Introduction
The principle of majority authority is a core rule of company law. This rule means company decisions are determined by most shareholders, typically through votes at general meetings. Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204 shows how this rule relates to derivative actions and when a minority shareholder may act legally on behalf of a company. This case established clear requirements for starting legal claims for harm caused to a company. The judgment outlines legal criteria for proving a "fraud on the minority" and blocks individual shareholders from pursuing claims that are the company’s responsibility.
The Facts of Prudential v Newman
Prudential Assurance, a minority shareholder in Newman Industries, alleged that Newman’s directors approved a transaction unfairly favoring a company linked to certain directors. Prudential claimed this harmed minority shareholders and sought compensation for Newman Industries. The court needed to determine whether Prudential, as a minority shareholder, could bring the case or if only Newman Industries itself could act.
The Role of Foss v Harbottle
The Court of Appeal in Prudential v Newman relied on the earlier case of Foss v Harbottle (1843) 2 Hare 461. This case introduced the "proper plaintiff rule," requiring the company itself to sue for harm affecting it. Foss v Harbottle also identified exceptions, such as cases involving fraud against minority shareholders where wrongdoers control the company and block legal action.
The Court’s Ruling on the "Fraud on the Minority" Exception
The Court of Appeal in Prudential v Newman held that the "fraud on the minority" exception to Foss v Harbottle applies only in limited circumstances. The court emphasized that harm must primarily affect the company, not just minority shareholders. Wrongdoers must also hold sufficient control to prevent the company from acting. The court concluded Prudential did not meet these standards, upholding majority authority and rejecting the minority shareholder’s claim.
Impact on Corporate Governance and Shareholder Rights
Prudential v Newman reinforced majority authority in corporate decision-making. It confirmed that company actions, including lawsuits, generally depend on directors accountable to most shareholders. This restricts minority shareholders’ ability to start derivative claims, limiting unnecessary litigation. The case balances minority protections with efficient company operations.
Applying Prudential v Newman in Practice
Prudential v Newman remains a leading case in corporate law. It defines criteria for determining whether a minority shareholder may bring a derivative claim. Subsequent rulings have refined the "fraud on the minority" exception, maintaining strict standards to prevent misuse of Foss v Harbottle. Legal advisors must consider Prudential v Newman when assessing derivative claims, evaluating the nature of harm, control by wrongdoers, and the company’s best interests.
Conclusion
Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) is a significant ruling in company law. It upholds majority authority in corporate governance and limits legal actions by minority shareholders. By applying Foss v Harbottle, the Court of Appeal established clear guidelines for resolving corporate disputes. The judgment remains relevant today, shaping how shareholder conflicts are resolved and ensuring decision-making stays with the majority. It discourages excessive litigation while protecting minority rights. The case demands thorough analysis of fraud allegations, ensuring exceptions apply only when strict criteria are satisfied. Prudential v Newman continues to guide shareholder disputes and affirms majority authority in company governance.
