Introduction:
A company’s affairs are frequently decided in the best interests of the majority shareholders. Certain choices about the administration of a firm must be made on a daily basis, and these decisions are usually made by the majority of the members. There may be times when the interests of the majority shareholders collide with those of the minority shareholders throughout this decision-making process. All choices, whether in finance or management, are made based on the majority’s vote. Decisions made by a majority are thought to be fair and just, as well as in the best interests of the organization. However, minority shareholders’ opinions are not always taken into account. As they have little authority in the company’s management, their rights and interests are frequently neglected. The business world strives to strike a balance between efficacious and efficient control of the firm while safeguarding minority shareholders’ interests.
A firm can only be profitable if all of its members are working toward the same objective and appreciating each other’s perspectives and working methods. Majority shareholders often abuse their power and authority to take over the interests and rights of minority shareholders, resulting in disorganization and discrimination in the company. The Companies Act of 2013 guarantees that minority shareholders’ rights and interests are safeguarded. The measures designed to protect minority shareholders’ rights aim to ensure that corporations utilize their authority in accordance with natural justice and fairness principles. One of the most onerous issues plaguing current company law is the protection of minority shareholders within the realm of corporate activities. The goal must be to achieve a balance between the company’s effective control and the tiny individual shareholders’ interests.
Minority Shareholders: What do They Mean?[1]
A Minority Shareholder is a shareholder who possesses less than 50% of a company’s total shares. A minority shareholder typically does not have a voting authority over the firm and cannot elect directors to the board of directors on their own. In certain cases, nevertheless, there are no majority stockholders. Although the controlling shareholder may possess less than 50% of the voting rights, he or shall not be deemed a minority shareholder.
Majority Shareholders Have a Fiduciary Obligation to Minority Shareholders
Majority shareholders have a fiduciary responsibility to minority shareholders. This means that majority shareholders must act with transparency, sincerity, good intent, dedication, and impartiality while dealing with minority shareholders. Minority shareholders have a legal right to expect corporate officials and directors to behave in the best interests of the firm and in accordance with the shareholder’s agreement.
Majority shareholders can break this fiduciary responsibility in a variety of ways.
- Generate new businesses to compete directly with the corporate,
- Pay themselves a lot of money, or
- Sell the company’s equity on conditions that are exclusively beneficial to them.
Although the Companies Act, 2013 does not describe the term “minority shareholder,” legal provisions such as Sections 235 and 244 of the Act define the term.
Majority Rule[2]
The decision-making process is an important component of a corporation’s administration, but it is hampered when there is a disagreement between the majority and minority shareholders, with the majority shareholders making choices that are detrimental to minority shareholders’ rights.
The primary concept governing the management of a corporation’s operations is that “the courts will not, in general, intervene at the request of shareholders in concerns of internal administration; and will not intervene with the authority vested on them by the articles of incorporation.”[3]
This is primarily the basic concept that governs the majority rule. In the very ancient landmark common law case of Foss v. Harbottle[4], the rule of corporation ruling by the majority and the concept of “supremacy of majority” was established. In this case, two shareholders of a corporation launched an action against the directors and lawyers for unlawful transactions in which the company’s property was wrongly attributed and squandered. The plaintiffs demanded that the defendants compensate the firm for the losses it suffered as a result of its actions. The Court ruled in the case that minority shareholders could not bring such a lawsuit. The claim was denied in cases when a majority of the company’s shareholders possessed the authority to authorize or ratify transactions. As a result, any lawsuit, if any, may only be filed by the corporation, as the firm is the rightful plaintiff for any wrongs committed against it. Because the corporation operates by majority vote, the majority should have the right to determine whether or not to bring charges against the directors.
In Rajahmundry Electric Supply Corporation v. A. Nageswara Rao, the Supreme Court held that courts would not intervene at the request of shareholders in areas of internal administration and management of the business by the directors as long as they operate within the authorities conferred by the articles of incorporation. Furthermore, if the majority shareholders support the directors, the minority shareholders have little recourse.
A slew of Indian decisions, such as Rajahmundry Electric Supply Corporation v. A. Nageswara Rao[5]and Bagree Cereals v. Hanuman Prasad Bagri[6], reaffirmed the notion that if a simple majority can confirm a wrong, the court would not interfere.
