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Business Law Organisations - Essay Example

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Introduction Minority shareholders in the UK have traditionally been constrained from bring causes of actions against directors, due to the common law rule established by Foss v. Harbottle (1840) 67 ER 189. In this case, the Foss court held that actions may only be brought by the company itself, subject to certain exceptions…
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Download file to see previous pages Since “unfairly prejudicial” is not defined by the Act, this means that there are broad reasons why a minority shareholder may bring a cause of action against a corporation, which effectively negates the constraints established by Foss. This paper will examine Foss, will examine derivative actions, and will examine the Companies Act (2006), concluding that, while Section 260 of the Act does not provide shareholders with any more protection than what was had under Foss, section 994 does provide this protection. Foss v. Harbottle Even though shareholders are effective in holding directors accountable, the UK courts have a common law rule, delineated in Foss v. Harbottle (1840) 67 ER 189. In this case, two minority shareholders accused the defendants, who were the directors of a company called “Victoria Park Company,” of misapplying land, wasting land and obtaining improper mortgages, without the permission of the shareholders. The court in the Foss case dismissed the shareholders case, stating that only the company itself has a right to sue the directors. The reasoning for this might be best stated by the court in a subsequent case, Edwards v. Halliwell [1950] 2 All ER 1064. The judge in this case states that the sound reason why minority shareholders cannot bring an action against directors is that, if there is only a minority bringing the case, it would mean that the majority of the company is in favor of what was done. Ramsay & Saunders (2006) state that there are two prongs to the Foss case – one, it established the “proper plaintiff” who is the company itself; two, it established the principle that directors should be independent and not subject to shareholder meddling into business affairs (Ramsay & Saunders, 2006). There are exceptions to the Foss rule. One is that the company did an illegal or ultra vires act. A shareholder can bring an action on this basis, because the majority cannot ratify an illegal or ultra vires act (Wedderburn, 1957; Cockburn v. Newbridge Sanitary Steam Laundry Co. [1915] 1 IR 237). Another exception is that, if the company takes an action which, in the company’s constitution, requires a “special majority” to take this action, then a minority shareholder may sue if the company takes this action in contravention to its own constitution (Black, 1983; Edwards v Halliwell [1950] 2 All ER 1064). Berkahn (1998) states that another exception is that a shareholder’s “personal rights” have somehow been infringed by the corporation, therefore that shareholder has a right to sue for his personal rights infringement (Berkahn, 1998; Pender v Lushington (1877) 6 Ch D 70). Another exception is the “fraud on the minority” exception, which means that the wrong-doers actions amounts to fraud (Lo, 2004; Atwool v Merryweather (1867) LR 5 EQ 464n). Buckley (1976) states that this last action is the only derivative action of the exceptions, as the first three exceptions involve personal actions. Therefore, according to Maloney (1986), this action is the only true exception to Foss (Maloney, 1986). Statutory Actions Although Foss limited the actions that minority shareholders can take, statutory actions have restored many of the rights of the minority. One is that the Companies Act (2006) has given shareholder permission to bring ...Download file to see next pagesRead More
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