Foss v Harbottle Questions DADA AFA

1. What are the two legs of Foss v Harbottle. How has the
Companies Act impacted the application of this rule in
Corporate Litigation.

The principle of majority rule was established and emphasized in the case
of Foss v. Harbottle. The rule established in Foss v. Harbottle states that
when a wrong is done to the company or to the property of the company
or where there is a need to enforce a right, the proper person to bring that
action is the company itself and not a shareholder. This is the first leg of
the rule.

The common law position is that if a member is dissatisfied with the

decision of the board of directors or the majority of shareholders and
brings an action in court, the company can properly and successfully
object to the member’s standing to sue; or the court, whether on the
application of the company or on its own motion.

The common law takes the stance that even if there has been an
irregularity or breach of the Regulations, so long as the irregularity or
breach can be remedied by passing of an ordinary resolution, the action of
the shareholder will not be countenanced. The rule is also grounded on
the fact that an action of a single shareholder cannot be entertained
because the pleasure of the majority shareholders has been sought.

This was highlighted in the English case of MacDougall v. Gardiner.

Melish LJ said that if the thing complained of is a thing which is in
substance the majority ruling of the company which they are entitled to
do, there can be no use in having litigation about it.

The rule in Foss v. Harbottle has been recognized and applied in Ghana,
notably in Appenteng and Others v. Bank of West Africa Ltd and
others by Ollennu J.

The applicability of Foss v. Harbottle was not in issue; rather what was in
issue was based on the facts admitted ie. whether as matter of law, the
plaintiffs fell within the exception to permit them to sue. Ollennu J.
rejected the contention that the plaintiffs fell within an exception in the
instant case.

As surmised from the above case law, there are exceptions to the
application of the rule of Foss v Harbottle and this constitutes the
second ambit or leg of the rule.

The exceptions to this rule were espoused in landmark case of Edwards

v. Halliwell. They include:

a. Fraud and Negligence

b. Acts infringing the personal right of the shareholder.
c. Acts which are ultra vires or illegal.
Foss v Harbottle Questions DADA AFA

d. Acts supported by an insufficient majority.

e. Breach of duty.

FRAUD AND NEGLIGENCE

Where there is fraud on the minority, the rule will create injustice if the
majority were allowed to commit wrongs against the company, and
benefit from those wrongs at the expense of the minority. Fraud can be
committed by the majority where the company is defrauded by means of
misappropriation of company property as was seen in Cooks v. Deeks.

Fraud can be committed through expulsion of minority members. This is

illustrated in Brown v. British Abrasive Wheel. The defendant
company needed to raise further capital. The 98% of the majority were
willing to provide this capital if they could buy up the 2% minority. Having
failed to effect this buying agreement, 98% purposed to change the
articles of association to give them power to purchase the shares of the
minority.
Lord Ashbury held that the alteration of the articles would be restrained
because the alteration was not for the benefit of the company.

ACTS INFRINGING THE PERSONAL RIGHT OF THE SHAREHOLDER

In Pender v. Lushington. Here, Jessel MR allowed the action of a
shareholder despite the majority ruling of the company to protect his
personal right.

ACTS WHICH ARE ULTRA VIRES OR ILLEGAL

Where the company goes beyond its authorized business as permitted in
the Regulations or commits an unlawful act, the exceptions to the rule
make leeway for the shareholders to injunct the company from
perpetrating the ultra vires act.

ACTS SUPPORTED BY INSUFFICIENT MAJORITY

Where the act requires a special resolution, a single majority cannot
purport to change or confirm that act therefore requiring a shareholder or
shareholders to invoke the jurisdiction of the court. The exception was
noted in Clemens v. Clemens Brothers.

BREACH OF DUTY
The breach of duty of the directors will necessitate the shareholders
bringing an action on behalf of the company.

In Daniels v Daniels, 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
Foss v Harbottle Questions DADA AFA

brought an action against the directors and the company. It was held that
the minority shareholders had a valid cause.

