This article is written by Shikha Pokhriyal from the school of law, Delhi Metropolitan Education, GGSIPU. This article talks about the rights and interests of minority shareholders. The unfair prejudice, oppression, and mismanagement activities that are conducted in a company and remedies to help the aggrieved shareholders.
Matters of a company are often decided in the best interest of majority shareholders. All the decisions whether being finance or management everything are decided based on the majority. The decisions taken based on the majority are considered fair and just and in the company’s interest. But sometimes the opinions of minority shareholders are not taken into account. Their rights and interests are often ignored, as they do not hold a lot of power in handling the management of the company. The corporate world aims to maintain a balance between the effective and efficient control of the company by protecting the interest of the minority shareholders.
A company is successful only when all the members of the company are working towards the same goal by respecting each other’s opinions and working techniques. Sometimes the majority shareholders use their authority and powers to take over the interest and rights of the minority shareholders that cause mismanagement and prejudice in the company. Companies Act, 2013, ensures that the rights and interests of minority shareholders are protected. The aim of the provisions created to protect the rights of the minority shareholders is that companies should exercise their powers according to principles of natural justice and fair play.
This article will throw light on the rights of minority shareholders and why there is a need to protect their rights and the remedies available.
A minority shareholder’s right
A minority shareholder is an individual in a corporate company who does not enjoy a lot of authority and powers in the management of the company. The interests and the opinions of the shareholders who are a minority are often ignored or not taken into consideration. Definition of minority shareholder has not been defined in the Companies Act, 2013 but legal provisions like Section 235 and Section 244 of the Companies Act, 2013, provides the meaning for the minority shareholder. A person who is considered a minority shareholder holds few numbers of shares in the company less than 50%, so they are not eligible to exercise any power or authority in the company’s management.
The Companies Act, 1956, laid down the principle of the rule of the majority, which means that whoever holds the majority of shares in the company, rules the matters of the company. In Foss v. Harbottle, it was decided that the court will not intervene in the internal matters of a company decided by the board of directors until they are acting according to the company’s articles. The decisions taken by the rule of the majority shall be binding on the matters of the company. The rule stated in this case further was replaced by providing some powers and authority to minority shareholders in the Companies Act, 2013.
The practical working of the rule of the majority was found in the case of VN Bhajekar v. KM Shinkar, in this case, it was decided by the board of directors to appoint managing agents of the company, few shareholders were not in favor of this decision but despite this, the directors confirm the appointment. The shareholder filed the petition in the court where the court held that the few minority shareholders who possess little authority are not entitled to file a suit in the court asking the court to intervene in the matters like who should be the managing agent of the company.
These provisions were introduced to protect the rights of the minority shareholders and to make them aware of their rights. Also to check whether the shareholder’s committees are not overlooking the grievances of the minority shareholders. Many problems are faced by the minority shareholders. To overcome these problems the Companies Act 2013 was introduced.
Problems faced by minority shareholder’s right
The rights of the minority shareholders often get violated because of the greed of the majority shareholders. The majority shareholders think they can do anything as they have the majority of the power and authority. In this case, the board of directors also saves the majority shareholders, as they remunerate them.
It is not uncommon for majority shareholders to make decisions about the company’s management according to their own will. They make decisions like unauthorized transactions, diverging the funds of the company, reinvesting the profits so that the returns of minority shareholders can be denied.
The majority shareholders have the fiduciary duties toward the minority shareholders of paying their returns honestly and with loyalty. But the majority shareholders breach these duties by paying themselves higher salaries or sell stocks of the company that are favorable to them only or establish other companies.
Because of these reasons, minority shareholders require a law provision so that their rights and interests in the company are not ignored and overlooked. They have a right to get the return when the company is in profits, the majority shareholders cannot just decide not to give them their returns. These unfair practices against minority shareholders are criticized by the courts of law.
A minority shareholder in extreme circumstances can file a petition in the court based on conduct that would amount to unfair prejudice. The term unfair prejudice has not been defined by any specific law. The word unfair means wrong and by prejudice, we mean damage caused to one’s legal rights or claims.
The court can examine unfair prejudice when the affairs of the company are being conducted in a manner that the rights of some shareholders are being compromised and justice is not done or the company is omitting any clause of the article thereby affecting the interests of minority shareholders or there is serious mismanagement of the affairs of the company. In the case of unfair prejudice, a minority shareholder has a right to approach the court. If the court finds that matters are prejudice and unfair then they can:
- Order the company to refrain from such acts.
