Corporate Board: Role, Duties & Composition / Volume 12, Issue 1, 2016

ENFORCEMENT OF CORPORATE RIGHTS-THE

RULE IN FOSS v HARBOTTLE: DEAD OR ALIVE
Anthony O. Nwafor*
*Professor of Law, School of Law, University of Venda, South Africa

Abstract
The principle on the enforcement of a corporation’s right of action which is encapsulated as the
rule in Foss v Harbottle has continued to attract discombobulating academic and judicial
comments in defining the scope and exceptions to that rule. The recent statutory interventions
which are witnessed in the UK and South Africa by redefining the right of the minority
shareholders and other persons to intervene in the corporation’s right of action are seen by some
writers as having extinguished the flame ignited by the decision in Foss v Harbottle. A detailed
examination of the real purport of Wigram VC’s pronouncement in that case is undertaken,
streamlining the rule and the subsequent decisions of courts carving out rooms for departure
from the rule. The paper argues that the statutory interventions in jurisdictions under discussion
only borders on derivative action which is an exception to the rule. The effect of those statutory
provisions on the rule itself is not too significant as would justify the suggestion that the rule is
now extinct. Thus, the paper concludes that the rule in Foss v Harbottle remains the principal
approach to the enforcement of a corporation’s right of action.

Keywords: Corporate Rights, Derivative Action, Enforcement Common Law, Statute

1. INTRODUCTION seems to be to open a wider window for individuals

interventions in corporate matters for the enhanced
Since that famous pronouncement made by Sir James protection of corporate interests. The significance of
Wigram VC about the middle of the nineteenth those interventions on the common law concept of
century in Foss v Harbottle1 which accorded judicial derivative action has witnessed the description by
recognition to the corporation’s right of action in its writers of the rule in Foss v Harbottle as having been
own name, divergent views have continued to emerge consigned to the dustbin of history.3 The undergoing
from writers and the judiciary in their restatement of analysis of judicial decisions and statutory provisions
the scope and applications of that rule. This in the UK and South Africa, however, does not seem
conundrum of views was succinctly captured by to lend credence to any suggestion that the rule has
French, Mayson and Ryan as follows: been abolished.
The rule in Foss v Harbottle is the deepest
mystery of company law but it is of great 2. THE RULE IN FOSS V HARBOTTLE
practical importance. A lawyer must be able to
determine whether his or her client’s claim will The principles laid down in that case which have
or will not be heard by the court. So if the client’s metamorphosed into an arm of the common law rules
claim concerns the affairs of a company of of corporate governance relating to the enforcement
which the client is a member, the lawyer must of corporate rights have been subjected to various
determine whether the claim is an exception to interpretations and expatiations by academics and
the rule. Unfortunately there is disagreement the judiciary. The proper appreciation of what those
over defining the rule itself, let alone its principles are can be gleaned from the facts and the
exceptions, and the topic has been, and will pronouncement of Sir James Wigram VC upon those
continue to be, the subject of a vast amount of facts. The relevant part of the facts that informed the
academic and judicial comment.2 decision of the court are that some of the directors of
the company had in their capacity as such, purchased
The parliament in the UK and South Africa seem their own land at an over-value for the use of the
to have joined the fray, more as arbiters than as company. They were also alleged to have mortgaged
combatants. The parliamentary intentions are felt the land and applied the money raised from the
mostly in that aspect of the rule which seeks to draw mortgage for payment to themselves of the price of
exceptions rather than modifications of the the land. The plaintiffs alleged that the two remaining
substantive rule as stated by Wigram VC. The aim directors had refused to institute the suit, and

1
[1843] 2 Hare 460. the South African statutory context, Cassim observed that the abolition of the
2
Derek French, Stephen Mayson & Christopher Ryan, Mayson, French & Ryan common law derivative action happily relegates to the history books the
on Company Law 31st ed (Oxford: Oxford University Press, 2014) p. 547. ‘notorious’ rule in Foss v Harbottle. See FHI Cassim ‘Shareholder Remedies and
3
Paul L Davies, Sarah Worthington, Eva Micheler, Gower and Davies’ Minority Protection’ in FHI Cassim, MF Cassim, R Cassim, R Jooste, J Shev and
Principles of Modern Company Law 9th ed (London: Sweet & Maxwell 2012) J Yeats (eds), Contemporary Company Law2nd ed (Cape Town: Juta & Co Ltd,
p. 654 stated that the rule in Foss v Harbottle is consigned to the dustbin. In 2012) p. 778.

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 Corporate Board: Role, Duties & Composition / Volume 12, Issue 1, 2016

