Revisiting the Judge-Made Rule of Non-Interference in Internal Company Matters
South African Law Journal, Vol. 127, 2010
25 Pages Posted: 25 Jul 2015
Date Written: May 26, 2010
When one looks at several of the judge-made rules applied to the internal governance arrangements of companies, at first glance they seem very logical and indispensible to company law. Examples of these rules are: the rule of non-interference in internal company matters by the courts; the rule that courts will not take over the responsibility to manage the business of companies; the rule that courts will not second-guess the business decisions taken by the board of directors; the rule that the courts should respect the outcome of decisions taken by the majority of shareholders (the so-called majority rule); and that the company, as a separate legal entity, is the proper plaintiff when it comes to wrongs committed against the company (the so-called rule in Foss v Harbottle).
Superficially, some of these rules seem unrelated, and they seem to exist harmoniously, but a closer analysis reveals considerable overlaps between the rules, and even tensions between them. These overlaps and tensions only become apparent when the question is asked why the courts developed these rules. It is, however, a daunting task to identify trends and patterns as the courts, over a period of almost 200 years, have provided different explanations for the existence of some of these judge-made rules or, in some instances, have not provided clear explanations for developing them at all.
In this article the focus will be primarily on the judge-made rule of non-interference in internal company matters, but reference to other related judge-made company law rules is unavoidable. In section 2 of this article an in-depth analysis of some older, primarily English, cases will be undertaken. In section 3 the focus will be on some qualifications required of the rule that courts will not interfere with internal company matters.
In the discussion it will be seen that some of the judge-made rules still applied today were developed almost 200 years ago. However, these rules, and the cases in which they were laid down, retain their importance, even with a new South African Companies Act (the Companies Act 71 of 2008) having been promulgated. As the courts are required to exercise a value judgement on whether or not to interfere in internal company matters, the courts will have to revisit the origin of the judge-made rule of noninterference in internal company matters. There is also no indication in the new Companies Act 71 of 2008 that any of these judge-made rules have been abolished or codified to any extent that would make them irrelevant or inapplicable in the modern company law context in South Africa. Thus, it remains important to discuss and analyse these rules.
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