Rights of Minority Shareholders

This article discusses the meaning of the term minority shareholders and their rights as laid down under the Companies Act. This article also highlights the need to protect these rights.
Estimated Reading Time: 8 minutes

Introduction

A common law judgement of Foss vs Harbottle[1] settled the principle of the rule of the majority. As per this rule, the court will not interfere in the internal management of the company even if the shareholders put forward their case before the court. Even if some wrongful act is committed in the company, then also the court will not interfere if the alleged wrong is passed by the members in the general meeting of the company. This is also called a majority rule. Such decisions were taken by the shareholders who have majority shares in the company; thus, nobody listens to the plea of minority shareholders, and most of the decisions were against them. Over the years, and through various judgements, we have seen that this rule comes up with certain exceptions now; among those exceptions, rights of minority shareholders is one such example. The courts in India do interfere in the matters where the rights of these shareholders are prejudiced.

 The Companies Act of 2013 brought some specific provision with regards to the rights of minority shareholders were made. The Companies Act, 1956 did not have any particular provision when it came to the oppression of shareholders who held fewer shares in the company.

Meaning of Minority Shareholders

Neither the Companies Act, 1956, nor the 2013 one defines “Minority Shareholders”. The Law Dictionary defines a minority shareholder as “One who owns fewer shares of stock than other shareholders in a company and thus is unable to have a great deal of voting influence on the matter on which the corporation operates.”[2]

The Merriam-Webster definition says,“A shareholder whose proportion of shares is too small to confer any power or exert any control or influence over corporate action.”[3]

The definitions clearly state the position of a minority shareholder. In fact, the prefix “minority” explains that this group of shareholders are not conferred with the powers that a majority group enjoys. Despite this, Companies Act, 2013 incorporated some rights that the minority shareholders can avail.

Report of the Expert Committee on protecting rights of minority shareholders under the Company Law, 2005

After seeing the changes in the economic environment of the country, the government felt the need to come up with a framework which would encourage good corporate governance, and which can protect the interest of shareholders and investors of a company. For this purpose, the Companies Act, 1956 had to be amended. In the year 2002, an expert committee under the chairmanship of Dr J. J. Irani was set up with the task of advising the government on the proposed revisions to the 1956 Act. Some of the suggestions, for the interest of minority that the committee came up with are[4]:

  • The first suggestion comes up with providing an equal voice to both majority and minority shareholders in the decision making. Though the majority of shareholders have the power, but it should be placed within reasonable bounds. Their decision should not be in such a manner which results in oppression of the minority shareholders or causes any mismanagement to the company. It is the need of the hour that the rights of the minority should also be specified in the substantive law.
  • The second suggestion is regarding the representation of the minority interest. To represent their shares, the concept of representation of specific minority shareholders group can be incorporated by the boards of the companies.
  • The third suggestion is to bring about adequate transparency and disclosures. By following this, risks of investors can be reduced and minimized. There should be adequate and deterrent penalties in law against wrong disclosures. If all the disclosures are made properly, then the minority shareholders can take the decisions prudently.
  • Next suggestion is regarding holding the meeting of the company. Sometimes, the meetings of the company are organized at such places or times, which prevent the minority shareholders of an effective hearing. So, to avoid this, postal ballot, including electronic media, can be used for the shareholders to participate in meetings.

Even though some of the suggestions of the committee were incorporated in the 2013 Act, there were still a lot which could not make it. However, there are some very important provisions in the present Act which protect the interest and rights of a minority shareholder.

Rights of Minority Shareholders under the Companies Act, 2013

There is a separate Chapter XVI in the Companies Act, 2013 which deals with “Prevention of Oppression and Mismanagement”. Apart from this, Section 235 (Power to Acquire Shares of Shareholders Dissenting from Scheme or Contract Approved by Majority), Section 236 (Purchase of Minority Shareholding) and Section 151 “Appointment of Director Elected by Small Shareholders” also give some powers to the minority shareholders.

Right to apply:Section 241 states that in case any member of a company has a complaint, that the affairs of a company are against public interest or oppressive to him; or any material change has taken place in the management/ control of the company, which is prejudicial to the interest of its members, may, if he has the right to apply under Section 244,  apply to the Tribunal. This power is also given to the Central Government.

Powers of Tribunal: Section 242 talks about the “Powers of Tribunal” that can be exercised if an application is made under section 241. Some orders among many others that the Tribunal can pass are[5]:

  • The conduct and affairs of the company can be regulated by the Tribunal.
  •  Allotment of the shares of the company or even the transfer of the company can be restricted.
  • Termination, setting aside or modification of any agreement, upon such terms and conditions as the Tribunal finds just and equitable;
  • Any kind of transfer, delivery of goods, payment, execution, or other act relating to property made or done by or against the company will be set aside which has been within three months before the date of the application under this section.
  • Power to remove of managing director, manager, or any of the directors of the company.