showed, in fact, that it would be against their convenience which could only be departed from upon
personal interest to do so, inasmuch as they were compelling reasons of very urgent character.11
answerable in respect of the transactions in question; Reading through the company’s Act of Incorporation,
if the plaintiffs could not, therefore, institute the suit the judge held that the directors as the governing
themselves they would have no redress. These set of body are the only ones vested with power to sue in
facts were legally reconstructed by Wigram VC the name of the company. The residuary power lies in
reflecting the nature of the alleged injury and the real the general meeting which could be exercised where
victim of the wrongdoing as follows: “[t]he Victoria the governing body is incapacitated, but no individual
Park Company is an incorporated body, and the incorporators is empowered to sue in the manner
conduct with which the Defendants are charged in proposed by the plaintiffs on the present record.12
this suit is an injury not to the Plaintiffs exclusively; The vesting of the company’s management
it is an injury to the whole corporation by individuals powers in the directors has consistently continued to
whom the corporation entrusted with powers to be receive judicial approval. This feature of corporate
exercised only for the good of the corporation.”4 governance has been elevated to the status where any
Upon this foundation was laid the first principle interference by the general meeting is deemed
of the enforcement of corporate rights which is unacceptable by the courts.13 In Shaw & Sons (Salford)
described by writers as the ‘proper plaintiff Ltd v Shaw14 Greer LJ was very specific on this issue
principle/rule’.5 This inference was drawn from that where he stated that “if powers of management are
arm of the decision of Wigram VC where he held that vested in the directors, they and they alone can
“it was not, nor could it successfully be, argued that exercise these powers. The only way in which the
it was a matter of course for any individual members general body of the shareholders can control the
of a corporation thus to assume to themselves the exercise of the powers vested by the articles in the
right of suing in the name of the corporation. In law directors is by altering their articles, or, if the
the corporation and the aggregate members of the opportunity arises under the articles, by refusing to
corporation are not the same thing for purposes like re-elect the directors of whose actions they
this.”6 disapprove.”
The strength of this finding lies on the distinct The importance of shielding the board’s
legal personality of the company. The fact that a management powers from shareholders control
company is separate or distinct from the members founds justification for the paradigm shift of that
has never been in doubt. This legal contraption which practice in South Africa from a mere matter of
received unparalleled judicial impetus from the company’s internal arrangement to a statutory
House of Lords in Salomon v Salomon & Co Ltd7 has affair.15 Section 66(1) of the South African Companies
never waned in its acceptance even in modern Act, for instance, provides that “[t]he business and
company statutes. Section 19 of the South African affairs of a company must be managed by or under
Companies Act8 (in like manner as its English the direction of its board, which has the authority to
counterpart9) declares ex abundante cautela that a exercise all of the powers and perform any of the
company enjoys juristic personality from the date functions of the company, except to the extent that
and time of its incorporation having all the legal this Act or the company’s Memorandum of
powers and capacity of an individual as prescribed by Incorporation provides otherwise.” This provision is
the Act. complemented by the standard set in section 76(4) (a)
The underlying question in this arm of the (iii) of the Act which provides that:
judgment which recognizes the company as the (4) In respect of any particular matter arising in
proper plaintiff and at the same time as a juristic the exercise of the powers or the
person borders on the rightful persons that could in performance of the functions of director, a
law institute legal action for and in the name of the particular director of a company—
company. The artificial nature of the corporate entity (a) will have satisfied the obligations… if—
invariably deprives the company of that unique (iii) the director made a decision, or supported
character of self will which is inherent in natural the decision of a committee or the board, with
persons. Wigram VC had obviously ruled out the regard to that matter, and the director had a
individual members as competent persons to seek rational basis for believing, and did believe, that
redress for the company as that would amount to a the decision was in the best interests of the
departure from the rule which, prima facie, would company.16
require that the corporation should sue in its own Both provisions do not only preclude
name and in its corporate character.10 This is a rule of unwarranted shareholders interference in
law and practice which is admittedly technical, but management powers, but also enjoins respect for
founded on the general principles of justice and decisions honestly taken by the directors which they

4
Foss v Harbottle above note 1 p. 202 para. 490. business to be undertaken with limited financial liability [on the part of the
5
See French, Mayson & Ryan above note 2 p 546 where the authors stated members] in the event of the business proving to be a failure.”
that if a wrong is done to a company, as a person separate from its members, 8
Act 71 of 2008.
only the company may sue for redress. This is the significant principle stated 9
S 16 of the UK Companies Act 2006.
by Wigram VC in Foss v Harbottle itself and is known as ‘proper claimant’ 10
Above note 6 para 491.
principle. 11
Ibid 203 para 492.
6
Above note 4. 12
Ibid 203 para 493.
7
(1897) AC 22 (HL). Lord Macnaghten’s speech at page 51 reflects the court’s 13
See Breckland Group Holdings Ltd v London and Suffolk Properties Ltd
position. He said: “The company is at law a different person altogether from [1989] BCLC 100. Automatic Self-Cleansing Filter Syndicate Ltd v
the subscribers to the Memorandum and, although it may be that after Cunninghane [1906] 2 Ch 34. Scott v Scott [1943] 1 All ER 582.
incorporation the business is precisely the same as it was before, and the same 14
[1935] 2 KB 113 CA at 134.
persons are managers, and the same hands receive the profits, the company is 15
It remains a matter of internal arrangement in the UK. See The Companies
not in law the agent of the subscribers or trustees for them.’ In Dimbleby & (Model Articles) Regulations 2008, SI 2008/3229, art 3.
Sons Ltd v National Union of Journalists [1984] 1 WLR 427 at 435, Lord 16
Emphasis added.
Diplock explained the essence of this judicial attitude as being “to enable

