- In this process of decision-making, there may arise certain occasions wherein the interests of the majority shareholders may come in conflict with that of the minority shareholders. In such a case, if the decisions taken, are not in the larger interest of the company as a whole, but only caters to the interest of one particular group, the minority group whose interest may have been violated can raise its voice against such an action.

-The protection of minority shareholders within the domain of corporate activity constitutes one of the most difficult problems facing modern company law. The aim must be to strike a balance between the effective control of the company and the interest of the small individual shareholders. [1] Palmer has stated with respect to rights of shareholders:

“A proper balance of the rights of majority and minority shareholders is essential for the smooth functioning of the company.” [2] 

It is only right to expect that in matters of a company, any decisions that are taken are done so in keeping with principles of natural justice and fair play. In case of failure to do so, it is important that the interest of minority shareholders be protected.

RULE OF MAJORITY: FOSS v. HARBOTTLE

The basic principle relating to the administration of the affairs of a company is that “the courts will not, in general, intervene at the instance of shareholders in matters of internal administration; and will not interfere with the powers conferred on them under the articles of the company”. [3] This is mainly the underlying principle governing the rule of majority. The rule of company governing by majority and ‘supremacy of majority’ has been settled in the very old landmark common law judgment of Foss v. Harbottle [4] .

In the instant case, an action was brought by two shareholders of a company for the illegal transactions made by the directors and solicitors, whereby the property of the company was misapplied and wasted. The plaintiffs pleaded that the losses caused thereafter to the company be made good by the defendants. In ruling over the case, the Court opined that such an action cannot be brought by minority shareholders. The claim was rejected in respect of those transactions which a majority of the shareholders of the company had the power to confirm or ratify. Thus, an action, if any, can be brought in only by the company, as company is the proper plaintiff for wrongs done to the company.   [ 5 ]   Since the company acts through majority, the majority should have the power to decide whether to initiate proceedings against the directors or not.

In other words, the opinion of the Court was as follows:

“The conduct with which the defendants are charged is an injury not to the plaintiffs exclusively, it is an injury to the whole corporation. In such cases the rule is that the corporation should sue in its own name and in its corporate character. It is not a matter of course for any individual members of a corporation thus to assume to themselves the right of suing in the name if the corporation. In law the corporation and the aggregate of

members of the corporation are not the same the thing for purposes like this.” [6] 

The justification for the rule is the need to preserve the right of the persons who can exercise a majority of the voting rights at a general meeting of the company to decide how the company’s affairs shall be conducted and the ineffectiveness of any attempt by the court to interfere when its decision could be set aside by a later converse resolution passed by the controlling votes of those persons. [7]  (for non-intervention)

Reiterating this principle in MacDougall v. Gardiner [8] , Mellish LJ stated:

“In my opinion, if the thing complained is a thing which, in substance, the majority of the company are entitled to do, or something has been done irregularly which the majority of the company are entitled to do regularly, or if something has been done illegally which the majority of the company are entitled to do legally, there can be no use having litigation about it, the ultimate end of which is only that a meeting has to be called, and then ultimately the majority gets its wishes.”   [9] 

Therefore, summarising ‘the majority rule’ governing decision-making among shareholders of a company, it is important to understand that a company is a legal person separate from its members. Although its members invest in the company, and so have a stake in it, the law does not recognise that they have even an insurable interest in its assets. If therefore, the company’s property is misappropriated or lost or if its affairs are mismanaged, the company alone is the person who should bring legal proceedings against those who have caused it damage.   [ 12 ] If an individual shareholder seeks to bring such a complaint, he should do so by bringing it before a general meeting and persuade other shareholders to adopt the course of action he thus proposes.   [ 13 ]  

Fraud on minority – A majority carrying out a fraud on the minority is also an exception to the majority rule. The meaning of “fraud” has not been clearly defined beyond a discriminatory action, but in the case of Greehalgh v. Arderone Cinemas Ltd [16] , it was laid down that:

“a special resolution would be liable to be impeached if the effect of it were to discriminate between the majority shareholders and minority shareholders, so as to give to the former an advantage of which the latter were deprived.” [17] 

