In corporate law, the derivatives mechanism allows minority shareholders to bring and litigate a legal action on behalf of the company against an insider of the company whose actions allegedly harmed the company. The secondary measure is a mechanism under company law to deal with agency issues, as company insiders who are expected to make such claims sometimes face a conflict of interest. The secondary measure is an essential and well-known corporate governance tool, the objective of which is to ensure that agency problems, which are inherently of concern to companies, do not hinder attempts to obtain redress by offenders whose actions have harmed the company, in particular in cases of fraud. This paper discusses the paradigm shift from the strict protections afforded to controlling shareholders by the Foss v. rule. Harbottle for greater recognition of the rights of individual shareholders, thus interpreting the true exception liberally, making the rule less of a practical obstacle to the application of shareholder rights «The rule (in Foss v. Harbottle) is the consequence of a corporation being a separate legal entity. Other consequences include limited liability and limited rights. The Company is responsible for its contracts and torts; The shareholder has no such responsibility. The Company acquires grounds for breach of contract and tort that harm the Company. The shareholder has no cause of action.
When the shareholder acquires a share, he accepts that the value of his investment follows the fate of the company and that he can only influence the fate of the company by exercising his voting rights at the general meeting. The law gives him the right to ensure that the company respects the limits of its articles and the right to ensure that other shareholders comply with the rule imposed on them by the articles. While it is true that the law has conferred other rights on a shareholder or is expected to confer other rights in certain limited circumstances, the scope and consequences of these additional rights must be carefully considered. As noted above, there are exceptions to the rule, and in order for a minority shareholder to bring a derivative action on behalf of the Company, it must «(i) demonstrate that the Company is entitled to the relief sought and (ii) that the action falls within the reasonable limits of an exception to the rule in Foss v. Harbottle.» (4) Under Irish law, the proposed plaintiff must demonstrate «a realistic prospect of success» (5) in order to obtain leave from the court to bring a derivative action. «I respectfully agree that the wording of the rule in previous cases makes it clear that it is not to be applied in a manner that leads to injustice. Nevertheless, the right of a shareholder to assert a claim for and on behalf of a company by means of a derivative action is an exception to the fundamental principle. As such, it should be applied widely or generously. A very strong argument should be made.
It should be consistent with the principles underlying the foss v. Harbottle and exceptions to it. This includes the reluctance of the courts to interfere in the internal management of a company. However, the rule does not prevent the shareholder from bringing an action for an injustice that was done directly to the shareholder and that does not otherwise belong to the corporation. A recent decision of the Ontario Court of Appeal illustrates this concept. As Beck wrote about the Foss v Harbottle rule: Kelly therefore decided that there was no case that warranted court intervention, let alone very strong intervention. The decision usefully confirms that the rule in Foss v. Harbottle always limits shareholder claims on behalf of the company, unless recognized exceptions apply. While «fairness of the case» may permit a derivative action, it is accepted only reluctantly and a plaintiff would be better advised to invoke one of the other exceptions than to hope that authorization to initiate a derivative action could be granted on that basis alone. In the present case, the judge found that the applicant had asked him to accept a fifth objection, relying on a decision of the Supreme Court of Western Australia (7) and a decision of the Irish High Court.
(8) In the first case, the Court of First Instance considered whether there was a fifth exception to the rule laid down in Foss v Harbottle. Ipp J. cited Foss v. Harbottle, in which the remarks of Sir James Wigram VC suggested that there should be a general power of interference of the courts when justice requires the exercise of such a power. Judge Ipp said: Wigram VC dismissed the lawsuit and ruled that if a company is treated unfairly by its directors, only the company has standing to sue. In fact, the court established two rules. First, the «good claimant rule» is that an injustice done to the company can be confirmed by the company alone. Second, the principle of «majority rule» states that if the alleged injustice can be confirmed or ratified by a simple majority of members at a general meeting, the court will not intervene (legal concept). The rule was later extended to cases where an internal irregularity in the company`s activities is alleged. However, it must be possible to confirm/sanction the internal irregularity by the majority.
The plaintiff`s correct rule was discussed and explained (invoking the rules in Foss v Harbottle) in Edwards and Another v Halliwell and Others,1 which says: So named in reference to the 1843 case in which the rule was elaborated. «The rule in Foss v. Harbottle provides that individual shareholders have no legal basis to bring an action for harm caused to the company, and that if an action is to be brought for such losses, it must be brought either by the company itself (by management) or through a derivative action. The rule is well established. Did this affect S`s ability to prosecute? Here, she did not. In this case, the company was not the tenant and did not have a contract with the landlord. There was not even an overlap of potential claims. The only claim available was that made by the tenant. The Court stated: Subsequently, if the exception to the personality law is requested under the rule, the shareholder must prove that the violation of his right is due to a violation of the company`s articles of association and not to a mere internal irregularity in the internal management of the company.
[4] Rights such as «the right to register one`s name and participation in the register of members[5], voting rights[6], the right to record one`s vote, the right to vote as a director of a company[7], the right to elect directors[8], the right of access to the register of members[9], the right to call a general meeting[10]» are some of the personality rights deriving from contract law and the common law. A derivative action occurs when an individual shareholder of a corporation (with court approval) initiates, intervenes or defends a proceeding on behalf of the corporation if the corporation itself fails to do so.6 .