Shareholders' Rights and the Rule in Foss v.

Harbottle (Continued)
Author(s): K. W. Wedderburn
Source: The Cambridge Law Journal , Apr., 1958, Vol. 16, No. 1 (Apr., 1958), pp. 93-106
Published by: Cambridge University Press on behalf of Editorial Committee of the
Cambridge Law Journal

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 SHAREHOLDERS' RIGHTS AND THE RULE IN

FOSS v. HARBOTTLE (continued)*

K. W. Wedderburn

Heading 4. " Fraud on a Minority," where the Wron

" Control.79

It was stated above, in the discussion of ultra vires, that actions

falling under the fourth Heading of the " exceptions " to Foss v.
Harbottle must be " corporate" and not " personal" actions.
That is why a minority action brought on the grounds of " fraud "
has usually been regarded as a real " relaxation " of the Rule. It
is a special procedure, only allowed to the minority in order to
avoid " an action in the name of the company, and then a fight
as to the right to use its name "39 in which the minority must lose
because the wrongdoers control the company. As such, it is " an
excellent illustration of the golden principle that procedure with its
rules is the handmaid and not the mistress of justice."40 The
representative form of the minority shareholders' action must not
be permitted to obscure the fact that the " only relief possible in
this action is corporate relief."40 For this reason, those cases
establishing a personal right to prevent any alteration of the articles
which would be a fraud on the minority, do not fail under this
Heading, and were placed under Heading 3.41 In the cases now to
be discussed, all the rules appropriate to corporate actions apply 42
—notably, that the plaintiff must sue in representative form and
cannot join a personal claim; can attack wrongs anterior to his own
membership; must join the company as a party; and can join
the wrongdoers to assert the company's rights against them. In
truth, these '* corporate " actions concern not so much a " fraud
on the minority " as a " fraud on the company," and the minority
is suing " to protect, as it were, the company from the unlawful

* From [1957] C.L.J. 194.

*• Lindley M.K., Alexander v. Automatic Telephone Co. [1900] 2 Ch. 57, 69.
40 Lord Blanesburgh, Ferguson v. Wallbridge [1935] 3 D.L.B. 66, 81, 83 (P.C.).
The standard of service has not, however, been very high.
41 Greenhalgh v. Arderne Cinemas [1951] Ch. 286; Sidebottom v. Kershaw,
Leese <& Co., Ltd. [1920] 1 Ch. 154 (applying a restrictive interpretation of
"fraud" here; but the form of the actionB was unchallenged): ante [1957]
C.L.J. p. 211, n. 14. See, too, infra, p. 102, n. 97.
42 See the " fraud " cases cited under Heading 1, in the discussion of " corporate
actions " brought by a minority : ante, p. 205 and Duckett v. Gover (1877)
6 Ch.D. 82 (on which see Tryon's Case (1886) 16 Q.B.D. 678); and Silber
Light v. Silber (1879) 12 Ch.D. 717.
93

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94 The Cambridge Law Journal [1958]

acts of the directors "43 or other wrongdoer

was recognised as early as the Rule itself,44 an
apparent that it constitutes a relaxation not so mu
interference " prohibition, as of the rule dema
brought to remedy wrongs done to the compan
in the name of the company itself, i.e., under t
majority.45 The two constituent parts of the H
and " Fraud," need to be separately investigate

Control. The easiest way to prove control

the way accepted in the leading cases, is to sho
against whom the allegations are made own
shares which confer voting rights 46—although
that de facto control can be obtained in a large
tion of a much smaller block of shares than fifty
the failure of members to attend meetings.47
courts to refuse to go behind the register of mem
ownership of shares; but if that were an absol
case, such a refusal to look for real owners who
by use of nominee shareholders would obviously
principle. Danckwerts J. was recently prepa
the investigation of nominee shareholding, in P
in order to determine who was in control; b
further. There, the shares in company W
company, of which the defendant directors of W
directors. His Lordship was not willing to p
veil of X Co. in order to discover sufficient con
themselves of company W, to bring the pri
into play49; but there seems little doubt that
in future adhere rigidly to this reasoning in vi
in which the veils of corporate personality hav

