Derivative Actions And Exceptions To Foss v Harbottle

Introduction

As a general rule, Irish law does not permit a shareholder to bring an action on behalf of the company in which it holds shares and treats the company itself as the proper plaintiff. This originates from Foss v Harbottle1 and derives from the fact that a company has separate legal personality. However, through four recognised exceptions to that rule, a shareholder can bring proceedings on behalf of the company in a derivative action. In Connolly v Seskin Properties Limited2 Judge Kelly examined the rule in Foss v Harbottle and whether a fifth exception existed – and, if so, on what terms.

Rule and its exceptions

The Foss v Harbottle rule reflects the principle that where damage is done to the company itself, it is the company that should bring any claim:

"the proper plaintiff in an action in respect of a wrong alleged to be done to a company or association of persons is, prima facie, the company or association of persons itself... the matter relied on as constituting the cause of action shall be a cause of action properly belonging to the general body of corporators or members of the company or association as opposed to a cause of action which some individual member can assert in his own right."3

As stated above, there are exceptions to the rule and, in order for a minority shareholder to bring a derivative action on behalf of the company, it must show "(i) that the company is entitled to the relief claimed and (ii) that the action falls within the proper boundaries of an exception to the rule in Foss v. Harbottle".4 Under Irish law, the intended plaintiff must show "a realistic prospect of success"5 in that regard in order to be given leave by the court to bring a derivative action.

In Fanning v Murtagh6 Judge Irvine identified that, as a matter of Irish law, there are four recognised exceptions to the Foss v Harbottle rule, which she summarised as comprising the following categories of wrongdoing:

"(a) an act which is illegal or ultra vires (sic) to the company;

(b) an irregularity in the passing of a resolution which requires a qualified majority;

(c) an act purporting to abridge or abolish the individual rights of a member;

(d) an act which constitutes a fraud against the minority and the wrongdoers are themselves in control of the company."

In the case at hand, the judge recorded that the applicant had invited him to accept a fifth exception, relying on a Supreme Court of Western Australia decision7 and an Irish High Court...