The rule in Foss v Harbottle was initially a substantial barrier to a minority shareholder wishing to remedy a corporate wrong. Early emphasis on the rights of managers to conduct the affairs of companies without outside interference, and assumptions as to the appropriateness of the majority rule principle in all cases resulted in the courts building up complex procedural rules, often only tenuously linked to the central issues of the company’s interests in having an action brought, and its ability to do so itself. With the growing realisation that corporate activity had become more of a public concern, and the resulting trend towards greater recognition of individual shareholders’ rights, the rule in Foss v Harbottle has, however, gradually been relaxed, particularly given a liberal interpretation to the true exception thereby making the rule less of a practical barrier to shareholder enforcement.

1. STATUTORY DERIVATIVE ACTION REVISITED: A REVIEW OF PAVLIEDS v.
JENSEN AND DANIEL v. DANIEL
Oluwaseyi Bamigboye1
In Pavlides v Jensen [1956] Ch 565 it was alleged that directors had been guilty of gross
negligence in selling a valuable asset of the company at a price greatly below its true market
value. It was stated that the since the sale of the asset in question was not beyond the powers
of the company and since there was no allegation of fraud on the part of the directors or
appropriation of the assets of the company by the majority shareholders in fraud of the
minority, the action did not fall within the admitted exceptions to the rule in Foss v Harbottle.
The sale of the asset was not beyond the powers of the company and it was not alleged to be
ultra vires. It was held that a minority shareholders' action was not available since it was open
to the company, on the resolution of the majority of the shareholders to sell the mine at a
price decided by the company in that manner. Additionally, it was open to the company, on
the resolution of the majority of the shareholders, to commence legal proceedings against the
directors on the basis of negligence or error of judgment in selling the asset at an undervalue.
Therefore in this case the court held that the directors' mere gross negligence in exercising
their duties, when they had not benefited from that negligence, does not amount to fraud.
In Daniels v Daniels [1978] 2 All E.R. 89 the minority shareholders had brought an action
against the two directors of the company who were the majority shareholders. It was alleged
that the company, according to the instructions of the directors, sold the company's land to
one of the directors, who was the spouse of the other, at an undervalue. The spouse then sold
the land later on for a much greater sum. It was held that the exception to the rule in Foss v
Harbottle enabling a minority shareholder to bring an action against a company for fraud,
where no other remedy was available, should include cases where even though there was no
fraud expressly alleged, there was a breach of duty by the directors and majority
shareholders, to the detriment of the company and the benefit of the directors. Templeman J
concluded at p. 414: "a minority shareholder who has no other remedy may sue where
directors use their powers intentionally or unintentionally, fraudulently or negligently, in a
manner which benefits themselves at the expense of the company".
1
LL.B (Hons.) (Ibadan)

2. It is essential to analyse the situation of minority shareholders to determine whether under the
old common law, minority shareholders were given adequate protection.
Majority rule is a very familiar term in the constitutional law vocabulary of democratic
nations2
. But because legal theory conceives of a company as a democratic business
organization, the principle of majority rule is also applicable to registered companies.3
. From
the point of view of judicial authorities the locus classicus is the case of Foss v. Harbottle4
hence the rule is generally referred to as the Rule in Foss v. Harbottle and sometimes called
the proper plaintiff rule.5
The rule, as set out by Sir James Wigram VC, simply stated that in
respect of wrongs to the company, ‘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. Thus, if an action did not have the support either of the directors of the
company, in whom the power to bring proceedings on the company’s behalf generally rests,
or of a majority of shareholders,6
it could not proceed.
The majority rule stands for the proposition that the decisions and choices of the majority will
always prevail over those of the minorities. In practice, the greater the amount of
shareholding of an individual member, the greater rights and powers accrued to that
individual member within the company. Thus it appears that a substantial amount of power
has been placed in the hands of the majority shareholders and that by virtue of the majority
rule, the minority shareholders are required to accept the decisions made by the majority
shareholders. In such circumstances, the minority shareholder cannot ask for court
intervention because Foss v Harbottle does not cater for minority members who complain of
a wrong done to the company provided that the majority shareholders do not wish to take any
action against the wrong committed. As a general principle laid down in Foss v Harbottle,
where it is alleged that a wrong has been done to the company then proper claimant in such
an action is the company itself and where the company is competent to settle the alleged
2
The Constitution of the Federal Republic of Nigeria 1999 returned Nigeria to a democratic system of
government in which majority rule is central after a prolonged period of military dictatorship.
3
Dias R V M 2013 Jurisprudence (5th
edition) India: Lexis Nexis page 250-271
4
(1843) 2 Hare 461.
5
Heyting v. Dupont 1964 1 WLR 843
6
Generally, the management of a company is vested in its board of directors. Thus it is usually only the board
which has the right to initiate proceedings in the company’s name, and a board cannot be compelled to comply
with a resolution of shareholders: Automatic Self-Cleansing Filter Syndicate Co. Ltd v Cuninghame [1906] 2
Ch34, 45; John Shaw & Sons ( Salford) Ltd v Shaw [1935] 2 KB 113, 134; and Breckland Group Holdings Ltd v
London & Suffolk Properties Ltd [1989] BCLC 100, 104-105. However, in practice, and as noted in the above
cases, a majority of shareholders will control the composition of the board, and may vote to remove directors if
their wishes are not followed.