The rule concerning protection of minority shareholder’s interest has evolved through a long process since the majority rule was laid down in Foss v. Harbottle under common law. From the rule that minority or a single shareholder may not seek any relief for a right violation, we have seen the various exceptions to the majority rule that have been developed through the various case laws over the years. The rule stands changed now and therefore, minority rights are finally protected under the law. In fact, in ICICI v. Parasrampuria Synthetic Ltd. [34] , the courts ruled that the rule in Foss v. Harbottle cannot be applied mechanically in India. The courts taking in consideration, the fact that financial institutions provide huge finances to the company, though their share-holding may be small, ruled that they should be given a say in the matters of the company. In such a situation applying the majority rule would be unjust and impracticable.

Read more: Protecting the interest of minority shareholders | Law Teacher http://www.lawteacher.net/business-law/essays/protecting-the-interest-of-minority-shareholders-business-law-essay.php#ixzz3E6wcaJsW Follow us: @lawteachernet on Twitter | LawTeacherNet on Facebook

-Shareholder oppression occurs when the majority shareholders in a corporation take action that unfairly

prejudices the minority. It most commonly occurs in close corporations, because the lack of a public market for

shares leaves minority shareholders particularly vulnerable, since minority shareholders cannot escape

mistreatment by selling their stock and exiting the corporation.[1] 

-The majority shareholders may harm the economic interests of the minority by refusing to declare dividends or

attempting a squeezeout. The majority may physically lock the minority out of the corporate premises and even

deny the minority the right to inspect corporate records and books, making it necessary for the minority to sue

every time it wants to look at them.[2]

-The potential for shareholder oppression arguably increased when corporate law was changed to eliminate

the common law right of minority shareholders to veto fundamental corporate changes such as mergers.[5] It has

been said that the business judgment ruleand notions of majority rule have allowed shareholder majorities to use

the minority's investment without paying for it.[6] It has also been said, however, that it is difficult to determine how

to deal with the rights of the minority shareholder without destroying the corporation, while still respecting the

rights of the majority shareholder.[7]

The courts sometimes make oppression remedies available. An oppressed minority shareholder can ask the

court to dissolve the corporation or to hold the corporation's leaders accountable for

their fiduciary responsibilities.[8] 

References[edit]

1. Jump up ^ Means, Benjamin (October 15, 2008), A Voice-Based Framework for Evaluating Claims of Minority Shareholder Oppression in the Close Corporation 97, Georgetown Law Journal,SSRN 1285204

2. Jump up ^ Meinhardt, J. Mark (2000–2001), Investor Beware: Protection of Minority Stakeholder Interests in Closely Held Limited-Liability Business Organizations: Delaware Law and Its Adherents 40, Washburn L.J., p. 288

3. Jump up ^ Matheson, John H.; Maler, R. Kevin (2006–2007), Simple Statutory Solution to Minority Oppression in the Closely Held Business, A 91, Minn. L. Rev., p. 657

4. Jump up ^ A Chernichaw (1994), Oppressed Shareholders in Close Corporations: A Market-Oriented Statutory Remedy, Cardozo L. Rev.

5. Jump up ^ Heglar, Robert B. (1989), Rejecting the Minority Discount 1989, Duke L.J., p. 2586. Jump up ^ Spratlin, Arthur D. Jr. (1990), Modern Remedies for Oppression in the Closely Held

Corporation 60, Miss. L.J., p. 4057. Jump up ^ Grandfield, Cynthia S. (2001–2002), Reasonable Expectations of Minority Shareholders in Closely

Held Corporations: The Morality of Small Businesses, The 14, DePaul Bus. L.J., p. 3818. Jump up ^ Thompson, Robert B. (1992–1993), Shareholder's Cause of Action for Oppression, The48, Bus.