The rule of the majority was demonstrated in the case of VN Bhajekar v. KM Shinkar[7], in which the board of directors chose to appoint managing agents for the business, despite the fact that a few shareholders were opposed to the decision. Despite this, the directors confirmed the appointment. The shareholder filed an application in court, and the court ruled that a few minority shareholders with limited authority are not allowed to bring a lawsuit requesting the court to meddle in subjects such as who should be the company’s managing director.
What does Minority Shareholder’s Interest or Right Mean?
Minority shareholder rights/interests relate to the rights that minority shareholders enjoy as a result of their stock ownership. Participation in sales and some audit privileges are among these rights. These rights are limited in the same way as the number of shares held by shareholders is limited. As a consequence, these are referred to as non-controlling interests. Because minority shareholder rights are generally limited under the company’s articles of incorporation, shareholders may engage in a Shareholders Agreement, which is the greatest form of legal protection for a minority shareholder.
Issues Confronting a Minority Shareholder[8]
The Minority Shareholders come across a various number of issues. The interests of minority shareholders are frequently infringed as a result of the majority shareholders’ greed. Because they have the bulk of the power and authority, the majority of stockholders believe they can do just about anything. The majority of stockholders are also saved in this situation since the board members compensate them. It is just not unusual for majority shareholders to make management choices based on their personal preferences. They make judgments such as illegal transactions, diverting the company’s money, and reinvesting earnings to deny minority shareholders’ rewards. There are certain duties that a majority shareholder should perform towards the minority shareholder. The majority owners owe the minority shareholders a fiduciary duty to pay their returns fairly and loyally. However, majority owners violate these obligations by awarding themselves larger wages, selling stock in organizations that are primarily beneficial to them, or forming new businesses.
Even though the Companies Act, 1956 has measures to safeguard the interests of minority shareholders, the minority has been unable or reluctant to act owing to a lack of time, access, or monetary, or other capabilities. As a response, the minority has had to choose between allowing the majority to control and repress them or pushing them out of the firm’s decision-making process and, eventually, the company. The Companies Act 2013 has tried to ensure that minority shareholders’ interests are always protected, and it may be deemed a huge success in the conflict between majority and minority shareholders.
Minority shareholders require a legal framework for these reasons so that their rights and interests in the firm are not neglected. They have a right to a return when the firm is profitable; majority owners cannot simply refuse to pay them. The courts have condemned these discriminatory actions against minority shareholders.
Unfair Prejudice
In certain situations, a minority shareholder might bring a court petition based on behaviour that amounts to unjust prejudice. There is no explicit legislation that defines the phrase “unfair prejudice.” The term “unfair” refers to wrongdoing, while “prejudice” refers to the harm done to one’s basic rights or interests.
Any shareholder can seek remedy in court if the company’s affairs are being managed in a way that is unduly detrimental to a shareholder’s interests, or if the company’s actual or prospective act or omission will be adverse. If both bias and injustice are demonstrated, the court has a wide variety of authorities to safeguard minority shareholders’ interests, including:
- Determining how the company’s activities will be conducted in the future
- Asking the company to abstain from doing anything
- An order that the company’s articles of incorporation be amended.
- Shareholders would be obliged to purchase the shares of other shareholders.
Oppression and Mismanagement[9]
Sections 397 and 398 of the Companies Act, 1956 protect minority shareholders from oppression and mismanagement by the majority. Oppression is defined as “when the affairs of the company are being conducted in a manner prejudicial to the public interest or a manner oppressive to any member or members,” while mismanagement is defined as “when the affairs of the company are being conducted in a manner prejudicial to the public interest or a manner oppressive to any member or members.”
Minority shareholders satisfying the ten percent shareholding, hundred members, or one-fifth member limit, as the case may be, have the right to file a complaint with the Company Law Board in the event of persecution and/or incompetence. In the event that the limit outlined in Section 399 is not fulfilled, the Central Government has the option to enable any number of shareholders and/or members to petition for relief under Sections 397 and 398.
Sections 241-246 of the Companies Act 2013 contain laws pertaining to oppression and mismanagement. Section 241 Section 244(1) grants the right to apply to the Tribunal under Section 241, with the same minority restriction as Companies Act 1956. Under the Companies Act 2013, the Tribunal may waive any or all of Section 244(1)’s criteria, allowing any number of shareholders to seek restitution. This is significant divergence from the rules of the Companies Act 1956 since the tribunal has been granted the option to enable any number of owners to be deemed a minority, which is likely to be implemented by the tribunal under the new Companies Act 2013.