7
 Corporate Board: Role, Duties & Composition / Volume 12, Issue 1, 2016

consider to be in the interests of the company. This one of the reasons for the rule in Foss v Harbottle.21
statutory position is drawn from the judicial Although Wigram VC did not explicitly state as such,
disinclination to interfering in management there are sufficient grounds in the judgment to justify
decisions. Lord Wilberforce buttressed this judicial such inference.
stance in Howard Smith v Ampol Petroleum Ltd17 The second arm of the rule is described as the
where he held that there is no appeal on merits from ratifiability principle or the majority rule.22 Wigram
management decisions to courts of law nor will courts VC had articulated this principle in his judgment
of law assume to act as a kind of supervisory board where he said:
over decisions within the powers of management The complaint is that those trustees have sold
honestly arrived at. In Burland v Earl18 Lord Davey was lands to themselves, ostensibly for the benefit of
very explicit in his objection to any form of judicial the cestui que trusts. The proposition I have
interference in matters of internal management of the advanced is that, although the Act should prove
company and in fact emphasized that the court has to be voidable, the cestui que trusts may elect to
no jurisdiction to do so. confirm it. Now, who are the cestui que trusts in
The exclusion of shareholders from interfering this case? The corporation, in a sense, is
in management decisions is a strong reason for the undoubtedly the cestui que trust; but the
courts to exhibit some reluctance in doing so, as the majority of the proprietors at a special general
simple question is; if the shareholders as a general meeting assembled, independently of any
meeting cannot interfere in management decisions, general rules of law upon the subject, by the very
why should the courts? The courts cannot be more terms of the incorporation in the present case,
interested in the running of the affairs of the has power to bind the whole body, and every
company than the shareholders themselves except individual corporator must be taken to have
perhaps when the interests of the creditors are come into the corporation upon the terms of
involved.19 Respecting management decisions ensures being liable to be so bound. How then can this
corporate functionality though the necessary checks Court act in a suit constituted as this is, if it is
and balances should not be rule out. This perhaps is to be assumed, for the purposes of the
what the parliament had in mind by demanding in argument, that the powers of the body of the
that provision that the decision taken by the director proprietors are still in existence, and may
should have a ‘rational basis’. The requirement of lawfully be exercised for a purpose like that I
‘rational basis’ for decision making demands some have suggested? Whilst the Court may be
level of objectivity in the assessment of the relevant declaring the acts complained of to be void at
decision to ascertain its sustainability in the context the suit of the present Plaintiffs, who in fact may
of the director’s acclaimed state of mind. An be the only proprietors who disapprove of them,
illustration is found in the decision of Jonathan the governing body of proprietors may defeat
Parker J in Regentcrest plc v Cohen20 the decree by lawfully resolving upon the
The question is not whether, viewed objectively confirmation of the very acts which are the
by the court, the particular act or omission subject of the suit.23
which is challenged was in fact in the interests
of the company; still less is the question whether The principle was reaffirmed even more
the court, had it been in the position of the explicitly by the same Judge in Bagshaw v Eastern
director at the relevant time, might have acted Union Railway Co24 where he stated that if the act,
differently. Rather, the question is whether the though it be the act of the directors only, be one
director honestly believed that his act or which a general meeting of the company could
omission was in the interests of the company. sanction, a bill by some of the shareholders, on behalf
The issue is as to the director's state of mind. No of themselves and others, to impeach that act cannot
doubt, where it is clear that the act or omission be sustained, because a general meeting of the
under challenge resulted in substantial company might immediately confirm and give
detriment to the company, the director will have validity to the act of which the bill complains.
a harder task persuading the court that he Successive court decisions have continued to
honestly believed it to be in the company's expatiate and explain the practicalities of this
interest. principle.25 But those decisions are mired in
The judicial reluctance if not refusal to interfere controversy in defining what is or is not ratifiable by
in matters of corporate management is identified as the majority of the members.26 Lord Davey had

17
[1974] AC 821 at 832 (HL). See also Richard Brandy Franks Ltd v Price dominated by the rule in Foss v Harbottle which has two elements: first, the
(1937) 58 CLB 136. proper plaintiff in respect of a wrong allegedly done to a company is prima
18
[1902] AC 83 at 93 (PC). See also Shuttleworth v Cox Brothers and Co facie the company; secondly, where the alleged wrong is a transaction which
(Maidenhead) Ltd [1927] 2 KB 9 per Scrutton LJ at 22-24. Regentcrest v plc might be made binding on the company by a simple majority of the members,
v Cohen [2001] 2 BCLC 80 per Jonathan Parker J at 105. no individual member of the company is allowed to bring a claim in respect
19
See Hellard & Anor (Liquidators of HLC Environmental Projects Ltd) v of it. Brenda Hannigan, Company Law 3rd ed (Oxford: Oxford University Press,
Carvalho [2013] EWHC 2876 (Ch) para 92. Colin Gwyer & Associates Ltd v 2012) p. 417. See also French, Mayson & Ryan above note 21 p 550.
London Wharf (Limehouse) Ltd, Eaton Bray Ltd v Palmer [2002] EWHC 2748 23
Foss v Harbottle above note 12 pp. 203-204 para. 494.
(Ch), [2003] 2 BCLC 153 para 74. Kalls Enterprises Pty Ltd v Baloglow [2007] 24
(1849) 7 Hare 114 at 130.
NSWCA 191, 25 ACLC 1094 para 162. Roberts v Frohlich [2011] EWHC 257 25
Davidson v Tulloch (1860) 3 Macq 783 at 792, Edwards v Halliwell [1950]
(Ch) para 85, Bell Group Ltd v Westpac Banking Corporation [2008] WASC 2 All ER 1064 at 1066 per Jenkins LJ, MacDougall v Gardiner (1875) 1 ChD
239 paras 4438-4439, Kinsela v Russell Kinsela Pty Ltd (1986) 4 NSWLR 722 13 at 25 per Mellish LJ, Prudential Assurance Co Ltd v Newman Industries Ltd
at 730, Brady v Brady [1988] BCLC 20 (CA) at 40h-I, GHLM Trading Ltd v (No 2) [1980] 2 All ER 841, per Vinelott J, Smith Croft (No 2) [1987] 3 All ER
Maroo & Ors [2012] EWHC 61 (Ch) para 164. 909 per Knox J.
20
[2001] 2 BCLC 80 at 105. See also Vivendi SA Centenary Holdings Iii Ltd v 26
See KW Wedderburn, ‘Unreformed Company Law’ (1969) 32 MLR 563.
Richards & Ors [2013] EWHC 3006 (Ch) para 147. KW Wedderburn, ‘Shareholders Rights and the rule in Foss v Harbottle’
21
See French, Mayson & Ryan above note 5 p. 548. (1957) CLJ 194.
22
Hannigan observed that at common law shareholder’s remedies are

