NAME: SHABA ZARINA MUGENYI

REG NO.: AS19B111/230

ACESS NO.: A86768
YEAR: LLB 3
COURSE UNIT: BUSSINESS ASSOCIATIONS
STREAM: A
LECTURER: KYEYUNYE ALBERT
TUTOR: MR. WANAMBUKO SAMSON
According to Section 1(f) of the Companies Act, a company means a company formed and
registered under the Companies Act. A company has a separate legal personality from the
members who compose it and so it can ‘sue and be sued on its own name’1. Decisions of a
company are taken by the shareholders and the board members represent the majority of the
company2.Each company member is contractually bound by the company’s constitution which
mandates that every member agrees to be bound by the majority’s decisions. Courts have been
reluctant to get involved in the company’s internal management as long as directors are operating
under provisions of Articles. All these above principles coexist in the rule of Foss v Harbottle3.
In Foss v Harbottle4, Richard Foss and Edward Starkie Turton were the two minority
shareholders in the “ Victoria Park Company” which was set up to buy land near the Manchester
in order to transform it into a park, known as Victoria park, Manchester”. Subsequently in 1837,
an act was passed by the parliament through which the company was incorporated for the
purpose of laying out and maintaining the ornamental park within the township of Rusholme.
According to them, the property was misappropriated and wasted and also various mortgages
were given improperly over the property of the company. Both the shareholders decided to take a
legal action on behalf of themselves and the other shareholders or proprietors of shares in the
company, and therefore, filed a claim against the five directors, the solicitor and architects and
also against the several assignees’ of Byrom, Adsheed and Westhead who became bankrupts.
The issues where whether the members of the company can file suit on behalf of the company or
not and can the guilty parties be held accountable for their wrong deeds or not.
In this case, Wigram VC dismissed the claim of the shareholders and held that an individual
shareholder or any outsider of the company cannot take any legal action against the wrong done
to the corporation as both company and its shareholders are considered as the separate legal
entities. The reason that the shareholders of the company cannot sue is that the company is the
one who has actually suffered injury and not its members, so it is on the company to sue or take
any legal action against those members who have misappropriated its property. He followed the
judgments passed in older cases on the unincorporated companies and instead the minorities to
show that they have exhausted all the possibilities or redressal within the internal forum as he has
stated that the courts will not intervene in those cases where majority of the shareholders can
ratify the irregular conducts, but this rule was considered as favorable for the minorities because
it barred them from taking any legal action whenever the alleged misconduct was in law capable
of ratification. Therefore, in effect of the two principle rules where established by court;
First and the foremost rule was the “Proper Plaintiff Rule” which laid down that if any wrong
done to the company or company suffers any loss due to fraudulent or negligent acts of directors
or any other outsider, then in such situation only the company can sue the directors or outsiders
1
Alan Dignam and John Lowry, Company Law (9th edn, OUP 2016) 174
2
‘Majority Rule from Foss v Harbottle’ (Madhurika Ray, September 2015)
https://raymadhurika.wordpress.com/2017/01/07/majority-rule-from-foss-v-harbottle/accessed 20 October 2021
3
Foss v Harbottle [1843] 67 ER 189, (1843) 2 Hare 461
4
Foss v Harbottle [1843] 67 ER 189, (1843) 2 Hare 461
in order to enforce its rights. Whereas, the members of the company or any outsider cannot sue
on its behalf because of the principle of “Separate Legal Entity” which considers company as a
separate legal person from all the members of the company, so, it can sue and be sued in its own
name. This is the only reason why only a company can bring legal action or institute legal
proceedings not any member in order to cover the losses that has been suffered by the company.
A member of the company can take a legal action on its behalf against the wrong doer only if he
is authorized to do so by the board of directors or by an ordinary resolution passed in the general
meeting.
The court laid download the “Majority Principle Rule” which laid down that if the alleged wrong
can be confirmed or ratified by a simple majority of members in the general meeting, thein in
those cases the court will not interfere.
In Ugandan Jurisprudence, the rule in Foss v Harbottle was reiterated in Salim Jamal and Ors V
Uganda Oxygen Ltd and 2 Ors5 where Oder J cited Mor v Wallersteinner6 and held that it’s a
fundamental principle of law that a company is a legal person with a corporate personality
separate and distinct from its shareholders or directors and with its own property rights and
interests to which alone it is entitled. If its defrauded by the wrong door, the company itself is the
one person to sue for the damages.
However, the principle of separate corporate personality has been firmly established in common
law since the case of Salmon V Salmon7, Mr. Salmon was a sole trader of a shoe making
company in England. He then incorporated it by selling it to a separate legal person A Salmon&
Co Ltd. Under the Companies Act 1862(not valid) a company is required a minimum of seven
members of A Salmon and Company Ltd was Salmon himself, his wife and his 5 children. Mr.
Salmon held 20,000 shares whereas the other 6 shareholders had one share each. The company
still owed Mr. Salmon a certain amount of money so he gave them debentures for this amount
which gave him a floating charge entitling him to payment in the event of liquidation. The
company went into liquidation. The issue was whether Mr. Salmon should be made responsible
for the company’s debts and shouldn’t be paid forgetting he only had limited liability and that the
company was a separate legal person. The House of Lords held that; once a company is legally
incorporated, it is an independent person with rights and liabilities of its own and these aren’t
influenced by motives of the people involved in its promotion. The company conducts its own
business as a separate legal person.
It is important to note that the Harbottle Rule has exceptions as discussed hereunder;
The rule in Foss v Harbottle8 is not completely applicable in Uganda and the fights of minority
members are protected by the law. Ugandan courts have demarcated boundaries as to when as to

