Introduction

• This case deals with the scenario where minority shareholders cannot sue the company.

Facts

• Victoria Park Company was a duly incorporated entity, with Richard Foss and Edward Starkie Turton serving as the two minority shareholders therein.
• The aforementioned minority shareholders instituted legal proceedings against the directors of the company, contending on three distinct grounds.
  • Firstly, they alleged fraudulent transactions leading to the misappropriation of the company's assets.
  • Secondly, they raised concerns regarding the insufficiency of qualified directors within the company to constitute a proper board.
  • Thirdly, they asserted that the company lacked a clerk or office, thereby rendering the shareholders powerless to reclaim property from the directors, necessitating the initiation of legal action.
• The Court, however, dismissed the action on the basis that majority shareholders possessed the authority to ratify said transactions.

Issue Involved

• Whether minority shareholders can file a suit on behalf of the company against the directors?

Observations

• The Court of Chancery rejected shareholders' claims, asserting that individual shareholders or outsiders cannot legally pursue actions against harm done to a corporation.
• The court contended that the company and shareholders are distinct personalities.
• The ruling emphasized that shareholders lack standing to sue because it is the company, not its members, that has suffered the injury; thus, the company is responsible for legal actions against those who misappropriate its assets.
• The court established two pivotal rules.
  • Firstly, the "Proper Plaintiff Rule" mandated that only the company itself can sue if it incurs losses due to fraudulent or negligent acts by directors or outsiders.
    • Members and outsiders are barred from suing due to the "Separate Legal Entity" principle, which views the company as a distinct legal entity capable of suing and being sued independently.
    • Consequently, only the company can initiate legal proceedings to address its losses.
  • Secondly, the "Majority Principal Rule" stipulated that if a majority of members in a general meeting can confirm or ratify alleged wrongs, then court will not intervene in those cases.

Conclusion

• The action of the shareholders was rejected and held that shareholders can bring an action against the company only if the company spent money ultra vires of the company’s transaction.