Corporate Democracy is preserved when the will of the majority constitute the decision of the body… However, the application of this principle of corporate democracy and sovereignty have targeted at the minority…creating adverse effects on them.
The principle of democracy (rule of the majority or popular rule) have become prevalent in modern societies such that even artificial persons have imbibed this principles in their everyday existence. One of such artificial persons who are now (or expected to be) democratized are business entities- companies. Such that company law today recognise that a company should be dictated by the wishes of the majority of members of the company not the ‘whim-wham’ of the minority who may not have the majority interest at heart. In company law this concept is referred to as majority rule or the rule in Foss v. Harbottle.
However modern democracies also recognise that to foster a harmonious co-existence, the wishes and aspirations of the minority cannot be gainsaid. Atleast, the Arab Springs have shown us the political dimension to this. So in other to prevent ‘corporate springs’, courts and statutes have come up with exceptions to the majority rule. These exceptions show that sometimes, the majority may not necessarily be acting in the best interest of the company, rather they are bent on serving streamlined interests. By providing these exceptions the law seeks to provide remedies in case of ‘corporate springs’ especially where the wrongdoers are in control.
Majority Rule
The rule in Foss v. Harbottle was laid down in an old English case of the same name.[1]In that case two sharholders[2]of the Victoria Park Company alleged against five directors of the company[3]and others that they misapplied the company’s properties and as such they should be held liable and accountable for the losses and the properties. The court dismissed the claim and held that when a company is wronged by its directors, it is only the company that has the standing to sue. In effect the court established two rules. Firstly, the “proper plaintiff rule” which is that a wrong done to the company may be vindicated by the company alone. Secondly, the “majority rule principle” which states that if the alleged wrong can be confirmed or ratified by a majority of members in a general meeting , then the court will not interfere. The rule covers cases where what is complained of is some internal irregularity in the operation of the company.
In the very recent South African case of Szabo v Star Contractors (Pty) Ltd[4]delivered on 13 June 2013, the court reiterated the rule to the effect that in addressing a wrong done to the company, the action for such purpose should be brought by the company itself. Though the court admitted that in certain exceptional circumstances, the court would permit departures from the principle.

In Nigeria, the majority rule is codified in Section 299 of CAMA. That section does re-echo the position of the court in Foss v. Harbottle and other similar decisions which is to the effect that where a wrong has been done in the course of a company’s affairs or to the company (by the majority or the alter ego), only the company can sue to remedy the wrong. A litany of Nigerian cases have applied this principle.[5]
Some rationale have been given for the majority rule as follows, that;
1. It is a corollary to the corporate legal personality principle.
2. It prevents multiplicity of actions over one or similar incidents arising from the same set of facts.
3. The members in a general meeting have powers to ratify the acts of the alter ego of the company.
Minority Protection
In undeserving cases, the application of the majority interest rule have worked injustice against the minority. Since the decision of the court in Foss v. Harbottle, company operations have revolutionalised such that oppression of the minority by reliance on the majority rule at any slight opposition could no longer be supported. Hence the courts (even Nigerian courts) have developed exceptions to the majority rule, which are popularly known amongst legal scholars and jurists as the exceptions to the rule in Foss v. Harbottle. Suffice it to say that, in company law today, the exceptions are more relevant in their application than the general rule itself.[6]This translates to say that company law today is more interested in protecting minority rights rather than covering the caprices of the majority. Ofcourse, this is deservedly so because if there are no exceptions to the majority rule, the minority shareholders will be not be protected from the political intrigues of corporate governance.
Under Nigerian corporate law there are six recognised exceptions to the majority rule. These exceptions are codified in Section 300 of CAMA. The court will enforce minority rights (even if not brought by the “proper plaintiff”) where:
  1. The act is illegal or ultravires the majority or company;
  2. The act is done by an improper procedure such that where a special majority was required a simple majority alone was used;
  3. The act or omission infringes on the individual member’s right(s);
  4.  The act of the majority constitutes a fraud on the minority;
  5. It is impracticable to call a general meeting to redress the wrong;
  6. The directors or ‘wrongdoers’ will profit or benefit from their wrong or illegality;
The courts have sometimes referred to serving the “interest of justice” as an exception to the rule.[7]Professor Gower[8] is one of the leading scholars and proponents of that exception. However scholars like Dr. Olakunle Orojo[9]and Professor Ehi Oshio have rather taken a more withdrawn view, with the later outrightly criticising that exception as “too vague and imprecise in meaning and would have given room for endless controversies”.[10]We go with the latter view. Interestingly, CAMA also left out that exception from Section 300.
Note that only a member of a company or a person who derived title from a member can bring an action under Section 300 of CAMA.[11]
I’m afraid this is the much we can take on this post. The next post will conclude the discussion.

Thank you.

[1] Foss v. Harbottle [1843] EngR 478; (1843) 2 Hare 461; (1843) 67 ER 189.
[2] Richard Foss and Edward Turton.
[3] Thomas Harbottle, Joseph Adshead, Henry Byrom, John Westhead, Richard Bealey.
[4] (2009/52823) [2013] ZAGPJHC 147.
[5] See the cases of SPDC Ltd v. Nwawka [2003] 6 NWLR (pt. 815), Tika-Tore Press v. Abina (1973) 1 All NLR (PT. 1) 401, Edokpolor v. Sem-Edo Wire  Industries Ltd (1984) 7 SC 119, Okoya v. Santilli (1990) 2 NWLR (pt. 131) 172, Williams v. Edu (2002) 3 NWLR (pt. 754) 400.
[6] This is evident in the fact that most cases that cite the general rule rather apply one or more of the exceptions.
[7] See Szabo v. Star Contracts Pty Ltd, supra; Heyting v. Dupont (1964) 1 WLR 843; (1964) 3 TMI 34, Omisade v. Akande (1976) 1 SC 63.
[8] See Gower and Davies; Principles of Modern Company Law, 8th Edn, 2008, Sweet and Maxwell, London.
[9] See Orojo O., Company Law and Practice in Nigeria, 4th Edn, Lexis Nexis.
[10] Oshio E. Modern Company Law in Nigeria, 1995, Lulupath Press, Benin City, pg. 204.
[11]  See Section 302 of CAMA.

About the author

Nigerian Law Today

NLT’s mission is to take legal-content writing to the next level in Nigeria by leveraging legal expertise and technology. We publish fresh, original, and insightful articles on areas of law we cover.

Leave a Comment

This site uses Akismet to reduce spam. Learn how your comment data is processed.

1 Comment