This document summarizes the rule in Foss v Harbottle and its exceptions regarding a member's right to bring legal action against a company. The rule establishes that the company is usually the proper plaintiff, not individual members, but there are exceptions. These include where the majority acts ultra vires, fails to obtain a required special resolution, infringes on a member's personal rights, commits fraud on the minority, or does not act bona fide for the company's benefit as a whole. The exceptions allow members to bring a derivative suit on behalf of the company or a personal claim to enforce their own rights.

1. Company Law II - Chapter 2
Membership and Members Rights
PART B
2.4 Infringement of members’ rights
 Law has developed various
remedies where majority act
unfairly or oppressively in order
to protect the interest of the
company and its members
2.4.1 Introduction
 Members’ rights (as a whole) –
conferred by CA, AA and
general law
 Members’ personal rights
(individual)
(a) To have the MA and AA
observed.
(b) To restrain ultra vires and illegal
acts
(c) To have access to the
company’s records and to have
certain information provided to
them.
(d) Where general meetings are
held, to attend and vote at general
meetings.
(e) To be treated fairly.
 Limb 1:
Rule in Foss v Harbottle and its
exceptions
 Limb 2:
Statutory remedies: s 181, 218(1)(f)
& (i), s 199 CA

2. Limb 1:
THE RULE IN FOSS V HARBOTTLE
(CL)
 Right of a member to bring
action to remedy an internal
irregularity or a wrong
committed against the
company stemmed from the
rule in F v H and its exception
 Rule was based: it is generally
appropriate for disputes to be
resolved in accordance with the
constitution and vote of the
majority. Courts were reluctant
to interfere with this processes
- exception was made in order to
give standing to members to bring
legal actions to enforce personal
rights as members
- in other cases, members were
given permission to bring legal
actions to enforce a right of the
company in circumstances where it
failed to do so -Derivative actions
 Concept of majority rule:
- Those who takes interest in
company limited by shares have to
accept the majority rule.
- person who joins, deemed to
have accepted the risk that wider
interest of company which may be
prejudicial to his own
- if he joins a company, he will be
bound by certain policy of the
majority which does not coincide
with his own
- If there is conflict of opinion; the
majority’s opinion must prevail
--> minority have by contract
agreed to submit to the will of the
majority
-----------------------------------------------
(a) Internal management rule
- based on the courts’ reluctance to
interfere with internal
irregularities, which are capable of
being rectified by ordinary
resolution of a GM of members

3. (b) Proper plaintiff rule
- a recognition of the separate legal
identity of the company. Where a
wrong is done to a co, then the co
itself is the proper pf in any legal
proceedings, which seek to remedy
it
(c) Effect of rule
 This is the rule of “majority
rule”. This rule has two parts:-
1. If a wrong is alleged against the
company, then the proper Plaintiff
to sue in respect of that alleged
wrong is the company itself and
not any individual Shareholder
2. If company officers have
committed an irregularity and this
irregularity can be ratified in
general meeting, then no individual
member may sue in respect of
the irregularity.
Common Law Exceptions to the
rule in Foss v Harbottle
(a) Where the act of the company
is ultra vires
 Common law: individual SH
could bring an action to
complain that the co was acting
on some matter which was
ultra vires
 Ultra vires: not only acts which
were beyond the objects and
powers set out in the
memorandum but also to illegal
and criminal acts
 if it is outside their object,
illegal or ultra vires, the
company or any individual
members can sue because the
act itself cannot be confirmed
by the majority. Here, the
minority members may sue to
restraint the company from
performing ultra vires or illegal
activities

