends and surpluses and related matters. This legislation was in force for over 77 years which period covered not only the tail end of the colonial period but also the period of state-planned economy through to liberalisation in the 1990s. Clearly it was time for reform to cover an increasingly sophisticated market and the dramatic changes to the Tanzanian economy.

The new reforms are contained in the Companies Act 2002 (the CA 2002), an act on the shelf for almost three years which came into force as from the 1st of March, 2006.

The key reforms brought in by the CA 2002 are as follows.

Insolvency Minority shareholders Arrangements, compromise, reconstruction and amalgamation Investigation into a companys affairs Capacity of the company to act Directors

However Our main concentration is on the Protection of the minority shareholders which was brought about as a result of the reforms of Companies Act of 2002[footnoteRef:1]. [1: Chapter 212]

Previously, the principle of majority rule was recognized in Foss vs. Harbottle[footnoteRef:2]. It is also known as proper plaintiff principle[footnoteRef:3] , which states that, in order to redress a wrong done to a company or to the property of the company or to enforce rights of the company, the proper claimant is the company itself, and the court will not ordinarily entertain an action brought on behalf of the company by a shareholder - [2: (1843) 67 ER 189] [3: http://www.kenyalawresourcecenter.org/2011/07/majority-rule-foss-vs-harbottle-1843.html]

RULE OF MAJORITY: FOSS v. HARBOTTLE[footnoteRef:4] [4: ibid]

The basic principle relating to the administration of the affairs of a company is that the courts will not, in general, intervene at the instance of shareholders in matters of internal administration; and will not interfere with the powers conferred on them under the articles of the company. This is mainly the underlying principle governing the rule of majority. The rule of company governing by majority and supremacy of majority has been settled in the very old landmark common law judgment.

In the instant case, an action was brought by two shareholders of a company for the illegal transactions made by the directors and solicitors, whereby the property of the company was misapplied and wasted. The plaintiffs pleaded that the losses caused thereafter to the company be made good by the defendants. In ruling over the case, the Court opined that such an action cannot be brought by minority shareholders. The claim was rejected in respect of those transactions which a majority of the shareholders of the company had the power to confirm or ratify. Thus, an action, if any, can be brought in only by the company, as company is the proper plaintiff for wrongs done to the company. Since the company acts through majority, the majority should have the power to decide whether to initiate proceedings against the directors or not.

The court dismissed the suit on the ground that the acts of the directors were capable of confirmation by the majority members and held that the proper plaintiff for wrongs done to the company is the company itself and not the minority shareholders and the company can act only through majority shareholders.

It was also held that, it is elementary principle of law relating to joint stock companies that the court will not interfere with the internal management of the company, acting within their powers and jurisdiction to do so. Again it is clear that in order to redress a wrong done to the company or to recover monies or damages due to the company the action should prima facie be brought by the company itself . [footnoteRef:5] [5: Ibid]

Basis of the Rule

(1) The right of the Majority Rule

The court has said in some of the cases that an action by a single shareholder cannot be entertained because the feeling of the majority of the members has not been tested and that they may be prepared to waive their right to sue.

(2) The Company is a Legal Person

The court has also said from time to time that since a company is a person at law, the action is vested in it and cannot be brought by a single member.

(3) The prevention of multiplicity of Actions

This situation could occur if each individual member was allowed to commence an action in respect of a wrong done to the company.

(4) The court s order may be made ineffective

The court s order could be overruled by an ordinary resolution of members in a subsequent general meeting

Section 233.-(I) of Companies Act[footnoteRef:6] states inter alia as follows; [6: Ibid]

Any member of a company may make an application to the court by petition for an order on the ground that the company's affairs are being or have been conducted in a manner which is unfairly prejudicial to the interests of its members generally or of some part of its members including at least himself or that any actual or proposed act or omission of the company including an act or omission on its behalf is or would be so prejudicial. If the court is satisfied that the petition is well founded, it may make such interim or final order as it sees fit for giving relief in respect of the matters complained of.

Exceptions to the Rule in Foss vs. Harbottle (Protection of the Minority)

It is clear from Foss vs. Harbottle rule that it is the majority rule that prevails in the company management. Such powers may be misused to exploit the minority shareholders and to serve personal ends. This may be clear in case of private companies where few individuals own majority of shares however,

Palmer J rightly pointed out that, a proper balance of rights of majority and minority shareholders is essential for the smooth functioning of the company .To curtail the power of the majority, the following exceptions have been admitted as follows:-

Acts which are ultra vires or illegal

Foss (supra) will apply only when the act done by the majority is one which the company is authorized to do by its memorandum.No simple majority of members can confirm or ratify an illegal act, not even if all the shareholders are willing to do so. Incase of ultra vires acts, even a single shareholder can restrain the company from committing those acts by filing a suit of injunction. Majority rule will not prevail where the act in question is illegal.

Acts supported by insufficient majority

For certain acts, it might require th majority. The rule in Foss (supra) cannot be invoked by a simple majority if the act requires special majority. If the requirements of special majority are not fulfilled, any shareholder can restrain the company from acting on resolutions.

Edwards v Halliwell [footnoteRef:7] [7: [1950] 2 All ER 1064]

A trade union had rules which were the equivalent of the articles of association, under which any increase in members contributions had to be agreed by a 2/3rd majority in a ballot of members. A meeting decided by a simple majority, to increase the subscriptions without holding a ballot. The claimants as a majority of members applied for a declaration from the court that the resolution was invalid.

