Common law exceptions to the rule in Foss V. Harbottle

Illegal acts

The majority have never been able to affirm an act which is ultra vires the company. The exception relates to other illegal acts such as financial assistance.

Decisions requiring qualified majority.

A majority cannot confirm a resolution by simple majority where the constitution of the company requires a qualified majority: in Edwards v. Halliwell [1950], a trade union's rules provided that members' subscriptions could only be increased by a special resolution of the delegates. The court allowed a minority action where the union purported to increase subscriptions by an ordinary resolution.

Personal rights of a shareholder

The minority shareholder can always enforce his personal rights as a shareholder: Fender v. Lushington (1877).

Where there is a fraud on the minority.

The concept of fraud on the minority involves an abuse of its power by the majority. This abuse can be directed at the minority shareholders where there is an attempt by the majority to compulsorily acquire the shares of the minority; alternatively the abuse can be directed against the company itself, as where the majority attempts to expropriate a corporate opportunity for itself. In both cases the minority can sue (i) to block an abusive use of majority power, Clemens v. Clemens Bros Ltd [1976], or (ii) to recover the company's expropriated property: Cook v. Deeks [1916].

The form of the minority action.

Depending on the nature of the exception, the minority action may take a different form. The following actions exist: a personal action; a representative action and a derivative action. The personal action is for infringements of the shareholder's personal rights as a member. The representative action is where there is an infringement of the rights of a minority of the shareholders including the member bringing the action; the action will be in the form of a direct representative action (or class action), where the shareholder will initiate the action for the benefit of the affected class. The derivative action is in respect of wrongs against the company itself where the shareholder acts as a champion for the company as a whole. In order to bring a derivative action the minority shareholder must establish as a preliminary issue the following points: (i) that there has been a wrong in the nature of a 'fraud' committed against the company; and (ii) that the wrongdoers are in control of the company.

Fraud against the company.

The term ‘fraud’ includes abuses of power both in the capacity of director and shareholder.

The wrongdoers are in control.

'Control' means actual voting control of the company. It is not sufficient to show de facto control merely through combined dominance of shareholding and management position, but the court does take into consideration control through nominees.

The court may order the company to indemnify the minority shareholder where it was reasonable and prudent for him to bring the action and if it was brought in good faith.