4.  Simpson v Westminister Palace Hotel
Co
- H: a minority argued that a decision to
lease a major portion of the hotel as
offices was not within the objects of the
hotel company and therefore claimed to be
an ultra vires act. The court held that a
single member can maintain a suit for
declaration.
 Malaysia: s 20(1), 20(2)
- preserve the validity of ultra vires
act
- a member may still raise any lack
of capacity or power in a
proceeding against the company to
restrain the company from entering
into any ultra vires transaction
 Bee See & Tay v Ong Hun Seang
 Limitation:
i. SH bear all cost of bringing
action
ii. Power to restrain lost if the
transaction is wholly executed
(b) Where the act of the company
requires a special majority
 A company may only do certain
things by special resolution of
the GM
  s 152(1) CA - special resolution is
a resolution considered at a meeting
to which 21 days notice has been
given and passed by a majority of not
less than three quarters of the
members which entitle to vote
 Ex: s 31(1) - need special resolution
in order to alter the articles
 Edwards v Halliwell
- F: the constitution of a trade union
provided that alteration of the
contributions of employed members could
only be made by a ballot vote of the
members and ¾ majorities must be
obtained. During the Second World War,
a meeting of the union was made and a
resolution increasing the amount of
contributions was passed without taking a
ballot and without obtaining ¾ majorities.
Two members of the union sued for a
declaration that the resolution is invalid.
H: The defence was that the rule in Foss v
Harbottle debarred the members from
taking action.The defence was rejected
and the court held that the resolution was
invalid. The rights infringed were
individual membership rights. The ¾
majority requirement also has not been
complied with and for that reason, the rule
in Foss v Harbottle did not apply, the
individual members were entitled to sue.
 Quin v Axtens Ltd v Salmon
- H: the court held that an ordinary
resolution to authorize a sale of

5. company’s property is ineffective because
the AOA prohibited disposal without
the consent of the P. The only course
open to the company was a special
resolution to amend the AOA before they
could validly dispose any property and
this was not done. P was allowed to take
action.
(c) Where a member’s personal
rights are infringed
 Personal rights conferred either
by the Act, s 33(1), AA or a
separate contract.

 Examples:
- s 65 ; confers a rights on holders
of shares to bring an action to
prevent the majority from altering
the articles.
- s 148; confers the rights on a
member to attend and vote at a
general meeting. This right cannot
be limited by MA AA
- s 33; personal rights may be
conferred in articles and such
articles create a statutory contract
 Hickman v Kent or Romney
Marsh Sheep-breeders’
Association
- F: Article 49 said disputes
between the association and a
member should go to arbitration,
before court. Mr Hickman
complained about refusal to
register his sheep in the published
flock book and was under threat of
being expelled.
H: There was a contract. Hickman
was bound. The predecessor to the
Companies Act 2006 section 33
creates a contract, which affects
members in their capacity as
members, though not in a special or
personal capacity (eg as director).
As a member, Mr Hickman was
bound to comply with the company
procedure for arbitrating disputes
and could not resort to court.
 Pender v Lushington
- F: The AOA provided that members
were entitled to only one vote for every
company share held, up to a maximum
100 votes. A member, who held the large
number of shares, knowing this restriction
on voting, transferred his number of
shares to Pender, who was to vote in
accordance with the transferor’s direction.

6. At the general meeting of the company,
Pender’s votes were disallowed. This
resulted in the passing of resolution for
which he would not have voted had his
votes been counted. Pender then brought
an action against the directors to overturn
the dis-allowances of his vote and to
restraint them from acting on the
resolution.
H: The court upheld his right to bring an
action and decided that he came within an
exception to the rule in Foss v Harbottle
because he was enforcing his personal
right conferred on all members to have
their vote counted.
 Wood v Odessa Waterworks Co
P: The company declared a dividend
and passed a resolution to pay it by
giving their shareholders debenture
bonds bearing interest. The articles
provided that the company declare
a dividend to be "paid in cash"
HELD: The words meant paid in
cash and in consequence a
shareholder could restrain the
company from acting ultra vires.

7. (d) Where majority members
commit a fraud on the minority
 General rule: majority must use
their voting power to act ‘bona
fide for the benefit of the
company as a whole’: Allen v
Gold Reefs of West Africa failing
which is amounting to fraud on
minority.
 Exception to the proper plaintiff
rule in F v H
 Onus of showing an abuse of
power is on the minority
shareholder: Peters’ American
Delicacy Co Ltd v Heath 
 A resolution of the general
meeting which is a fraud on
minority may be challenged by
members who lack voting
rights, such as preference
shareholders:Pavlides v Jensen
 Two elements must be
established:
i) fraud
ii) wrongdoer in control

