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
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 of members in a general meeting, then the court will not interfere, Edwards v Halliwell  2 All ER 1064 is a UK labour law and UK company law case about the internal organisation of a trade union, or a company, and litigation by members to make an executive follow the organisation’s internal rules
Some members of the National Union of Vehicle Builders sued the executive committee for increasing fees. Rule 19 of the union constitution required a ballot and a two third approval level by members. Instead a delegate meeting had purported to allow the increase without a ballot.
Jenkins LJ granted the members’ application. He held that under the rule in Foss v Harbottle the union itself is prima facie the proper plaintiff and if a simple majority can make an action binding, then no case can be brought. But there are exceptions to the rule. First, if the action is ultra vires a member may sue. Second, if the wrongdoers are in control of the union’s right to sue there is a “fraud on the minority”, and an individual member may take up a case. Third, as pointed out by Romer J in Cotter v National Union of Seamen a company should not be able to bypass a special procedure or majority in its own articles. This was relevant here. And fourth, as here, if there is an invasion of a personal right. Here it was a personal right that the members paid a set amount in fees and retain
Salomon v A Salomon & Co Ltd  AC 22 is a landmark UK company law case. The effect of the Lords’ unanimous ruling was to uphold firmly the doctrine of corporate personality, as set out in the Companies Act 1862, so that creditors of an insolvent company could not sue the company’s shareholders to pay up outstanding debts.membership as they stood before the purported alterations.
Mr Aron Salomon made leather boots and shoes in a large Whitechapel High Street establishment. He ran his business for 30 years and “he might fairly have counted upon retiring with at least £10,000 in his pocket.” His sons wanted to become business partners, so he turned the business into a limited company. His wife and five eldest children became subscribers and two eldest sons also directors. Mr Salomon took 20,001 of the company’s 20,007 shares. The price fixed by the contract for the sale of the business to the company was £39,000. According to the court, this was “extravagent” and not “anything that can be called a business like or reasonable estimate of value.” Transfer of the business took place on June 1, 1892.
The purchase money the company paid to Mr Salomon for the business was £20,000. The company also gave Mr Salomon £10,000 in debentures (i.e., Salomon gave the company a £10,000 loan, secured by a charge over the assets of the company). The balance paid went to extinguish the business’s debts (£1,000 of which was cash to Salomon). Soon after Mr Salomon incorporated his business a series of strikes in the shoe industry led the government, Salomon’s main customer, to split its contracts among more firms (the government wanted to diversify its supply base to avoid the risk of its few suppliers being crippled by strikes).
His warehouse was full of unsold stock. He and his wife lent the company money. He cancelled his debentures. But the company needed more money, and they sought £5,000 from a Mr Edmund Broderip. He assigned Broderip his debenture, the loan with 10% interest and secured by a floating charge. But Salomon’s business still failed, and he could not keep up with the interest payments. In October 1893, Mr Broderip sued to enforce his security.
The company was put into liquidation. Broderip was repaid his £5,000, and then the debenture was reassigned to Salomon, who retained the floating charge over the company. The company’s liquidator met Broderip’s claim with a counter claim, joining Salomon as a defendant, that the debentures were invalid for being issued as fraud. The liquidator claimed all the money back that was transferred when the company was started: rescission of the agreement for the business transfer itself, cancellation of the debentures and repayment of the balance of the purchase money.
Lee v Lee’s Air Farming Ltd  AC 12 is a UK company law case, concerning the veil of incorporation and separate legal personality. The Privy Council reasserted that a company is a separate legal entity, so that a director could still be under a contract of employment with the company he solely owned.
Mrs Lee’s husband formed the company through Christchurch accountants, which worked in Canterbury, New Zealand. It spread fertilisers on farmland from the air, known as top dressing. Mr Lee held 2999 of 3000 shares, was the sole director and employed as the chief pilot. He was killed in a plane crash. Mrs Lee wished to claim under the Workers’ Compensation Act 1922, and he needed to be a ‘worker’, or ‘any person who has entered into or works under a contract of service… with an employer… whether remunerated by wages, salary or otherwise.’ The company was insured (as required) for worker compensation. The Court of Appeal of New Zealand said Lee could not be a worker when he was in effect also the employer. North J said “the two offices are clearly incompatible. There would exist no power of control and therefore the relationship of master-servant was not created.
The Privy Council advised that Mrs Lee was entitled to compensation, since it was perfectly possible for Mr Lee to have a contract with the company he owned.