Law., p. 6999. Jump up ^ Art, Robert C. (2002–2003), Shareholder Rights and Remedies in Close Corporations:

Oppression, Fiduciary Duties, and Reasonable Expectations 28, J. Corp. L., p. 37110. Jump up ^ Miller, Sandra K. (1997), Minority Shareholder Oppression in the Private Company in the

European Community: A Comparative Analysis of the German, United Kingdom, and French Close Corporation Problem 30, Cornell Int'l L.J., p. 381

11. Jump up ^ DD Prentice (1988), The Theory of the Firm: Minority Shareholder Oppression: Sections 459-461 of the Companies Act 1985, Oxford Journal of Legal Studies

12. Jump up ^ Brownlee, Hunter J. (1994–1995), Shareholders' Agreement: A Contractual Alternative to Oppression as a Ground for Dissolution, The 24, Stetson L. Rev., p. 267

http://en.wikipedia.org/wiki/Shareholder_oppression

Foss v Harbottle (1843) 67 ER 189 is a leading English precedent in corporate law. In any action in which a wrong is alleged to have been done to a company, the proper claimant is the company itself. This is known as "the rule in Foss v Harbottle", and the several important exceptions that have been developed are often described as "exceptions to the rule in Foss v Harbottle". Amongst these is the 'derivative action', which allows a minority shareholder to bring a claim on behalf of the company. This applies in situations of 'wrongdoer control' and is, in reality, the only true exception to the rule. The rule in   Foss v Harbottle   is best seen as the starting point for minority shareholder remedies.

-Richard Foss and Edward Starkie Turton were two minority shareholders in the "Victoria Park Company". The company had been set up in September 1835 to buy 180 acres (0.73 km2) of land near Manchester and, according to the report,

"enclosing and planting the same in an ornamental and park-like manner, and erecting houses thereon with attached gardens and pleasure-grounds, and selling, letting or otherwise disposing thereof".

This became Victoria Park, Manchester. Subsequently, an Act of Parliament incorporated the company.[1] The claimants alleged that property of the company had been misapplied and wasted and various mortgages were given improperly over the company's property. They asked that the guilty parties be held accountable to the company and that a receiver be appointed.

The defendants were the five company directors (Thomas Harbottle, Joseph Adshead, Henry Byrom, John Westhead, Richard Bealey) and the solicitors and architect (Joseph Denison, Thomas Bunting and Richard Lane); and also H Rotton, E Lloyd, T Peet, J Biggs and S Brooks, the several assignees of Byrom, Adshead and Westhead, who had become bankrupts.

Judgment[edit]

The court dismissed the claim and held that when a company is wronged by its directors it is only the company that has standing to sue. In effect the court established two rules. Firstly, the "proper plaintiff rule" is that a wrong done to the company may be vindicated by the company alone. Secondly, the "majority rule principle" states that if the alleged wrong can be confirmed or ratified by a   simple majority [ disambiguation needed ]   of members in a general meeting , then the court will not interfere,   cadit quaestio .

“The Victoria Park Company is an incorporated body, and the conduct with which the Defendants are charged in this suit is an injury not to the Plaintiffs exclusively; it is an injury to the whole corporation by individuals whom the corporation entrusted with powers to be exercised only for the good of the corporation. And from the case of The Attorney-General v Wilson (1840) Cr & Ph 1 (without going further) it may be stated as undoubted law that a bill or information by a corporation will lie to be relieved in respect of injuries which the corporation has suffered at the hands of persons standing in the situation of the directors upon this record. This bill, however, differs from that in The Attorney-General v Wilson in this—that, instead of the corporation being formally represented as Plaintiffs, the bill in this case is brought by two individual corporators, professedly on behalf of themselves and all the other members of the corporation, except those who committed the injuries complained of—the Plaintiffs assuming to themselves the right and power in that manner to sue on behalf of and represent the corporation itself.

It was not, nor could it successfully be, argued that it was a matter of course for any individual members of a corporation thus to assume to themselves the right of suing in the name of the corporation. In law the corporation and the aggregate members of the corporation are not the same thing for purposes like this; and the only question can be whether the facts alleged in this case justify a departure from the rule which, primâ facie , would require that the corporation should sue in its own name and in its corporate character, or in the name of someone whom the law has appointed to be its representative...

