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...