 Definition “fraud on minority”
- Fraud has broader meaning than
under the law of Tort. Fraud in the
context of ‘fraud on minority’
means an abuse power whereby
the majority secures an unfair gain
at the expense of the minority, the
injured party need not actually be
the minority shareholders, but may
also be the company itself.
- In other words, the minority or
company was affected either
directly or indirectly by the decision
taken by the controlling majority.
 Abdul Rahman bin Aki v
Krubong Industrial Park
(Melaka) Sdn. Bhd.
P: Gopal Sri Ram made up the
following points in relation to fraud
on minority which are ‘Fraud on
minority’ is a term of art and has
absolutely nothing whatsoever to
do with actual fraud or deception at
common law, it is not necessary to
prove dishonesty before a minority
shareholder may claim relief under
the exception and it is sufficient for
a plaintiff to show that the majority
had abused their power vested in
them in the sense that they used
their power for a collateral purpose
and not for the true purpose for
which such powers were granted.

8.  Appear to come within s 181
 Expropriation (rampasan) of the
company’s property
- majority commits fraud if it
resolves to expropriate the co’s
property
- fraud if majority SH use their
voting power so as to deprive a
member of his or her shares in the
co > by altering articles (which can
only be done with adequate
compensation and bona fide for the
benefit of the co as a whole)
o Menier v Hooper’s Telegraph
Works
- P:Majority SH resolved to wind up
the co and transfer property owned
by it to another co they controlled
H:Majority could not divide up their
co’s property between themselves
to the exclusion of the minority

 Expropriation of members’
shares
o Brown v British Abrasive Wheel
Co
- F: A co need capital. The majority
SH held 98% of issued capital but
would only provide further capital if
they could buy up the remaining
issued shares. Minority refuse to
sell. So GM was set up to alter the
articles, so as to require the
minority SH to sell their shares.
H: The alteration was fraud on
minority because the majority was
trying to achieve by compulsion
and the alteration was not bona
fide for the benefit of the co as a
whole
Cf: Wong Kim Fatt v. Leong & Co
Sdn. Bhd.

 Ratification of directors’ breach
of duty
o Bamford v Bamford
- The GM has a wide power to ratify
the actions of directors who are in
breach of their duty and to
exonerate from liability arising from
such breach
o Ngurli Ltd v McCann
- Ractification by majority may be
challanged by minority

9. o Daniels v Daniels
- F: a director purchase land from
his co at a very low price and later
resold at a high profit. Minority SH
brought an action by alleging that
director (majority SH) had sold the
land at a gross undervalue
H: Minority could bring case as the
directors had benefited from their
negligence even there is no fraud
but they made an unfair profit at
the co’s expense
(e) Bona fide for the benefit of the
company as a whole
 North-West Transportation v
Beatty
 Greenhalgh v Ardeme Cinemas
Ltd
(f) Where the justice of the case
requires

 UK’s approach
 Prudential Assurance Co Ltd v
Newman Industries Ltd & Ors
(No.2)

 Australia:
 Hawkesbury Development Co
Ltd v Landmark Finance Pty Ltd
 Biala Pty Ltd & Anor v Mallina
Holdings Ltd & Ors (No.2) (1993)
11 ACLC 1082

 Malaysia:
 Abdul Rahman bin Aki v
Krubong

10. o Daniels v Daniels
- F: a director purchase land from
his co at a very low price and later
resold at a high profit. Minority SH
brought an action by alleging that
director (majority SH) had sold the
land at a gross undervalue
H: Minority could bring case as the
directors had benefited from their
negligence even there is no fraud
but they made an unfair profit at
the co’s expense
(e) Bona fide for the benefit of the
company as a whole
 North-West Transportation v
Beatty
 Greenhalgh v Ardeme Cinemas
Ltd
(f) Where the justice of the case
requires

 UK’s approach
 Prudential Assurance Co Ltd v
Newman Industries Ltd & Ors
(No.2)

 Australia:
 Hawkesbury Development Co
Ltd v Landmark Finance Pty Ltd
 Biala Pty Ltd & Anor v Mallina
Holdings Ltd & Ors (No.2) (1993)
11 ACLC 1082

 Malaysia:
 Abdul Rahman bin Aki v
Krubong