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Abstract
The principle of the supremacy of the majority is essential to the proper functioning of companies. Members of a company are bound by the decisions of the prescribed majority of members who are present and vote at a general meeting, provided that these decisions are arrived at in accordance with the law-even if the decisions adversely affect the rights of the minority members.
In order to establish whether it was arrived at in accordance with the law and is therefore binding on the minority, a resolution must be tested twice; firstly according to the technical rules relating to the existence of the power to pass the resolution and to the convening of and procedure at general meetings; secondly according to equitable rules in order to limit abuse by the majority. This dissertation deals with the technical or formal requirements for valid resolutions and the equitable restraints on the exercise of majority power.
Normally the validity of resolutions is questioned not by the company but by minority members. Attention is therefore also focused on the access by an individual member or group of members to the courts in the case of irregularities or abuse of power.
In Chapter II the technical irregularities which may render resolutions of the general meeting invalid are analysed with special reference to an individual member's right to complain of an irregularity in the conduct of corporate affairs. Special consideration is given to the problems caused by the approach adopted in MacDougall v Gardiner ([18751 1 Ch D 13 [CAl) and a number of similar cases. This series of cases, relatively small in number, purports to deny the member's right to have the articles observed on all procedural matters. According to these cases certain irregularities in general meetings pertaining to a breach of the company's constitution may be regarded as ratifiable by a majority in general meeting, thereby excluding the personal action by an aggrieved member. The courts have been unsuccessful to draw a line between ratifiable and non-ratifiable irregularities. The field has proved a happy hunting-ground for commentators wishing to chase distinctions.
This approach is untenable. It is submitted that a failure to observe procedural requirements prescribed by the company's constitution, the Companies Act and common law should always give an individual member the right to sue. Furthermore, the view that a member has a general right to enforce the company's constitution is supported. There are no sufficiently compelling reasons for denying members their right to challenge the validity of resolutions passed at a general meeting on the grounds of failure to comply with the technical rules set out in the Act, common law and company's constitution. Contrary to general belief, this approach will not cause a flood of litigation. The non-compliance of these rules constitutes an infringement of a member's personal or individual rights and therefore the so-called Rule of Foss v Harbottle which is based on the ratifiability of the irregularity complained of, does not apply. However, not every irregularity in general meetings will necessarily entail invalidity. It is the duty of the court to establish whether the alleged irregularity in the conduct of corporation affairs did occur and whether the technical error renders the challenged resolutions invalid.
The principle of unanimous assent is also discussed in Chapter II.
Chapter III considers the equitable restraints on the exercise of majority power. It is generally accepted that a formally regular exercise of majority power could be set aside if the majority abuse their powers vis-à-vis the minority or the company. However, a considerable amount of uncertainty concerning the contents and application of the equitable limitations still prevails. The problem of the scope of the constraints on the exercise of majority power in general meetings is one that bristles with difficulties. Furthermore, there is the apparent conflict between the established principle that members are free to vote in their own interests and the equitable restraints on the exercise of majority power. It is submitted that the rule that a member may vote as he pleases has no genuine effectiveness or usefulness.
The fact that a resolution of a general meeting prejudices or diminishes some of the rights of minority members is not in itself a ground for attacking the validity of the resolution. Under the common law the validity of a resolution which causes prejudice to members can only be challenged on the basis that the majority did not cast their votes bona fide in the interests of the company. Generally, if a resolution is passed by the required majority bona fide for the benefit of the company, it cannot be said to amount to a fraud on the minority. The precise content and extent of the principle •bona fide in the interests of the companyu has not yet been comprehensively defined.
Athough there is some controversy among the writers as to whether the courts should apply an objective or subjective standard, it is generally accepted that the courts follow a subjective approach - a resolution will only be set aside at the instance of the prejudiced minority if it is established that the majority supporting it did not consider it to be in the interests of the company. However, it appears from the cases that the test is not entitely subjective. The fact that no reasonable man could really consider a resolution for the benefit of the company affords cogent, if not irrebuttable, evidence of bad faith. In this dissertation an objective approach is advocated.
