By : Abdallah Sekibembe
INTRODUCTION
According to David J Bakibinga, he defines a company or corporation to mean a legal entity separate and set apart from its members or shareholders. This legal personality is an artificial one which is distinguishable from natural personality.
Nature of a company
The nature of a company is basically centered on democracy hence the principle of majority rule. Under this rule, shares normally amount to votes and the shareholder with the most shares has the most votes which literally means that decisions of the majority will always prevail over those of the minority since substantial power is placed in the hands of the majority shareholders, the minority shareholders would in this case be required to accept the decisions made by the majority. The consequences of this position have been detrimental to the minority shareholders whose views and interests are normally ignored at the expense of the majority shareholders who end up growing to view the interests of the company and their own interests as identical and any act complained of by the minority shareholders would to this end be ratified.
Position under the general rule
Circumstances might arise where a wrong or irregularity is made against a company or in the course of the company’s affairs, a member breaks a duty or commits an irregularity. The general rule is to the effect that the company would be the proper claimant in such an action and not the claimant minority shareholder (also known as the proper plaintiff rule). This literally means that if a complaint is made that the directors have broken their duties of loyalty, care or skill, the company is the proper plaintiff in an action against them. This would render the company competent to ratify or condone any irregularity which can be made binding on it by its own internal procedure therefore preventing a member from bringing an action.
This is premised on the fundamental principle that a company is a legal person, with its own corporate identity, separate and distinct from its directors or shareholders and with its own property rights and interests to whom alone it is entitled hence capable of suing and being sued in its own name. This is evidently seen in the case of Moir v Waller Steiner ([1975]1 ALLER 849 where Lord Denning MR held the view that being a legal person with its own corporate identity, separate and distinct from the directors or shareholders and with its own property rights and interests, a company could itself sue for damage in cases where it was defrauded and such was the rule in Foss v. Harbottle. The rule is easy enough to apply when a company is defrauded by outsiders.
A locus classicus to this effect is the leading case of Foss v Harbottle where Foss was a minority shareholder in a company in which Harbottle was one of the directors and majority shareholders. Foss accused the directors for selling a plot of land to the company at an inflated price. The court held that it was not for the minority shareholders to challenge the actions of the actions of the directors since the proper plaintiff was the company itself. Foss was not the company and therefore couldn’t bring an action.
Rationale behind the Foss v Harbottle rule (Reasons)
Authors and writers have cited reasons for the rule in Foss v. Harbottle which include; First, it avoids a situation where the courts would inquire into the desirability or wisdom of the acts of corporate management (the business management rule) since courts lack the experience and expertise to find solutions for every business situation which is normally rooted in risking venture. Secondly, it avoids and prevents a multiplicity suits or unlimited litigation from almost every shareholder. It also maintains the principle of majority as already noted earlier.
The above position summarizes the view that the company is the only person capable of suing regardless of who has defrauded it (insiders or outsiders).
Exceptions to this rule.
As an exception to this rule, courts have come up with situations where individual shareholders can institute a suit against majority shareholders and parameters have been set up to be clearly followed and strictly identified to this effect. This part of the essay will address the reasons for the exception, mode of filing a suit and the prerequisites needed and then shall address the circumstances where a minority can bring an action as an exception to the general rule.
Reason for the exception
The rationale for these exceptions is seen in the case of Allied Bank international limited v Sandru Kara and others where Justice Ogoola noted that;
“If there were no such exceptions, the minority would be completely in the hands of the majority. Even the limitations imposed by the substantive law would be stultified, for as long as the company remained a going concern no action could effectively be brought to enforce them.”
This would therefore enable court go behind the corporate veil in the interest of justice, on grounds of fraud, to enforce compliance with contractual obligations or enforce economic realities obtained under a holding company and its subsidiaries. This is in line with the position that substantive justice demands that where the minorities rights cannot be enforced by an action because of the majorities making it impossible for the company to institute a suit then a shareholder can himself file the suit if he can bring himself within the ambit of the exceptions to the Foss v Harbottle rule as was accurately noted by court in the case of National Enterprises Corporation v Nile Bank Civil Appeal No 17/94 (SCU) unreported.
Filing of a suit by a minority shareholder
In case of any irregularity made on the company or individual shareholder, a minority shareholder can file a bill asking leave to use the name of the company if they show reasonable grounds for their charging against the majority shareholders or directors. Court would then appoint the minority shareholder as a representative of the company to bring proceedings in the name of the company against the wrong done to it.