4a Cairns L.J., Ferguson v. Wilson (1866) 2 [Link]. 7

M.K. in Beattie v. Beattie [1938] Ch. at p. 718.
44 See Lord v. Copper Miners Co. (1848) 2 Ph. 740.
45 Burland v. #aWe [1902] A.C. p. 93.
46 See Menier v. Hooper's Telegraph Works (1874) 9 C
v. Harris (1879) 11 Ch.D.'97, 108; Alexander v. dut
[1900] 2 Ch. 56, 69; Cook v. Deefc? [1916] 1 A.C. 55
47 See Gower, op. cit. 204-205, discussing s. 154, Com
also recognises control of " the composition of its bo
mark of the "subsidiary company." See, too, Hornsey, (1950) 13 M.L.B.
470-474.
48 [1956] Ch. 565, 577 (dicta).
49 Largely because he thought that the majority of X Co. could overrule a
decision of the directors as to the use of voting rights on matters concerning
action by W. Co. which would not seem to be the approach in cases like Shaw
& Sons (Salford), Ltd. v. Shaw (supra). Does "control" of W Co. depend,
then, on the exact terms of X Co.'s articles? Cf. Gower (1956) 19 M.L.B. 539.
*o See, e.g., Re Darby [1911] 1 K.B. 95; Gower, op. cit., 208 et seq. The reason-
ing of Danckwerts J. is hardly consistent with the approach apparent in

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C.L.J. The Rule in Foss v. Harbottle 95

On the other hand, " control by the

narrow a phrase by which to express th
is much to be said for expressing the p
the minority must " account for the fa
seen fit to bring action on its own be
showing that the company has refuse
brought on its own behalf, or that, by
being in control of the company at the
it would be idle to apply to the compan
the point is to be preferred because it s
of a majority of shares held by the wr
itself, a sufficient, but not a necessary,
of the principle. Similarly, Jessel M
Waterworks Co.52 allows it to apply wh
a majority of votes, or (ii) there has bee
by the majority, or (iii) the corporatio
it is not willing to sue. If this is correc
in Shaw's case53 are accurate which as
of general management confer upon
right to decide upon legal proceedings,
earlier, be a way round them, at least i
Where the wrongdoers are not an obvi
should take steps to find out whet
intended 54; if the directors are not
proceed, then " control" is establishe
rule. More, such a refusal to sue might,
both of control and of "fraud," at an
themselves are allegedly " wrongdoers,
have as yet clearly established the circu
be so. On the other hand, it is arguable
be satisfied with a case based only u
to allow suit, unless the plaintiffs gave

Menier y. Hooper's Telegraph Works (1874

the position in the tax cases seems to be exac
he took up in Pavlides' case. The Court of
I.R.C. [1957] 2 All E.R. 612, in deciding wheth
interest *' for the purposes of the Finance Act
veil of a corporate shareholder, to see who
but the judgments make it clear that (beca
cases) most other nominee shareholding could n
this purpose.
" Fairweather J. in Fisher v. St. John Opera
342 (italics supplied).
" (1875) 20 Eq. 474, 482.
« [1935] 2 K.B. 113, 134,142; see ante, p. 201
"Morris v. Morris (1877) W.N. 6; Ferguson
66, 83, 84 (P.C.).

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96 The Cambridge Law Journal [1958]

exercising their right to requisition a gener

attempting to persuade the majority to dismis

Fraud. " Fraud," in this context, seems to be

able meaning and is not confined to the fraudul
of the common law world, although these will,
But its exact definition in this area of law has
investigated, for the reason that it has not usu
the context of ratification. It is, no doubt, as
other case in which the action is a " corpor
minority " cannot have a larger right to relief
itself would have if it were plaintiff, and can
which are . . . capable of being confirmed b
Therefore, our quest is for a definition of that
transaction " which it was not competent for
carry out" by bare majority.58 If all, or no, " frauds" were
ratifiable, the answer would be easy to give. Unfortunately, some
are, and some are not. We have already seen that the dividing
line will not easily be discovered by probing the state of mind
of the majority members when, and if, they voted on the matter,
since their votes are, at any rate at general meetings, "rights of
property " to be used largely in their own interests.59 Even in
Greenhalgh v. Arderne Cinemas (involving a personal action to
challenge allegedly fraudulent alteration of articles), Evershed
M.R. admitted that they need not " dissociate themselves
altogether from their own prospects and consider whether (sic)
what is thought to be for the benefit of the company as a going
concern."60 Further, the majority may never get the chance to
vote on the matter at all. Fraud lies rather in the nature of the
transaction than in the motives of the majority.61 Not unnaturally,
the transactions raising the problem have almost invariably con¬
cerned acts of directors who have been able, in one way or another,
to control their company; and, although the ground of this sub¬
section will not thereby be completely covered, it will be convenient