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 Corporate Board: Role, Duties & Composition / Volume 12, Issue 1, 2016

sought, early in the 20th century, in Burland v Earle27 both jurisdictions deal with the concept of derivative
to clear the air on the ensuing controversy by action. The veracity of those writers’ opinions will as
suggesting that acts which are of fraudulent character such be tested in that context.
or ultra vires are not ratifiable. Examples of such acts
were given as where the majority are endeavoring 3. DERIVATIVE ACTION
directly or indirectly to appropriate to themselves
money, property, or advantages which belong to the Derivative action is a common law device by which
company, or which other shareholders are entitled to the shareholder is allowed to seek redress for and on
participate. behalf of the company for an injury done to the
But the conducts which Wigram VC found to be company. This meaning is now statutorily recognized
ratifiable in Foss are not significantly different from in the UK and affirmed in recent judicial decisions.33
some of the illustrations offered by Lord Davey. The first description of a minority shareholder right
Indeed, cases of expropriation of company’s of action for an injury to the company as derivative
opportunity have been found to be ratifiable as action was made by the United States Supreme
witnessed in Regal (Hastings) Ltd v Gulliver28 where Court.34 The aim was to address the real owner of the
Lord Russell of Killowen had suggested, in the right of action which is the company. The
judgment of the House of Lords, that the directors shareholder’s right to sue is thus derived from the
could, had they wished, have protected themselves by company.
a resolution (either antecedent or subsequent) of the Prior to the US court pronouncement on this
shareholders in the general meeting. Not even the concept, the English courts have dealt with this type
approach adopted by Vinelott J in Prudential of action more as a representative action by the
Assurance Co Ltd v Newman Industries Ltd and Others shareholder on behalf of the company.35 The
(No 2)29 where the judge held that fraud lies, not in circuitous nature of the proceedings then was
the character of the act or transaction giving rise to described by Lord Denning MR in Wallersteiner v Moir
the cause of action, but in the use of the voting power (No 2)36 as a cumbersome process demanding two
by the controlling shareholders/directors to ratify the stages of proceedings: first, in the name of the
transaction, could resolve the controversy. That shareholders and, subsequently in the company’s
decision draws a line between the majority and the name after leave is obtained from the court. An
minority shareholders and locates fraud in a innovative path adopted by Lord Hatherly LC in
ratification process which places the minority Menier v Hooper’s Telegraph37which required only one
shareholders at a disadvantage. This is not, however, action in the name of the minority shareholder
suggesting that fraud cannot also be found on the against the wrongdoer and the company as a nominal
character of a transaction. The expropriation of defendant was approved by the Court of Appeal.38
corporate opportunities and self-dealing by the An aspect of Lord Denning MR’s decision that is
directors are good instances of fraud founded on the relevant to this discourse lies in the justification for
character of the transaction.30 Although it is accepted a derivative action which was set down as follows:
that the shareholders could ratify frauds arising from If it is defrauded by a wrongdoer, the company
the directors breach of duty in certain circumstances, itself is the one person to sue for the damage.
there is still an underlying controversy relating to the Such is the rule in Foss v Harbottle. The rule is
nature of the transaction and in what circumstances easy enough to apply when the company is
a ratification would be allowed.31 defrauded by outsiders. The company itself is
These discombobulated judicial decisions on the the only person who can sue. Likewise, when it
issue of ratification demanded parliamentary is defrauded by insiders of a minor kind, once
intervention. When that intervention came, it was not again the company is the only person who can
geared at defining the conduct that is ratifiable or not, sue. But suppose it is defrauded by insiders who
but rather the effect of such ratification or control its affairs - by directors who hold a
ratifiability of a particular conduct on the minority majority of shares - who can then sue for
shareholders right of action. The provisions toeing damages? Those directors are themselves the
this innovative path are found in sections 263 and wrongdoers. If a board meeting is held, they will
165 of the UK and South African Companies Acts not authorise proceedings to be taken by the
respectively. The intrinsic impact of those provisions company against themselves. If a general
on the second arm of Wigram VC’s decision seems to meeting is called, they will vote down any
form the basis upon which the suggestion is made by suggestion that the company should sue them
some writers that the rule in Foss v Harbottle is now themselves. Yet the company is the one person
extinct.32 Incidentally, those statutory provisions in who is damnified. In one way or another some

27
[1902] AC 83 at 93. Ahmanson 168 Cal App 3d 119, 214 Cal.Rptr. 177 (Ct. App. 1985), at 183-
28
[1967] 2 AC 134n (HL). 184.
29
[1980] 2 All ER 841. 35
Which was why it was originally referred to as minority shareholder’s
30
See Burland v Earle [1902] AC 83 where Lord Davey referred to the action. See East Pant Du United Lead Mining Co. Ltd. v Merryweather (1864)
transaction as being of fraudulent character. 2 Hem. & M. 254.
31
For more discussion on the various facets of this controversy, see Anthony 36
[1975] 2 WLR 389 at 395-396 (CA)
O Nwafor & Gloria C Nwafor, ‘Breach of Duty: Power of Shareholders to Ratify 37
(1874) 9 Ch App. 350.
Directors Fraudulent Dealings’ (2014) 10 (2) Corporate Board: Role, Duties & 38
The two stage proceedings is retained in both UK and South Africa but in
Composition 32. the manner recommended by Lord Hatherley LC in Menier’s case. See
32
See Davies et al above note 3 p 654, Cassim above note 3 p 778. Bamford v Harvey [2012] EWHC 2858 (Ch) para 2, Cinematic Finance Ltd v
33
See s 260(1) of the UK Companies Act 2006. See Abouraya v Sigmund Ryder [2010] EWHC 3387 (Ch) para 2. See also See also Francis George Hill
[2014] EWHC 277 (Ch) para 12, Hughes v Weiss [2012] EWHC 2363(Ch) Family Trust v South African Reserve Bank and Others [1992] ZASCA 50;
para 27, Iesini v Westrip Holdings Ltd [2009] EWHC 2526 (Ch) paras 68, 73. 1992 (3) SA 91 (AD), TWK Agriculture Ltd v NCT Forestry Co-operative Lt
34
See Hawes v City of Oakland 104 U.S. 450 (1882) where the United States and Others 2006 (6) SA 20 (N), Kalinko v Nisbet and Others 2002 (5) SA 766
Supreme Court gave judicial expression to the concept known as derivative (W).
action. See also Whitten v Dabney 171 Cal 621 (1915), quoted in Heckman v