5
Salim Jamal and Ors V Uganda Oxygen Ltd and 2 Ors (1997)
6
Mor v Wallersteinner (1975)
7
Salmon v Salmon & Co Ltd [1896] UKHL 1, [1897] AC 22
8
Foss v Harbottle [1843] 67 ER 189, (1843) 2 Hare 461
when the act of the company prejudices its interests. In the case of Nahurira v Baguma & 2
Ors9, the court was to the effect that the conduct with which the defendant is charged is an injury
not to the plaintiffs exclusively, it is an injury to the whole corporation. In such cases the rule
that the corporation should sue in its own name and its corporate character. It is not a matter of
course for any individual members of a corporation thus to assume themselves the right of suing
in the name of the corporation.
The “fraud on minority exception” is allowed when two requirements are met. First, there must
be fraud on the minority. Second, the wrong doers must be control of the company. Thus though
this exception, minority shareholders are protected from the fraud or wrongdoing of the
controlling majority shareholders and as such they will not be legally liable.10 In Salim Vs
Uganda Oxygen Ltd11. Oder J held that minority shareholders could bring in their own names
against the company for the director’s wrong doing provided it was impossible to get the
company itself to sue.
Where majority shareholders are using company assets for their own self-gratification. In
the case of Salim Jamal and Ors v Uganda Oxygen and 2 Ors12 it was held by the Ugandan
Supreme Court that where a wrong has been done to a company, the minority shareholders can
bring an action to stop its continuance or to recover the company’s property, damages or
compensation.
Where there is a breach of the Articles of Association. If a breach of Articles takes place, any
aggrieved shareholder can proceed to court notwithstanding that the company itself may have
been prejudiced. In Hickman v Kent13 The court held that upon registration of a company, the
articles of association create a contract between the members and the company, the articles of
association create a contract between the members and the company breach of which entitles a
member to a remedy.
The exception to the rule are where personal rights have been infringed; where the alleged
wrong is ultra vires the corporation or illegal; where the conduct complained of requires a
resolution by a special majority; where what has been done is fraud on the minority.14 The
minority shareholders could only bring an action under one or more of these exceptions to the
rule. In Misango v Musigire15, a general meeting purported to alter Articles of Association to
the detriment of the plaintiff. It was also stated that some 9 shareholders had attended that
meeting and voted in favor of the resolution. Sir Udo Udoma CJ, held that the action could be
cancelled in so far as what was complained of infringed on the rights of the plaintiff.

9
Nahurira v Baguma & 2 0rs (Civil Suit-2014/392) [2015] UGCommC 76
10
https://ir.kiu.ac.ug
11
Salim Jamal and Ors v Uganda Oxygen and 2 Ors (1977)
12
Salim Jamal and Ors v Uganda Oxygen and 2 Ors (1977)
13
Hickman v Kent (1915) 1 Ch 881
14
Edwards v Halliwell (1950) 2 ALL ER 1064, 1066-1069
15
Misango v Musigire (1966) E.A. 390,
 Interest of Justice. Courts are ready to entertain any action of a shareholder which fails outside
the above f four exceptions if it is in the interest of Justice. There must be negligence or breach
of duty of directors and that the breach or negligence must have resulted into a benefit to those
directors at the expense of the company. In the case of Alexander V Automatic Telephone Co16,
the directors issued shares and required some people who took up the shares to make payments
for those shares but did not themselves pay for the shares, they took a minority shareholders
action was instituted against the directors and it was held that the action was maintainable since
the directors were guilty of breach of duty in procuring those contracts and then taking advantage
of them so as to benefit themselves at the expense of the company.
Derivative action. This is a recently developed action where a shareholder who cannot proceed
under common law because of the rule in Foss V Harbottle or under the statute can take a
complaint to court for the wrongs committed in his company. In Kigongo V Mosa Apartments
Ltd 17,to examine the circumstances of the case the court had to refer to Section 24818 where
there is an option of petitioning to court for remedies on ground that the company’s affairs where
being conducted in a manner which is unfairly prejudicial to the interest of its member including
at least the petitioner himself of herself or that any actual or proposed act or omission of the
company including an act or omission on its behalf is or would be prejudicial.
There are other modes of protecting minority shareholders under the Companies Act which
relates to the manner of holding general meetings and extra ordinary meetings. Members have a
right to be given notice in advance of general meetings under Section 12019.This gives a leeway
to any member including a minority shareholder to discuss matters in the form of abuse on the
minority as per Section 131(2)20. Section 141(b)21 allows a member or members of the company
representing not less than one tenth of the total voting rights of all the members having at the
said date a right to vote at general meetings of the company, to convene an extra ordinary
meeting. This is on requisition of all members having at the said date a right to vote at a general
meeting of the company. Failure by a company to hold a meeting in any of the ways prescribed
by the articles or the Companies Act attract court action. In Section 142(1)22, any director or
member of the company is empowered to move to court and get orders compelling a company to
call for such a meeting. Further Section 14123 grants members of a company certain rights that
relate to notice of annual general meeting and resolutions thereof. This is in addition to Section
247(1)24 which gives a minority shareholder the right to apply to a court of law for a company to
be wound up on just and equitable grounds.

