INTRODUCTION TO MINORITY SHARE HOLDERS
To start with we will first know the definition of “majority and minority shareholders”.The majority shareholders in a firm or company are those members who own the most shares in the company. The word “minority shareholder” is not defined in the Company Law. However, it is commonly accepted that persons who own minor shares in a company or firm are referred to as minority shareholders. In this article we will also need an introduction to Companies Act.An individual who owns less than 50% of a company’s shares is said to be a minority shareholder. In contrast, a majority shareholder has more than 50% of the shares in a firm, giving them control over the bulk of the company’s decisions.
INTRODUCTION TO COMPANIES ACT
Companies play a significant role in every emerging economy. Companies generally form the basis of developing nations, without which economy of a country cannot br formed completely.The importance of companies in developing nations led to the enactment of 1956 Companies Act.It was not just passed with juridical, mathematical, and scientific considerations in mind; rather, it was primarily centred on the social and economic demands of the fledgling or emerging nation in order to promote economic progress. It was introduced largely to control the establishment, operation, financing, and dissolution of businesses. The law became operative on April 1st, 1956. There were approximately 658 Sections in the original Act. The Act established a number of regulatory frameworks for all organisational, financial, and managerial aspects of a business.
2013 Companies Act The Companies Act of 1956 was finally replaced by the Companies Act of 2013. The Companies Act 2013 contains 470 section and many of them are new, and the obsolete provisions of the Companies Act of 1956 were eliminated. The Act granted shareholders additional authority, and it also attempted to empower women by mandating the appointment of at least one woman director to the Board of every kind of firms in India that were specified. In addition to introducing the idea of corporate social responsibility, this legislation created the National Company Law Tribunal (NCLT) to relieve some of the High Courts’ workload and offer specialised justice to company related cases and controversies.In this article one of the main changes which was brought by the companies amendment act, “the rights of the shareholders” will be discussed in details in this article.
PROBLEMS FACED BY MINORITY SHAREHOLDERS BEFORE THE AMENDMENT
The oppression faced by the minority shareholders by the majority shareholders were the main reason for the amendment.The fundamental cause of oppression of minority shareholders is some of the majority shareholders’ unbridled avarice, which in some circumstances knows no bounds. Since there were prolonged injustice faced by the minority shareholders, and the law specified in the companies act,1956 was unable to serve justice to them in some cases.Thus, the amendment was necessary.
FOSS v. HARBOTTLE 1843 RULE WITH EXCEPTIONS
1)Study of the case- A company is a juristic person and it has a legal entity thus it can be sued and can sue in its own name.Since it is a legal person all the decisions related to the company are taken by the board of directors and its share holders through voting system.Generally when a decision is made by a majority on any matter related to the company, court refrains itself from interfering in any such decision made as long as the directors are working within the power of MoA and AoA (Memorandum of Association and Articles of Association-The scope of operation, goals, regulations and internal administration of a corporation are specified in these two documents.).This is known as majority rule.
In this case Turton and Foss were two minority shareholders of a company, they took a legal action on the directors of the company alleging them of making fraudulent transactions, misappropriation caused to the property of the company and also alleged that the mortgages were given improperly.Both of them filed a case against five directors of the company who were,Thomas Harbottle, Henry Byrom, John Westhead, Richard Bealey. The Court held that an individual shareholder, or any outsider of a company, cannot take any legal action against the wrong done to the corporation as both the company and its shareholders are considered as separate legal entities.It also held that a company may sue and be sued in its own name and a member has no right to take legal action on behalf of the company because its the company which suffered losses and not the person.And the claim was rejected.In another similar case of MacDougall v. Gardiner(1875) ,the court held that the action was rejected by the Court of Appeal. The judge concluded that there was no sense in continuing the case. The company’s internal mechanisms may be able to fix the current issue. In particular, the company’s majority of members had the authority to resolve this issue by passing a resolution to that effect. Therefore, in these circumstances, personal action was not permitted to enforce the case.
Two rules were established
a) Proper plaintiff rule- In this rule it was established that in case of any wrong done to the company or any loss suffered due to the director or any outsider then the company can take a legal action on its name and no other person in its behalf can take a legal action.
b)Majority Principle Rule- It laid down that if the alleged wrong can be ratified by a simple majority of the members by a general meeting then in such a case the court will not interfere with the decision taken by the majority.
There are certain exceptions to the general rule outlined in Foss v. Harbottle. That is an exception to Foss V. Harbottle’s rule.
1. Acts of ultra vires- When a company or its directors act in a way that is illegal or outside the scope of a company MOA or Article, or when they do so while representing the majority of shareholders, those actions are considered ultra vires acts.
2. Minority victim fraud – Whenever the majority shareholders commit any act that amounts to a fraud against the minority stockholders. For instance, the company sells its properties to family members at a discount from their market value.
3. Criminals in Charge- The minority shareholders’ representative action for fraud on the minority will be taken if the wrongdoers are in charge of the business.
4. A decision is necessary simple majority, but it is approved by a special majority. If an act requires a special majority but is passed by a simple majority, a shareholder may initiate a lawsuit against the firm. Minority shareholders may also do so.