3. wrong itself or, the company is competent to ratify or condone an irregularity by its own
internal procedure, then no individual member may bring action.
This principle was later expanded to also state that if the alleged wrong is ratifiable by a
majority of the company’s shareholders, the minority may not sue. Mellish LJ in
MacDougall v Gardiner emphasised the practical advantage of the rule in avoiding futile
litigation when he said:
"If the thing complained of is a thing which in substance the majority of
the company are entitled to do, or if something has been done
irregularly which the majority of the company are entitled to do
regularly ... there can be no use in having a litigation about it, the
ultimate end of which is only that a meeting has to be called, and then
ultimately the majority gets its wishes."7
Consequently, when reference is made to the ‘rule in Foss v Harbottle’, it is generally this
broader set of principles which is being referred to, rather than just the locus standi rule
referred to by Sir James Wigram in Foss v Harbottle itself. There is disagreement as to
whether the rule is in fact a single rule incorporating these two components - the ‘proper
plaintiff’ component and the ‘internal management’8
or ‘majority rule’ component - or two
separate but related rules. The former interpretation postulates a single rule, based in broad
terms on the majority rule principle,9
and stating that, where a company has a cause of action,
that company is the proper party to bring proceedings, provided that an individual
shareholder or director may take action on the company’s behalf if the conduct complained
of cannot be properly ratified by an ordinary resolution of shareholders.
A strict application of the general principle laid down in Foss v Harbottle appears to be harsh
and unjust with regard to minority shareholders, as although a substantive right has been
accrued to them, still they are barred from obtaining justice under the rule and have to submit
to the wrongs done by the majority because at the end of the day it is the majority of the
members that control the company and the minority members have no say due to their small
7
(1875) 1 ChD 13, 25. See also Mozley v Alston (1847) 1 Ph 790 for the original formulation of this component
of the rule.
8
This principle means that the court will not interfere with the internal management of a company. See
MacDougal v. Gardiner (supra)
9
Wedderburn K, ‘Shareholders’ Rights and the Rule in Foss v Harbottle’ [1957] CLJ 194, 198 states that ‘it is
...plain that beneath the two parts of it there is, after all, one ‘rule in Foss v Harbottle’; and the limits of that rule
liealong the boundaries of majority rule’.