The company was a separate legal person. Lord Morris of Borth-y-Gest said
It was never suggested (nor in their Lordships’ view could it reasonably have been suggested) that the company was a sham or a mere simulacrum. It is well established that the mere fact that someone is a director of a company is no impediment to his entering into a contract to serve the company. If, then, it be accepted that the respondent company was a legal entity their Lordships see no reason to challenge the validity of any contractual obligations which were created between the company and the deceased…
It is said that the deceased could not both be under the duty of giving orders and also be under the duty of obeying them. But this approach does not give effect to the circumstance that it would be the company and not the deceased that would be giving the orders. Control would remain with the company whoever might be the agent of the company to exercise… There appears to be no great difficulty in holding that a man acting in one capacity can make a contract with himself in another capacity. The company and the deceased were separate legal entities.
Perpetual Real Estate Services, Inc. v. Michaelson Properties
Aaron Michaelson formed Michaelson Properties, Inc in 1981. Aaron was the sole shareholder and the corporation’s president. It was a business for real estate joint ventures. It entered a joint venture with Perpetual Real Estates (forming a partnership called “Arlington Apartment Associates”) to build condominiums. As they were building, further finance was needed. Michaelson Properties Inc could not put up its share, so Perpetual loaned it $1.05m, and got a personal guarantee from Aaron.
The apartments did not turn out to be built that well. Purchasers sued the partnership successfully for $950,000. Perpetual Real Estates paid it off on the partnership’s behalf. Then they sought Michaelson Properties Inc to contribute its share. It did not have the money, and went bust. So they sued Aaron to pay. He argued that Michaelson Properties, Inc was a separate legal person to him, and it was inappropriate to pierce the corporate veil. At first instance the jury held Aaron should pay. Aaron appealed.
JudgmentWilkinson J noted that Virginia law had assiduously upheld the “vital economic policy” of respecting a corporation as a separate legal entity, since it underpinned the operation of vast enterprises. He emphasised that the veil would only be lifted where a defendant exercises “undue domination and control” and uses the corporation as “a device or sham… to disguise wrongs, obscure fraud, or conceal crime.” He said the description of the law which the jury had heard was in a “rather soggy state” and emphasised that it was not enough that “an injustice or fundamental unfairness” would be perpetrated.
“The fact,” he continued, “that limited liability might yield results that seem “unfair” to jurors unfamiliar with the function of the corporate form cannot provide a basis for piercing the veil.” Because there was no evidence that Aaron was attempting to defraud anybody, the veil could not be lifted. There was no “unfair siphoning of funds” when Aaron paid himself a dividend, because distribution was entirely foreseeable when the money was given, and the distribution happened well before any suit was filed. The fact that Aaron had given personal guarantees strengthened the corporate veil presumption, because the transactions recognized it existed.
Veil lifting by the courts
(1) Where company is a Sham or Façade
Adams v Cape Industries
English law has suggested a court can only lift the corporate veil when (1) construing a statute, contract or other document; (2) if a company is a “mere façade” concealing the true facts, or (3) when a subsidiary company was acting as an authorised agent of its parent, and apparently not so just because “justice requires” or to treat a group of companies as a single economic unit, in the case of tort victims, the House of Lords suggested a remedy would in fact be available. In Lubbe v Cape plc Lord Bingham held that the question of proving a duty of care being owed between a parent company and the tort victims of a subsidiary would be answered merely according to standard principles of negligence law: generally whether harm was reasonably foreseeable.
the decision in Yukong Line Ltd of Korea v Rendsburg Investment Corpn of Liberia (No 2)  2 BCLC 485 was timely in pointing out that creditors have no standing, individually or collectively to bring an action in respect of any such duty. Toulson J, held that a director of an insolvent company who, in breach of duty to the company, transferred assets beyond the reach of its creditors owed no corresponding fiduciary duty to an individual creditor of the company. The appropriate means of redress was for the liquidator to bring an action for misfeasance (the Insolvency Act 1986, section 212). Notwithstanding the logistical issue of locus standi raised by Toulson J. the question of directors’ duties to creditors again emerged in two recent decisions of the Companies Court
(2) Where the company is used for a fraudulent purpose
Sri Jaya Berhad v RHB Berhad
The courts in Singapore thus far have been reluctant to pierce the corporate veil when called upon to do so and indicated that they would only exercise their power when called upon to do so sparingly .
Re Darby, ex parte Brougham  1 KB 95 is a UK company law case concerning piercing the corporate veil. It is a clear example of the courts ignoring the veil of incorporation where a company is used to conceal a fraudulent operation.