- Regulates the affairs of the company.
- Order the company to amend the article of association.
Oppression and mismanagement
Oppression can be defined as the unjust or unfair use of authority. Oppression is done when the matters of the company are decided unfairly or in a manner unfair to any member. Mismanagement can be defined when the matter of the company is done in a manner prejudicial to the interests of any member. The term oppression has been defined under Section 397(1) of the Companies Act, 1956 and the term mismanagement has been defined under Section 398(1) of the Companies Act, 1956.
Acts like depriving a member of the dividends, issue of further shares only benefitting a section of shareholders, not maintaining the statutory record of the company to not calling the general meeting, and keeping the shareholders in the dark, would amount to oppression.
Activities like handling of the company’s bank account by the unauthorized person, violation of the memorandum, serious issues going between the directors and the directors not taking action against the illegal activities, would amount to mismanagement.
Rights and remedies to protect the interest of minority shareholders
National Company Law Tribunal (NCLT), a special tribunal has been formed by the Companies Act 2013, which deals specifically in the protection of the rights of the minority shareholders. This tribunal was formed by the Supreme Court to handle the cases regarding the company. Section 241 to Section 246 deals with the matters regarding unfair prejudice, oppression, and mismanagement of the company.
The term prejudice was added by the Companies Act, 2013, which means that if the matters of the company are prejudiced against any shareholders or members of the company, then legal action can be taken. This is a new concept which needs to be dealt with carefully. In these cases, the courts first investigate whether the conduct of the shareholders against whom the petition has been filed comes under the concept of unfair prejudice or not. Due to the lack of guidelines on this topic, the judgment varies from case to case.
Application against unfair prejudice, oppression, and mismanagement under Companies Act, 2013.
The remedy to deal with the problems of oppression and mismanagement was first introduced in the companies act 1956. The Companies Act, 2013 deals with prejudice, oppression, and mismanagement under Section 241 to Section 246.
Section 241 application to the tribunal for relief in cases of oppression, etc, this section of the act gives the power to any member of the company to file a case against the company if it found that:
- The affairs of the company are conducted in a prejudicial manner to the interest of any member of the company.
- If there are changes regarding the interests of any creditors, debenture holders, or shareholders or in the company’s management, prejudicial to only a certain class of members means providing profits to only certain groups of people.
- If the central government thinks that a company is conducting its internal affairs in a prejudicial manner thereby affecting the interests of the members of the company, then it can itself apply to the tribunal.
Section 242 talks about the power of the tribunal if a petition has been filed under section 241. The tribunal has the following power:
- If the court finds out that the matters or affairs of the company are conducted in an unfairly prejudiced manner or oppressive to any member of the company, then the court can order the company to stop such prejudice and oppression, and winding up is not ordered as it would be unfair to other members.
- The tribunal without any prejudice can provide or amend the regulations of the company. They can also order shareholders to purchase the shares of the other shareholders.
- It can reduce the share capital of the company and put restrictions on the process of allotment and transfer to curb the problem of oppression and mismanagement.
- The tribunal can remove the directors, managing directors if it found that they were having unfair gains.
The management of the company was used to decide based on majority rule. But with the introduction of modern corporate law, the opinion and interests of minority shareholders were not overlooked. Many remedies were introduced to help minority groups who hold a little share in the company. It is found that their interests are being discriminated against based on holding shares or voting rights. Due to the introduction of these new laws, the managing committees of the companies will be careful in handling their internal matters. The minority shareholders or the individual shareholders are now empowered to raise their voices against the abuse of prejudice, oppression, and mismanagement of the affairs of the company.
Though several steps are there to win a case against the offending shareholders. The legislature still is not very clear on these steps. Therefore, sometimes these types of cases take up a lot of time in the courts. In these cases, the method of arbitration and mediation can be considered as it is a quick process and not very expensive. In this process, the problems are solved fruitfully by amicable understanding. A company can work in an effective way only when the member is getting accomplished. To attain the company’s goals, every individual, whether be with a lot of powers or few powers, should work together by respecting each other’s interests and opinions.
- http://www.legalservicesindia.com/article/2427/Protection-of-minority-shareholders-in-a-company-under-companies-Act,-2013.html#:~:text=CA%201956%20provider%20for%20 protection,or%20in%20a%20manner%20oppressive
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