Fraud on the Minority

The principle in Foss v Harbottle establishes that a company, as a separate legal entity, is the proper claimant for wrongs done to it. Shareholders cannot typically sue for damages affecting the company, even if their share value is indirectly reduced. This principle applies straightforwardly when the company is defrauded by outsiders, but complications arise when insiders, such as directors or controlling shareholders, act in self-interest to the detriment of the company.

If insiders refuse to pursue legal action against themselves for company wrongs, an exception to the rule permits minority shareholders to bring a derivative action. This allows them, with court approval, to act on behalf of the company to remedy the wrongdoing. Such actions are limited to cases where the wrongdoing cannot be ratified by the majority, ensuring minority protection only in irreparable scenarios.

Fraud on the minority, as an exception, addresses inequitable conduct by the majority, often involving personal enrichment at the company’s expense. This concept extends beyond dishonesty to include unconscionable actions harming the minority’s proprietary interests. While some advocate for expanding exceptions to the Foss v Harbottle rule for justice, courts remain cautious, preserving the principle that company decisions lie within its internal management. A strong case is required to invoke these exceptions.

Read a detailed Article on this subject with the Legislation and Cases, browse Irish Legal Guide  or Contact Us for advice below.