Darby and Gyde were undischarged bankrupts with convictions for fraud. They registered a company called City of London Investment Corporation Ltd (LIC) in Guernsey. It had seven shareholders and issued £11 of its nominal capital of £100,000. Darby and Gyde were the only directors and entitled to all profits. The company purported to register and float a company in England called Welsh Slate Quarries Ltd, for £30,000. It bought a quarrying licence and plant for £3500 and sold this to WSQ for £18,000. The prospectus invited the public to take debentures in WSQ. It stated the name of LIC, but not Darby and Gyde, or the fact that they would receive the profit on sale. WSQ failed and went into liquidation. The liquidator claimed Darby’s secret profit, which he made as a promoter. Darby objected that the LIC and not him was the promoter.
JudgmentPhillimore J rejected the argument. LIC ‘was merely an alias for themselves just as much as if they had announced in the Gazette that they were in future going to call themselves ‘Rothschild & Co’. They were ‘minded to perpetrate a very great fraud’
Creation of Agency
(1) Actual Authority
The doctrine of estoppel comes into play here to prevent a principal from asserting to a third party that the agent has authority when in fact he does not, and then subsequently the principal seeks to renege on an agreement on the basis that the agent never had actual authority. In law, apparent authority refers to the authority of an agent as it appears to others, and it can operate both to enlarge actual authority and to create authority where no actual authority exists.
The law relating to companies and to ostensible authority are in reality only a sub-set of the rules relating to apparent authority and the law of agency generally, but because of the prevalence of the issue in relation to corporate law (companies, being artificial persons, are only ever able to act at all through their human agents), it has developed its own specific body of case law. However, some jurisdictions use the terms interchangeably. In Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd  2 QB 480 the director in question managed the company’s property and acted on its behalf and in that role employed the plaintiff architects to draw up plans for the development of land held by the company. The development ultimately collapsed and the plaintiffs sued the company for their fees.
The company denied that the director had any authority to employ the architects. The court found that, while he had never been appointed as managing director (and therefore had no actual authority, express or implied) his actions were within his ostensible authority and the board had been aware of his conduct and had acquiesced in it. Diplock LJ identified four factors which must be present before a company can be bound by the acts of an agent who has no authority to do so; it must be shown that: 1. a representation that the agent had authority to enter on behalf of the company into a contract of the kind sought to be enforced was made to the contractor;
2. such a representation was made by a person or persons who has ‘actual’ authority to manage the business of the company, either generally or in respect of those matters to which the contract relates; 3. the contractor was induced by such representation to enter into the contract, i.e. that he in fact relied upon it; and 4. under its memorandum or articles of association the company was not deprived of the capacity either to enter into a contract of the kind sought to be enforced or to delegate authority to enter into a contract of that kind to an agent. The agent must have been held out by someone with actual authority to carry out the transaction and an agent cannot hold himself out as having authority for this purpose.
The acts of the company as principal must constitute a representation (express or by conduct) that the agent had a particular authority and must be reasonably understood so by the third party. In determining whether the principal had represented his agent as having such authority, the court has to consider the totality of the company’s conduct. The most common form of holding out is permitting the agent to act in the conduct of the company’s business, and in many cases this is inferred simply from allowing the agent to use a particular title, such as ‘finance director’.
The apparent authority must not be undermined by any limitations on the company’s capacity or powers found in the memorandum or articles of association, although in many countries, the effect of this is reduced by company law reforms abolishing or restricting the application of the ultra vires doctrine to companies. However, statutory reforms do not affect the general principle that a third party cannot rely upon ostensible authority where it is aware of some limitation which prevents the authority arising, or is put on enquiry as to the extent of an individual’s authority. In some circumstances, the very nature of a transaction would be held to put a person on enquiry.
Lord Suirdale (Richard Michael John Hely-Hutchinson) sued Brayhead Ltd for losses incurred after a failed takeover deal. The CEO, chairman and de facto managing director of Brayhead Ltd, Mr Richards, had guaranteed repayment of money, and had indemnified losses of Lord Suirdale in return for injection of money into Lord Suirdale’s company Perdio Electronics Ltd. Perdio Ltd was then taken over by Brayhead Ltd and Lord Suirdale gained a place on Brayhead Ltd’s board, but Perdio Ltd’s business did not recover. It went into liquidation, Lord Suirdale resigned from Brayhead Ltd’s board and sued for the losses he had incurred. Brayhead Ltd refused to pay on the basis that Mr Richards had no authority to make the guarantee and indemnity contract in the first place. Roskill J held Mr Richards had apparent authority to bind Brayhead Ltd, and the company appealed.