5. A majority of shareholders cannot take over an individual member’s membership. He is entitled to all the rights and privileges associated with his membership status. An individual shareholder has the right to demand strict adherence to legislative requirements.
6. Negligence in duty If there is a duty violation by the majority and directors to the harm of the firm, even when there is no evidence of fraud, the minority shareholder may file a lawsuit against the corporation.
RIGHTS OF MINORITY SHAREHOLDERS
Oppression and Mismanagement
Sections 397 and 398 of the Companies Act of 1956 provide protection for minority shareholders from oppression and mismanagement .Section 397 deals with application to the tribunal in cases for relief in cases of oppression and Section 398 deals with the application to the tribunal for relief in cases of mismanagement.
The phrase “oppression” is defined as “where the affairs of the company are being conducted in a manner adverse to the public interest or in a manner oppressive to any member or members” in Section 397(1) of the Companies Act of 1956. Section 397 states that in cases where there is any affair conducted in a manner which is harmful to public interest or in any other way which is oppressive to the members , the members can complain to the tribunal for an order under this section.
While Section 398(1) of the law states that mismanagement is defined as “managing the operations of the firm in a manner adverse to the public interest or in a manner prejudicial to the interests of the company.This section mainly states that if any complain of such mismanagement by any member of the company is received by the tribunal and the tribunal is having an opinion that the affairs are being conducted in a fraudulent manner, the tribunal may make orders for bringing an end to the matters or preventing such mismanagement.Under Section 399, which requires fulfilling 10% of the share capital or 100 members or a fifth of the members limit, the right to apply to the business board for oppression and mismanagement is provided. However, any of the shareholders or the members may now appeal to the corporate board for relief under Sections 397 and 398 and the credit goes to the discretionary powers of the federal government. whereas, on the other hand, under the Companies Act of 2013, relief from oppression and mismanagement has been made available under Sections 241-246, where the relief can be sought from the tribunal in cases of oppression and mismanagement through Section 244(1), which provides the right to apply to tribunal with the same minority limit mentioned in the Companies Act of 1956; however, the tribunal, while exercising discretionary powers, may allow any numbers of shareholders and to take any other actions.
Furthermore, the Companies Act of 1956 did not have a provision for class action lawsuits, but Section 245 of the 2013 Act does. This provision allows class action lawsuits to be brought against both the company and its auditors.
Amalgamation and Reconstruction
The Companies Act of 1956 states in Section 395 that in order to transfer shares or any class of shares of a company to another company, consent of the holders of at least (9/10), or 90% of the shareholders, will be required. This is referred to as the majority suppressing the rights of the minority shareholders. It further specifies that the transferee may notify any dissident shareholders of his intention to purchase their shares within two months of the expiration of the four-month period. Whereas, to address these shortcomings, Section 235 of the Companies Act of 2013 gives the transferee company the authority to acquire the shares of shareholders who oppose a plan that has been approved by a majority of not less than 9/10 in value of the shares, and the transferee company may give notice to the shareholder in question before doing so.
Under section 151 of Companies act,2013 the small shareholders who are holding shares of not more than 20000 rupees, are empowered to elect directors and listed company are required to appoint the elected directors.In Tata Consultancy Services Limited v. Cyrus Investments Pvt. Ltd. & Ors, the Supreme Court addressed the relatively unexplored and current issue of the rights of small shareholders in the context of Section 151 of the Companies Act, 2013 while passing judgement on the larger issue of oppression and mismanagement.
The section specifies that a listed company may have one director elected by such small shareholders.Additionally, it was clarified that listed corporations may elect a small shareholders’ director from among the small shareholders either suo moto(Suo Moto is a latin legal term which means “on its own motion)or by giving notice to not less than 500 or one-tenth of the total number of small shareholders.
Generally speaking, a minority shareholder is someone who holds less than the majority shareholder or less than 50% of the voting power in a corporation. A minor shareholder, on the other hand, is a person who has shares worth at least Rs 20,000.The company also ensures that the small shareholder director should enjoy a tenure of three years.But they are ineligible for reappointment.
E-voting is now required for listed firms with at least 1000 shareholders, which will improve active involvement and provide minority owners a voice in the management of the business. Additionally, it would make it possible for the minority owners to influence the company.
Tag along right or Piggy backing right
In this concept it gives another right to the minority shareholder. When the majority shareholder is ready to sell his shares to an outsider, the minority shareholder can require the buyer to buy his share as well at the same price and on same conditions.
The amendment made in 2013 and creation of new companies act was to safeguard the rights of minority shareholders and to protect them from the oppression and mismanagement faced by them.However, without proper implementation of these provisions rights cannot be safeguarded. Even after are additions in the act, without proper implementation it would remain useless.It can also be understood that back in 1956 minority shareholders were not given such major parts in the company but after 2013 they are also considered as integral part.Thus minority shareholders should be given importance in companies then only proper implementation can be considered.
- 1.https://blog.ipleaders.in/rights-minority-shareholders-companies-act-2013/ (blog.ipleaders)
- 2.Hp legal YouTube channel.
- 3.Companies Act,1956.
- 4.Companies Act,2013
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