55 Under s. 132, Companies Act, 1948: and see s. 134 (b): but this takes at least
14 days: s. 133. See H. Salt Q.o. (1957) [Link] Law 248, on the weakness
of the shareholder's position.
56 Under b. 184, ibid.: (at least 28 days needed, see s. 142).
57 Burland v. Earle [1902] A.C. p. 93.
58 Lindley M.R., Kerry v. Maori Dream Gold Mines, Ltd. (1898) 14 T.L.R. 402.
59 See the cases cited ante, p. 200, and, especially, North-West Transportation,
Ltd. v. Beatty (1887) 12 [Link]. 589.
60 [1951] Ch. p. 291 ("whether" Bhould obviously be deleted).
61 Of course, there might well occur circumstances in which the nature of the
transaction was such that it constituted an obvious fraud on the company
by the majority: e.g., Menier v. Hooper's Telegraph Works (1874) 9 [Link].
350; Cook v. Deeks [1916] 1 A.C. 554, discussed infra.

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C.L.J. The Rule in Foss v. Harbottle 97

to restrict our discussion of fraud

directors who have control. Even so
in full the vexed question of the exac
and what follows is offered as an outline
Directors are said to be " trustees "
company's rights and property in th
more than that directors in the perf
in a fiduciary relationship to the com
enough." 62 This proposition is a co
But " fiduciary duties " are notorious
it is particularly difficult, in this contex
of them amount to " fraud " because
more with the construction of particu
with the fundamental duties impo
Companies Act, the articles can still m
The Act of 1948, it is true, lays upon
able duties, such as the duty to disclos
with the company63; and section
" exempting any officer of the compa
him against any liability which by vir
otherwise attach to him in respect of
of duty or breach of trust of which h
the company, shall be void." 64 But th
avoid " breach of duty " in some cases
duty to break. A duty would normally
for profits and benefits obtained f
company knows and assents "65; an a
by assent in advance, as in the case of
And the articles may show that a com
normal right and " stipulate that the
of their directors is a benefit of whi
themselves." 67 The category of cas
can be given in advance may not be co
ratification of a breach of existing
62 Romer J., Be City Equitable Fire Insu
see other cases cited in Regal (Hastings)
378 (H.L.).
63 8. 199 (but disclosure only to the other directors); and see s. 198.
64 But the court may on terms relieve him from liability, under s. 448, if he
acted honestly and reasonably and ought fairly to be excused.
65 Buckley, op. cit. p. 876.
ee Compare Arts 84 (2) and (4); and Costa Rica Ry. v. Forwood [1901] 1 Ch.
746. Modification of duties by the articles seems, in view of Beattie v.
Beattie, to operate by way of waiver, and not of contract, since it is un¬
doubtedly effective whether or not the terms of articles are " incorporated "
into the director'B contract. (As to promoters, eee Omnium Electric Palaces,
Ltd. v. Baines [1914] 1 Ch. 332, and cases there cited.)
67 Buckley, op. cit. 878: aB to "competition" by directors, see 868.

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98 The Cambridge Law Journal [19581

view of the terms in which section 205 restricts

it is in the latter question that we are mainly i
be examined by taking separately three types
directors' fiduciary duties.

Mala Fides. The directors' first duty is to exerc

bona fide, that is to say "in what they consid
court may consider—is in the interests of the com
any collateral purpose." 68 There can be no doubt
are mala fide, in the sense that the directors have p
interests other than those of the company, are op
by the minority on grounds of " fraud."89 Th
managing director, who controlled a company, so
on the basis of deceitful misrepresentations, an
with the assets of the company for ulterior purp
the minority could enforce the corporate action a

Negligence. Directors are expected to exer

performing their duties; but the standard of c
apparently determined rather in a subjective than
manner; it is " such care as is reasonably to be exp
having regard to their knowledge and experience.
is not a doctor. There is no reasonable director in
cab against whose notional pattern of conduct his a
Indeed, perhaps the best advice to him is: "Av
and avoid experience. They will step up your
directors act foolishly, " however ridiculous and a
duct might seem, it was the misfortune of the co
chose such unwise directors."73 Should they,
come up to the standard expected of reasonable