That has been done in the judgments of this court in Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd. It is there shown that actual authority may be express or implied. It is express when it is given by express words, such as when a board of directors pass a resolution which authorises two of their number to sign cheques. It is implied when it is inferred from the conduct of the parties and the circumstances of the case, such as when the board of directors appoint one of their number to be managing director. They thereby impliedly authorise him to do all such things as fall within the usual scope of that office. Actual authority, express or implied, is binding as between the company and the agent, and also as between the company and others, whether they are within the company or outside it.
Ostensible or apparent authority is the authority of an agent as it appears to others. It often coincides with actual authority. Thus, when the board appoint one of their number to be managing director, they invest him not only with implied authority, but also with ostensible authority to do all such things as fall within the usual scope of that office. Other people who see him acting as managing director are entitled to assume that he has the usual authority of a managing director. But sometimes ostensible authority exceeds actual authority.
For instance, when the board appoint the managing director, they may expressly limit his authority by saying he is not to order goods worth more than £500 without the sanction of the board. In that case his actual authority is subject to the £500 limitation, but his ostensible authority includes all the usual authority of a managing director. The company is bound by his ostensible authority in his dealings with those who do not know of the limitation. He may himself do the “holding-out.” Thus, if he orders goods worth £1,000 and signs himself “Managing Director for and on behalf of the company,” the company is bound to the other party who does not know of the £500 limitation
(2) Apparent Authority
An ‘apparent’ or ‘ostensible’ authority, on the other hand, is a legal relationship between the principal and the contractor created by a representation, made by the principal to the contractor, intended to be and in fact acted upon by the contractor, that the agent has authority to enter on behalf of the principal into a contract of a kind within the scope of the ‘apparent’ authority, so as to render the principal liable to perform any obligations imposed upon him by such contract.
To the relationship so created the agent is a stranger. He need not be (although he generally is) aware of the existence of the representation but he must not purport to make the agreement as principal himself. The representation, when acted upon by the contractor by entering into a contract with the agent, operates as an estoppel, preventing the principal from asserting that he is not bound by the contract. It is irrelevant whether the agent had actual authority to enter into the contract.In ordinary business dealings the contractor at the time of entering into the contract can in the nature of things hardly ever rely on the ‘actual’ authority of the agent. His information as to the authority must be derived either from the principal or from the agent or from both, for they alone know what the agent’s actual authority is.
All that the contractor can know is what they tell him, which may or may not be true. In the ultimate analysis he relies either upon the representation of the principal, that is, apparent authority, or upon the representation of the agent, that is, warranty of authority.The representation which creates ‘apparent’ authority may take a variety of forms of which the commonest is representation by conduct, that is, by permitting the agent to act in some way in the conduct of the principal’s business with other persons. By so doing the principal represents to anyone who becomes aware that the agent is so acting that the agent has authority to enter on behalf of the principal into contracts with other persons of the kind which an agent so acting in the conduct of his principal’s business has usually ‘actual’ authority to enter into.| | First International v Hungarian International Bank|
An agent who had no apparent authority to conclude a transaction might nevertheless have apparent authority to make representations of fact concerning it, such as the fact that his principal had given the necessary approval for it. The Court of Appeal dismissed an appeal by the defendant, Hungarian International Bank Ltd, and upheld a decision of Judge Michael Kershaw QC, sitting as a deputy High Court judge in the Commercial Court on 23 October 1991, giving judgment for the plaintiff, First Energy (UK) Ltd. The case concerned an alleged contract under which the defendant was to provide the plaintiff with business finance.
One of the issues was whether the defendant’s agent had ostensible authority to communicate the offer upon which the contract was based. The judge held that he did, and that the plaintiff accepted that offer, so creating the contract. Mary Arden QC and Michael Todd (Chaffe Street, Manchester) for the defendant; Giles Wingate-Saul QC and Andrew Sander (Davies Arnold Cooper) for the plaintiff. LORD JUSTICE STEYN said a theme that ran through the law of contract was that the reasonable expectations of honest men must be protected. It was not a rule or principle of law.
But if the prima facie solution to a problem ran counter to reasonable expectations of honest men, this criterion sometimes required a rigorous re-examination of the problem to ascertain whether the law did compel demonstrable unfairness. In the present case, if their Lordships were to accept the implications which the defendant had placed on observations of the House of Lords in Armagas Ltd v Mundogas SA (1986) 1 AC 717, it would frustrate the reasonable expectations of the parties.
