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![handle is hein.journals/lqr104 and id is 357 raw text is: THE
LAW QUARTERLY
REVIEW
Volume 104 July 198
NOTES
SHAREHOLDER AcTIONS: THE RULE IN Foss v. HAuoTrLE
THE rule in Foss v. Harboule (1843) 2 Hare 461 should be viewed
primarily as one of procedure, intended to sift out cheaply and
expeditiously those cases in which a shareholder has standing to
bring an action with respect to internal irregularities in the conduct
of a company's affairs or breach of duty by directors, from those
cases in which they have no such standing. All too often, however,
it achieves the opposite result as is illustrated by Smith v. Croft
(No. 2) [1987] 3 W.L.R. 405, which lasted approximately 17 days
and in which over one hundred authorities were cited to the court.
And, if this were not bad enough, there were other proceedings
involving the parties (Smith v. Croft [1986] 1 W.L.R. 580; Prentice,
Wallersteiner v. Moir: A Decade Later [1987] Conv. 167).
In Smith v. Croft (No. 2) the plaintiff shareholders commenced
an action alleging that the directors of the company had (a) acted
ultra vires or in dishonest breach of their fiduciary duties by paying
themselves excessive salaries, by making improper payments to
management companies with which they were associated, and by
reimbursing themselves for expenses falsely claimed to have been
incurred in rendering services to the company (the improper
payments allegations); and (b) had breached section 42 of the
Companies Act 1981 (now sections 151-152 of the Companies Act
1985) by entering into transactions involving the provision of
financial assistance by the company in connection with the
acquisition of its shares (the section 42 allegation). Of considerable
importance was the tripartite division of the company's voting
share capital: the plaintiffs held approximately 12 per cent., the
defendant directors approximately 63 per cent., and a third block
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