Consequences of an order under section 242:Section 243 which deals with consequences of an order under section 242, states that a managing director, director or manager, whose agreement is terminated or set aside, shall not be appointed or act as the managing director or manager of the company for the period of five years from the date of such order.

Members right to apply:Section 244 gives the following members of a company, the right to apply under section 241:

  • In the case of a company having
  • not less than one hundred members, or
  • not less than one-tenth of the total number of its members, or
  • any member or members were holding not less than one-tenth of the issued share capital of the company, whichever is less, on the condition that all calls and sum due on his shares has been paid.
  • The company which does not have a share capital, then not less than one-fifth of its total members can apply to the Tribunal.
  • The Proviso of this section further says that the Tribunal can waive all the requirement which has been provided above to enable the members to apply under section 241 of the Act.

Class Action:Section 245 talks about “Class Action” were not present in the 1956 Act. The sub-section (3) gives minority shareholders the right to approach the Tribunal to:

  • Prevent the company from performing any act which is ultra vires, or which is against the Articles of Association or Memorandum of Association
  • Evading the company from breaching the provisions of an article of association or memorandum of associations.
  • Preventing the company from taking action which is against the provision of the Companies Act;
  • The company to be restricted from taking any action which is against the resolution passed by the members;
  • Damages from the company or its directors, auditors, advisor, or consultant can be claimed.
  • Seek any remedy that the Tribunal may deem fit.

This section gives both the members and the depositors the right to seek any damages or compensation from the company and from each partner who acted in an unlawful manner.

Transfer of any sharesSection 235 – Under this section, the rule states that for transfer of any shares from one company to another needs the approval of nine-tenths of the shareholders whose transfer is involved in the whole transaction.

Notification of intention to buy remaining shares:Section 236 states that an acquirer becomes the registered holder of ninety per cent of the equity share capital of a company, such acquirer shall notify the company of their intention to buy the remaining shares from the remaining shareholders (minority shareholders) at a price determined on the basis of valuation by a registered valuer. Under sub-section (3), a minority shareholder may also offer to the majority shareholder to purchase the minority equity shareholding of the company according to the price determined.

small shareholders:Section 151 explains “small shareholders” for the purpose of the section, as a shareholder holding shares of the nominal value of not more than twenty thousand rupees or such other sum as may be prescribed. Under this section, a listed company can have one director who is elected by small shareholders.

The rights of the minority shareholders can be exercised by way of approaching the Tribunal. Any matter relating to the Companies Act, be it arbitration, compromise or winding up, everything is dealt with the National Company Law Tribunal.

National Company Law Tribunal

Under Section 408 of the Companies Act, 2013, the Central Government constituted National Company Law Tribunal (NCLT).[6] It is a quasi-judicial body which was set-up in the year 2016 on the recommendation of V. Balakrishna Eradi Committee to recommend on the law relating to the insolvency and winding up of companies.[7] All proceedings under the Companies Act are disposed of by NCLT which is chaired by a retired High Court Judge.[8]

Conclusion

The Companies Act, 2013 was a major step towards giving minority shareholders their deserved rights which were missing in the Companies Act, 1956. What is necessary now is implementing the provisions of the Act, making the shareholders aware of their rights. In February 2020, we have seen a lot of amendments being recommended to the Companies Act, 2013. One of those amendments includes that in case of an acquisition of a minority shareholders’ share by a majority shareholder, the former can approach the NCLT with his grievance and the Tribunal can pass any order as it deems fit. These steps would empower the minority shareholders, and its proper implementation can be helpful for overall corporate governance.


[1](1843) 67 ER 189

[2]Definition of Minority Shareholder, The Law.com Dictionary, available at https://dictionary.thelaw.com/minority-shareholder/

[3]Definition of minority shareholders, Merriam-Webster, available at <https://www.merriam-webster.com/legal/minority%20shareholder#:~:text=Legal%20Definition%20of%20minority%20shareholder,or%20influence%20over%20corporate%20action>

[4]J.J. Irani, Report of the Expert Committee on the Company Law, 2005, Ministry of Corporate Affairs.

[5] The Companies Act, 2013; Section 242 (2)

[6] National Company Law Tribunal constituted – new perspectives for dispute resolution, An Article by Khaitan & Co, Lexology, Last updated on 3rd June 2016 available at   https://www.lexology.com/library/detail.aspx?g=b6ddd99b-bba5-46fc-9b12-57206932b31d

[8]Ibid

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