A Critic of Interest of Majority and Minority Shareholders Under Companies Act 2013

“Of all tyrannies a country can suffer the worst is the tyranny of the majority”

– William Inge

In corporate world, all democratic choices and control of a organization are made with the majority rule that is deemed to be truthful and justified. The majority rule of decision making, quite often than not overlooks the views of minority shareholders. Majority power has exquisite importance in the running of a corporation and the courts will now not generally interfere at the instance of the shareholder in matters of internal management.It follows that the general public of the participants enjoy the splendid authority to exercising the powers of the organisation and commonly to govern its affairs and the minority shareholders must concede to most people choice. This, however, may result in a opportunity that the individuals having majority vote may additionally have a tendency to be oppressive towards the minority shareholders misusing their majority strength.To overcome this problem faced by the minority, the Companies Act, 2013 came up with the solution to tackle the problems which are usually faced by the minority shareholders.The principle that the will of the majority should prevail over the will of the minority in matters of internal administration of the company was founded in the case of Foss v. Harbottle which is today known as the rule in Foss v. Harbottle.According to this principle, the courts will not, intervene at the instance of the shareholders, in the management of a company it’s direct so long as they are acting within the powers conferred on them by the articles of the company.

 OPPRESSION AND MISMANAGEMENT

In Companies Act, 1956, the protection for the minority shareholders from oppression and mismanagement have been provided under section 397 (An Application to be made to company law board for relief in cases of oppression) and 398 (An Application to be made to company law board for relief in cases of oppression)therefore, right to apply to the company board for the oppression and mismanagement is provided under the section 399, that is, meeting 10% of shareholding or hundred members or one-fifth members limit. however, relevant government under their discretionary powers has allowed any numbers of shareholders to apply for the company board for the relief under Sections 397 and 398. Whereas, on the other hand, under Companies Act, 2013, the relief from the oppression and mismanagement has been provided under Section 241-246.

In addition, under the section 245, companies Act, 2013, the new concept of class action has been introduced which was non-existent in companies Act, 1956 wherein it provides for class movement suits to be instituted against the company as well as towards the auditors of the company.Piggy Backing provision states that if the majority sells their shares then the minority shareholder right has to be included in the deal. Moreover, “Piggy Backing” requires the party to consider the purchase of the business to sell 100 percent of the outstanding shares. To ensure the compulsory provisions of the minority shareholders”.

 “In the early period, the Court followed the Majority rule completely and allowed even the irregular acts of the majority shareholders to be made regular through resolution. This was seen in the case Bhajekar v. Shinkar where the board of directors of a company passed a resolution appointing certain persons as managing agents. The resolution was confirmed by the company in the general meeting with the complete knowledge of all the material facts. Some minority directors brought a suit claiming the resolution to be declared invalid since it was irregular. The court held that it was the right of the company to ratify any type of agreement even if it was irregular and the Court will not interfere in the internal affairs at any cost. Similarly, in Rajahmundry  Electric Supply Corporation Ltd. v. Nageshwara Rao and Bagree Cereals v. Hanuman Prasad Bagri, it was observed that the Courts will not interfere in the internal affairs of the Company or the management of the directors as long as they act within the ambit of the powers conferred on them under the Articles of Association of the company. Over the years, the Judiciary has deviated from the strict sense of the majority rule, so as to safeguard the interest of minority over majority shareholders. It has tried to maintain a balanced view.The Court in Sri Ramdas Motor Transport Ltd. v. Tadi Adhinarayana Reddy and Ors. has stated that under section 397 of the Companies Act 1956 any member of the company who complains that the affairs of the company are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members may apply to Company Law Board for an order under that section. However, the majority shareholders are not deprived of their democratic rights due to minority activism.This was also upheld in the case of Shanti Prasad Jain v. Kalinga Tubes Ltd.A fight between broke out two groups of business magnates for the control of a certain company. The appellant chairman of the company alleged that the affairs of the company were conducted in a manner that was oppressive to him and his group of members. The appellant also contended that the allotment of new shares to outsiders was for defeating the rights of the existing shareholders and that it amounts to oppression. The Apex Court held that the High Court was right in holding no case for action under Section 397, as mere fact of allotment does not constitute oppression. The court clarified that the facts should be there to justify any potent mismanagement or oppression. The Court in Miheer H. Mafatlal v. Mafatlal Industries Ltd. held that the Court cannot intervene if the scheme is sanctioned by the majority of shareholders and if it is lawful. Court can only go through the scheme and examine if it has complied with all the requirements under Section 391 (2) and if it is passed by the requisite majority. If the scheme passed by the company with majority is just and fair, then the Court will not interfere. But it will interfere if the the majority shareholders action affects the class interest of such equity shareholders.

