Company Law Assignment

Pages: 7 (2362 words) Published: March 3, 2015


NAME : SAMUEL PATIENCE

STUDENT NUMBER: N01310247W

PROGRAM : FISCAL STUDIES

DEPARTMENT : FINANCE

COURSE : COMPANY LAW 2 CIN 2206

LECTURER : MR MAKUYANA

QUESTION

“By becoming a shareholder in a company, a person undertakes by his contract to be bound by the decisions of the prescribed majority of shareholders, if those decisions on the affairs of the company are arrived at in accordance with the law, even when they adversely affect his own rights as a shareholder.” Per Trolip JA and Ors v President Brand Gold Mining Co. 1969 (3) SA 629(A). Give an assessment of the above statement in light of any applicable principles of common law under the law of companies. (25) It can be reasonably assumed that since all the shareholders in a company have one objective which is to maximize the value of their investment, they all agree to one option when making financial decisions. This is why there is the majority shareholder rule. The judgment given in the case of Per Trolip JA in Samuel and Ors v President Brand Gold Mining Co. 1969 (3) SA 629 (A) is in support of this majority rule. In this case law the judgment was,” By becoming a shareholder in a company, a person undertakes by his contract to be bound by the decisions of the prescribed majority of shareholders, if those decisions on the affairs of the company are arrived at in accordance with the law, even where they adversely affect his own rights as a shareholder.” However there are exceptions to this rule because sometimes the minority is oppressed, so the exceptions to the majority rule are there to protect the minority.

The majority shareholder rule means that the decisions and choices of the majority will always prevail over those of the minority. This means that the minority is obliged to subject itself to the decisions of the majority as long as they are lawful and as long as the majority acts lawfully the court will refuse to interfere in the conduct of the company affairs at the instance of the minority. This was shown in the case of Levin vs felt and tweeds (pvt) ltd where the court stated that it is not part of the business of the court of justice to determine the wisdom of the course adopted by company in the management of its own affairs. It is also stated that if the decision in question is one which the company could have ratified in a general meeting, the court will be bound by the majority decision and will adopt a hands off approach.

According to company law principle, the statement in the preceding paragraph greatly supports the principle of majority rule. This same principle was laid down in the case of Foss vs Harbottle. In that case two shareholders of the Victoria park company alleged against five directors of the company 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 has been wronged by its directors it is only the company which can take action against them.

There are various justifications of the Foss vs Harbottle rule. The first one is the "proper plaintiff rule" which is that a wrong done to the company may be vindicated by the company alone. This rule has the effect of recognizing the separate legal personality of the company. A company is able to sue and be sued in its own name in all cases. Allowing other people to sue on behalf of the company has the effect of limiting the capacity of a company as a separate legal persona hence the rule of Foss vs Harbottle prevents that. The duties of the directors are owed to the company and not to the individual shareholders so it is the company which can sue.

The second justification is that of the "majority rule principle" which states that if the alleged wrong can be...

References: 1) Dr Udo C Braendle: www.univie.ac.at/...506/CG/shareholder-protection.pdf.
2) www.kenyalawresourcescenter.org/2011/07/majority-rule-foss-vs-harbottle-1843.html
3) www.mondaq.com/x/134566
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