December 23, 2010 10430 VIEWS



Legal Alert for December 2010:
The global economic crises have again highlighted the dereliction in the responsibilities of the shareholders of companies, who as owners and not spectators of their companies, should properly oversee the governance and management of their companies. And to in proper instances, assert their legal rights to protect their shares/investments in these companies.
The position of the minority shareholders is usually more precarious as a result of the narrow understanding of the general legal rule that allows only a company, through its majority shareholders, to assert the legal rights of such a company. This rule, commonly known as the rule in Foss V Harbottle (1843) 2 Hare 461, is intended to avoid multiplicity of law suits and also to protect our courts of law from interfering in the internal affairs of a company. However, and sometime, the injury to the company is caused by the majority shareholders or their appointed Directors to which situation the law has created exceptions to this general rule.
Minority Shareholders Rights
Section 81 of the Companies & Allied Matters Act ascribes to every member of an incorporated company, who has fully paid for his or her shares, a right to attend all the shareholders’ meetings of such a company; and to speak and vote at such shareholders meetings. The mode of proving membership of a company is by the possession of a share certificate and the tendering of a certified true copy of the register of members should such a matter go to litigation. See the decision in Oriji v. Dorji Textile Mills Limited (2009) 12 SC (Part III) 101 @ 108, 112-113.
All the members of a company also have the right to receive copies of the Memorandum and Articles of Association of the company as they do further have the right to receive and comment on the audited accounts of the company.
The minority shareholders of a company also have the right to bring derivative actions, in the name of the company, where the wrongdoers are the controlling directors of the company, who have being entrusted with the control and management of the company, and who have done any of the
a)       Entered into any transaction which is illegal or ultra vires the Memorandum and Articles of Association of the company;
b)       Committed a fraud on either the company or on the minority shareholders despite repeated notice to refrain or remedy such complained of actions;
c)       Derived or is/are deriving a profit or benefit or profited from their negligence and or breach of duty of care;
d)       Have by their actions or inactions or omissions infringed upon the individual rights of the minority shareholders;
e)       Are conducting the affairs of the company in an unfair, prejudicial and oppressive manner.
Judicial decisions on this matter, for your study, include the decisions in William v. William (1995-1996) ALL NLR 283 @ 294-302; Yalaju-Amaju v. A.R.E.C (1990) 6 SC 157 @ 175-176.
The plethora of judicial authorities with the provisions of the Companies & Allied Matters Act are available to all shareholders, including the minority shareholders, to protect their investment rights. Shareholders should therefore avail themselves of these provisions to avoid more catastrophic losses in the future.
Foss v Harbottle (1843) 2 Hare 461 - The Rule In Foss v Harbottle
This case is of course the one that lead to the famous rule, now know as "The Rule In Ross v Harbottle". Two minority shareholders initiated legal proceedings against, among others, the directors of the company. The claimants asked the court to order the defendants to compensate for losses to the company as a result of alleged fraudulent activity. Wigram VC held that since the company’s board of directors was still in existence, and since it was still possible to call a general meeting of the company, there was nothing to prevent the company from obtaining redress in its corporate character and thus the action by the claimants could not be sustained: "The corporation should sue in its own name and in its corporate character, or in the name of someone whom the law has appointed to be its representative."
However, the best known and perhaps the clearest statement of the rule in Foss v Harbottle was actually set out by Jenkins LJ in the case of Edwards v Halliwell:
"The rule in Foss v Harbottle, as I understand it, comes to no more than this. First, the proper plaintiff in an action in respect of a wrong alleged to be done to a company or association of persons is prima facie the company or the association of persons itself. Secondly, where the alleged wrong is a transaction which might be made binding on the company or association and on all its members by a simple majority of the members, no individual member of the company is allowed to maintain an action in respect of that matter for the simple reason that, if a mere majority of the members of the company or association is in favour of what has been done, then cadit quaestio.". The rule established that where the company suffers harm, the company itself is the true and proper claimant. Therefore the shareholders cannot generally sue for wrongs done to the company.
There are however several exceptions to the rule in Foss v Harbottle that have given rise to a number of exceptions which include - the act complained of is illegal or 'ultra vires'; the requirement of a special majority; personal rights; and a fraud on the minority.
DISCLAIMER NOTICE: This Legal Alert is a free educational material, for your general information and enlightenment ONLY. This Alert, by itself, does not create a Client/Attorney relationship. Recipients are therefore advised to seek professional legal counselling to their specific situations when they do arise. Questions, comments, criticisms, suggestions, new ideas, contributions, etc are always welcomed. This Legal Alert is protected by Intellectual Property Law and Regulations and is reproduced by Proshare Nigeria Limited under permission for the Proshare online investment community. Oserogho & Associates []
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