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 Corporate Board: Role, Duties & Composition / Volume 12, Issue 1, 2016

means must be found for the company to sue. C for an injury done by B to C. C is the proper plaintiff
Otherwise the law would fail in its purpose. because C is the party injured, and, therefore, the
Injustice would be done without redress.39 person in whom the cause of action is vested. This is
sometimes referred to as the ‘Rule in Foss v
The passage explicitly demonstrates what the Harbottle’" Similarly, in Cinematic Finance Ltd v
rule in Foss v Harbottle entails, i.e., that the company Ryder46 Roth J observed that the general rule is that a
itself is the only person to sue for the damage done cause of action vesting in a company should be
to it. The right of the minority shareholder to sue pursued by the company and not by its shareholders.
which could only be triggered when the company’s A similar approach was adopted by the South African
right of action is incapacitated due to the involvement court in Hillcrest Village (Pty) Ltd and Another v
in wrongdoing by the relevant organ that would have Nedbank Limited and Others47 where Mavundla J held
instituted action for the company is not an intrinsic that save for certain exceptions, in general, when a
part of that rule. Indeed, in Foss, Wigram VC had wrong is alleged to have been done to a company the
described the shareholders action as a ‘departure’ proper plaintiff to sue the wrongdoer is the company
from the rule40 and an ‘anomalous form of suit’ which itself.
he could not see any reason why it should be resorted A derivative action is conceived as an exception
to when the powers of the corporation could be called to the rule in Foss to deal with the particular
into exercise.41 A further confirmation that the circumstances when the company cannot or will not
minority shareholders’ right of action was not the bring an action against the alleged wrongdoer. In
concern of the court is buttressed by the finding by Edwards v Halliwell48 Jenkins LJ observed that the rule
Wigram VC that “during the years 1840, 1841 and in Foss is not an inflexible rule and will be relaxed
1842 there was a governing body, that by such body where necessary in the interest of justice. Wigram VC
the business of the company was carried on, that did not, however, relax the rule in Foss. Although
there was no insurmountable impediment to the there are statements in the judgment suggesting
exercise of the powers of the proprietors assembled positive disposition of the judge in that regard,49 the
in general meetings to control the affairs of the facts as pleaded did not give room for a consideration
company, and that such general meetings were of that possibility.
actually held.”42 Thus, as the relevant organs of the The rule itself is a substantive rule bordering on
company that could seek redress in the name of the the powers of the company to conduct its own affairs
company were all active, there was no basis for the as a juristic entity. The exception referred to as
consideration of the minority shareholders right of derivative action is described by the court as a ‘mere
action on behalf of the company. This position of the matter of procedure designed to afford remedy to the
law was recently given credence by Lewison J in Iesini company for wrong which would otherwise escape
& Ors v Westrip Holdings Ltd & Ors43 where the Judge redress’.50 It simply lays down when and how the
held that whether a company should bring minority shareholder may seek redress for wrong
proceedings to redress a wrong was a matter that was done to the company. Such power is secondary in
to be decided by the company internally; that is to say nature and cannot extinguish the primary and
by its board of directors, or by a majority of its substantive rule on which its existence is predicated.
shareholders if dissatisfied by the board's decision This submission, however, does not put an end
and that the court would not second guess a decision to the ensuing controversy over that rule. The second
made by the company in accordance with its own arm of the rule that denies the minority shareholder
constitution. a right of action where the wrong is ratifiable by a
Subsequent court decisions have, as such, majority of the shareholders seems to have fallen
consistently referred to the minority shareholders severely under the weight of the statutory innovation.
right of action as encapsulated by the concept of Section 263(2)(c) which is contained in Part 11 of the
derivative action as an exception to the rule in Foss v UK Companies Act that deals generally with the
Harbottle. In Burland v Earle44 Lord Davey had concept of derivative action directs the courts to
recognised that the cardinal principle is that company decline permission to commence a derivative action
should sue for an injury done to it as laid down in if the court is satisfied that:
Foss v Harbottle, but that an exception is made where (c) where the cause of action arises from an act
the persons against whom the relief is sought are or omission that has already occurred, that the
themselves in control of the majority of the shares in act or omission—
the company, and will not permit action to be brought (i) was authorised by the company before it
in the name of the company. In Prudential Assurance occurred, or
Co Ltd v Newman Industries Ltd and others (No. 2)45 (ii) has been ratified by the company since it
the UK Court of Appeal stated that "[a] derivative occurred.
action is an exception to the elementary principle that
A cannot, as a general rule, bring an action against B
to recover damages or secure other relief on behalf of

39
Wallersteiner v Moir (No 2) (1975) 1 All ER 849 (CA) at 857 D – F. See also 46
[2010] EWHC 3387 (Ch) para 9.
Francis George Hill Family Trust v South African Reserve Bank and Others 47
[2008] ZAGPHC 134 para 5.2.
[1992] ZASCA 50; 1992 (3) SA 91 (AD) where Denning MR’s decision was 48
[1950] 2 All ER 1064 at 1067.
considered and applied by the South African Court of Appeal. 49
For instance, at page 204 para 494, the judge stated that “[i]n order then
40
Foss’case above note 23 para 491. that this suit may be sustained it must be shown either that there is no such
41
Ibid para 504. power as I have supposed remaining in the proprietors, or, at least, that all
42
Ibid paras 502-503. means have been resorted to and found ineffectual to set that body in motion:
43
[2009] EWHC 2526 (Ch) para 73. this latter point is nowhere suggested in the bill.”
44
[1902] AC 83 at 93. 50
Burland v Earle [1902] AC 83 at 93 per Lord Davey.
45
[1982] Ch. 204 at 210. See also Abouraya v Sigmund & Ors [2014] EWHC
277 (Ch) para 26.