The first objection taken in the argument for the Defendants was that the individual members of the corporation cannot in any case sue in the form in which this bill is framed. During the argument I intimated an opinion, to which, upon further consideration, I fully adhere, that the rule was much too broadly stated on the part of the Defendants. I think there are cases in which a suit might properly be so framed. Corporations like this, of a private nature, are in truth little more than private partnerships; and in cases which may easily be suggested it would be too much to hold that a society of private persons associated together in undertakings, which, though certainly beneficial to the public, are nevertheless matters of private property, are to be deprived of their civil rights, inter se , because, in order to make their common objects more attainable, the Crown or the Legislature may have conferred upon them the benefit of a corporate character. If a case should arise of injury to a corporation by some of its members, for which no adequate remedy remained, except that of a suit by individual corporators in their private characters, and asking in such character the protection of those rights to which in their corporate character they were entitled, I cannot but think that the principle so forcibly laid down by Lord Cottenham in Wallworth v Holt (4 Myl & Cr 635; see also 17 Ves 320, per Lord Eldon) and other cases would apply, and the claims of justice would be found superior to any difficulties arising out of technical rules respecting the mode in which corporations are required to sue.

But, on the other hand, it must not be without reasons of a very urgent character that established rules of law and practice are to be departed from, rules which, though in a sense technical, are founded on general principles of justice and convenience; and the question is whether a case is stated in this bill entitling the

”

Plaintiffs to sue in their private characters...

Developments[edit]

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/sanctioned by the majority.

The rule in Foss v Harbottle has another important implication. A shareholder cannot generally bring a claim to recover any reflective loss - a diminution in the value of his or her shares in circumstances where the diminution arises because the company has suffered an actionable loss. The proper course is for the company to bring the action and recoup the loss with the consequence that the value of the shares will be restored.

Because   Foss v Harbottle   leaves the minority in an unprotected position, exceptions have arisen and statutory provisions have come into being which provide some protection for the minority. By far and away the most important protection is the unfair prejudice action in ss. 994-6 of the Companies Act 2006 (UK) (s 232 Corporations Act 2001 in Australia). Also, there is a new statutory derivate action available under ss 260-269 of the 2006 Act (and s 236   Corporations Act 2001   in Australia).

Exceptions to the rule[edit]

There are certain exceptions to the rule in Foss v. Harbottle, where litigation will be allowed. The following exceptions protect basic minority rights, which are necessary to protect regardless of the majority's vote.

1. Ultra vires and illegality

The directors of a company, or a shareholding majority may not use their control of the company to paper over actions which would be ultra vires the company, or illegal.

s 39 Companies Act 2006 for the rules on corporate capacity Smith v Croft (No 2) and Cockburn v. Newbridge Sanitary Steam Laundry Co. [1915] 1 IR 237, 252-59 (per

O'Brien LC and Holmes LJ) for the illegality point2. Actions requiring a special majority

If some special voting procedure would be necessary under the company's constitution or under the Companies Act, it would defeat both if that could be sidestepped by ordinary resolutions of a simple majority, and no redress for aggrieved minorities to be allowed.

Edwards v Halliwell [1950] 2 All ER 10643. Invasion of individual rights

Pender v Lushington (1877) 6 Ch D 70, per Jessel MR

...and see again, Edwards v Halliwell [1950] 2 All ER 1064

4. "Frauds on the minority"

Atwool v Merryweather (1867) LR 5 EQ 464n, per Page Wood VC Gambotto v WCP Limited (1995) 182 CLR 432 (Aus) Daniels v daniels (1978)

fraud in the context of derivative action means abuse of power whereby the directors or majority, who are in control of the company, secure a benefit at the expense of the company

...and see Greenhalgh v Arderne Cinemas Ltd for an example of what was not a fraud on the minority

http://en.wikipedia.org/wiki/Foss_v_Harbottle

In Hercules Management, the rule was articulated by Justice Laforest of Canada's Supreme Court as follows:

"The rule in Foss v. Harbottle provides that individual shareholders have no cause of action in law for any

wrongs done to the corporation and that if an action is to be brought in respect of such losses, it must be

brought either by the corporation itself (through management) or by way of a derivative action."

In Prudential Assurance, the English Court of Appeal wrote:

"The rule (in Foss v. Harbottle) is the consequence of the fact that a corporation is a separate legal entity. Other

consequences are limited liability and limited rights. The company is liable for its contracts and torts;

the shareholder has no such liability. The company acquires causes of action for breaches of contract and for

torts which damage the company. No cause of action vests in the shareholder. When the shareholder acquires

a share he accepts the fact that the value of his investment follows the fortunes of the company and that he can

only exercise his influence over the fortunes of the company by the exercise of his voting rights in general

meeting. The law confers on him the right to ensure that the company observes the limitations of its

memorandum of association and the right to ensure that other shareholders observe the rule, imposed on them

by the articles of association. If it is right that the law has conferred or should in certain restricted circumstances

confer further rights on a shareholder the scope and consequences of such further rights require careful

consideration."