68 Re Smith and Fawcett, Ltd. [1942] Ch. 304, 306, Lor

too, Piercy v. Mills [1920] 1 Ch. 77. It has been sugge
Report on the Savoy Hotel, Ltd. (H.M.S.O. 1954), p. 27
purpose " introduces a separate test different from that o
acts are bona fide; but the writer has elsewhere suggested
[1955] Camb.L.J. 37. (Cf. Legion Oils, Ltd. v. Barrow
505, 516.) See, too, that note, and Prof. Gower in (1955
1185 et seq. on the meaning of the " interests of the compan
69 Cannon v. Trask (1875) 20 Eq. 669; and see Ngurli, Ltd
90 C.L.R. 425, 43&-440.
70 Mason v. Harris (1879) 11 Ch.D. 97; and Atwool v. Merryweather (1867) 5
Eq. 464 n.; Menier v. Hooper's Telegraph Works (1874) 9 [Link]. 350;
Cook v. Deeks [1916] 1 A.C. 554; but see infra, p. 101 on these cases, which
may go further than mala fides.
71 Lagunas Nitrate Co. v. Lagunas Syndicate [1899] 2 Ch. 392, 435; and see Re
City Equitable Fire Insurance [1925] Ch. 407, where the matter is exhaustively
discussed.
72 See Marquis of Bute's Case [1892] 2 Ch. 100.
™ Turquand v. Marshall (1869) 4 [Link]. 376, 386.

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C.L.J. The Rule in Foss v. Harbottle 99

experience, the duty of care owed t

But, even so, the most recent case, Pav
that such a breach is not to be equat
Heading 4 cannot be extended to incl
sue. A fortiori, the same result mus
of amiable lunatics " have obtained c
becoming majority shareholders, and
sold the company's products at greatly
example," thought Danckwerts J.,
teetotallers who obtained a controll
company."

Other Breaches of Fiduciary Duty. The assumption in this

section is that actual mala fides is not shown. Nevertheless, a
director must not put himself, however honestly he acts, into
a position " in which he has, or can have, a personal interest
conflicting, or which possibly may conflict, with the interests of
those whom he is bound to protect," 77 that is to say, of the
company.78 No question of unfairness arises. He is not allowed
to place himself in this position at all. The most important
consequences of this rule, derived from the rules applicable
to trustees, are, of course, that contracts between him and his
company are prima facie voidable at the option of the company,
and that profits made out of his position must prima facie be
accounted for. In both cases, however, the way to escape liability
is disclosure to the company.79 It is secret profits which are for¬
bidden him.80 The standard of disclosure demanded is a high one;
the company must be " fully informed of the real state of things ";
if this is not so, the duty is broken and the normal rule is that any
benefit or profit obtained by him is recoverable by the company—
and recoverable even if the right to rescind a contract from which
it arose has been lost.81 (To this last point there is one exception,
namely where the director honestly sells property to his company
74 A claim for negligence was dropped in Regal (Hastings) Ltd. v. Gulliver
[1942] 1 All E.R. 378. Quaere: is the claim quite one for "common law
negligence"?: Evershed M.R., Re B. Johnson [1955] Ch. 634, 648.
75 [1956] Ch. 565. But eee, too, Alexander v. Automatic Telegraph Co. tl900]
2 Ch. 56, discussed infra.
76 Counael's argument, ibid., p. 570. If the articles were infringed Heading 3
might, of course, be used; and see the discussion, infra, p. 102, of "fraud
by appropriation of corporate advantages."
77 Aberdeen Ry. v. Blakie (1854) 1 MacQ. 461, 471 (H.L.).
78 The fiduciary duty is not normally owed to the members.
79 i.e., to the members; quaere, now to an independent board of directors?
Gray v. New Augurita Porcupine Mines [1952] 3 D.L.R. 1 (P.C.). But see
Costa Rica Ry. v. Forwood [1901] 1 Ch. 746, 761.
80 Jacobus Marler v. Marler (1916) 85 L.J.P.C. 167 n. (Lord Parker's interesting
review of fiduciary duties of directors and of promoters).
81 Gray v. New Augurita Porcupine Mines (supra), pp.12-14 per Lord Radcliffe.

