When people first start a company, they think ownership equals control.
“If I own shares,” they say, “then I can decide what happens.”
But company law doesn’t work like that.
Owning part of a company doesn’t always mean you can act for it — not even when something unfair or illegal happens.
Imagine you own 40% of a tech startup. One day you discover that one of the directors used company funds for personal travel. You’re furious.
Your first instinct? Sue them.
But your lawyer calmly says:
“You can’t sue them personally. Only the company can.”
That’s when most people realize for the first time that a company is not its owners — it’s a separate legal person.
1. The company as a separate person
This idea is one of the foundations of modern business law.
When a company is formed — whether it’s a private limited company in the UK, an LLC in the US, or a Pte Ltd in Singapore — the law gives it a legal personality.
That means:
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It can own property.
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It can enter contracts.
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It can sue and be sued.
But most importantly:
The company’s money, rights, and obligations belong to the company — not directly to its shareholders.
So if a director damages the company, the company is the victim — not you personally.
This concept protects investors, limits liability, and gives the company independence.
It’s what allows modern capitalism to function: people can invest in risky ventures without putting their entire personal wealth at risk.
But it also creates a strange side effect — the company becomes a kind of “fictional person” that can only act through its organs, like directors or shareholders.
That’s where the real legal questions begin.
2. The logic of “The Rule in Foss v Harbottle”
In the 19th century, a famous English case, Foss v Harbottle (1843), asked a simple but powerful question:
“If a company suffers harm, who has the right to bring the claim — the shareholders or the company itself?”
The court’s answer became one of the cornerstones of company law:
“The proper claimant is the company itself.”
This means that only the company, as a separate legal person, can take action against those who wrong it — including its directors.
Why? Because the directors owe their duties to the company, not to individual shareholders.
If each shareholder could sue every time they disagreed with a decision, business life would collapse into endless litigation.
So the law decided: one voice, one claimant — the company.
That principle became known as the “proper claimant rule.”
3. Why this rule matters in real life
Let’s bring this into a modern example.
Say you’re one of five co-founders of a gaming company called PixelVerse Studios.
The board has three directors:
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Amina, the CEO
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Luke, the CFO
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You, as CMO
One day, you find out that Luke used company funds to invest in another business secretly owned by him. That’s clearly a breach of duty.
You want to sue Luke personally.
But the lawyer tells you:
“You can’t. The damage was to PixelVerse Studios, not to you as a shareholder.”
This feels unfair — after all, it’s your money too. But legally, the harm affected the company’s value as a whole.
You may feel the loss through a drop in share value, but that doesn’t give you the right to act directly.
Only the company can take that step.
This prevents hundreds of conflicting lawsuits.
Imagine if 100 shareholders each filed separate claims — the chaos would destroy the company faster than any director ever could.
So the rule is practical. It’s about order, stability, and consistency.
4. The idea of collective decision-making
But here’s the catch:
If the company must act — who decides for the company?
Usually, the board of directors decides whether to sue.
But what if the directors themselves are the ones who caused the harm?
That’s the paradox.
In theory, the company should protect itself.
In practice, the people controlling it may refuse to act.
This is one of the biggest weaknesses of the Foss v Harbottle rule — it assumes that those in control will act in the company’s best interests.
But that’s not always true.
If the board refuses to take action, the only people left who care are often minority shareholders — those with little voting power.
Yet they can’t act directly.
That’s where modern law developed special solutions, like derivative actions, where shareholders can go to court on the company’s behalf — but only with permission, to avoid abuse.
5. Why the rule makes sense (from a business point of view)
It’s easy to see Foss v Harbottle as a technical or unfair rule, but there’s deep business logic behind it.
The law assumes that companies should manage their own problems internally.
This is part of the broader principle called “corporate autonomy” — the idea that a company, like a small society, should govern itself without outside interference.
Let’s compare it to real life:
Just as courts don’t jump into every political disagreement, they also avoid getting involved in every internal business dispute.
The law prefers that companies handle things through internal voting, meetings, and majority decisions.
This system — though imperfect — keeps businesses functional, reduces court congestion, and prevents personal emotions from turning into legal wars.
6. The rise of “majority rule”
The rule in Foss v Harbottle naturally led to another powerful concept: majority rule.
In simple terms:
Whoever owns more shares gets to decide what the company does.
That includes whether to start a lawsuit, replace directors, or approve major transactions.
This principle reflects democracy in business — though it’s a limited one.
It’s not “one person, one vote.”
It’s “one share, one vote.”
The more you invest, the more power you have.
This makes sense from an investor’s point of view — those who risk more should have more control.
But it also creates a constant tension between majority and minority shareholders.
7. The problem of abuse
Majority rule sounds fair until you realize how easily it can be abused.
Imagine the majority shareholders are close friends with the directors.
If those directors breach their duties, the majority might simply vote to “forgive” them.
The minority — even if right — would have no power to stop it.
They can’t sue directly, because the proper claimant is the company.
And the company is controlled by the same people who caused the problem.
It’s a classic trap — power without accountability.
That’s why modern corporate law in almost every major jurisdiction has developed safeguards:
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Derivative actions (UK, EU, India, Singapore)
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Oppression remedies (Canada, Malaysia)
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Shareholder class actions (US)
These are mechanisms that give minority investors limited power to fight back when the system fails.
8. Internal management vs external interference
Courts prefer to stay out of internal company matters — this is the internal management principle.
The idea is that disputes about internal voting, director decisions, or meeting procedures should be settled inside the company, not in court.
There’s a famous historical example :
A shareholder once tried to sue the chairman for mishandling a meeting vote.
The court said:
“That’s an internal irregularity. Handle it at your next meeting. Don’t bring it to court.”
Why? Because not every error should turn into a lawsuit.
Business is dynamic — mistakes happen, and the system must stay flexible.
Courts only step in when the issue goes beyond irregularity — when there’s fraud, oppression, or violation of fundamental rights.
9. Summary Table
| Concept | Description | Why it matters |
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| Separate Legal Personality | The company is its own “person” | Protects shareholders and allows growth |
| Proper Claimant Rule | Only the company can sue for harm done to it | Prevents chaos and duplicate claims |
| Derivative Action | Exception allowing shareholders to sue on behalf of the company | Protects minorities from abuse |
| Majority Rule | Decisions follow the majority of voting shares | Creates stability and democracy |
| Internal Management Principle | Courts avoid interfering in company operations | Keeps disputes private and efficient |
| Practical Lesson | Build trust, structure, and clear agreements early | Prevents legal paralysis later |
10. The business mindset takeaway
For young founders and investors, this rule teaches one of the most important business lessons:
The company is bigger than you.
You might have the idea, the energy, even the majority of shares — but once you form a company, it becomes its own being.
You can’t treat it like your personal project anymore.
It has rights, duties, and a voice — and sometimes that voice isn’t yours.
Knowing how to navigate this structure isn’t just legal knowledge — it’s business survival.
Q1: Who is considered the proper claimant when a company suffers harm?
Any shareholder who owns more than 10% of shares.
The director responsible for the harm.
Q2: What is the purpose of the internal management principle?
Courts avoid interfering in routine company operations.
Courts immediately step in to correct any shareholder disputes.
Shareholders can bypass directors and sue directly whenever they disagree.
Q3: Why is the rule in Foss v Harbottle important for minority shareholders?
It establishes that only the company can sue, and minority shareholders may need derivative actions to protect themselves.
It allows minority shareholders to always override majority decisions.
It makes directors personally liable to every shareholder.
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