This article has been written by Sanjana Rao pursuing the Diploma in Cyber Law, FinTech Regulations and Technology Contracts from LawSikho. This article has been edited by Smriti Katiyar (Associate, Lawsikho).
Due to the increasing shift of focus on corporate governance, there has been a notable attempt by the Ministry of Corporate Affairs to protect the interests of Minority shareholders by including comprehensive provisions in the Companies Act of 2013 as compared to the Companies Act of 1956. The Companies Act 2013(CA,2013), is more comprehensive and well thought out for the benefit of minority shareholders and strives to promote caution and transparency in the overall functioning of a company. Minorities commonly suspect that the business is not being handled correctly but lack facts to back up their concerns. Evidence is required for all claims. Controlling shareholders and directors frequently refuse to release information voluntarily. Though there are some inconsistencies and lacunas in this regard, Indian corporate governance has definitely come a long way in protecting minority shareholders’ rights. Having said that, it is on the part of the management and shareholders to hold their end of their bargain with efficiency and avoid abuse of remedies or powers conferred upon them.
Difference between CA, 1956 and CA, 2013 with regard to Minority rights
Companies Act of 1956 granted remedial rights to minority shareholders under Section 397, 398, covering the concepts of oppression and mis-management. Under this Act, Company Law Board was the authorised authority to deal with these matters and the Central Government had powers to waive off eligibility requirements in certain cases. However, under CA 2013, NCLT is the authorising body and it has power to waive off eligibility requirements in certain cases. It is also vested with additional rights under Section 242. Introduction of class action suits has facilitated pellucid decision making by the management, thereby increasing the protection to all classes of shareholders. CA, 2013 provides for the same in it’s Chapter XVI “Preventions and Oppression of Management” , under Section 241 – 246.
|Sections under Companies Act, 2013.||Explanation|
|Section 214||Combination of Sections 397 and 398 of CA,1956; Provides protection and remedies to minority shareholders against oppression or mismanagement of majority shareholders.|
|Section 242||Powers of the Tribunal for applications filed under 241,includes removal of directors, restrictions on transfer and allotment of shares, imposing costs, recovering of undue gains.|
|Section 243||Consequences of an order passed by the Tribunal in such cases.|
|Section 244||Right to approach the Tribunal under 241; requirements.|
|Section 245||Class Action suits can be instituted against a company or its auditors, eligibility and admissibility by depositors as well as|
|Section 235||Power to Acquire Shares of Shareholders Dissenting from Scheme or Contract Approved by Majority|
|Section 236||Purchase of minority shareholdings|
|Section 151||Listed companies to have one director elected by small shareholders.|
Minority shareholders have certain contractual as well as statutory rights. It includes:
- Oppression and management-
Any member or members holding at least 10% of the company’s issued share capital, or a minimum of 100 or 10% of the total number of members, whichever is less, have the right to approach the Tribunal (NCLT) if,
- the company’s affairs are being conducted in a way that is either: harmful to the public interest or the company’s interests; or oppressive to any of the company’s members.
- any mismanagement; changes that would materially affect the management of the company so that the affairs of the company have been conducted in a way that is prejudicial to the interests of its members or the company itself.
- Breach of any fiduciary duty of majority shareholders.
Misusing management control, depriving dividends, making personal profits are some of the examples.
In SP Jain v. Kalinga Tubes, Supreme Court held that the alleged oppressive action must involve a lack of fair dealing and probity with a member about his proprietary rights as a shareholder. As a result, the act in question must harm the petitioner in his capacity or character as a member or shareholder, not in any other role such as director or creditor.
Similar to this, in Amalgamations Limited & Others v. Shankar Sundaram & others, it was decided that to allege oppression or mismanagement, there has to be legal relation between the aggrieved and the company, and therefore, a shareholder of a holding company cannot claim remedy for oppression by its subsidiary company.
On the contrary, in Vikram Bakshi v. Connaught Plaza Restaurants Limited, Vikram Bakshi cried oppression when he was not re-elected as the managing director and sought relief for the same under 397 of CA,1956. Even though it was not filed by him within the capacity of a shareholder, NCLT not only maintained the claim but also ruled in his favour by stating that the end result of the actions of the company was oppressive and restored his position as MD.
Tracing the inconsistency in judgments in cases filed under these sections, it is safe to conclude, what amounts to “oppression”, “prejudice” or even maintainability, is for the Tribunal to decide, depending on the facts and fundamentals of each case.
- Requisition of general meeting- A minimum of 10% of the company’s voting shareholders can request the board of directors to call an extraordinary general meeting. If the board of directors fails to summon the meeting, the shareholders have the authority to call it themselves. They also have the right to vote at these meetings.
- Cancel variation of rights- Approach the tribunal for cancellation of variation of rights attached to their shares, if they have not consented to it.
