This article has been written by Prasenjeet Kirtikar pursuing Diploma in Corporate Litigation and edited by Shashwat Kaushik.
This article has been published by Sneha Mahawar.
Table of Contents
Introduction
In a healthy democratic society, it is very important to pay equal attention to the rights and interests of the minority along with those of the majority. In the same way, for a healthy corporate administration and overall growth of a company, it is essential to address the rights and interests of minority shareholders to avoid exploitation in the hands of majority shareholders. The minority shareholders are those who hold less than 50% shares in the company and thus may have their voice unheard or ignored during the major decisions taken by the majority shareholders. In the existing Companies Act of 2013, there are lots of provisions enacted to safeguard the interests of minority shareholders. In modern times, it has become inevitable to protect the interests of minority shareholders; however, such was not the case from the inception of the corporate era.
This is a fair attempt to understand the evolution of the principal and the current provisions of the Act to safeguard the rights and interests of the minority shareholder.
The Foss vs. Harbottle case
The principle forming the foundation on which the rights of minority shareholders happen to be framed is derived from the famous case of Foss vs. Harbottle (1843). The case was decided by the House of Lords in 1843. The board of directors is elected by the majority of shareholders in the general body meeting to run the affairs of the company; in fact, the majority had the upper hand in every decision and the minority got no voice in any of the company’s decisions and received stepmotherly treatment. Upon an appeal by the minority stakeholders against this oppression, it was held that the court should not interfere in the internal matters of the company unless there is a grave violation of the principle of natural justice with concern to the minority shareholders.
In this way, the case had become a landmark judgement in protecting the rights of the majority in company affairs. However, the exceptions to the rule let down in Foss vs. Harbottle have emerged as a lifesaver for the rights of minorities.
Let’s discuss the exceptions to understand the grounds on which the rights of minorities can be protected.
Exception 1- Ultra Vires act
If any act done by the company management is beyond its powers, that is, ultra vires, the minority has a right to take action against such an act.
Case law
Sh. Kanhaiya Lal vs. Bharat Insurance Co. (1933)
Facts of the case: As per the provisions in the Memorandum of the Company, the loan must be given upon adequate security being available. However, as per the resolution passed by the majority, the loan was passed, violating provisions in the Memorandum of the Company.
Judgement of the Court: The Court held that the act was ultra vires and thus protected the rights of minority shareholders.
Exception 2- Fraud on majority
If the majority suppresses the rights of minorities by passing a resolution to commit any fraud in company affairs, then the rights of minorities must be protected.
Case law
Menier vs. Hooper’s Telegraph Co. (1874)
Facts of the case: There were two companies with the same person in majority on both sides. When there was a conflict of interest between the companies, the majority decided to go for a compromise that violated the interests of minority shareholders; hence, they protested on the grounds of fraud committed by the majority shareholders and appealed in court.
However, the majority raised the defence, claiming that the court cannot interfere in internal matters of the company, referring to the judgement in the Foss vs. Harbottle case.
Judgement of the Court: The Court held that the case is not applicable here as the decision of the majority amounts to fraud.
Exception 3- Prevention of oppression and mismanagement
The ultimate rule of corporate functioning is that the majority decision prevails; however, there can be serious violations and the operation of the rights and interests of minority shareholders. The progress of a company lies in the fact that there should be a perfect balance between the rights of minority shareholders and the powers of major shareholders and almost zero mismanagement of company administration.
If there is any oppression or mismanagement, the rights of minorities can be protected by making an appeal to the Central Government, the Company Law Tribunal, or the court of law.
These agencies have vested powers to prevent operation and mismanagement through the appointment of directors as per the statute.
Exception 4- Wrong doers in control
When the majority of shareholders have taken over the control of management by violating the provisions of the Memorandum of Association and Articles of Association to fulfil their malicious intention, which is likely to harm the growth of the company and the overall interests of the stakeholders.
Case law
Glass vs. Atkin (1967)
Facts of the case: In this case, the defendant fraudulently converted the company’s assets for personal benefit.
Judgement of the Court: The Court held that this is an exception to the Foss vs. Horbottle case, as the directors violated their duties by manipulating their positions and compromising their morals for personal gains.
Exception 5- Individual membership rights
Every shareholder can enforce his individual rights against the company, for example, the right to vote and the right to contest the election of directors.
Case law
C.L. Joseph vs. Jos (1963)
Facts of the case: The plaintiff, being a shareholder, was a candidate for the election of directors but lost the election. However, he was again proposed as a candidate to fill the second vacancy but the chairman raised objections considering his previous defeat.
Judgement of the Court: The Court held that the chairman acted beyond his powers by disallowing the nomination of the plaintiff and thus protecting the individual rights of the plaintiff.
Provisions as to the rights of minority shareholders as per the Companies Act, 2013
Not only the rights of minority shareholders but also the entire corporate affairs in India are regulated by the Companies Act 2013, which was enacted as per the recommendations of the J.J. Irani Committee report. To discuss about the present scenario of rights of minority shareholders, it is necessary to discuss the provisions of the Companies Act, 2013 in relation to the same
Who is the shareholder
As per Section 2(84) of the Companies Act, ‘share’ means a share in the share capital of a company and includes stock. An individual, body corporate, association or company, irrespective of its incorporation, can purchase and hold ownership of a share and is thus called a shareholder. As per Section 2(55)(iii) of the Act, shareholders are also known as members.