SQUEEZE OUT

 “Squeeze out implies the acquisition of minority shareholders by majority shareholders through cash compensation. It is a mechanism where the shareholders holding 90% or more shares of a company have the power or ability to acquire the shares of the minority shareholders. It is a mechanism to lower down the power of the minority shareholders. Though the concept of ‘squeezing out’ was practically prevalent in the corporate sector throughout the world, but under Companies Act, 2013, Section 236 introduces the concept explicitly. This was enforced by the Ministry of Corporate Affairs vide notification dated December 7, 2016 which is exactly five years from now. Where directors fail to take appropriate action against any wrongdoing or fraud committed against the shareholders. In Pavlides v Jensen, it was held that actual fraud should be caused in order to bring action against the company and not mere negligence. But Daniels v Daniels came up with a more liberal approach i.e. if shareholders had no other option but to sue the directors, they can. Where the directors act in such a manner that benefits them at the cost of the company, then the shareholders having no remedy to it, shall be able to file a suit against the directors. Squeezing Out is a situation where minority shareholders are given the opportunity to give up their shares to the majority shareholders and exit. Section 236 elucidates the purchase of minority shareholdings by the majority shareholders in exchange of considerations. Though inclusion of the concept of squeezing out is no-doubt a progressive move for India, yet the drawback lies to the fact that there is no clarity to the provision. Like in case of UK, USA and Norway as elucidated above, the term “compulsory acquisition” has been mentioned, which indicates that the minority shareholders do not have much option but to give their shares away for acquisition. They have the right to dissent to the price paid to them. Whereas in case of Australia the minority shareholders can submit objection which are required to be considered.So, if Section 236 is amended to an extent that it shall clear out the ambiguity, then it can be treated as a fulcrum for deciding the boon and controversies in future.”

BALANCE OF INTEREST

“Every Shareholder plays an essential role in the company and therefore, there must be a proper balance between majority and minority shareholders for the welfare of the company. The Companies Act also provides certain rights to minority shareholders so that they cannot be abused by controlling shareholders. On the other hand, there is also a need of majority or supremacy while taking decisions on behalf of the company. Therefore, there are some steps to maintain a balance between both majority and minority shareholders. ‘Buy out’ is one of the steps which can balance the interest of both the shareholders i.e. if the minority shareholders want to sell their shares at a fair value, then it is the duty of the majority shareholders to buy the same at a fair value. However, if the controlling shareholders refuse to do so, then the Articles of Association gives a right to the dissenting shareholders to demand the same from the company.”

SOME RECENT TRENDS

The origin of the class actions suits in the U.S. was in the year 1842 when the Equity Rule 48 gave the individuals the right to file such suits. After multiple changes and revisions, it gained its current form in the year 1966.Since then, this option has been used on numerous occasions in the U.S. Even in 2006, many shareholders in the U.S. lost their money after investing in the shares of Enron. They received a total of $7.2 billion after a probe revealed that the officials of the company had falsified their to the investors and had hidden the losses before going bankrupt. Hence, it is pretty clear that the class action suits are pretty common in U.S. and are one of the usual redressal mechanisms.In India, before the commencement of the new Act, people filed for class action in the name of Public Interest Litigation. The class action suit dealt under Section 245 of the Companies Act of 2013 came into place only because of the Satyam Computer Services Scam, popularly known Satyam Scam that broke out in 2009. Lot of members were affected but were without any remedy. The investors in India did not have any legal recourse while their counterparts, who were in USA filed the class action suit against the company and got compensation from the company. The class action suit is a mechanism which evolved to overcome `Collective Action’ problem, wherein the suits by smaller stakeholders are not cost effective, and hence, may never get filed.The question that arose here was why is there a need for a separate provision under Section 245, despite remedies being there for oppression and mismanagement. It is seen that Section 245 of the Act also covers depositor sand the court generally gives restraining orders to the company under   Section 245. Another added advantage here is that the National Company law Tribunal generally gives a public notice after the class action is filed. This serves as an opportunity for any other affected parties to join which will then make this a representative action for them.