4. strength of number. However, the law then makes provisions for exceptions, by way of a
derivative action without which the hope of the minority would have been sealed.10
The four
established exceptions to the rule at common law11
and the two extensions in decided cases12
have been codified under section 300 of the Companies and Allied Matters Act 1990 to the
effect that the court, on the application of any member, may, by injunction or declaration,
restrain the company from the following:
(a) entering into any transaction which is illegal13
or ultra vires14
;
(b) purporting to do by ordinary resolution any act which by its constitution or the Act
requires to be done by special resolution;15
(c) any act or omission affecting the applicant’s individual rights as a member,16
(d) committing fraud on either the company or the minority shareholders where the directors
fail to take appropriate action to redress the wrong doing;17
(e) where a company meeting cannot be called in time to be of practical use in redressing a
wrong done to the company or to minority shareholders;18
and
(f) where the directors are likely to derive a profit or benefit, or have profited or benefitted
from their negligence or from their breach of duty.19
A derivative action is an action brought by a shareholder or director of a company in the
name and on behalf of that company.20
Such an action is ‘derivative’ in the sense that the
right to sue belongs not to the party actually bringing the action, but is ‘derived’ from that of
10
Aina K. 2014. The Derivative Action in Nigeria: A Comparative Review, The Lord Justice Journal: Essays I
honour of Prince Bola Ajibola SAN (2014) 5 U.I.L.S.S. 205
11
The so-called fifth exception at common law never really enjoyed judicial, or academic support and is not
recognised under the Companies and Allied Matters Act 1990. See the articles cited in note 5. Gower’s
Principles of Modern Company Law, 4th edition p. 645, Heytin v. Dunpont (1964) 1 W.L.R.843; Baillie v.
Oriental Telephone & Electric Co. Ltd. (1915) 1 Ch. 503; Russel v. Wakefield Waterworks Co. (1875) L.R, 20
Eq. 474, Cotter v. National Union of Seamen (supra), Prudential Assurance v. Newman Industries (No. 2)
(1982) Ch. 904; Eastmanco (Kilner House) Ltd., v. Greater London Council (1982) 1 All E.R. 437; Oshio,
Modern Company Law in Nigeria, 1995, p. 203-204; Akanki (ed.) Essays on Company Law 1992, 277-278,
Bames, Cases and Materials on Nigeria Co.
12
Hodgson v. NALGO (1972) 1 W.L.R. 130, Daniels v. Daniels (1978) Ch. 406; Alexander v. Automatic
Telephone Co. (1900) 2 Ch. 56.
13
Hoole v. Great Western Rly. Co (1867) L.R 3Ch.D. 13
14
Associated Registered Engineering Co. Ltd and Others v. Yalaju-Amaye (supra) Section 300(a)CAMA LFN
2004
15
Edwards v. Halliwell (1950) W.N 537 , Quin & Axtens v. Salmon (1909) A.C. 442; Section 300(b) CAMA
LFN 2004
16
Pender v. Lushington (1877) 6 Ch. D. 70. Section 300(c) CAMA LFN 2004
17
Section 300(d) CAMA LFN 2004
18
Hodgson v. National Association of Local Government Officers
19
Section 300(f) CAMA LFN 2004
20
Berkahn M. 1998 The Derivative Action in Australia and New Zealand: Will the Statutory Provisions
Improve Shareholders’ Enforcement Rights? Bond Law Review, Vol. 10, Issue 1, Article 5.

5. the company. Its purpose is to achieve relief in situations aforementioned where a wrong has
been done to the company, rather than to its shareholders personally. Normally, the decision
to take action on the company’s behalf lies with the directors, as they generally have the
responsibility of managing the company.21
Hence, in these cases it is necessary that the
shareholders be given the right to commence action on the company’s behalf, usually
because some or all of the board are themselves responsible for the wrong that has been
committed.
A review of these exceptions is beyond the scope of this paper; however, we shall review one
of the exceptions under the common law in relation to one of the judicial extensions with a
view to do justice to the aim of this assessment.
The cases of Pavileds v. Jensen (supra) & Daniels and Daniels (supra) both come under the
one of the aforementioned exceptions, where the court will grant an injunction or declaration
to minority shareholders to restrain the company from committing a fraud on the minority or
company. This has been described as ‘the only true exception’ to the rule in Foss v Harbottle,
a fair description when it is considered that the others are really self-evident and, strictly
speaking, not even within the ambit of the rule. It is also the broadest exception and thus the
one most often invoked by complaining minorities. The exception included two components:
Those against whom relief was sought had to control the company, thereby preventing an
action being brought against them in the company’s name; and the conduct complained of
must, in the view of the court, have constituted a fraud.
It must however be stated that their contrast rests upon the ratio decidendi on which the
courts based their judgements in the respective derivative actions. In both cases the courts
came to different interpretations of fraud in relation to the negligence of the directors. This is
perhaps because the courts have not set any precise parameters on the meaning of fraud, but
acknowledged that it is clearly wider than common law fraud.22
In Pavlides’ case, the court
held that there must be actual fraud or dishonesty, and mere negligence including gross
negligence was not sufficient to qualify as fraud. It was the opinion of the court that only
negligence and no actual fraud could be proven and also because the majority can ratify a
negligent action, the minority shareholder could not maintain an action. In contrast, in the
case of Daniel v. Daniel, the court extended this rather restrictive interpretation of the
21
See Section 63(3) CAMA
22
Aina K. Op.cit