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 Corporate Board: Role, Duties & Composition / Volume 12, Issue 1, 2016

Factors which the court should consider in deciding the Act but an actual and effective ratification
whether or not to grant permission to commence an certainly does.54
action are also set down in section 263(3) and include: The South African Companies Act of 2008
(c) where the cause of action results from an act embodies extensive provisions on derivative action in
or omission that is yet to occur, whether the act section 165. Apart from subsections 1 and 2 of that
or omission could be, and in the circumstances section (which clumsily runs up to subsection 16) all
would be likely to be— other provisions in that section are matters of
(i) authorised by the company before it occurs, procedure. While subsection 1 provides statutory
or route to a derivative action, subsection 2 redefines
(ii) ratified by the company after it occurs. the scope of persons that may institute derivative
proceedings to protect the interests of the company.55
A distinctive feature of subsection 2(c) is that The provision of subsection 1 of section 165 deserves
actual ratification forecloses the right of action. But some attention as it forms the basis upon which the
that provision does not foreclose the power of the suggestion is made that the rule in Foss v Harbottle is
court to examine the validity of the ratification now abolished in South African. That provision is as
process. That position was adopted by Hodge QC follows:
sitting as a Judge of the High Court in Singh v Singh51 Any right at common law of a person other than
where the judge declined to grant permission on the a company to bring or prosecute any legal
ground that the conduct on the part of the first proceedings on behalf of that company is
defendant of which the complaint is made has been abolished, and the rights in this section are in
‘effectively’ ratified by the company. The emphasis is substitution for any such abolished right.56
on ‘effective’ ratification and not just mere
ratification. A ratification to be effective must satisfy The provision does not harbour any ambiguity on
the threshold laid down in section 239 of the Act what is abolished. It is the right at common law of any
relating to disqualification from voting by interested person to bring or prosecute legal proceedings on
wrongdoer and connected persons. The judicial behalf of the company. That is actually what the
power to scrutinise the ratification process is common law concept of derivative action stands for.
strengthened by section 239(7) which provides that It is only by that concept that an individual is allowed
section 239 does not affect any other enactment or to vindicate a company’s right of action. The right of
rule of law imposing additional requirements for the company at common law to seek redress for
valid ratification or any rule of law as to acts that are wrong done to the company is not affected and is
incapable of being ratified by the company. Although indeed explicitly preserved in that provision by the
the position at common law, remains uncertain as to exemption phrase ‘other than the company’ as
what is or is not ratifiable, and it has in fact been held contained in the provision. The recognition and
by the court that there is no limit to the power of the preservation of the corporation’s right of action is
majority to ratify an act or transaction,52 what is exactly what the rule in Foss v Harbottle, a common
certain is that the circumstances or process of rule, entails. The explicit nature of this provision
ratification can be inquired into by the court. This makes inescapable the questioning of the basis for
legal position is buttressed by the decision of Knox J the suggestion that the rule in Foss is now abolished
in Smith v Croft (No 2)53 to the effect that the ultimate, in South Africa.
question has to be…: is the plaintiff being On issue of procedure, although the Act now
prevented improperly from bringing these provides an alternative route for a derivative action,
proceedings on behalf of the company? If it is an this does not suggest that those standards set at
expression of… an appropriate independent common law for granting of leave to the applicant to
organ that is preventing the plaintiff from prosecute this type of action are also abolished. In
prosecuting the action he is not improperly but fact some of those conditions set down by the Act as
properly prevented and so the answer to the prerequisites for bringing of a derivative action
question is No. The appropriate independent remain either explicitly or implicitly the same as
organ will vary according to the constitution of under the common law. This is buttressed by the
the company concerned and the identity of the provision of section 165(5) which requires that the
defendants, who will in most cases he court may grant leave only if satisfied, among other
disqualified from participating by voting in conditions, that the applicant is acting in good faith,
expressing the corporate will. and that the action is in the interests of the
company.57 In Mouritzen v Greystone Enterprises (Pty)
The provision set down in section 263(2)(c) differs Ltd & Another58 where this provision was considered,
from Wigram VC’s position in Foss in that the Ndlovu J observed that in most, but not all, instances
provision emphasises actual ratification as against both requirements would overlap. An instance where
mere prospect of the conduct being ratified which a person does not act in good faith but is driven by
was the concern of the court in Foss. The prospect of an ulterior motive, such as personal vendetta, will
ratification does not bar derivative proceedings under generally not be in the best interests of the company.
If a broad view of these concepts is taken by the court,

51
[2013] EWHC 2138 (Ch) para 39. [2012] EWHC 2858 (Ch) para 5.
52
See Prudential Assurance Co Ltd v Newman Ind Ltd (No 2) [1981] Ch 257 55
See s 165(2)(a-d) which confers right of action on the shareholder or
at 307 per Vinellot J who held that there is no obvious limit to the power of beneficial owner of shares, director or prescribed officer of the company,
the majority to authorise or ratify an act or transaction whatever its character registered trade union and another person granted leave by the court.
provided that the majority does not have an interest which conflicts with the 56
Emphasis added.
interests of the company. 57
See s 165(5)(b)(i)(iii). Note that both requirements are also prescribed at
53
[1987] 3 All ER 909 at 955-956. See also Iesini v Westrip Holdings Ltd common law.
[2009] EWHC 2526 (Ch) paras 127. 58
2012 (5) SA 74 (KZD) para 62.
54
See Hughes v Weiss [2012] EWHC 2363(Ch) para 42, Bamford v Harvey