As Beck wrote in regards to the rule of Foss v Harbottle:

"If the corporation is a legal person separate from its members, it follows that for a wrong done to it the

corporation itself is the only proper plaintiff."

REFERENCES: Beck, S., The Shareholder's Derivative Action, 52 Can. Bar Rev. 159 (1974)

Duhaime, Lloyd, Legal Definition of Derivative Action

Foss v. Harbottle (1843), 2 Hare 460, 67 E.R. 189

Hercules Management v Ernst & Young [1997] 2 SCR 165

NPV Management Ltd. v. Anthony, 218 Nfld. & P.E.I.R. 257 and at 28 B.L.R. (3d) 244 (2002)

Prudential Assurance Co. v. Newman Industries Ltd., [1982] 1 All E.R. 354

http://www.duhaime.org/LegalDictionary/R/RuleinFossvHarbottle.aspx

Companies law

Companies law theory[edit]

-

-. The power of making by-laws was “tacitly annexed to corporations by the very act of their establishment.”[2] While they must not directly contradict the overarching laws of the land, the central or local government cannot be expected to regulate toward the peculiar circumstances of a given body, and so “they are invested with authority to make regulations for the management of their own interests and affairs.” [2]

-

The question then arises: if corporations are to be inspected with care, what - if not the commercial or social conduct, or the by-laws - is to be inspected – and by whom? Do corporations have duties? Yes: “The general duties of every corporation may be collected from the nature and design of its institution: it should act agreeably to its nature, and fulfill the purposes for which it was formed.”[2]

-As theorists such as Ronald Coase have pointed out, all business organizations represent an attempt to avoid certain costs associated with doing business. Each is meant to facilitate the contribution of specific resources - investment capital, knowledge, relationships, and so forth - towards a venture which will prove profitable to all

contributors. Except for the partnership, all business forms are designed to provide limited liability to both members of the organization and external investors. Business organizations originated with agency law, which permits an agent to act on behalf of a principal, in exchange for the principal assuming equal liability for the wrongful acts committed by the agent. For this reason, all partners in a typical general partnership may be held liable for the wrongs committed by one partner. Those forms that provide limited liability are able to do so because the state provides a mechanism by which businesses that follow certain guidelines will be able to escape the full liability imposed under agency law. The state provides these forms because it has an interest in the strength of the companies that provide jobs and services therein, but also has an interest in monitoring and regulating their behavior.

Companies law study[edit]

The basic theory behind all business organizations is that, by combining certain functions within a single entity, a business (usually called a   firm   by economists) can operate more efficiently, and thereby realize a greater profit. Governments seek to facilitate investment in profitable operations by creating rules that protect investors in a business from being held personally liable for   debts   incurred by that business, either through mismanagement, or because of wrongful acts committed by the business. [ citation needed ]

The Rule in Foss v Harbottle is Dead; Long Live the Rule in Foss v HarbottleDavid Kershaw*

-Prior to the Companies Act 2006, English company law made it very difficult to bring derivative

litigation. Through a common law rule known alternatively as the Rule in Foss v Harbottle or the

proper plaintiff rule, English law affirmed the fundamental right of the company through its organs

to make the litigation decision in relation to a breach of an obligation owed to it.

-the proper plaintiff rule set forth in Foss v Harbottle is the parent of the wrongdoer control pre-

requisite to bringing derivative litigation at common law.

It provides that only the company itself can bring litigation for the infringement of

obligations owed to it and only if the company is disabled from acting (such as where there is

wrongdoer control of the general meeting) will the law countenance a derivative action. If it is not

so disabled the proper plaintiff rule provides that a derivative action cannot be broughtIn Foss v

Harbottle, Wigram VC held that the derivative litigant had no standing to

The decision was based on two propositions: first, that the company itself had been wronged and,

therefore, only the company through its board and shareholder body could elect to sue; and

second, that it made no sense for the court to entertain an action which could at any subsequent

time be ratified and cured by the general meeting.