The view that the application of the principle ubona fide in the interests of the company is confined to alterations of the company's constitution which causes prejudice to members is unacceptable. It is submitted that it is the alteration or variation of the rights of members which is the proper criterion for the application of the principle in question. The words Ovariationo and alteration ought to be used in a wider connotation than the extremely narrow interpretation given tp it in the so-called class rights cases.
Attention is also paid to section 252 of the Companies Act 61 of 1973, which introduces a remedy for unfairly prejudicial treatment of members. The statutory remedy is compared and contrasted with the common law restraints on majority power vis-â-vis minority members. It is suggested that a resolution taken by majority vote will not be set aside under section 252 if it could reasonably have been passed for the benefit of the company (or if there appears to be a reasonable business justification for the resolution). It is here that a possible significant difference with the common law remedy may be discerned. Under section 252 the result of the majority's conduct and not the motive of the majority is of primary importance. The statutory remedy has not entirely removed the necessity for resorting to the common law. The statutory remedy cannot for instance have application in respect of threatened wrongs or acts to be done in future. Finally, the application of section 252 is not confined to resolutions passed at general meetings and the remedy or relief available under this provision is not restricted to the setting aside or invalidation of resolutions. The Court has a wide discretion with regard to the orders that can be given under section 252. The statutory remedy offers a more acceptable solution than the common law remedy. This becomes especially apparent when the nature of the actual relief available under the statutory provision is examined. The fact that the courts are empowered to grant relief that does not necessarily undermine or defeat majority rule should have an important bearing on the protection of minority members.
The traditional and most widely held view relating to the position where the majority use their voting power in an unconscionable manner vis-à-vis the company, is that a resolution constitutes a fraud on the company, and is therefore invalid, in the following circumstances: (i) where the directors have acted fraudulently or in violation of their fundamental duty to act bona fide in the interests of the company and the majority use their voting power to ratify the wrongful act; (ii) where the majority members, acting in their capacity as members, expropriate the company's property or ratifiy a misappropriation by directors of the company's property. The common law limitations on majority power vis-â-vis the company are extensively investigated in this thesis.
The defects and flaws in the common law position and section 266 of the Companies Act 61 of 1973 are also considered and analysed.
The major defects may be summarised as follows:
(i) Uncertainty exists as to the contents and application of the equitable restraints on majority power vis-a-vis the company and the position of the company is not effectively safeguarded under the traditional exposition of the relevant common law principles. It is for example within the power of majority members to ratify or excuse negligent conduct by the directors of a company provided the said breach of duty did not benefit the directors. It is suggested that the application of the general principle that the majority must exercise their powers bona fide for the benefit of the company could also in this respect solve many of the problems experienced - especially if an objective standard is applied. Cases involving ratification of fraudulent conduct by directors or an expropriation of company property afford strong but not conclusive evidence of the fact that a reasonable man would not consider ratification to be in the interests of the company. The ratification of breaches of directors' duties other than the above two wrongs, and all other resolutions that affect the interests of the company should measure up to the objective yardstick of reasonable business justification.
(ii) Information regarding company matters is normally in the hands of the controllers who are usually the wrongdoers or their sympathizers. Therefore it could be very difficult, if not impossible, to establish whether a resolution of a general meeting amounts to a fraud on the company.
(iii) The form of the common law derivative action is both complex and cumbersome. Section 266 makes an inroad upon majority rule for, in order to initiate proceedings under the statutory provision, the question whether the ratification of a wrong by a director or officer by majority resolution at a general meeting constitutes a fraud on the company, is irrelevant. Section 266 does not, however, replace the common law. The equitable restraints on the exercise of majority power and/or the common law derivative action will still be important in instances where a wrong by a director or officer and the ratification thereof at a general meeting are not at stake or when a company itself institutes legal proceedings.
Chapter IV contains a comparative analysis and evaluation of the company laws of Germany, the Netherlands and the United States of America relating to the validity of decisions taken by members of companies. The position in English law is considered and discussed together with the South African law.