Further in Pavlides v. Jensen the directors approved of the sale of a

mine at a gross under value. The minority sued complaining of fraud and
gross incompetence. The court held that a minority shareholder can sue
on behalf of the company.

How has our Ghanaian Company Act embraced this rule and its
exceptions?

There are instances when a plaintiff may institute an action to enforce a

personal right as an exception to the rule under the Act: where a person in
whom the Regulations vest power to appoint or remove an officer is being
deprived the opportunity to exercise his right-section 21(2); and when a
fully paid-up member is deprived of his right to attend general meetings
or to speak or vote on resolutions before the meeting-section 31.

Most importantly, there are three key provisions of the Act that afford
judicial relief against improprieties: section 210, which deals with
actions against directors; section 217, which deals with illegal or ultra
vires measures; section 218-which deals with remedies against
oppression. All these fall under the second leg of the rule.

Section 210 of the Companies Act, Act 179 enlists the legal
proceedings to enforce liabilities that may be brought by the company
itself. This can be inferred as an affirmation of the general rule in Foss v
Harbottle.

For instance, section 210(1) provides that proceedings to enforce the

liabilities for a breach of director’s duties or to restrain a threatened
breach of a director’s duty or conflict of interest or to recover from any
director of the company any property of the company may be instituted
by the company. The same section also recognizes the exception to the
rule as it further permits the action to be brought by any member of the
company.

Furthermore, section 217(1) of Act 179 provides that member may

apply to the court for an injunction to restrain the company from doing
any act or entering into any transaction which is illegal, or beyond the
power and capacity of the company or infringes any provisions of the
Regulations or from acting on any resolution not properly passed in
accordance with the Act and the Regulations.

A member may also apply to the court for a declaration that any such act
that has already been done, or that a transaction that has already been
Foss v Harbottle Questions DADA AFA

done, or that a transaction that has already been entered into or that a
resolution that has already been passed is void and of no effect.

In Aboagye v Tetevi, the court gave life to this law by emphasizing that
it was a remedy only members could resort to.

Moving on, a member or shareholder may apply for a remedy against

oppression exercised by the company on the authority of section 218 of
Act 179. More than a singular act of oppression, and other things besides
oppression, may entitle one to a section 218 remedy. It includes persisting
and continuing situation where the affairs of the company are being
conducted in a manner that is oppressive to one or more members or
debentureholders.

Whereas only members may apply for section 217 remedy, members and
debentureholders may apply for a section 218 remedy.

In Pinamang v. Abrokwa, Lamptey JA held that to bring an application

under section 218 of Act 179 the applicant must adduce evidence seeking
to show a chain of events and occurrences of harsh and burdensome
conduct which continued up to the date of the presentation of the petition.

Failure to bring a compliant within any of the categories spelt under

section 218 is fatal to one’s application, in the sense that it is incompetent
and misconceived. Edusei J in Aboagye v. Tetevi reasoned that section
218 was very wide and simply says that where the powers of the directors
are being exercised in an oppressive manner, or in disregard of the
interest of a member, a shareholder, an officer or a debentureholder, an
application may be brought to court for certain reliefs.

In Mahama v. Soli and Another, Apaloo JA was of the opinion that the
word "oppressive" in section 218 (1) of the Companies Code, 1963 (Act
179), was not a term of art; it must be construed in its ordinary sense and
it meant burdensome, harsh and wrongful.

The rule against oppression has been reiterated and consolidated in

DuPaul Wood Treatment Ltd v. Asare and Okudjeto and Others v
Irani Brothers and Others,

What remedy may the court pursuant to section 218 provide?

The court can provide a wide range of remedies, including, but not limited
to:
1. Directing an act-section 218(2)(a)
2. Prohibiting an act-section 218(2)(a)
3. Cancelling any transaction or resolution-section 218(2)(a)
4. Varying a transaction or resolution-section 218(2)(a)
Foss v Harbottle Questions DADA AFA

Hayfron-Benjamin J in Vambaris v Altuna considers the remedy of

cancelling a transaction or resolution pursuant to section 218(2)(a) of the
Act. In this case, the High Court set aside as improper the appointment of
the company’s solicitor as a director. The said person was ordered to file
an account of all sums he had received as a director of the company, and
sums received as dividend.