Both propositions are rooted in the notion that it is for the company as a separate legal person to

decide what to do in relation to wrongs to which it has been subject.

Wigram VC observed further that:

In order that this [derivative action] be sustained it must be shewn either that

there is no such power as I have supposed remaining in the [governing body

of the] proprietors [to confirm the unlawful act] or, at least, that all means

have been resorted to and found ineffectual to set that body in motion

(emphasis supplied).

This paragraph suggested two grounds which could justify a derivative action: first,

where the shareholder meeting does not have the power to ratify a wrong as in

such a situation the courts’ practical concern that its actions could be undermined

at any time by shareholder confirmation are no longer relevant; and second, where

the corporate organs cannot be set in motion in the company’s interests because

of some practical barrier to action8 or because the organs are controlled by the

parties who have allegedly wronged the company.9 Accordingly, as James LJ

observed in Gray v Lewis, the basic ‘rule laid down in Foss v Harbottle’ is that: ‘where

there is a body corporate capable of filing a bill for itself to recover property either

from its directors or officers, or from any other person. That corporate body is the

proper plaintiff, and the only proper plaintiff’.

In subsequent cases a set of common law rules emerged which, in different guises, assessed

whether the proposed derivative action was in the corporate

interest. Relying upon Nurcombe v Nurcombe, in 1995 the Court of Appeal in Barrett

v Duckett32 held that the action will only be allowed to proceed if it is brought

‘bona fide for the benefit of the company’ and not for any ‘;ulterior purpose’. In

Barrett the action was not allowed to proceed because, amongst others, although

the actions themselves fell within the wrongdoer control exception, the

shareholder was held to be motivated by a personal grudge against the director,

who was the ex-husband of the shareholder’s daughter.

The 'fraud' precondition to the ‘fraud on the minority’ exception

has clearly, therefore, been abolished. This in itself is a notable change, which

increases the exposure of directors to liability for breaches of the duty of care.

file:///C:/Users/EllieLund/Downloads/SSRN-id2209061.pdf

A Property Rights Theory

- A property rights justification might take the following general form. While shareholders are not the owners of the company’s assets as a matter of strict law, 108   they are in substance the owners by virtue of being the contributors of the company’s capital. 109   Owners are entitled to use their property in whatever ways they wish. It follows that the power that results when shareholders pool their resources in corporate form is legitimate, because in possessing and exercising it they are doing only what they have a right to do. Accordingly it is not necessary, in order to establish that corporate power is legitimate, to show that the existence of companies is conducive to the general welfare, and the state has no right to intervene in their affairs in the name of the public good other than by the traditional means of altering the background legal constraints within which all businesses and citizens must operate. Before evaluating this argument two preliminary objections will be noted.

-

The first is that the corporate constitution does not provide that the   members   shall decide how the business is run, but vests decision-making power in the directors and managers. Not only that, if we accept that there has been a divorce between ownership and control in the typical large company,110 then management has escaped effective shareholder supervision and hence possesses a broad discretion as to the ends for which the company’s power shall be used. The objection therefore is that since power and property (p.35) have separated, the legitimating link between them has been broken. As against this, it is possible to argue that corporate power, as exercised by management, is still ultimately rooted in, and hence legitimated by, property rights, on the ground that the structure that gives rise to it is created with the consent of the shareholders.111The members’ rights of