It was held that the rule in Foss did not prevent a minority of a company from suing because the matter about which they were suing was one which could only be done or validly sanctioned by a greater than simple majority.

Where the act of majority constitutes a fraud on the minority

A resolution would constitute a fraud on minority if it is not bona fide for the benefit of the company as a whole. Similarly, an action of the majority which discriminates between majority shareholders and minority could constitute a fraud of majority. A special resolution would be liable to be impeached if the effect of it were to discriminate between the majority shareholders and minority shareholders, so as to give the former advantage of which the latter were deprived.

The rule in Foss would create grave injustice if the majority were allowed to commit wrongs against the company and benefit from those wrongs at the expense of the minority, simply because no claim could be brought in respect of the wrong.

Cook vs. Deek [footnoteRef:8] [8: (1916) 1 AC 554]

The directors of a Railway Construction company obtained a contract in their own names to construct a railway line. The contract was obtained under circumstances which amounted to breach of trust by the directors who then used their voting powers to pass a resolution of the company declaring that the company had no interest in the contract.

It was held that the benefit of the contract belongs in equity to the company and that the directors would benefit themselves at the expense of the minority. It is tantamount to majority oppressing the minority. In case of breach of duty of this sort, the rule in Foss did not bar the claimants claim.

Brown vs. British Abrasive Wheel Co. [footnoteRef:9] [9: [1919] 1 Ch 290]

A company required further capital. The majority who represented 98 percent of the shareholders, were willing to provide this capital but only if they could buy up the 2 percent minority. The minority would not agree to sell and so the majority shareholders proposed to alter the articles to provide for compulsory acquisition under which 9/10th of shareholders could buy out any shareholders.Lord Asbury held that the alteration of the articles would be restrained because the alteration was not for the benefit of the company. The rule in Foss did not bar the claimant s claim.

Where it is alleged that the personal membership rights of the plaintiff shareholder has been infringed

Such individual rights include the right to attend meetings the right to receive dividends the right to insist in strict observance of the legal rules; statutory provisions in the memorandum and articles. If such a right is in question, a single shareholder can on principle, defy a majority consisting of all other shareholders.

Thus, where the chairman of a meeting at the time of taking the poll ruled out certain votes which should have been included, a suit by a shareholder was held to be validly filed.Where the candidature of a shareholder for directorship is rejected by the chairman, it is an individual wrong in respect of which the suit is maintainable.

Where it is alleged that the personal membership rights of the plaintiff shareholder has been infringed

Such individual rights include the right to attend meetings the right to receive dividends the right to insist in strict observance of the legal rules; statutory provisions in the memorandum and articles. If such a right is in question, a single shareholder can on principle, defy a majority consisting of all other shareholders.

Thus, where the chairman of a meeting at the time of taking the poll ruled out certain votes which should have been included, a suit by a shareholder was held to be validly filed.Where the candidature of a shareholder for directorship is rejected by the chairman, it is an individual wrong in respect of which the suit is maintainable.

Where there is breach of duty

A minority shareholder can bring a suit against the company where there is a breach of duty by the directors and majority shareholders to the detriment of the company.

Daniels vs. Daniels (1978)[footnoteRef:10] [10: [1978] 2 All E.R. 89]

A company on an instruction of the two directors (husband and wife), having majority shareholding sold the company s land to one of them, (the wife) at a gross under value. The minority shareholders brought an action against the directors and the company.It was held that minority shareholders had a valid cause of action.

(vi) Oppression and Mismanagement

Where there is oppression of minority or mismanagement of the affairs of the company, Foss vs. 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.

CONCLUSION

Minority shareholders are granted additional new protections under the CA 2002, including procedures for orders in cases of unfair prejudice and the institution of derivative actions (i.e. the right of a person to apply to court to prosecute, defend or bring an action in the name of and on behalf of the company or any of its subsidiaries).

Squeeze-out" means the use of strategic position, management powers, or legal device by some owners in a business enterprise to eliminate other owners. The term is used here also to cover oppressive action to reduce the participation of some owners or to deprive them unfairly of income or advanta ges.

A proper balance of the rights of majority and minority shareholders is essential for the smooth functioning of the company. It is only right to expect that in matters of a company, any decisions that are taken are done so in keeping with principles of natural justice and fair play. In case of failure to do so, it is important that the interest of minority shareholders be protected.[footnoteRef:11] [11: http://www.lawteacher.net/free-law-essays/business-law/protecting-the-interest-of-minority-shareholders-business-law-essay.php]

BIBILIOGRAPHY

a. Foss vs. Harbottle (1843) 67 ER 189b. Edwards v Halliwell [1950] 2 All ER 1064c. Cook vs. Deek (1916) 1 AC 554d. Brown vs. British Abrasive Wheel Co[1919] 1 Ch 290e. Daniels vs. Daniels (1978) [1978] 2 All E.R. 89

http://www.lawteacher.net/free-law-essays/business-law/protecting-the-interest-of-minority-shareholders-business-law-essay.php

http://www.kenyalawresourcecenter.org/2011/07/majority-rule-foss-vs-harbottle-1843.html

ZANZIBAR UNIVERSITYFACULTY OF LAW AND SHARIAH

COMPANY LAWPROFESSOR NANDWAGROUP ASSIGNMENT

GROUP MEMBERS

a. Asante Musab. Asteria Urizac. Boikobo Mosekid. Chifundo Jonase. Joan Kwatiwanif. Nasrah Ramahang. Shakeerah Utilah. Vincent Muwera

Discuss how the company law protects the rights of minority.