- Class action suits– A class action suit is a legal action in which a group of people with a common interest can file a complaint with the NCLT if they believe the company’s affairs are being managed in a way that is harmful to the company’s, members’, or depositors’ interests. Under CA, 13, section 245, requirements to file a class action lawsuit are as follows: There must be at least 100 members, or 5% of the overall number of members (whichever is less) or any member or members owning at least 5% of an unlisted company’s issued share capital, or at least 2% of a listed company’s issued share capital.
Class action suit found its importance during the Satyam Scam. American investors were able to recover almost 151 million from Satyam and PWc but Indian investors had to bear the brunt due to the lack of regulations in this regard. Acknowledging the disparity in treatment of security holders in India and the United States, the Ministry of Corporate Affairs drew attention to class action litigation, which eventually found a home under section 245 of the new Companies Act.
- Right to alter or restrict changes in Company’s share capital in instances of unconsented variation of rights, wrongful dilution of shareholding of minority shareholders.
- Contractual rights under the shareholders’ agreements- The minority shareholders of a company can incorporate certain provisions in the shareholders’ agreement to restrict changes or alter the company’s share capital like affirming voting rights, restriction on transfer of shares, pre-emptive rights and so on. Rights like board representative, veto and departure rights can also be included. These provisions are also incorporated in the articles of association of the company.
- Rights during amalgamation and mergers- Some of the rights include pre-emptive rights, drag along with payment rights, anti-dilution provisions, shotgun clauses, co-sale or tag-along rights. These rights are usually included only after negotiating with the companies for incorporation of these additional protective clauses.
In re Elpro International Limited, the court established that, under the listing agreements, stock exchanges have the authority to take action if they believe that any securities law has been violated in any business deal. Therefore, a squeeze-out deal was refused by Bombay Exchange in the view of it being prejudicial to the company’s minority shareholders (silence of minority shareholders to the deal was treated as acceptance of the proposal).
- Right to appoint small shareholders director- Under 151 of CA, 2013, small shareholders in a listed company can elect a “small shareholders’ director” via an ordinary resolution. He/she will be an independent director, appointed for a single period of three years. *Small shareholders – where the nominal value of total shares held by one shareholder does not exceed rupees 20,000. It is imperative to note that small shareholders are different from minority shareholders. They come under the purview of minority shareholders but not vice-versa.
- E-voting rights- Section 108 of CA, 2013, mandates certain companies to offer E-voting facilities to shareholders. This promotes active participation and exertion of power by minority shareholders.
Notable case laws
In this infamous case law, one Mr. Cyrus Mistry(Minority shareholder) was removed from the position of non-executive director and dictatorship in various Tata groups, by a resolution passed by the Board of Tata Sons(Majority shareholders). Mr. Mistry, who had a total of 18.36% share in Tata Son, alleged oppression and prejudice by the Board and approached the Tribunal under Section 241, 242 and 243 of Companies Act, 2013. In this petition, he sought almost 21 remedies, some of which included reinstating him as Executive Director, declaring Tata Sons as public limited. The case went back and forth between NCLT and NCLAT, resulting in NCLAT deciding in favour of Mr. Mistry. An appeal was preferred by Tata with the Supreme Court, which not only dismissed the order of NCLAT but also questioned its powers in passing those orders.
Some of the key observations made by the Supreme Court:
- To have adequate representation in the board, shareholders need to enter into contractual agreements, since they are not automatically entitled to a seat on the company’s board.
- Clear difference between small shareholders and minority shareholders. Minority shareholders do not have the right to claim proportionate representation.
- Removal from the position of Director of a company is not sufficient reason to claim remedy unless it involves clear cut oppression or is prejudiced to the interest of the members.
- Minority shareholders cannot call for winding up of the company when there is a mere lack of confidence between them.
- When deciding a case under Section 241, the court can only consider past or current conduct. A Section 241 complaint cannot be used to investigate fear of future misconduct resulting from the company’s Articles.
In this case, the Government of India filed a case for oppression and mismanagement under Section 241(2).
The term ‘public interest’ cannot be interpreted to mean all Indian nationals. It would be sufficient if the rights, security, economic well-being, health, and safety of even a small segment of society – such as candidates seeking membership in the category of common citizen – were jeopardized.
Case laws regarding power of the Tribunals
In Deloitte Haskins & Sells LLP v Union of India, NCLAT allowed the Central government to impeach the auditors of a company in case of mismanagement which was prejudicial to the public interest, under Section 241(2) of CA, 2013.
In Smt. Smruti Shreyans Shah v. The Lok Prakashan Ltd. & Ors, the NCLAT held that the Tribunal can issue interim orders under Section 242 if a prima facie case is made out.
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