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This rule is derived from two general legal principles of company law.
Firstly, a company is a legal entity separate from its shareholders.
Secondly, the Court will not interfere with the internal management of
companies acting within their powers. Where an ordinary majority of
members can ratify the act, the Court will not interfere. This simply means,
if the majority can ratify an act, the minority cannot sue.
However, there are four exceptions to the rule in Foss v Harbottle, namely :-
For the purpose of this article, I will concentrate on the last exception, that
is, fraud on the minority, which is the most common ground for derivative
actions.
b. the "wrongdoers are in control of the company" and will not allow
the company to sue.
Fraud against the minority
The Court has interpreted the term "fraud" loosely to include fraud in a strict
sense as well as a breach of duty which results in conferring some benefit on
the directors or third parties.
It has been held that gross negligence may also amount to fraud against the
minority. The Court will allow a derivative claim where the wrongdoers have
benefited personally from their self-serving negligence. Typical examples
include, diverting business from the company to themselves in breach of
fiduciary duty, causing the company to sell assets to themselves at an
undervalue, or selling worthless assets to the company.
Restrictions
In view of the above restrictions, I shall look at the new statutory provisions
in Part II of this article.