In this blog post, Harsh Moorjani, a student pursuing his final year LLB at Government Law College, Mumbai and a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, describes the laws laid down for the protection of the rights of the minority shareholders under the Companies Act, 2013.
Introduction
“Of all tyrannies a country can suffer the worst is the tyranny of the majority” [1], Companies Act, 2013 (Hereinafter referred as the “the New Act”) changed the entire gamut of Modern Company Law and to some extent filled the various lacunas that plagued the Companies Act, 1956(From now on referred as the “Old Act”)
The author of this article shall discuss the history of majority rule in body corporate along with the statutory provisos laid down by the New Act in contrast to the Old Act to protect the interests of minority shareholders and shall give conclusive analysis for the same.
Rule of Majority
The process of decision-making is an integral part of a corporate bodies functioning,
the said process is frustrated when there is a conflict of opinion between the majority and minority shareholders whereby, the majority shareholders take decisions, not in the interests of the company but to cater to their whims and fancies gravely prejudicing the rights of minority shareholders.
The Rule of Majority found its firm roots in the landmark common law judgment Foss v. Hardbottle[2], where the court held that the “Courts will not intervene in the internal administration of a company at the instance of a shareholder and will not interfere with the management of a company by its directors so long as they are acting within the powers conferred on them under the Articles of the company. Nothing related to an internal dispute between shareholders is to be made the subject of an action by a shareholder. [3]
The same principle was reiterated by a plethora of Indian judgments like Rajahmundry Electric Supply Corporation v. A. Nageshwara Rao [4]or Bagree Cereals v. Hanuman Prasad Bagri [5]thereby, reaffirming the principle that if a simple majority can ratify a wrong, the court will not intervene.
Provisions of the New Act in contrast with the Old Act protecting the minority shareholders interests
“A Proper Balance of the Rights of Majority and Minority Shareholders Is Essential for the Smooth Functioning of the Company” [6], and that’s exactly what the legislature intended to do with Companies Act, 2013.
Neither the Old nor the New Act lay down a statutory definition to the term minority shareholders, one finds a legal definition of the term in the classic Black’s Law Dictionary where it defines the term as “an Equity holder with less than 50% ownership of the firm’s equity capital and having no vote in the control of the firm.”
Apart from the exceptions to Foss v. Hardbottle that are ultra vires acts, fraud on minority acts requiring a special majority, wrongdoers in control and individual membership rights, the New Act protects the rights of Minority Shareholders under the head Prevention of Oppression and Mismanagement embodied in S.241-S.246 under Chapter XVI of the New Act.
By S.241, the oppressed minority shareholders are empowered to move the tribunal against the company and its statutory appointee’s, an application stating the same can be made to the Company Law Board. The requisite number of members who must sign the application is laid down in S.244, where the company is with share capital than by at least 100 members of the company or 1/10th of the total number of its members, whichever is less. If the company is without share capital, then the application mentioned above has to be signed by 1/5th of the total number of its members.[7]
However, departing from the Old Act the tribunal rather than Central Government has the discretion to allow any member or members to sue if in its opinion circumstances exist which make it just and equitable, making it a speedy actionable remedy.
Certain pre-requisites laid down by the S.241 need to be satisfied before an oppressed shareholder makes an application. The grounds for the application must either pertain to the affairs of the company being conducted in an oppressive manner which is prejudicial or oppressive to the interests of the company or when there a material change has taken place in the management or control of the company which shall affect the members or class of members.
Lord Cooper explained the term Oppression as the conduct complained of should at the lowest involve a visible departure from the standards of fair dealing, and a violation of the conditions of fair play on which every shareholder who entrusts his money to the company is entitled to rely.[8]
Although the legislation aims to protect the minority shareholders interest, in a fit case if the court is satisfied with the acts of oppression and mismanagement, relief can even be granted if the application is made by a majority rendered ineffective by the wrongful acts of a minority group.[9]
While the powers granted to the competent authority under the Old Act were constrained to some extent, under the New Act the tribunal has been given wider powers by S.242 placing it in a better position to protect the interests of the minor.
The New Act introduces a novel concept of Class Action suit which owes its conception to the Satyam scandal that broke out in 2009. The essential provisions to enforce the rights of minority shareholders and investors were missing in the Old Act.
Under S.245 of the New Act, the provision above has been introduced thereby providing great impetus to minority shareholders, investors and depositors as well. By virtue of this provision a suit may be filed against a company or its directors, auditor or expert advisor , in the case of a company with share capital by not less than 100 members or not less than 10% of the total number of its members or by any member or members singly or jointly holding less than 10% of the issued share capital of the company. In the case of a company without share capital, a suit may be filed by not less than 1/5th of the total number its members. Similar provisos are laid down for the protection of depositors. By the said provisos the legislation intends to protect the interests of the minority shareholders.
The New Act also infuses minority shareholding protective measures during mergers and amalgamations. Such measures have been introduced in S.235 and S.236 of the New Act by which transfer of shares or class of shares by a transferor to a transferee company requires the approval of shareholders with a nine-tenth shareholding in value if any dissenting shareholder then the transferee company has to serve a notice to the same.
Under S.236 of the New Act, minority shareholders have the option to make an offer to the majority shareholders to purchase the minority equity shareholding of the company at a price as fixed below. The acquirer, person or group of persons shall offer to the minority shareholders of the company for buying the equity shares held by such shareholders at a price determined by valuation by a registered valuer.
In an event where the acquirer or person acting in concert thereon or a group of persons become the registered holder of ninety percent or more of the issued share capital of a company by amalgamation, share exchange and so on then they shall notify the company of their intention to buy the remaining equity shares.
Under the 2013 Act, minority shareholders are also involved in corporate decision-making whereby, in listed companies “small” shareholders that are having a nominal shareholding of shares not more than Rs 20,000 have the right to appoint a director. [10]
Conclusion
On a careful examination of the provisions above, it is apparent that the legislators have tried to protect the interests of the minority shareholders at every stage by filling the cavities/lacunas of the Old Act. Like any legislation, the effective implementation of the provisions above plays a key role in executing the intention of the legislator thereby enabling the protection of minority shareholders interests.
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References:
[1] Quote by Mr. William Inge
[2] (1843) 67 ER 189
[3] Mac Dougall v. Gardiner, (1875) 1 Ch. D 13.
[4] 1955 SCR (2)1066
[5] 2001 105 CompCas 465 Cal
[6] Palmer, Company Law, 492 (20th ed., 1959)
[7] Company Law by Avtar Singh
[8] Scottish Coop Wholesale Society v Meyer
[9] Baltic Real Estate Ltd (No 1)
[10] S.151 of the Companies Act, 2013
