Discuss the two principles laid down in the case of Foss Vs Harbottle

Rule in Foss v Harbottle is a leading English precedent in corporate law. According to

this rule, the shareholders have no separate cause of action in law for any wrongs which

may have been inflicted upon a corporation. The rule is named after the 1843 case in

which it was developed. The rule was later extended to cover cases where what is

complained of is some internal irregularity in the operation of the company. However, the

internal irregularity must be capable of being confirmed or sanctioned by the majority.

The rule is now subject to several important exceptions like 'derivative action', which

allows a minority shareholder to bring a claim on behalf of the company. This applies in

situations of wrongdoer control.

The language and order of rule and exception misleads us into seeing all the rules that

form ‘the exception’ as separable and distinct from the proper plaintiff rule. Through this

lens, the proper plaintiff rule becomes merely a rebuttable presumption and it follows

from this that the substantive rules which determine if the presumption can be rebutted

including wrongdoer control, can be abolished or amended whilst leaving the proper

plaintiff rule intact. This is incorrect and not supported by authority. The proper plaintiff

rule as set forth in Foss v Harbottle and its progeny is a substantive rule of law that is

umbilically connected to the wrongdoer control rule, which is merely one example of a

circumstance in which the company is not capable of acting.

The common law proper plaintiff rule provides that where the corporate organs are

'capable' of acting in the corporate interest there can be no derivative action. Only when

those organs are incapacitated, by, for example, wrongdoer control of the general

meeting, can such an action be brought. Accordingly, if one were to allow derivative

actions in the absence of either wrongdoer control or some other form of general

meeting incapability then the common law proper plaintiff rule would no longer be

applicable