16
Alexander v Automatic Telephone Co. [1990] 2 Ch.56, C.A
17
Kigongo V Mosa Apartments Ltd (Company Cause-2015/1) [2016] UGHCCD 11
18
The Companies Act,2012
19
The Companies Act,2012
20
The Companies Act,2012
21
The Companies Act, 2012
22
The Companies Act, 2012
23
The Companies Act, 2012
24
The Companies Act, 2012
Corporate governance. The organization of economic cooperation and development defines
Corporate governance as a set of relationships between a company’s management, its board of
directors, it’s shareholder’s and other stake holders.25 In each country, the corporate governance
structure has certain characteristics or constituent elements, which distinguish it from structures
in other countries. The corporate governance framework should ensure the equitable treatment of
all shareholders, including minority and foreign shareholders. Any changes in voting rights
should be subject to approval by those classes of shares which are negatively affected. Minority
shareholders should be protected from abusive actions by, or in the interest of, controlling
shareholders acting either directly or indirectly, and should have effective means of redress.
Votes should be cast by custodians or nominees in a manner agreed upon with the beneficial
owner of the shares. Processes and procedures for general shareholder meetings should allow for
equitable treatment of all shareholders. Company procedures should not make it unduly difficult
or expensive to cast votes which would hinder the rights of minority shareholders.26
The board of directors’ duties in common law. This includes the duty to exercise care and
skill in the care of management functions27. The second is to use discretionary powers in good
faith and for proper purposes.28Third duty is the fiduciary duty to act loyally in the interest of the
company29.
Capital Markets Authority is the regulator of the capital markets in Uganda. It was set up in
1996 by an Act of parliament. Capital markets are charged with duties of protecting investors
and minority shareholders’ interests30 and where its powers and functions conflict with other
written laws it prevails. Thus majority shareholders listed companies cannot act in a manner that
would injure other shareholders without expecting the Authority to come in.31
In conclusion, minority shareholders are protected by various laws in Uganda for example; the
common law rule in Foss v Harbottle and the exceptions to the rule, which have their
foundations in equity. Various Sections in the Companies Act of 2012. Article 27 of the
Constitution and the Capital Markets Authority.

BIBILIOGRAPHY
STATUSES
The Companies Act,2012

25
The OECD principles of corporate governance, (2004)
26
https://ir.kiu.ac.ug
27
Section 198(b), Companies Act 2012
28
Section 198(c), Companies Act 2012
29
Devine Hutton, Corporate Governance and Director’s Duties: 2003- PLC Global Counsel Handbooks (Practical Law
Company: London, 2002) at 22
30
Section 5, Companies Act,2012
31
https://ir.kiu.ac.ug
CASE LAW.
Foss v Harbottle [1843] 67 ER 189, (1843) 2 Hare 461
Salim Jamal and Ors V Uganda Oxygen Ltd and 2 Ors (1997)
Mor v Wallersteinner (1975)
Salmon v Salmon & Co Ltd [1896] UKHL 1, [1897] AC 22
Nahurira v Baguma & 2 0rs (Civil Suit-2014/392) [2015] UGCommC 76
Salim Jamal and Ors v Uganda Oxygen and 2 Ors (1977)
Hickman v Kent (1915) 1 Ch 881
Edwards v Halliwell (1950) 2 ALL ER 1064, 1066-1069
Misango v Musigire (1966) E.A. 390
Alexander v Automatic Telephone Co. [1990] 2 Ch.56, C.A
Kigongo V Mosa Apartments Ltd (Company Cause-2015/1) [2016] UGHCCD 11
TEXTBOOKS.
Alan Dignam and John Lowry, Company Law (9th edn, OUP 2016) 174
Devine Hutton, Corporate Governance and Director’s Duties: 2003- PLC Global Counsel
Handbooks (Practical Law Company: London, 2002)
ARTICLES.
‘Majority Rule from Foss v Harbottle’ (Madhurika Ray, September 2015)
The OECD principles of corporate governance, (2004)
WEBSITES.
https://raymadhurika.wordpress.com/2017/01/07/majority-rule-from-foss-v-harbottle/accessed
20 October 2021
https://ir.kiu.ac.ug