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100 The Cambridge Law Journal [1958]

which he has previously acquired in some capacity othe

of director and otherwise than on the company's behal
of the right to rescind the transaction prevents the com
recovering profit, for the court will not, after that po
new contract" between the parties.82) The fundamen
has, however, been frequently applied, and was recent
in rigorously strict terms in Regal (Hastings), Ltd. v
In that case, directors had, in order to help finance a
for the appellant company, personally subscribed for s
subsidiary company formed to carry it out. Later the
was effected by a sale of the shares of the subsidiary t
who also took over the appellant company by buyin
The House of Lords held that the directors were lia
to the company the profit made upon the sale of the s
shares.84 " At all material times they were directo
fiduciary position, and they used and acted upon th
knowledge acquired as such directors "; proof of ma
not necessary when they had profited " by reason and
of " their fiduciary relationship, " in the course of th
ment and in utilisation of their opportunities and speci
as directors." 85 It is of interest to see the extent to w
cases on "trustees" proper, especially Keech v. Sandf
relied upon to produce this result. Moreover, the Hous
clearly considered that proper disclosure would have be
and Lord Russell expressly equated antecedent disclosure
val with subsequent ratification. " They could, had t
have protected themselves by a resolution (either an

82 This must be the explanation of cases such as Re Cape Breton

795 (affd. (1887) 12 [Link]. 652); and the second point in Bu
[1902] A.C. 83: (company lost right to rescind Bale; no righ
profit made by director on property he had bought up earlier
See, Ballem (1952) 30 Can.B.R. 179; and Marler's case (su
v. Heathorn (1842) 1Y.& C.C.C. 326, 340; Peninsular & Orient
Co. v, Johnson (1938) 60 C.L.R. 189, 212, 249, where Dixon
the suggestion, made in Marler's case, that an action for dama
if the company proved real damage. To the common lawy
might present itself as one merely for breach of the implied
faith in the contract (cf. Boston Deep Sea Fishing Co. v. An
Ch.D. 339); but possibly equity reaches the same result, apa
(Nocton v. Lord Ashburton [1914] A.C. 932; Re Leeds & Han
of Varieties [1902] 2 Ch. 809, 825).
*a [1942] 1 All E.R. 378 (H.L.): earlier cases, eee Buckley, op. c
84 The purchasers thus " receive in one hand part of the sum w
paid by the other," Lord Porter, p. 394.
ss Ibid. Viscount Sankey, 382; Lord Russell, 385-386; Lord Mac
The company, therefore, could presumably have recovered any pr
v. Wright [1902] 2 Ch. 421. See, too, the strict application
Zwicker v. Stanbury [1954] 1 D.L.R. 257; Smith v. Smith [19
470; Canada Safeway v. Thompson [1951] 3 D.L.R. 295 (where
were made to account).
88 (1726) [Link]. 61 (not quite the same situation).

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C.L.J. The Rule in Foss v. Harbottle 101

subsequent) of the Regal shareholders in

such a resolution, e.g., that no action sho
by the company, the majority clearly had co
could apparently have used any votes th
Which seems to show that, in circumsta
directors need do is blow their own voti
of the fiduciary duty will come tumbling
make enough noise to tilt the balance.
It might, therefore, be concluded that
ratified, " fraud " which permits of a
restricted to minute proportions, outsid
But there are two indications to the con
there are cases in which bona fide breach
given rise to minority corporate actio
matic Telephone Co.90 the directors had,
under the articles, required applicants f
payments, but issued shares to themselv
ment and without disclosing the discrim
The Court of Appeal, although acceptin
good faith, allowed the minority to comp
company for the benefit thus obtained. T
burden of complaint made against the d
absence of disclosure, and this seems to
might, in accordance with the princip
ratified their breach of duty. Neverth
Harbottle was swept aside. If such case
indieate that there do exist real exceptio
there is a group of cases which are fr
" frauds " which cannot be ratified. The
turn to Menier v. Hooper's Telegraph Wo
had allegedly " divided the assets of th
between themselves, to the exclusion of
true case of "majority fraud," rather th
duty, although the directors were inter
87 [1942] 1 All E.R. p. 389. And see Viscount S
See the attempt to "marry" the trust, and
disclosure, by Danckwerts J. in Fine Indust
(1954) 71 R.P.C. 253, 261-262.
88 Re Transvaal Gold Exploration Co. (1885) 1 T.L.R. 604.
89 On the principle of North-West Transportation, Ltd. v. Beatty (1887) 12
[Link]. 589 (P.C.). The Editor of [1942] 1 All E.R. 378, remarks at
p. 379 that " they doubtless controlled the voting."
so [1900] 2 Ch. 56, especially Lindley M.R. at pp. 67-69. And see Shaw v.
Holland [1900] 2 Ch. 305 (which may rest on ultra vires, p. 311); and
Piercy v. Mills [1920] 1 Ch. 77 (which probably turns on mala fides).
91 (1874) 9 [Link]. 350, 353; and see Atwool v. Merryweather (1867) 5 Eq. 464
n.; Kerry v. Maori Dream Gold Mines, Ltd. (1898) 14 T.L.R. 402; Mason
v. Harris (1829) 11 Ch.D. 97.