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 Corporate Board: Role, Duties & Composition / Volume 12, Issue 1, 2016

it cannot realistically arrive at a fair decision by effective ratification as a bar to a derivative action.
shutting its eyes to the position of the wrongdoer But the provision should not be taking as implying
either within or outside the company when brought that ratification of wrong done to the company by
to the attention of the court. That of course is a shareholders does not have any real impact on
common law position on this type of action.59 An derivative action under South African law. Section 75
illustration is found in the Australian case of of the Act provides for the ratification of directors
Swansson v Pratt60 where Palmer J observed that an wrongful acts. Subsection 7 of that section provides
action sought to be instituted by a former that:
shareholder with a history of grievances against the A decision by the board, or a transaction or
current majority of shareholders or the current board agreement approved by the board, or by a
may be easier to characterize as brought for the company…, is valid despite any personal
purpose of satisfying nothing more than the financial interest of a director or person related
applicant’s private vendetta. An applicant with such a to the director, only if -
purpose would not be acting in good faith even when (a) it was approved following disclosure of that
the alleged wrongdoers are seemingly in control of interest in the manner contemplated in this
the company. In Mouritzen’s case61 Ndlovu J expressed section; or
the view that factual proof of any pre-existing (b) despite having been approved without
personal animosity between the parties, as in that disclosure of that interest, it -
case, does not per se serve as conclusive proof that (i) has subsequently been ratified by an ordinary
any person referred to in section 165(2) of the Act is resolution of the shareholders following
not acting in good faith in serving a demand under disclosure of that interest.
that subsection, or instituting an application under
section 165(5). However, personal animosity between This provision implies that ratification is valid if
the opposed parties is an important factor which the effectively obtained as prescribed by law. Thus, the
Court will always take into account together with requirement of section 165(14)(b) that the court may
other relevant evidentiary material presented before take the ratification into account in arriving at its
the Court in a given situation, in determining whether decision should be read as an obligation on the court
or not an applicant has, on a balance of probabilities, to examine the effectiveness or validity of the
satisfied the ‘good faith’ requirement. The reference ratification as provided in section 75 of the Act. It is
to ‘other evidential material’ is an indication that the important that such consideration should be
factors which could be considered by the court as undertaken by the court at the early stages of the
provided in section 165(5) of the Act are not exclusive proceedings when leave is sought as it is done under
and would as such include the relationship or the English law63 to prevent a long drawn litigation on
position of the wrongdoer in the company. a wrong which has become extinct following an
There are no mandatory grounds for declining effective ratification process. Thus, the major
leave as is the case under the English law, but one of difference between the statutory position in South
the factors which should inform the decision of the Africa as under the English law and the rule in Foss
court and is of primary importance to this discourse remains that the former emphasises effective
is found in section 165(14) of the Act which provides ratification and not just a mere prospect of
as follows: ratification as in the latter as a vitiating factor for an
(14) If the shareholders of a company have individual’s right of action to vindicate a wrong done
ratified or approved any particular conduct of to the company.
the company-
(a) the ratification or approval- 4. CONCLUSION
(i) does not prevent a person from making a
demand, applying for leave, or bringing or The fact that in both jurisdictions there are presently
intervening in proceedings with leave under this elaborate statutory provisions on derivative action
section; and are simply not sustainable as ground for any
(ii) does not prejudice the outcome of any suggestion that the rule in Foss v Harbottle is now
application for leave, or proceedings brought or extinct. Dignam and Lowry had observed in relation
intervened in with leave under this section; or to the UK Companies Act provisions that:
(b) the court may take that ratification or If we compare the language of ss 261-264 with
approval into account in making any judgment the common law rule it replaces, it is apparent
or order.62 that there is little or no change of emphasis in
terms of formulation. The focus of the rule laid
This provision is particularly of significance in
down in Foss v Harbottle and its jurisprudence
redefining the second arm of the rule in Foss v
was on prohibiting claims unless one of the
Harbottle. It embodies a paradigm shift from that arm
of the rule which recognises a mere possibility of exceptions to the rule was satisfied. The
ratification as sufficient to prevent a derivative statutory language similarly proceeds from the
action. It also differs from the UK Companies Act rather negative standpoint that the court must
provision in that it does not recognise actual and

59
See Bamford v Harvey [2012] EWHC 2858 (Ch) para 29 where Roth J 62
As amended by s 104 of Companies Amendment Act 3 of 2011.
accepted that even as ‘wrongdoer control’ was not an explicit condition in 63
See Singh v Singh [2013] EWHC 2138 (Ch) para 39 where Hodge QC
section 263(2) of the UK Companies Act, it remains a factor to be taken into (sitting as a Judge of the High Court) in dismissing application for leave to
consideration as section 263(3) of the Act is not exclusive. See also Stimpson commence a derivative action held that “this is a clear case where permission
v Southern Private Landlords Association [2009] EWHC 2072 (Ch) para 46 to bring a derivative claim should be refused…, the principal reason for that
per Judge Pelling QC sitting as a Judge of the High Court. is that the conduct on the part of the first defendant of which complaint is
60
[2002] NSWSC 583 para 41 per Palmer J, referred to by Ndlovu J in made is conduct that was either authorised by the company before it occurred,
Mouritzen’s case above note 58 para 59. or has effectively been ratified by the company since then.”
61
Ibid.

