Duhaime's Law Dictionary

Rule in Foss v Harbottle Definition:

A rule of corporations law: shareholders have no separate cause of action in law for any wrongs which may have been inflicted upon a corporation.

So named in reference to the 1843 case in which the rule was developed.

In Hercules Management, the rule was articulated by Justice Laforest of Canada's Supreme Court as follows:

"The rule in Foss v. Harbottle provides that individual shareholders have no cause of action in law for any wrongs done to the corporation and that if an action is to be brought in respect of such losses, it must be brought either by the corporation itself (through management) or by way of a derivative action."

In Prudential Assurance, the English Court of Appeal wrote:

"The rule (in Foss v. Harbottle) is the consequence of the fact that a corporation is a separate legal entity. Other consequences are limited liability and limited rights. The company is liable for its contracts and torts; the shareholder has no such liability. The company acquires causes of action for breaches of contract and for torts which damage the company. No cause of action vests in the shareholder. When the shareholder acquires a share he accepts the fact that the value of his investment follows the fortunes of the company and that he can only exercise his influence over the fortunes of the company by the exercise of his voting rights in general meeting. The law confers on him the right to ensure that the company observes the limitations of its memorandum of association and the right to ensure that other shareholders observe the rule, imposed on them by the articles of association. If it is right that the law has conferred or should in certain restricted circumstances confer further rights on a shareholder the scope and consequences of such further rights require careful consideration."

As Beck wrote in regards to the rule of Foss v Harbottle:

"If the corporation is a legal person separate from its members, it follows that for a wrong done to it the corporation itself is the only proper plaintiff."


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