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102 The Cambridge Law Journal [1958]

—a company which held most of the shares in

company. The majority are not allowed to use selfish
rights to this extent. They cannot be allowed to pu
property "into their pockets." It has, therefore,
the minority can sue whenever the wrongdoers in
priate to themselves money, property, or advantage
to the company, or in which the other shareholder
participate."92 The same principle has been used
directors were directly in control, notably Cook v.
directors, while carrying on the company's affairs,
contracts in their own names in circumstances which left no doubt
that they ought to have contracted and obtained the benefits for
their company. It was held that the contractual rights were held
by them on behalf of the company; and that a resolution, which
had actually been passed in general meeting by means of their own
votes as shareholders, and which purported to approve of what they
had done for their own benefit, could not stand. In consequence,
the minority could sue to protect what really belonged, in equity, to
the company. It has even been suggested that the same principle
can be applied if directors extract " excessive or grossly unfair "
remuneration, because that might amount to " appropriation of
the company's assets." 94
This formula in Cook v. Deefcs05 can be used in three ways.
(i) First, it can help to mark off from cases such as N.W. Transporta-
tion v. Beatty B6 cases in which the nature of transactions originated
by the majority themselves is " fraudulent" within the meaning
of this Heading. They must not filch the company's assets—other¬
wise, at any rate, than the articles expressly allow.97 (ii) Secondly,
it is useful as a distinction between Cook v. Deeks,9* and cases like
Burland v. Earle,m where voidable sales to the company by directors
were ratified: i.e., between a "case of the director selling to his
company property which was in equity as well as at law his own,"

•* Burland ?. Earle [1902] A.C. 93. ™ [1916] 1 A.C. 564.

94 Foster v. Foster [1916] 1 Ch. 532, 549; and see the Cohen Report on
Law Amendment, 1945, p. 30.
** [1916] 1 A.C. 554. »• (1887) 12 [Link]. 589.
97 Quaere whether the cases on fraudulent alterations in the arti
account of this principle. It may well be that the persona
succeed only upon proof of express " discrimination ": Green
Cinemas [1951] Ch. 286, 291. But it might be that in
representative plaintiff could sue to protect some " corp
which had been squandered by the majority wholly or main
purposes, e.g., that of being " controlled " by a special group o
the special resolution purports to destroy. Compare Clark v,
1 Ir.R. 107, 117. " Corporate advantages " is a pregnant p
be used to develop this Heading. Cf. Ngurli, Ltd. v. McG
C.L.R. 425, 447, M The right to issue new capital is an a
belongs to the company."
98 Supra, n. 93. »« Supra, n. 92.

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C.L.J. The Rule in Foss v. Harbottle 103

and " the case of a director dealing with

his own at law, in equity belonged to the
it might be thought that cases like Ale
explained by the formula as being cases
an equitable " property " in the benefits
and therefore minority action was possible
which exposes the difficulty at the root o
tinction between the Cook case3 and th
first the " property " belonged ab initio i
Was that not so in Regal as well? The r
cases is " that a director is a trustee—th
cannot make a profit out of his agency un
No doubt, in his case, just as in that of t
confusing matters to identify such a fid
ordinary, out and out trusteeship." 6
profits made by either promoter or direc
pany in equity; " the promoter is bound
got quocunque modo from what is really
pany "7; the " profit which (the director
even though the property by means of wh
could not have been acquired on its be
benefit " on behalf of (the company) and
benefit." 9 Secret profit has been called "
Cairns himself, and the director has been s
the profit which he must be considered t
for the association." 10 Just so, in Cook v
" cannot retain the benefit of such contr
must be regarded as holding it on behalf
It must be admitted, however, that s
found for using the formula. For the p
actions, a director, while he has certainly

i ri916] 1 A.C. 563. 2 [igoo] 2 Ch. 56.

