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  • Writer's pictureRitik Agrawal

RIGHTS OF MINORITY SHAREHOLDERS AND RELATED PARTIES

Ananya Pandey

Xavier Law School, XIM University, Bhubaneswar

Understanding the Legal Protections for Minority Shareholders and Related Parties

INTRODUCTION

The Company is an artificial entity incorporated under the Companies Act of 2013 that conducts its affairs through a Board of Directors appointed in accordance with the procedures outlined in the Act. The Board of Directors has a fiduciary relationship with all of the company's stakeholders and conducts its affairs in a neutral and unbiased manner. Shareholders are broadly divided into two categories: majority shareholders and minority shareholders. A majority shareholder is someone who owns more than 51% of the company's shares and voting rights, whereas a minority shareholder owns less than 50%. 

The rule of majority is supreme in a corporate democracy! The Majority Rule is based on the highest number of shares (51% or more) held by an individual, rather than the total number of head count. Consequently, with a superspecial majority of at least three fourths, shareholder resolutions may be adopted in most jurisdictions with simple majority or, where a decision is of fundamental importance to the company's operations or future, with a superspecial majority of at least three fourths. Therefore, all members and shareholders are bound by the majority's decision.

It's fine if the interests of a company, its majority and minority shareholders are in alignment. However, a boardroom and shareholder standoff can occur when a strong promoter or management group considers (or is alleged to consider) only its own benefit, at the expense of the company and/or the minority shareholder(s). What recourse does the minority have against the oppressive behaviour of the majority in such a case? Where the majority of management is mismanaging a company and damaging its minority shareholders, what can be done? 

Provisions on empowerment and protection of minority shareholders from oppression and management by majority shareholders, as well as provisions aimed at ensuring fair play and protecting minority shareholders in a company are included in both the Companies Act and guidelines issued by SEBI.

Legal Provisions for Minority Shareholder Protection: Laws and Cases 

Chapter 16 of the Companies Act provides for the prevention of oppression and mismanagement within the Company, and any eligible shareholder may approach the NCLT under section 241/242 to seek redress of his grievances if the Company's activities are detrimental to the public interest or the Company's interest, or in any other manner that is prejudicial to their interest Section 242 provides that the NCLT may grant the applicant a number of reliefs, including the modification of the agreement, the removal of the director, the setting aside of any purchase or sale of goods or services, and so on. Furthermore, minority shareholders have several rights, including the right to be heard at AGMs and other meetings, the legal right to file a class-action suit against the company under Section 245 of the Company Act, the appointment of directors under Section 163 using the proportional representation principle, and so on. 

In the famous case of Foss v. Harbottle[i], which determined that majority rule applies to a company but is not an absolute rule, the concept of protection for minority shareholders can be traced back to this event. Minority shareholders may approach the courts in certain circumstances, such as when the Company's actions are ultra vires or illegal, where there is a breach of fiduciary duties, or in cases of oppression and mismanagement in the Company, irregularities in the Company, such as notice of resolution not being given to minority shareholders, and so on.

Remedies for Oppression, Mismanagement, and Prejudice

Sections 241-246 of the 2013 Act provide relief and protection to members of a company (subject to meeting a minimum numerical threshold) from acts of oppression, mismanagement, and acts of the majority/management of a company that are detrimental to the company's or public interest.

Kalinga Tubes Ltd. vs. S. P. Jain[ii]. If the NCLT is satisfied, on an application made to it, that facts justify the company's winding-up on just and equitable grounds, but that such an order would not do complete justice, it may make such orders as it deems appropriate to put an end to the matters complained of. In that respect, the powers of the NCLT are broad.

Oppression

It is oppression to conduct the affairs of a company in such a way that it will be detrimental for the public interest or its interests, or oppressive on any member or shareholder. Under this provision, it is not possible to remedy the abuse of a person in a capacity other than that of a member, such as a director, unless it is related to the appointment of a director nominated by a shareholder and thus related to the shareholder himself.

The bedrock of principles governing acts of oppression were laid down more than fifty years ago in S.P. Jain v. Kalinga Tubes Ltd [iii], where the Supreme Court expounded on the principles determining the concept of oppression, namely that the conduct must be burdensome, harsh, and wrongful, involving a lack of probity or fair dealing with a member in the matter of his proprietary rights as a shareholder. Moreover, a lack of trust between the majority and minority shareholders is not sufficient if it is not the result of a minority being deprived of control of the company's affairs by the majority.

Mismanagement

In general, the term "misadministration" refers to gross mismanagement of a company's affairs, which is detrimental to the interests of the company. Any change which is detrimental to shareholders or any class thereof has been expanded by the 2013 Act. It can also refer to diverting public funds for unknown purposes, which have a material impact on the company's finances; wholly negligent management of affairs and inaction.

If there is a material change in the management or control of the company, whether by changing the board of directors, manager, or ownership of the company's shares, changing the company's membership, or in any other way, an act of mismanagement may be charged. This change, or the likelihood that the company's affairs will be conducted in a manner prejudicial to the public interest or the interests of the company, its shareholders or any class of shareholders, is the cause of actual mismanagement of the company's affairs.

Conclusion

In summary, the 2013 Act protects the rights of minority shareholders in Indian companies, including a number of reliefs which the NCLT may grant to address oppression, mismanagement, and prejudice claims, as well as minority interests. In balancing the interests of the minority with the majority and the interests of the company, the conditional nature of the determination of a just and equitable case for the winding up of the company in question may seem difficult to achieve, but it allows true justice to be served.

References

[i] 1843 2 Hare 461

[ii] AIR 1965 SC 1535

[iii] AIR 1965 SC 1535


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