In Billy v. Kuwor and another, Benin J also maintained the court could
under section 218(2)© of the Companies Act find and impose an order on
the parties as it thinks fit where the court found the directors had been
oppressive towards the applicant, a shareholder and employee, by their
summary dismissal of him without assigning any reasons nor affording
him the opportunity of being heard.

Without an iota of doubt, the Companies Code fully embraces the legs in
rule in Foss v Harbottle from the above analysis.

2. The rule in Foss v Harbottle should be assigned to the

graveyard of archaic Victorian theories. It has no relevance
for Ghana’s modern Company law.

The rule established in Foss v. Harbottle states that when a wrong is done
to the company or to the property of the company or where there is a
need to enforce a right, the proper person to bring that action is the
company itself and not a shareholder.

The common law takes the stance that even if there has been an
irregularity or breach of the Regulations, so long as the irregularity or
breach can be remedied by passing of an ordinary resolution, the action of
the shareholder will not be countenanced. The rule is also grounded on
the fact that an action of a single shareholder has not been entertained
because the pleasure of the majority shareholders has been sought.

This was highlighted in the English case of MacDougall v. Gardiner.

Melish LJ said that if the thing complained of is a thing which is in
substance the majority ruling of the company which they are entitled to
do, there can be no use in having litigation about it.

To insinuate that the rule has no significance in modern company law in

Ghana would be outrightly erroneous. My argument is that a plethora of
case law reveals its application in Ghana jurisprudence.

The rule in Foss v. Harbottle has been recognized and applied in Ghana,
notably in Appenteng and Others v. Bank of West Africa Ltd and
others by Ollennu J. In this case where shareholders had been injured
Foss v Harbottle Questions DADA AFA

by negligent misstatements of a bank and sued the bank, the applicability

of Foss v. Harbottle was not even in issue. The rule was given life. Rather
what was in issue was based on the facts admitted ie. whether as matter
of law, the plaintiffs fell within the exception to permit them to sue.
Ollennu J. rejected the contention that the plaintiffs fell within an
exception in the instant case since the act by the defendant did not
constitute an invasion of their legal right.

The rule was further re-visited in Pinamang v Abrokwa. Lamptey JA took

cognizance of the fact that the courts have held that the rule in Foss v.
Harbottle must be observed by the trial courts and it must not inquire
into matters of internal management or, at the instance of a shareholder,
interfere with transactions which though prima facie irregular and
detrimental to the company, are capable of being rectified by an ordinary
resolution of the company in a general meeting.

Under the Companies Act, section 210 of the Companies Act, Act 179
could be said to be a reproduction of the general rule in Foss v
Harbottle.

Section 210(1) provides that proceedings to enforce the liabilities for a

breach of director’s duties or to restrain a threatened breach of a
director’s duty or conflict of interest or to recover from any director of the
company any property of the company may be instituted by the company.

The proceedings instituted by the company are usually commenced on

the authority of the board of directors or of any receiver and manager or
liquidator of the company, or of an ordinary resolution of the company
which shall either have been agreed to by all the members of the
company entitled to attend and vote at a general meeting or have been
passed at a general meeting, according to section 210(2) of the
Companies Act.

That the company ought to sue on the authority of the BOD was affirmed
in Golden Gates Services v. Ghana Ports and Harbours Authority
and Others where the two applicants were Golden Gates Services Ltd
and its majority shareholder and managing director, one Bennet Aboagye
sued the respondents without having passed any resolution authorizing
the instant suit. The court on this objection by the respondent concluded
that should the board have authorized the MD to sue or should litigation
have been part of their ordinary business of Golden Gates Services Ltd,
the suit would have been proper.

This suggests that the company is the legal person undertaking the act for
itself and not the company.