3 Supra, n. 93. 4 [1942] 1 All E.R. 378 (H.L.).
* Mellish L.J., Hay%$ Case (1875) 10 [Link]. 593, 605.
6 Sargant J., Omnium Electric Palaces, Ltd. v. Bain
7 Lord Dunedin, Jubilee Cotton Mills, Ltd. v. Lewi
8 Lord Porter, the Regal Case [1942] 1 All E.R. 395
9 Danckwerts J., Fine Industrial Commodities v. Po
253, 259; the secret benefit was there an invention
by use of his position in the company; the equitabl
in the company, even if the use of the invention wo
it was the director's duty to " exploit every opening "
if it involved aiteration of the company *s memora
Act (258)!
i° Imperial Mercantile Credit Association v. Colema
per Lord Cairns 209, and Lord Chelmsford 202, respect
n [1916] 1 A.C. 654.
12 [1916] 1 A.C. 563.

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104 The Cambridge Law Journal [1958]

of property received from the company's coffers,1

not to occupy that position in respect of certain
received from outsiders. When a " bribe " was so received, Brett
L.J. held that "neither at law nor in equity could this sum . . .
be treated as the money of the company until the court . . . had
decreed it to belong to them." 14 Although the rules about limita¬
tion have since changed, it can be argued that such cases show
that there is no equitable " title " in the company (at any rate until
the court's decree) in respect of improper profits made " on the
side," as opposed to transactions involving property clearly belong¬
ing to the company; and that, in the former case, the director is
initially no more than a mere debtor of the company.15 It is not
easy to see either why this technicality of the old limitation cases
should be applied for all purposes, or how such an approach can be
reconciled with the modern cases. One reason why the limitation
cases treated directors as trustees where they had misapplied
corporate assets, albeit innocently, was that it was not easy for the
members to obtain redress against the directors 1G; it would be
strange to give the latter an advantage because they had made their
profit in breach of duty but had been clever enough to avoid actual
assets. Moreover, although it is notoriously difficult to say when
an agent becomes a " constructive trustee," 17 it has been said
(and in one of the limitation cases) that where " a person makes
a profit out of the improper use of another person's property, he
becomes a trustee of that profit for the owner of the property." 18
Cook v. Deeks and Regal seem to recognise corporate advantages
and opportunities as corporate " assets." Will not the secret profits
invariably be made by use of such " assets " ? The modern cases
frequently seem to be saying that the profit " belongs " to the
company as soon as it is earned. Indeed, the equitable " property "

13 e.g., Tintin Exploration Syndicate v. Sandys (1947) 177 L.T. 412. The relevant
statute is now s. 19, Limitation Act, 1939. On the previous position, Bee
Keeton, Law of Trusts (7th ed.) 401-408 and Ashburner, Principles of Equity,
608-615.
i* Metropolitan Bank v. Heiron (1880) 6 Ex.D. 319, 324. " Bribes " are, of
course, rather an oddity, in that the company can recover the specific sum
from the director even if equivalent damages have already been recovered from
the briber: Salford Corpn. v. Lever [1891] 1 Q.B. 168. Quaere, whether receipt
by directors of "bribes*' can be ratified by the majority?
15 I am much indebted to Mr. L. Sealy of Caius College for discussions on this
area of law; but it would be wrong thereby to suggest that he agrees with
the view advanced. ™ Lindley L.J. in Re Sharpe [1892] 1 Ch. 154, 167.
17 See the cases discussed by Hanbury, Modern Equity (6th ed.), 354-356.
is Henry v. Hammond [1913] 2 K.B. 515, 522. The test used there for distin¬
guishing between types of agents is whether the agent is under a duty to keep
the property separate from his own property. Will the law not impose that
duty upon a profiteer director? (For a strong decision upon profits acquired
by an agent by use only of opportunities afforded by his position, or M status."
see Reading v. Att.-Gen. [1951] A.C. 607, especially Lord Porter at pp. 514-515,
and Lord Normand at p. 517.)

