Rights of Minority Shareholders

A company is a democratic entity in which the majority of decisions are made by a vote of the shareholders. These shareholders are responsible for making crucial decisions that are important for the working of the company. Like a democracy, there exists a majority and a minority within the diversification of shareholders. Herein, a decision has to be taken to take into account welfare and goals of the minority while also upkeeping the democratic character through the majority shareholders. Investors have a right to know what’s going on with their money, and more disclosure should lead to more educated shareholders and other stakeholders.

The Companies Act of 2013 does not include a definition for the phrase “Shareholders,” but the definition that may be inferred is that the term refers to the individuals who possess shares in the firm. The majority shareholders are those who hold more than half of the company’s shares, and the minority shareholders are those who hold less than half of the company’s shares. The definition of a “small shareholder” under the Companies Act of 2013 may be found in Section 151 and states that the value of the shareholder’s shares must be less than 20,000 Indian Rupees. Those who possess the most stock in a firm is in a better position to influence its direction. Black’s Law Dictionary defines a minority shareholder as “an equity holder who owns less than fifty percent of the equity capital of a company and who does not participate in the control of that company.” When two Victoria Park Co. stockholders filed a petition against the company’s five largest directors, it gave rise to the notion of majority rule. In addition to blaming the defendants for the reappointment of the receiver and the mishandling of the property, the petitioners also alleged that the company’s assets had been misused and not utilised effectively. The court ruled that the petitioners’ claim had no basis for the appeal and was, thus, unfit for the proceedings against the firm or its agents . Thus began the introduction of majority rule in the company.
Stockholders in a company’s minority may be subjected to repression, bias, and discrimination on the part of the company’s majority. Examples of such actions include keeping a share of the earnings for oneself, being shut out of managerial positions, and making other transactions only for one’s own benefit. Sections 397 and 398 (Minority shareholders’ rights) of the Companies Act, 1956 provide protection for minority shareholders against oppression and mismanagement. However, with the advent of Companies Act, 2013, more and more rights have been incorporated into the matter of minority shareholders.
Legislation that safeguards minority shareholders creates a more inclusive business climate by appealing to a wider range of investors, improves internal company dynamics by shielding those on the margins from the whims of the majority, and encourages more ambitious expansion by rewarding those willing to take calculated risks.