ownership entitle them not only to make decisions personally about how their property is to be used, but also to delegate that power to others, and they are free to stipulate what degree of control they require over the discretion ceded by them. The validity of this reasoning ultimately depends, it is suggested, on the genuineness of the shareholders’ consent to the resulting situation. If the reality is that through the inadequacies of the governance structure and of other pressures for conformity the directors have effectively wrested power to pursue goals which diverge from those preferred by the shareholders, then the necessary legitimating connection with property rights is not made out. Whether corporate boards have escaped shareholder control will be considered in Chapter 2 below.The second objection is that the ownership justification erroneously assumes that property rights are absolute. The justification supposes that so long as a person is possessed of a right, that right may be exercised regardless of the consequences for others. But it can be argued that we should not view rights in this way, and that when their use has adverse effects on third parties, rights should not be treated as signifying a moral entitlement in the right-holder to bring about those effects. The harm resulting from corporate discretion might lie in its impact on particular individuals or groups, or it might exist at a more abstract level, in the social disfigurement that the concentration of power in a small number of hands represents. If the position of power that comes about when shareholders combine their property in a company is damaging in either of these ways, then an invocation of ownership rights will not constitute a conclusive justification. Now the purpose of relying on a rights-based argument is frequently to claim an entitlement to act irrespective of the consequences for others, and so if the idea of rights is to be coherent we must accept that a freedom to act in the face of at least some adverse social outcomes is entailed.112 If this is so then the issue should be formulated as one of whether the existence of corporate power is sufficiently objectionable to defeat the prima facie justificatory force of a rights’ claim.

I The Separation of Ownership and ControlSince the publication in 1932 of Berle and Means’ study of American capitalism, The Modern Corporation and Private Property, it has been the orthodoxy that in the majority of large public companies managements have escaped effective shareholder control. That shareholder control had become severely attentuated was certainly accepted in Britain by 1945. In that year the Cohen Committee succinctly explained how this state of affairs had come about:

The illusory nature of the control theoretically exercised by the shareholders over directors has been accentuated by the dispersion of capital among an increasing number of small shareholders who pay little attention to their investments so long as satisfactory dividends are forthcoming, who lack sufficient time, money and experience to make full use of their rights as occasion arises and who are, in many cases, too numerous and too widely dispersed to be able to organize themselves. 8 (yes relevant to members and people with much greater shareholding)

The weakness of shareholder control results, in short, from the ‘logic of collective action’: 9   while the shareholders as a group would benefit if their rights of control over management were exercised, it is rational for the members individually to remain passive.10 It is unlikely that voting by a single shareholder will make much difference to the success of a resolution (p.55)   The state of shareholder inactivity that results from these factors, it is argued, enables managers to pursue objectives of their own choosing. These are likely to be self-serving, but, in Berle and Means’ view, the possibility is also opened up that, rather than furthering their own interests, or those of the shareholders as currently required by law, management might act in the interests of society as a whole

.

Managerial Motives

The goals commonly attributed to management, in no particular order, are status, power, salary, and security. It is assumed that these are not linked to profit maximization, but depend on the size of the

enterprise. The predominant management goal therefore becomes one of growth, and in particular growth of sales.40 It should however be noted that while profit (p.64) maximization is not regarded as a goal, it is accepted in managerial theories that there is a profits constraint, either because a minimum level of profitability is a condition of survival of the enterprise, or necessary to protect management from loss of office through take-over.41Furthermore, growth itself is more difficult without a respectable profits record, and conversely in a dynamic economy continuing profitability frequently demands growth. The mutual dependence of profitablity and growth, as we shall see, makes the assessment of management motivation particularly problematical.The connection of status and power with size, rather than with high profits per se, seems fairly self-evident. Prestige is derived from holding executive office in a large, and hence well-known, organization. And the bigger the company is, the more important are the decisions made by its managers likely to be, affecting a greater value of assets and a larger number of employees. The scope for discretionary action may also be increased, given the connection between size and market power.

Corporate Power and Responsibility: Issues in the Theory of Company LawJ. E. Parkinson

Print publication date: 1995Print ISBN-13: 9780198259893Published to Oxford Scholarship Online: March 2012DOI: 10.1093/acprof:oso/9780198259893.001.0001

Australian judicial decisions have not been tolerant of the "layperson's fallacy"

which treats the corporate form as "mere machinery" for effecting the wishes of the

incorporators. 100 In Morgan v 45 Flers Avenue Pty Ltd, 101 Young J ventured the following

interesting conm1ent:

Unfortunately it ve1y often happens in cases in this Court that a person has ananged his

affairs for commercial or fiscal reasons employing a particular stmcture which with respect to

creditors and the Government he expects to be recognised as no sham but when it comes to a

dispute with his fanner wife or fanner business associates it is not in his interests to maintain

the structure and he pleads before this Court that one must not look at the structure but rather

at the "realistic" or "practical" effect of what has happened. I do not find this sort of

submission attractive. So long as the law permits people to erect structures which have

meaningful legal consequences then if a person elects to erect such a structure he must take

the consequences of such erection for better or worse for richer for poorer in commercial

sickness or commercial health. 102

I 00 These expressions are adapted from Gas Lighting Improvement Co Ltd v Inland Revenue Commissioners

[I 923] AC 723 at 741 per Lord Smmier, cited by Kitto J in Hobart Bridge Co Ltd v Federal Commissioner

o.fTaxation (1951) 82 CLR 372 at 385.

