COMPANY LAW

Company Law

Company Law

This paper is based on two questions regarding company law.



1. Shareholder Majority Rule

In order to evaluate whether or not, the rights of minority shareholders have been improved by the enactment of the Companies Act 2006, it is essential to analyse the situation of minority shareholders prior its enactment and determine whether under the old common law, minority shareholders were given adequate protection.

The old common law position was based on the principle of the 'Majority Rule' laid down in Foss v Harbottle(1843). 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 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.

The majority rule principle pervades much of company law as it touches on the key issue of who owns and controls the company. It should be understood from the outset that a company once incorporated becomes a distinct and separate legal entity and it is treated as a juristic entity separate from its shareholders. Indeed the concepts of separate corporate personality and the issue of limited liability are at the core of company law. No case illustrated the above position better than the leading case of Salomon v A Salomon & Co Ltd (1897) A C 462.

The entire edifice of modern company law stands on this twin principle of corporate personality and limited liability. Limited liability is the logical consequence of the existence of a separate personality. The logical consequence of the creation of a separate legal personality upon incorporation of a company is that a separate legal personality capable of suing and being sued in its own name is created and capable of holding property in its own name. Thus the company can make profit and losses that are its own and in its own name and not those of its members (the shareholders). Limited liability simply means that - flowing from the concept of corporate personality - that the liability ...