Measures to Safeguard Minority Shareholder’s Interests
The Companies Act of 2013 established the National Company Law Tribunal (NCLT), a unique tribunal dedicated to protecting the interests of minority shareholders. The Supreme Court established this panel to hear issues involving the corporation. Sections 241 to 246 deal with issues such as discrimination, coercion, and mismanagement in the workplace. Under the Companies Act of 2013, a complaint can be filed to stop discrimination, oppression, and mismanagement.
The Companies Act of 1956 was the first to provide a solution to the problems of oppression and mismanagement. Prejudice, oppression, and mismanagement are addressed in Sections 241 to 246 of the Companies Act of 2013. Section 241 appeals to the tribunal for relief in situations of oppression, etc. This section of the act allows any employee of the organization the authority to initiate a complaint against the firm if it is discovered that:
- The company’s affairs are conducted in a way that is detrimental to the interests of any of its members.
- If there are changes in the interests of creditors, debt holders, or shareholders, or in the company’s management, only a specific class of members will benefit.
- If the central government deems that a company’s internal affairs are being conducted in a detrimental manner, hurting the interests of the company’s members, it can file a complaint with the tribunal.
If a plea is submitted under section 241, section 242 discusses the tribunal’s power. The following are the powers of the tribunal:
- If the court determines that the company’s business or affairs are being conducted in an unfairly biased or oppressive manner to any member of the company, the court might order the company to halt such prejudice and oppression is not ordered since it would be unfair to other members.
- The tribunal could provide or alter the company’s regulations without prejudice. Shareholders might even be ordered to buy the shares of other shareholders.
- To combat tyranny and mismanagement, it might limit the company’s share capital and impose restrictions on the procedure of allotment and transfer.
- If the tribunal finds that the directors and managing directors have benefited unfairly, they might be removed.
Conclusion
It is clear from a close analysis of the provisions of the Companies Act, 2013 that the legislative purpose is to protect minority interests in a more comprehensive way. However, the provisions of the Companies Act 2013 not only necessitate effective implementation in order to address current flaws, but they also necessitate ingraining confidence in minority shareholders in the institutional and regulatory mechanisms that ensure that minority shareholders’ interests are taken into account. By correcting the Lacunas of the Old Act, the lawmakers have attempted to safeguard the interests of minority owners at every level, as seen by the measures above. The proper execution of the provisions above, like any law, is critical in carrying out the legislator’s objective and permitting the preservation of minority shareholder interests. Since the majority rule was established in Foss v. Harbottle[10]under common law, the rule addressing minority shareholder protection has changed through time. We have seen the many exemptions to the majority rule that have emerged over the years via various case laws, starting with the rule that a minority or single shareholder may not seek any redress for a right infringement. As a result, the regulation has been modified, and minority rights are now legally safeguarded.
References:
[1]Ayushi Verma, Protection of Rights of Minority Shareholders, TaxGuru (April 26th,2021) https://taxguru.in/company-law/protection-rights-minority-shareholders.html#:~:text=%20Protection%20of%20Rights%20of%20Minority%20Shareholders%20,of%20the%20articles%20and%20shareholders%E2%80%99%20agreement…%20More%20
[2]Protecting the Interest of Minority Shareholders, Lawteacher.net. https://www.lawteacher.net/free-law-essays/business-law/protecting-the-interest-of-minority-shareholders-business-law-essay.php#citethis
[3]Mac Dougall v. Gardiner, (1875) 1 Ch. D 13.
[5]1956 AIR 213, 1955 SCR (2)1066.
[6]2001 105 CompCas 465 Cal, (2001) 2 CompLJ 397 Cal.
[7](1934) 36 BOMLR 483.
[8]Diva Rai, the protection of minority shareholder’s rights: remedies to unfair prejudice and premises for bringing proceedings –iPleaders (June 15, 2021) https://blog.ipleaders.in/protection-minority-shareholders-rights-remedies-unfair-prejudice-premises-bringing-proceedings/
[9]Nivedha Krishnamurti, Protection of minority shareholders in a company under companies Act, 2013, Legalservicesindia.com. http://www.legalservicesindia.com/article/2427/Protection-of-minority-shareholders-in-a-company-under-companies-Act,-2013.html
[10](1843) 67 ER 189
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