101 (1987) 5 ACLC 222.

I 02 Ibid at 224-25. Compare this with Young J's suggestion in Mesenberg v Cord Industrial Recruiters Pty Ltd

that "It may be that the mle is or should be that the Court only regards a corporation which is a quasi

partnership as a legal entity until sufficient reason to the contrary appears and that sufficient reason is

where to continue to treat the legal entity as a separate entity would defeat public convenience, justify

wrong, protect fraud or defend crime": (1996) 14 ACLC 519 at 528.

-it can be seen that serious consideration of the question of when to lift the corp veil takes us to some fundamental issues.

AGGREGATE THEORY

As just noted, in the view of many c01runentators, the advent of general incorporation legislation and the accompanying rise in the number of incorporations meant that concession theory lost much of its explanatory force. State pennission for each grant of incorporation was no longer required. Under the new general companies legislation it was easier to think of each coqJoration as an exercise of an individual's right of association rather than an act of the state. Aggregate theory attempts to push these individual rights to the fore.

As with concession theory, there are different versions of aggregate theory, some making stronger claims than others. The early foundations for this theory were laid in judicial analyses at the turn of the century which applied a contractual analysis to questions of intemal company management. In Automatic Self-Cleansing Filter Syndicate Co v Cunninghame, 121 the court affirmed that the articles of association fonn a contract between members which regulates the internal affairs of the company. Intemally the corporation is to be regarded as an association (or aggregation) of individuals joined by mutual agreement. The decision in Ashbury Railway Carriage & Iron Co v Riche shows that this contractual view could be accommodated within a concession theory:

The memorandum of association is as it were the area beyond which the action of the company cannot go, but inside that area they [the members] may make such regulations for their own government as they think fit. 122 Most advocates of aggregate theory take a stronger line than this, conceding much less scope for the imposition of external constraints upon corporations. Why should corporations be subject to specialised regulatory regimes when other contractual fonns of association, such as partnerships, are not?

[T]he authority of the sovereign toward the corporation ... is no greater and no less than its authority toward any other private agreement among contracting parties. 123 his stronger version of aggregate the01y asserts the primary status of the individual and the private stat·us of the corporation. The role of law should be limited to facilitating the fonnation of these contractual relationships.

We have seen that the origins of modem law of corporations in Australia lie in the partnership fom1 of organisation. Today the process of incorporation still revolves around the creation or adoption of corporate constitutional documents which specify the rights and powers of members and directors. For these reasons it has been observed that "company law in Australia has thus always had a strong contractual element to it". 124 The legal basis for this approach is discussed in Chapter 9. Contractual arguments continue to

120 See Hessen R, In Defense of the C01poration (Stanford UP, California, 1979); for a review of the

arguments for and against concession theory see Bottomley S, "The Birds, the Beasts, and the Bat:

Developing a Constitutionalist Theory of Corporate Regulation" (I 999) 22 FL Rev 243.

121 [1906]2 Ch34.

122 [1874-80] AllER Rep Ext 2219 at 2225 per Caims LC.

123 Note, "The Constitutional Rights of the Corporate Person" (1982) 91 Yale LJ 641 at 1648.

12..\ Hill J, "Close Corporations in Australia - The Close Corporations Bill 1988" (1989) 15 Canadian

Business LJ 43 at 48.

125 Stokes M, "Company Law and Legal Themy" in Twining W (ed), Legal The01y and Common Law

(Blackwell, Oxford, 1986), p 162.

126 For a general introduction to law and economics themy, see Bottomley S and ParkerS, Low in Context

(Federation Press, Sydney, 2nd ed, 1997).