The plaintiff’s case was that the defendant’s agent, while not authorised to enter into the transaction, did have ostensible authority to communicate his head office’s approval of the financing facility. He had sent the plaintiff a letter to this effect, which the judge held amounted to an offer capable of acceptance by the plaintiff. The law recognised that in modern commerce an agent who had no apparent authority to conclude a particular transaction might sometimes be clothed with apparent authority to make representations of fact.
A decision that the agent did not have such authority would defeat the reasonable expectation of the parties. It would also fly in the face of the way in which in practice negotiations were conducted between trading banks and trading customers who sought commercial loans.
The agent whose act is sought to be ratified must have purported to act for the principal: Keighley, Maxstead & Co v Durant [1901, UK], endorsed by Crowder v McAlister [1909, Qld] per Cooper CJ – “There can be no ratification of a contract by a person sought to be made liable as a principal, unless the person who made the contract professed to be acting on behalf of the other at the time.”
Keighley, Maxstead & Co v Durant [1901, UK]: An agent had authority to purchase grain up to a particular price. Ended up contracting to pay too much, KMCo first decide to ratify, then change their minds. Problem was that the contract was in the name of the agent and of D. D sues, but loses.
a. At the time the act was done the agent must have had a competent principal: Corporations Law – s 131(1). b. At the time of ratificationthe principal must be legally capable of doing the act himself. c. The principal must have full knowledge of all material facts relating to the act to be ratified. Ratification must take place within a reasonable time of the agent’s act unless the contract stipulates another more specific timeframe. The principal has no right to see if market conditions improve, or similar, before ratifying: Prince v Clark (1823).
Ratification: entering into an unauthorised contract The principles of ratification Where an agent enters into an unauthorised contract, the principle may be happy to adopt it. This can be done by the process of ratification. For ratification to be available, however, the agent must purport to act on behalf of a principle, the principle must be in existence at the time of the contract, and the principle must have capacity. The agent must purport to act on behalf of a principle
Because the agent must purport to be acting on behalf of another, ratification is not available where the principle is undisclosed. The third party must know that there is, or is supposed to be, a principle in the background. If the third party thinks that the agent is acting on his or her own account, no later ratification will be possible. The principle must be in existence at the time of the contract
The second requirement for ratification, that is, that the principle is in existence at the time of ratification, arises mainly in relation to contracts made on behalf of new companies which are being formed. In Kelner v Baxter, it was held that if the company was not existence (in that it had not been incorporated) at the time of the contract, it could not later ratify the agreement. The purported ‘agents’, the promoters of the company, were therefore personally liable. Such personal liability is now imposed by statute, by virtue of s 36C of the Companies Act 1985. The principle must have capacity
The final requirement is that the principle must have capacity. There are in theory two aspects to this rule. The first rule is that the principle must have capacity to make the transaction at the time of the contract. This has most obvious relevance to minors, who want to ratify after reaching majority. It could also apply to contracts made outside the powers of a company. The second aspect is that the principle must have capacity at the time of ratification.
This was applied in Grover and Grover Ltd v Matthews. A contract of fire insurance was purported to be ratified after a fire had destroyed the property which was the subject of the insurance. It was held that this was ineffective because at the time of the purported ratification the principle could not have made the contract himself (because the property no longer existed). ‘Capacity’ is thus being given a rather broader meaning than usual, to cover the issue as to whether the principle would have in practice been able to make the contract in question. Ratification is retrospective in its effect, and the original contract must be treated as if it had been authorised from the start. This was confirmed by the Court of Appeal in Presentaciones Musicales SA v Secunda.
The implications of this rule are clear from the decision in Bolton Partners v Lambert. Bolton Partners owned a factory, which Lambert offered to buy. This offer was accepted by the managing director, though in fact he had no authority to do this. On 13 January, there was a disagreement, and Lambert withdrew his offer. On 17 January, Bolton Partners started proceedings for breach of contract. On 28 January, the Board of Directors of Bolton Partners ratified the actions of the managing director. Lambert argued that this ratification came too late, but the Court of Appeal held that it had retrospectively validated the original contract, and that Lambert’s attempt to withdraw was therefore ineffective.
INDOOR MANAGEMENT RULE and LIABILITY OF CRIMINAL and TORTOUS ACTS
Royal British Bank v Turquand (1856) 6 E&B 327 is a UK company law case that held people transacting with companies are entitled to assume that internal company rules are complied with, even if they are not. This “indoor management rule” or the “Rule in Turquand’s Case” is applicable in most of the common law world. It originally mitigated the harshness of the constructive notice doctrine, and in the UK it is now supplemented by the Companies Act 2006 sections 39-41.