The relationship of the rule in Foss v. Harbottle to the statutory remedies for minority shareholders

TLDR: In this paper, the authors consider the problem of the minority shareholder in the private corporation who seeks to recover compensation on behalf of the company where the wrongdoers are in control and thus prevent any action being taken.

Abstract: In this thesis I consider the problem of the minority shareholder in the private corporation who seeks to recover compensation on behalf of the company where the wrongdoers are in control and thus prevent any action being taken. At common law the minority shareholder was severely restricted by the Rule in Foss v. Harbottle. This stated that the company was the proper plaintiff for wrongs done to it and that internal irregularities could be cured by the company in general meeting. From this various exceptions developed to allow the minority shareholder the right to bring a derivative action on behalf of the corporation. The conditions to allow this to happen were, however, extremely restrictive. Accordingly various law reform committees recommended the introduction of statutory remedies to alleviate the problems of the minority shareholder. In Australia, the principal statutory remedy introduced was the oppression remedy, now contained in s.260 of the Corporations Law. This remedy has suffered from a number of defects. The judiciary has given s.260 a more narrow scope than was arguably intended and there are a number of problems with the wording of the section and its interrelationship with other areas of the law. It is therefore apposite to consider the alternatives offered to the minority shareholder in England, Canada and the United States, as well as other common law options available in Australia. These options including the personal action by the minority shareholder to recover on the basis that there has been a breach of the constitution of the company and/or an action in tort. Both Canada and the United States have developed a procedural framework to allow shareholders to bring a derivative action and this appears to provide the member with easier access to the courts than the present Australian options. Finally, I conclude by submitting that the existing avenues; the oppression remedy, the personal action and the tortious remedy do not provide convenient avenues for the minority shareholders to pursue wrongs to the corporation by those in control and that Australia would benefit from the introduction of the statutory derivative action. The law is stated as at 31/8/1992.