RIGHTS OF SHAREHOLDERS UNDER COMPANIES ACT 2013
One of the rights that have been assigned under companies act 2013 to the minority shareholders is the Right to appoint Small Shareholder’s directors. A ‘Small Shareholders’ Director is a member of the board of directors appointed by minority shareholders in accordance with Section 151 of the Act. One of the interesting things about such directors relates to the provisions mentioned in Sec 149(6). If a director meets the requirements for appointment in this Section, he or she may be designated as an independent director and is ineligible for reappointment at the conclusion of his or her term.
Another right that has been conferred to minority shareholders for protection of their own rights is Right to apply to NCLT for Oppression and Mismanagement. The Board of Directors is accountable for steering the firm toward profit maximisation and serving the best interests of its shareholders. Equal voting rights are given to all shareholders in a typical corporate setting. To that end, it is important that the majority owners have more influence over the company’s direction than the minority shareholders have. Often, the minority’s interests are jeopardised by the majority’s actions, and vice versa. In such circumstances, minority shareholders have recourse to the NCLT under the terms of the Companies Act of 2013. In the event of oppression or mismanagement, any member of the business may apply to have the matter referred to the National Company Law Tribunal (NCLT) and may assert claims on the grounds specified in Section 241 of the Companies Act, 2013. A shareholder of a company cannot invoke the provision of Sec 397 of 1956 Act and cannot file a complaint of oppression of a subsidiary company in which he is not a member. There is no legal principle between him and the subsidiary company, as stated by the bench in the case Amalgamation (P) Ltd & Others v. Shankar Sundaram & others. Moreover, the Central Government may apply to the NCLT under Section241(2) of the 2013 Act. In recent landmark events, National Company Law Tribunal (NCLT) rejected a petition filed by the Mistry group alleging oppression and mismanagement by the TATA sons in the case of Tata Consultancy Services Limited v. Cyrus Investments Pvt. Ltd & Ors. The Mistry group held only 2.17 percent of the TATA sons’ share capital, as opposed to the minimum requirement of total 10 percent provided under section 244 of the Companies Act. In this instance, the dominant shareholders, Tata Group, withdrew Cyrus Mistry from his role as director and from all of the Tata Group’s subsidiaries. The petitioner in this matter filed a plea with the Tribunal under Sections 241, 242, and 243 of the Companies Act, 2013 after Mr. Mistry was ousted from his position as CEO of Tata Sons by a resolution issued by the Board of Directors.
However, in some cases like Rajahmundry Electric Supply Corporation Ltd. V. Nageshwara Rao, it was made clear that courts will stay out of a company’s internal affairs and that directors will not be held accountable for their actions if they stay within the bounds of the law and the authority granted to them by the company’s Articles of Association.
The J.J. Irani Committee Report, which introduced the concept of class action suits in India, highlighted the risk of fraud perpetrated on the company’s minority shareholders by the majority shareholders.
The act also provides for Rights of shareholders during Mergers and amalgamations. Consolidation, which includes mergers and amalgamations, is subject to the requirements of the Companies Act, 2013, which provide that such actions must be approved by the High Court or Tribunal. High Court approval is required before the plan can be registered, and this is a requirement for both significant depositors and owners. Following registration, the scheme is disclosed to the company’s shareholders via a notification from the High Court or the relevant Tribunal, followed by an informational meeting for all shareholders and the company’s owners in accordance with Sec. 393 of the 1956 act.
For the sake of protecting the interests of minority shareholders, it is imperative that the valuation of a company’s securities and assets be conducted in a fair and objective manner, something that the audit committee will guarantee by reviewing alternative approaches. A shareholder may make a complaint with a court or tribunal if he or she has grounds to believe the process is not being carried out in accordance with the method provided by law and in an unbiased manner. It is up to the Tribunal to choose a fair and unbiased evaluator. For the same reason, the audit committee has issued guidance recommending that such bids keep an equal valuation for the protection of minority owners. Thus, there is entrustment of Right to fair valuation and safeguarding of minority rights.
CONCLUSION
The Act’s primary focus is on protecting minority shareholders against abuse by the company’s majority owners, and it bears a great deal of duty to do so. But the true issue is not with the legislation itself, but with how it is being enforced, and the law will only be effective if the legislature really uses it. Therefore, the effectiveness of the protections outlined in the Companies Act, 2013 is contingent upon the company’s management. A new trend in today’s business climate is providing minority shareholders with a fair chance to invest in the firm and a voice in critical decisions. The lack of a notion of trust-based fiduciary duty of the significant shareholders who are also liable to the interests of the minority is a fundamental gap in the legislation, although there is a certain amount of law that has been incorporated into the jurisdiction. The Securities and Exchange Board of India frequently makes reference to the fiduciary responsibility as the obligation owed by the majority shareholders in managing the control and management of the firm and placing greater reliance on the rights of the minority owners. Thus, the act clearly helps in bringing the minority shareholders rights to the forefront.

References

Parkinson, J. E., ‘Corporate Governance: Shareholder Democracy and the Monitoring Board’, CORPORATE POWER AND RESPONSIBILITY: ISSUES IN THE THEORY OF COMPANY LAW, CLARENDON PAPERBACKS (Oxford, 1995; online edn, Oxford Academic, 22 Mar. 2012), https://doi.org/10.1093/acprof:oso/9780198259893.003.0022, (09 Oct. 2022)

MINISTRY OF CORPORATE AFFAIRS, https://www.mca.gov.in/MinistryV2/investor+education+and+protection.html, (10th Oct. 2022)

BRYAN A. GARNER, BLACK’S LAW DICTIONARY, (West Publishing Co, 2019)

Means, Benjamin, A Voice-Based Framework for Evaluating Claims of Minority Shareholder Oppression in the Close Corporation, vol. 97, GEORGETOWN LAW JOURNAL, (October 15, 2008)

Mauro Guillen, The Value of Protecting Minority Shareholders in the Market, KNOWLEDGE WHARTON, (13th October, 10:25 am), https://knowledge.wharton.upenn.edu/article/the-value-of-protecting-minority-shareholders-in-the-market/

Expert Committee on Company Law, Ministry of Corporate Affairs, Government of India, Report on

Company Law, available at http://resource.cdn.icai.org/8315announ854.pdf (13th October 2022).

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