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C.L.J. The Rule in Foss v. Harbottle 105

(and what, after all, is that except the righ

sum in equity ?) has been vested in compan
of accepting it !19 The old test in the limita
be used for distinguishing cases in which th
initio in the company, (legally or beneficially
a " duty to account " arises, with no " title
it may be asked whether that test is eith
governing minority actions, or valid as a di
Cook and Regal types of case, once corporat
included within the area of the assets.
In the face of this jangle of discordant cases, the law can hardly
be regarded as settled. Commentators have tried to fit in Cook v.
Deeks by saying that majority sanction would have been valid
there if obtained before the contract was made 20; but the line of
cases does not suggest this; and it would be strange if the suggestion
were right since the majority would then in cases such as MenierJs
case 21 be completely in the saddle. Altematively, it can be said that
such cases turn on mala fides only; or, more desperately, that Cook
v. Deeks (like Burland v. Earle) is only a Privy Council decision after
all! Even if some such interpretation were adopted, however, or
if the test of the old " limitation cases " is made to explain Cook9s
case, we should still be left with the problem of Alexander's case.
In fact it is submitted that only three things are clear, namely that,
up to the Court of Appeal at least, English courts must recognise
(i) that " secret profits " and most other bona fide breaches of
fiduciary duty by directors are ratifiable by the majority; (ii) but
that in some cases such breaches, and certain appropriations of
property by the majority, amount to fraudulent appropriation of the
company's "assets" and are then not ratifiable; but (iii) that
whereas one would expect the line between (i) and (ii), if it could be
drawn, to be the division between cases in which minority corporate
action is possible and those where it is not, Alexander's case suggests
that some breaches open to sanction by disclosure (and, therefore,

19 e.g., in Fine Industrial Commodities v. Powling (supra, n. 9). And see

Zwicker v. Stanbury [1954] 1 D.L.R. 257, where the " profits " included Borne
of the company's own shares, and the directors were held liable by a Btrict
application of Regal, there being much talk of " trusts " on the way. This
could not have been a case where they had appropriated the company's
" property " in the usual sense; action by minority shareholders was, however,
permitted. The decision is not, of course, binding on our courts. But such
deeisions make less attractive distinctions between Regal and Cook v. Deeks
which rely heavily upon the inability of the company in Regal actually to pay
for the Bhares itself.
It must be stressed that nothing said above is meant to deny the distinction
between the proprietary remedy against "trust property" and a personal
remedy of account. But it may be questioned whether the case law has not
unsettled the application of such distinctionB in the area of law which we are
discussing. 20 Gower, op. cit., p. 499. 21 (1874) 9 [Link]. 350.

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 106 The Cambridge Law Journal [I958]

one would have thought, to ratification), allow

in spite of the Rule in Foss v. Harbottle. It is t
which is critical, because, if it is correct, it is t
to the Rule in Foss v. Harbottle which we have discovered; a case
where the majority might ratify, yet the minority can sue. When
future litigation brings this problem again before the eyes of the
Court of Appeal, there will plainly be plenty of room for new inter¬
pretations of the rules of equity to supplement the deficiencies of
the old; and the direction in which the courts move in this area
will provide a clear indication of judicial policy on modern company
law.22 When that time comes, it is respectfully suggested that the
problem of " fraud " would best be approach ed by the court posing
for itself two questions: (i) which " frauds," or breaches of fiduciary
duty, are open to majority ratification?; and (ii) are there cases
where the majority can ratify, but the minority can sue, so as to
constitute real exceptions to the Rule ? Only when those questions
are answered will we know the extent of the Rule in Foss v. Har¬
bottle. It may be that the court will prefer to leave both answ
to general " principles of justice" rather than attempt a r
formula. In that case: " If a case should arise of injury to a
corporation by some 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
. . . 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." 23

ADDENDUM

The appearance of the second edition of Professor G

Law unfortunately coincided with correction of pro
article. References to the first edition were, in consequence, retained in
footnotes. The new edition contains valuable new material and interpretations;
those especially relevant to the matters discuBsed here are on pp. 471-538?
(where there are important new chapters on Directors' Duties, Controllers'
Duties, and Foss v. Harbottle). Two other relevant sections which show fewer
innovations are pp. 120-128 (directors' powers and Shaw v. Shaw) and 251-254
(the contract formed under the articles.) Readers of those passages will see
in what manner the views advanced in this article differ from Professor
Gower's views in this edition. No space is available here for disputation
the differences rest largely upon: (i) a different analysis of cases like Q
Axtens v. Salmon, (see especially p. 537), which leads to a consequen
difference of view about the relationship between ratification, actions to d
personal rights, and the contract formed under the articles; and (ii) a r
different categorization of the cases concerned with " fraud on the minor
in which connection pp. 511-512 contain the core of Professor Gower's pos
on Cook's case, the Regal case and Alexander's case.

22 It will be interesting to see how the courts adapt such policy if recent pro
for extensive " State " shareholding are put into effect.
23 Wigram V.-C, Foss v. Harbottle (1843) 2 Ha. 461, 492.

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