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Rule in Foss v. Harbottle is actually rule of majority supremacy. It means that once a resolution is passed by majority, it is binding on all the members. Also the courts will in such cases not interfere to protect the minority interest. This is based on the rational that on becoming a member, each person impliedly consents to submit to the will of majority. Said in another way it is a corollary to the rule that only the company can sue, which again translates to the wish of the majority.
AND
Along with the rule of majority supremacy provisions are also made by way of exceptions, for protecting of minority interest. This is essential because, in its absence the company cannot function smoothly.Palmer points out, and rightly so, that a proper balance of right of majority and minority shareholder is essential for the smooth functioning of the company. Therefore it is necessary for the courts to do justice; there must be some exceptions to the rule. Started in another manner, the rule extends only in situations where the managerial sins may be ratified. In other cases every shareholder may sue in representative character of the corporate interest i.e. may bring a derivative action (as it is called in America.)
EXCEPTIONS
The protection of minority rights as mentioned in the previous part is realized by making out some exceptions to the Foss v. Harbottle rule. These exceptions are:
Wrongdoer in Control : Exception Two :If the person against whom the relief is sought is himself in control, the rule of majority supremacy cannot be applied.
Fraud on Minority : Exception Three :Where the act is not for the benefit of the company and discriminates between majority and minority shareholders, action can be brought by the minority.
Inadequate Notice : Exception Four :Where a shareholder because of inadequate notice, could not present himself in the meeting where a resolution against him is passed, the rule does not apply.
Qualified Majority : Exception Five :Where a resolution requiring special majority is actually passed by simple majority, an exception to the rule is found.
The Exception:
Every shareholder has a right, by injunction, to restrain the company from doing any act which are ultra vires the company or are illegal. A shareholder is entitled to bring an action against the company and its officers in respect of matters which are ultra vires the company.
Unacceptable delay:
Where there is unacceptable and unexplained delay in filing the action, the plaintiff may be barred from bringing the action.
Also where the plaintiff is not the proper person to bring the action he would be barred from taking the benefit of the exception. Thus in Narcombe v. Narcombe [(1985) 1 All ER 65 CA], an action was brought by the wife, a minority shareholder, against the wrong doing of her husband as a director. In a matrimonial proceeding between them she came to know about the improper profits made by the husband and such profits were taken into consideration in preparing the award, it was held that she was not a proper plaintiff for a derivative action.