The Companies Act 2013 does not define the concepts “majority shareholders” and “minority shareholders”. However, the terms “majority and minority shareholders” are conceptualised based on the percentage of shares they hold. Majority shareholders are those who hold more than 50% of the total voting power in a company, thus having significant influence over major decisions and the growth of the company.
Section 94 of the Act gives minority shareholders the right to inspect certain company records, such as the Memorandum of Association (MOA), Articles of Association (AOA), financial statements, and annual returns, during business hours.
Some more provisions as to the rights of minority shareholders as per the Companies Act 2013 are:
- Section 56 of the Act provides for the free transfer of shares and gives every shareholder the right to transfer ownership of the share they own as per their will.
- Section 100 of the act gives minority shareholders the right to call for extraordinary general meetings if they are holding at least 1/10th of the total voting power or a lower percentage as specified in the company’s articles.
- Section 108 of the Companies Act provides for modern technology of voting through electronic means for certain classes of companies. Exercising voting power through the use of electronic mode was a right that was absent in the Companies Act of 1956. This facility of exercising voting power through electronic mode has proved to be a boon to the shareholders who are not able to attend the meetings or are at a remote location.
- As per Section 101 of the Act, the notice of the meeting must be served to all the members within prescribed time, either in writing or through electronic means. According to this section, every single member or shareholder has the right to receive notice of the meeting.
- Section 109 of the Act gives minority shareholders the right to demand a poll if they are not satisfied with the passing of the resolution by show of hand. This section ensures a fair voting procedure and transparency in the process of company administration.
- According to Section 123 of the Act, it is the right of every registered shareholder to receive a dividend out of the profit of the company for that year as per the declaration made by the company.
- Section 151 of the Act gives minority shareholders the right to elect one director as per the prescribed manner. This section is one of the most essential provisions pertaining to the rights of minority shareholders, as it provides for the scope of keeping a check on the absolute power of the majority and valuing the opinions of minority shareholders.
- Section 241 of the Act acknowledges the rights of a member of a company to seek justice from a tribunal in cases of oppression and mismanagement of the company in the hands of the majority, causing harm to the interests of such member or any other member/members or against the public interest.
- In connection with Section 241, Section 242 talks about power of the Tribunal to address such application/appeal and inquire into the matter. Section 242 also provides vast powers to the Tribunal, including removal of directors and th, termination of any agreement or business transaction with the company.
- Section 245 of the Act enshrines the right to carry out “class action” by members if the majority is acting against the overall interest of the growth of the company. “Class action” is the action taken by a group of members having similar interests that is overlooked by the management of the company while taking key decisions.
Every minority shareholder must be treated as a key stakeholder in the affairs of the company administration. His rights must be respected as per the values vested in the principle of natural justice. He must be notified of all key developments and heard by company administration. In short, the company, as a family, must value the opinions and interests of every member.
Landmark judgements
Tata Consultancy Services… vs. Cyrus Investment Private Limited (2021)
The case provides for a landmark judgement on operations and mismanagement in company affairs.
Facts of the case
Mr. Cyrus Mistry was removed from the directorship of various Tata Group companies by passing resolutions in shareholders` meetings. Mr. Mistry and his company, which holds less than a 50% stake, become minority shareholders in Tata Group companies. Therefore, he challenged his removal in the National Company Law Tribunal (NCLT) on the grounds of oppression and mismanagement.
The NCLT held that there was no oppression or mismanagement in the management action. However, this judgement was reversed when Mr. Mistry appealed in NCLAT.
Judgement of the Court
On further appeal by Tata Group in the Supreme Court of India, it was held that just removal from the position of director is not sufficient ground to conclude that there was oppression and mismanagement.
Delhi Gymkhana Club Ltd. vs. Union of India Ministry of Corporate Affairs (2021)
Facts of the case
In this case, the government filed a petition with the Tribunal under Section 241 of the Act – application to the tribunal for relief in cases of oppression. It was also claimed that the affairs of the club were conducted in a way that was “prejudicial to the public interest”.
Judgement of the Court
NCLAT, while discussing the scope of Section 241(2) of the Companies Act 2013, held that the concept of public interest should not necessarily be stretched out to include every citizen of India; even the interests of a section of society can be sufficient to look into. The affairs of the club were prejudicial to the interests of the public, which amounts to oppression and mismanagement.
Conclusion
The exceptions to the principle laid down in the Foss v. Horbottle case highlight the essential rights of the minority shareholders, which must be exercised when the time and need arise. The voice of minorities must not go unheard for the sake of efficient company administration.
The Companies Act 2013, enacted as per the recommendation of the J. J. Irani Committee, has ensured that there is sufficient scope for the minority to express their opinion and safeguard their interests whenever they feel it is appropriate to do so. The act also provides for strong interference by the court of law and by the tribunal in exceptional cases of oppression and mismanagement in the company’s affairs by the majority of stakeholders.
However, achieving the goal of fully securing the rights of minority shareholders is a long way to go. The majority holding a share value greater than 50% has been proven to be an all time influencer in the game of driving the company on the path of growth as well as that of downfall.
References
- https://corporate.cyrilamarchandblogs.com/2023/03/protection-and-redressal-of-minority-shareholder-rights/#:~:text=To%20conclude%2C%20the%20rights%20of,claims%20and%20redress%20minority%20interests.
- https://www.mca.gov.in/content/mca/global/en/data-and-reports/reports/other-reports/report-company-law/minority-interest.html
- https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2564925
- https://blog.ipleaders.in/protection-of-minority-and-majority-shareholders-through-shareholder-agreements-under-the-companies-act-2013/
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