It must be noted however, that there are exceptions to the application of

this rule adumbrated in Edwards v Halliwell that may well have
rendered Foss v Harbottle archaic.
Foss v Harbottle Questions DADA AFA

It follows that, notwithstanding that this rule is presently recognized in

Ghanaian case law, it may be reasonably argued that the rule is of no
relevance due to the codification of the exceptions in the Companies Act
and subsequently adopted in case law.

There are instances when a plaintiff may institute an action to enforce a

personal right as an exception to the rule under the Act: where a person in
whom the Regulations vest power to appoint or remove an officer is being
deprived the opportunity to exercise his right in accordance with section
21(2); and when a fully paid-up member is deprived of his right to attend
general meetings or to speak or vote on resolutions before the meeting
under section 31.

This could taint the rule in Foss v Harbottle as being obsolete.

There are three key provisions of the Act that afford judicial relief
against improprieties and are deemed exceptions to the rule: section
210, which deals with actions against directors; section 217, which deals
with illegal or ultra vires measures; section 218-which deals with remedies
against oppression.

Although section 210 grants authority to the BOD to institute legal

proceedings on behalf of the company, it vests authority in the members
in section 210 to do same where there is a threatened breach of duties
of a director, among others.

Furthermore, section 217(1) of Act 179 provides that member may

apply to the court for an injunction to restrain the company from doing
any act or entering into any transaction which is illegal or not in
accordance with the Act and the Regulations of the company (ultra vires).

In Aboagye v Tetevi, the court gave life to this law by emphasizing that
it was a remedy only members could resort to.

Moving on, a member or shareholder may also apply for a remedy against
oppression exercised by the company on the authority of section 218 of
Act 179. More than a singular act of oppression, and other things besides
oppression, may entitle one to a section 218 remedy. It includes persisting
and continuing situation where the affairs of the company are being
conducted in a manner that is oppressive to one or more members or
debenture holders.

Failure to bring a compliant within any of the categories spelt under

section 218 is fatal to one’s application, in the sense that it is incompetent
and misconceived. Edusei J in Aboagye v. Tetevi reasoned that section
218 was very wide and simply says that where the powers of the directors
are being exercised in an oppressive manner, or in disregard of the
Foss v Harbottle Questions DADA AFA

interest of a member, a shareholder, an officer or a debentureholder, an

applicant may be brought to court for certain reliefs.

In Mahama v. Soli and Another, Apaloo JA was of the opinion that the
word "oppressive" in section 218 (1) of the Companies Code, 1963 (Act
179), was not a term of art; it must be construed in its ordinary sense and
it meant burdensome, harsh and wrongful.

The rule against oppression has been reiterated and consolidated in

DuPaul Wood Treatment Ltd v. Asare and Okudjeto and Others
and Irani Brothers and Others.

The court is empowered to granting a wide range of remedies, including,

but not limited to:
5. Directing an act-section 218(2)(a)
6. Prohibiting an act-section 218(2)(a)
7. Cancelling any transaction or resolution-section 218(2)(a)
8. Varying a transaction or resolution-section 218(2)(a)
Hayfron-Benjamin J in Vambaris v Altuna considers the remedy of
varying a transaction or resolution pursuant to section 218(2)(a) of the
Act. In this case, the High Court set aside as improper the appointment of
the company’s solicitor as a director. The said person was ordered to file
an account of all sums he had received as a director of the company, and
sums received as dividend.

In Billy v. Kuwor and another, Benin J also maintained the court could
under section 218(2) of the Companies Act find and impose an order on
the parties as it thinks fit where the court found the directors had been
oppressive towards the applicant, a shareholder and employee, by their
summary dismissal of him without assigning any reasons nor affording
him the opportunity of being heard.

Analyzing case law and statutory provisions, whilst we agree that the rule
in Foss v Harbottle has not been obliterated and is still of relevance to
Ghanaian Company Law, we concede that it may gradually be losing its
significance due to the remedies afforded members in section 210, 217
and 218 of the Companies Act.

3. Consider the scope of the rule in Foss v Harbottle and its

relevance in modern company law in Ghana.

The above essay can be re-produced.