6. exception and held that the court would permit a minority to sue even in the absence of actual
fraud, where directors have abused their powers, intentionally or unintentionally, negligently
or fraudulently, in a manner which benefits themselves at the expense of the company. The
court was of the opinion that actual fraud also need not be proved but where the directors had
benefitted from their negligent act, and then the minority shareholder can sue. Hence,
negligence or a breach of duty which not only harmed the company but also resulted in a
profit to a director did amount to a fraud on the minority. The defendants relied heavily on
the decision in Pavlides v Jensen in their submission that ‘mere gross negligence’ was not
actionable, to which Templeman J replied:
To put up with foolish directors is one thing; to put up with directors
who are so foolish that they make a profit of £115,000 odd at the
expense of the company is something entirely different.23
While conceding in his judgment that Pavlides v Jensen seemed to be in line with current
authorities on the subject (including Cook v Deeks,24
Alexander v Automatic Telephone Co
Ltd25
and Turquand v Marshall26
) Templeman J actually broadened the fraud on the minority
exception significantly, by effectively removing the requirement for bad faith on the part of
the defendants. He concluded that:
A minority shareholder who has no other remedy may sue where
directors use their powers, intentionally or unintentionally,
fraudulently or negligently, in a manner which benefits themselves at
the expense of the company.27
This passage, although representing a breakthrough for minority shareholders seeking to
enforce corporate interests, appears to retain the previous requirement that an intention (albeit
bona fide) on the part of the defendant to benefit from the conduct had to be shown.
This later decision has been held to be the current law28
and has also been enacted in Nigeria
under the Company and Allied Matters Act 200429
and has been given strength by the
23
Ibid 414
24
[1916] 1 AC 554.
25
[1900] 2 Ch 56.
26
(1869) LR 4 Ch App 376, 386, where Lord Hatherley said that the trust given by shareholders to directors
extended to conduct done ‘merely by default of judgement ... However ridiculous and absurd their conduct
might seem, it was the misfortune of the company that they chose such unwise directors.’
27
Ibid
28
Barrett v. Duckett [1995] 1 BCLC 73, overruled by the Court of Appeal on other grounds [1995] 1 BCLC
243.
29
Cap C20. Laws of the Federation 2004; Section 300(f),

7. Supreme Court in the case of Associated Registered Engineering Limited v. Yalaju-Amaye30
where it held that that in going on a withdrawal spree from the bank account, and forging
minutes of meetings to cover lack of a resolution to change the signatories to cheques, the
majority had committed fraud on the company.
However, under this exception, “fraud” is not restricted to its common law definition and the
Supreme Court defined it in a wider sense as “any act which may amount to an infraction of
fair dealing, or abuse of confidence or unconscionable conduct, or abuse of power as between
a trustee and his shareholders in the management of a company”, in which case the minority
shareholder was allowed to sue. Thus, “fraud’’ is used in a loose, wider and equitable sense
as an abuse or misuse of power on the part of the majority or the directors, and indeed, breach
of duty by directors. Consequently, no actual fraud need be proved; it may simply be
presumed.31
In this sense, it includes expropriation of the company’s property or other
members’ property and any attempt to release the directors’ from liability arising from breach
of duty of good faith. To succeed, plaintiff must prove (a) fraud on the minority and (b) that
the wrongdoers are in control of the company and this prevents the company itself from
bringing action in its own name.
Conclusion
The rule in Foss v Harbottle was initially a substantial barrier to a minority shareholder
wishing to remedy a corporate wrong. Early emphasis on the rights of managers to conduct
the affairs of companies without outside interference, and assumptions as to the
appropriateness of the majority rule principle in all cases resulted in the courts building up
complex procedural rules, often only tenuously linked to the central issues of the company’s
interests in having an action brought, and its ability to do so itself. With the growing
realisation that corporate activity had become more of a public concern, and the resulting
trend towards greater recognition of individual shareholders’ rights, the rule in Foss v
Harbottle has, however, gradually been relaxed, particularly given a liberal interpretation to
the true exception thereby making the rule less of a practical barrier to shareholder
enforcement.
30
(1990) 4 N.W.L.R. (Pt. 145) 422
31
Daniel v. Daniel (supra)