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 Corporate Board: Role, Duties & Composition / Volume 12, Issue 1, 2016

dismiss the application or claim in the REFERENCES

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done to the company only in exceptional (Oxford: Oxford University Press, 2014) p. 547.
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declined to grant permission to commence a Journalists [1984] 1 WLR 427 at 435.
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Stimpson v Southern Private Landlords Association68 13. Edwards v Halliwell [1950] 2 All ER 1064 at 1066
per Jenkins LJ.
Judge Pelling QC (sitting as a Judge of the High Court)
14. FHI Cassim ‘Shareholder Remedies and Minority
adopted a stance which is reminiscent of Wigram VC’s
Protection’ in FHI Cassim, MF Cassim, R Cassim, R
position in Foss by declining to grant permission Jooste, J Shev and J Yeats (eds), Contemporary
where the claimant is found to be in a position to Company Law2nd ed (Cape Town: Juta & Co Ltd,
“requisition an EGM, obtain if he can a replacement 2012) p. 778.
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do so, applying the duties imposed upon them by Reserve Bank and Others [1992] ZASCA 50; 1992 (3)
Sections 172, authorise the litigation.” SA 91 (AD), TWK Agriculture Ltd v NCT Forestry Co-
The major achievement of the statutory operative Lt and Others 2006 (6) SA 20 (N).
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prescribes more flexible criteria than the ‘wrongdoer Reserve Bank and Others [1992] ZASCA 50; 1992 (3)
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in Foss v Harbottle,69 thus making the concept of 17. Hawes v City of Oakland 104 U.S. 450 (1882).
derivative action more easily accessible by the 18. Hellard & Anor (Liquidators of HLC Environmental
shareholders and other persons who are given the Projects Ltd) v Carvalho [2013] EWHC 2876 (Ch)
right of action under the statute. Thus, a decision para 92.
19. Hughes v Weiss [2012] EWHC 2363(Ch) para 27,
such as that handed down by Mavundla J in Hillcrest
Iesini v Westrip Holdings Ltd [2009] EWHC 2526 (Ch)
Village (Pty) Ltd and Another v Nedbank Limited and
paras 68, 73.
Others70 where the Judge declined to allow a 20. Hughes v Weiss [2012] EWHC 2363(Ch) para 42,
derivative action on the ground that none of the Bamford v Harvey [2012] EWHC 2858 (Ch) para 5.
defendants were either directors or shareholders nor 21. Iesini v Westrip Holdings Ltd [2009] EWHC 2526
that any majority of such directors or shareholders as (Ch) paras 127.
constituted were among the defendants, but on the 22. Kalinko v Nisbet and Others 2002 (5) SA 766 (W).
contrary the defendants were all outsiders, i.e. 23. Kalls Enterprises Pty Ltd v Baloglow [2007] NSWCA
persons not being directors and or shareholders of 191, 25 ACLC 1094 para 162.
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Africa. But the fact that the company is the proper 722 at 730
plaintiff to vindicate any wrong done to it as a juristic 25. KW Wedderburn, ‘Unreformed Company Law’
person, a position which was indisputably articulated (1969) 32 MLR 563. KW Wedderburn, ‘Shareholders
by Wigram VC in Foss, remains as potent under the Rights and the rule in Foss v Harbottle’ (1957) CLJ
existing statutory arrangements in both the UK and 194.
South Africa, as it was at common law. 26. Paul L Davies, Sarah Worthington, Eva Micheler,
Gower and Davies’ Principles of Modern Company
Law 9th ed (London: Sweet & Maxwell 2012) p. 654.

64
Alan Dignam & John Lowry, Company Law 8th ed (Oxford: Oxford 67
[2012] EWHC 2858 (Ch).
University Press, 2014) p 204. Emphasis by authors. 68
[2009] EWHC 2072 (Ch) para 26.
65
[2010] EWHC 3387 (Ch) para 11. 69
See Wishart v Castlecroft Securities Ltd [2009] CSIH 65, [2009] BCC 161
66
Ibid, paras 11-12. See Law Commission Report No 246 (1997) para 1.9. See para 38 per Reed LJ.
also Bamford v Harvey [2012] EWHC 2858 (Ch) para 25 where this position 70
[2008] ZAGPHC 134 para 5.4.
was reaffirmed by Roth J.

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 Corporate Board: Role, Duties & Composition / Volume 12, Issue 1, 2016

27. Prudential Assurance Co Ltd v Newman Ind Ltd (No 33. Stimpson v Southern Private Landlords Association
2) [1981] Ch 257 at 307. [2009] EWHC 2072 (Ch) para 46.
28. Prudential Assurance Co Ltd v Newman Industries 34. Vivendi SA Centenary Holdings Iii Ltd v Richards &
Ltd (No 2) [1980] 2 All ER 841, per Vinelott J, Smith Ors [2013] EWHC 3006 (Ch) para 147.
Croft (No 2) [1987] 3 All ER 909 per Knox J. 35. Wallersteiner v Moir (No 2) (1975) 1 All ER 849 (CA)
29. Richard Brandy Franks Ltd v Price (1937) 58 CLB at 857 D – F.
136. 36. Whitten v Dabney 171 Cal 621 (1915), quoted in
30. Roberts v Frohlich [2011] EWHC 257 (Ch) para 85, Heckman v Ahmanson 168 Cal App 3d 119, 214
31. Shuttleworth v Cox Brothers and Co (Maidenhead) Cal.Rptr. 177 (Ct. App. 1985), at 183-184.
Ltd [1927] 2 KB 9 per Scrutton LJ at 22-24. 37. Wishart v Castlecroft Securities Ltd [2009] CSIH 65,
Regentcrest v plc v Cohen [2001] 2 BCLC 80 per [2009] BCC 161 para 38 per Reed LJ.
Jonathan Parker J at 105.
32. Singh v Singh [2013] EWHC 2138 (Ch) para 39

14