The other question that arises here is if this mechanism is used in India as often as it is used in the U.S., considering that it has been five years since its introduction to India. The answer remains the same. It has not been the most popular redressal mechanism in India. The major difference in India and U.S. is that in the U.S., the law firms and lawyers act as catalyst and ask the affected parties to file the case. This is because they get a share from the compensation and the aggrieved parties need not pay any for the legal assistance sought. Again, this possible because in the U.S. lawyers are allowed to charge contingency fees, i.e., the lawyer gets his fee only and if the case is won. In India, lawyers are barred from charging such fees. Relaxing this rule might encourage class action suits as it helps both the lawyers as well as the affected parties.Secondly, the Investor Education and Protection Fund will be used to provide any reimbursement of the expenses which were incurred while pursuing the suits under Sections 37 and 245 by the affected parties. Practically speaking, the government controlled fund cannot manage the class action suits as there is a high possibility of misuse”.

ANALYSIS AND SUGGESTIONS

“The rule in Foss v. Harbottle is actually rule of majority supremacy. It means that once a resolution is passed by the majority, it is binding on all the members.This principle was earlier considered as the symbol of democracy. But as far as India is concerned, this principle stands diluted and is not followed in its strict sense.The Companies Act of 1956 gave some provisions to protect the minority shareholders from the majority shareholders. It was the first step taken by the legislature to recognize the rights of the minority shareholders in India. In the Companies Act, 1956, the minority shareholders were not considered as a major part of the company due to the suppression by the majority in the company. But Companies Act of 2013 has taken various crucial steps to safeguard the interest of the minority rights of the shareholders in the company irrespective of the existence of oppression and mismanagement of the company affecting the rights of the minority shareholders. It can also be ascertained that the core intention of the legislation is to safeguard the interests of the minority shareholders. But the challenge to this is the enforcement of these rights. The minority shareholders‟ rights guarantees proper administration only when it is implemented successfully by giving importance to the minority shareholders in the management of the company.Another major flaw in the Companies Act of 2013 is that the numerical threshold that is mentioned under Section 244 of the Companies Act of 2013. While it is understood that there should be some filters to ensure that frivolous suits are not filed and the Court’s time is not wasted, it is difficult to meet the requisite number mentioned. This came into light after the recent Tata and Cyrus Mistry conflict where the Mistry group‟s plea was initially rejected as they did not fulfil the numerical threshold. Though the power of waiver is given to the NCLT, there is no clarity on when the NCLT can exercise that right and what is the criteria for the same. Generally, having filters for direct actions such as for oppression, which the shareholders bring in their own names and to assert their rights (rather than that of the company), goes against the spirit of corporate law and also ends up enfeebling the minorities. The introduction of class action suit is one step in the right direction. Efforts must be taken to create awareness regarding the same, so that the affected parties use this mechanism and get justice. This will also lead to reduction in the number of lawsuits since it has allowed a group of people to file the case against one defendant on common grounds.Further, the companies have started taking steps to ensure that the rights of the minority shareholders are not violated. The concept of “piggybacking” is being followed presently. Accordingly, if the majority sells their shares then the minority shareholder right has to be included in the deal. Moreover, it also requires the party to consider the purchase of the business, in order to sell 100% of the outstanding shares”.

CONCLUSION

“Majority rule is applicable in the country but after a number of instances of exploitation by majority shareholders, a revised approach has been provided for in Indian company law by majority shareholders, a revised approach has been provided for in Indian company law by providing protection to minority shareholders by giving certain rights to them. There is always a conflict between minority rights and majority rights and for the smooth functioning of the company, there is a need to mitigate these conflicts. Therefore, the Companies Act, 2013 provides a remedy to minority shareholders so that majority shareholders are not able to abuse their power and prejudice the interest of minority shareholders.”

“When a company can establish a proper balance between its majority & minority shareholders then obviously the company runs smoothly which results increase in profit. Both of these shareholders are internal stakeholder where the total company functioning by them. So it is very essential to a company to maintain its own internal environment to function properly. Therefore, a company can ensure its sound environment through transparency in decision making, good accountability and safeguarding the interests of shareholders” and “while a company can establish a proper balance between its majority and minority shareholders then obviously the company runs smoothly which results increase in profit both of these shareholders are  internal environment to function properly.”

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