Prerequisites needed in obtaining relief
To succeed in obtaining relief, there must be proof that the claimant is a member of the company therefore having an actual existing interest in the subject matter. This is based on the position which is settled in law that for a plaintiff to file an action, he must have locus standi (cause of action). A case that illustrates this is David Nahurira v Bagumya Cyprian Begumanya and Bwiruka Jane Frida where court noted that persons cannot purport to be members of a company merely because they know some members of the company. The claimants in this case failed to prove that they were members hence had no cause of action (court relied on the case of Auto Garage and another v. Motokov [1971] EA 515 to justify this). Secondly, the member must also establish that the affairs of the company were being conducted in a manner detrimental to the company and the minority shareholder as well, such wrong alleged could involve fraud on the minority or company which couldn’t be ratified or waived by the company in a general meeting for example; expropriation of the property of the company or in some circumstances that of the minority, breach of the directors duties of subjective good faith, voting for company resolutions not bonafide in the interest of the company etcetera. Third, the aggrieved party must show that the remedy being sought (bringing an action) is the last resort and they have exhausted all other available remedies. The defendant must also show that the suit filed is within the exception of the general rule and the company against which the alleged wrong had been committed must have been made a party.
Forms of Action
There are three types of action which a shareholder may bring an action in law. These are derivative actions, personal actions, representative actions and these have been applied in the various exceptions. They are discussed separately as follows;
Derivative action: In their book, Principles of Company law in Uganda, Chrispas Nyombi and Alexander Kibandana define derivative action to mean a procedural route by which shareholders, usually minority shareholders, are able to enforce the company’s rights where directors have breached their duties. Such action is normally brought by a member of the company where the wrongdoers are in control and prevented the company itself from suing. This is accurately seen in the words of Justice Oder in the case of Salim Jamal & Others v Uganda Oxygen Ltd & another where he said that derivative action is a suit by a shareholder to enforce a corporate cause of action. He furthermore stated that an action is derivative when action is based upon a primary right of the corporation but is asserted on its behalf by the shareholder because of the corporation’s failure, deliberately or otherwise, to act upon the primary right. A derivative action can used as an alternative remedy in cases of oppression as seen under section 247 of the companies Act, 2012.
Representative action: This is legal action or suit in which one or a few shareholders sue on behalf of themselves and other members against majority class of shareholders of the same company. Oder JSC in the Uganda oxygen case held the view that a shareholder can sue in a representative capacity or on behalf of himself and the other members other than the real defendant for it ensures that all the other shareholders are also bound by the result of the action (i.e. resjudicata).
Exceptional circumstances where a minority shareholder can institute a suit in their own name against the majority shareholders are seen below;
When it is claimed that the company is acting or proposing to act ultra vires, a minority shareholder can institute a suit. Bakibinga avers that an ultra vires act cannot be ratified by the company and each member must ensure that the funds of a company are used for its proper purpose. Courts in this instance are only concerned with whether the activity is ultra vires and not to its character in terms of merit or otherwise.
Another exception can arise where an act is not secured by a particular majority vote. This happens where when such act though not ultra vires could be effective only if resolved upon by more than a simple majority vote, say where a special or extra ordinary resolution is required and (it is alleged) has not been validity passed. This is seen in the case of Edwards v. Haliwell where some members of the National Union of Vehicle Builders sued the executive committee for increasing fees. Rule 19 of the union constitution required a ballot and a two third approval level by members. Instead a delegate meeting had purported to allow the increase without a ballot.
An individual can also bring a claim where his/her personal rights are not complied with. A case in point is the case of Pender v Lushington where court noted that a company member’s right to vote may not be interfered with because it is a right to property and therefore any interference leads to a personal right of a member to sue in his own name to enforce the right. Lord Jessel MR held that Pender who had been denied a right to vote in a general meeting could have an injunction for his vote to be recorded since his vote was a property right which could not be interfered with. Furthermore as a matter of litigation, Pender could sue in the name of the company, as well as in his own name, interference with personal right created both a derivative claim and a personal claim.
Another instance is where those who control the company are perpetrating a fraud on the minority. In such a case, it would be more accurate to describe the exception as fraud on the company even though the minority shareholders may ultimately suffer the loss by the diminution in the value of their investments in the company. A case in point to this effect is one of Cook v Deeks where the judicial committee of the Privy Council held that three directors who had taken a contract on project in their own name in the exclusion of Mr. Cook, a fellow member and the company was breach of their duty of loyalty to the company and that the shareholder ratification was fraud. The result was that the profits made on the contractual opportunity project were to be held on trust for the construction company.
A minority shareholder can also institute a suit in any other case where the interests of Justice require that the general rule, requiring suit by the company, should be disregarded. This is in line with Article 126 of the Uganda constitution.
Conclusion
In conclusion, as expressed by Gower, these exceptions can only be reduced to one saying that an individual shareholder can always sue notwithstanding the given Foss v Harbottle.
Bibliography
David J. Bakibinga, Company law in Uganda: The Writtenword publications, 2012
Chrispas Nyombi, Alexander Kibandana, Principles of Company law in Uganda, Kampala: LawAfrica publications, 2014
Paul Davies, Gower’s Principles of Modern Company Law 4th Ed, London: Sweet & Maxwell, 2003
References
The Constitution of Uganda, 1995
Companies Act, 2012
The writer is a student of Law at Uganda Christian University School of law.
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