In the day-to-day working of a company, some decisions need to be taken regarding the management of the company and these decisions are usually taken by the majority members. In this process of decision-making, there may arise certain opportunities in which the interests of the majority shareholders may come into conflict with the minority shareholders.
In such a case, if the decisions taken are not in the overall larger interest of the company as a whole, but only serve the interest of a particular group, then the minority group whose interest may have been violated can raise its voice against such an action.
The protection of minority shareholders within the sphere of corporate activity is one of the most difficult problems in today’s modern company law. The aim would be to strike a balance between the effective control of the company and the interest of the small individual shareholders.
With regard to shareholder rights, it has been rightly stated by palmer that “a proper balance of the rights of majority and minority shareholders is essential for the smooth functioning of the company”. It is reasonable to expect that in the matters of a company, whatever decisions that are taken are done so in keeping in mind with the principles of natural justice and fair play. In case of failure to do so, it is important that the interests of minority shareholders are to be protected.
Section 397 to 409 of the Companies Act, 1956 states the provision in order to protect the rights of minority shareholders and safeguard their interest against the oppressive acts of majority shareholders.
The rights of Minority Shareholders are based on the principle of Natural Justice. The basic head relating to the administration of the affairs of a company is that “the will of the majority prevails or the majority is supreme”. Except for the power vested in the Board of Directors, the overall powers of the company to control the issues that are with the shareholders which are exercised in the general meeting of a company.
Usually, the general rule is that the majority shareholder’s decision in a company binds the minority. Therefore, it is only a majority of the members who can control the board of directors. The majority is in the position where it is connected in every part of the company. They maintain their rights without considering the interests of minorities which creates a dull effect. They misuse their power to exploit the rights of the minority. In such a case, a proper balance of rights of majority and minority shareholders is essential for the smooth functioning of the company.
A majority shareholder is a shareholder who owns and controls the majority of the stock of a corporation or can cast the majority of votes in a company’s general meeting, and therefore controls all the important aspects of running a company such as the appointment of directors, managerial decisions; etc. It affects the minority shareholder’s rights who are effectively deprived of their say in the running of the company.
An individual or a group that owns more than 50% of a corporation’s outstanding shares may be termed as majority shareholder. This allows the majority shareholder to have outright control of the company’s operations, particularly the election of its board of directors. Some majority shareholders are not involved in the daily operations of the company, but most of them are involved.
Generally, a majority shareholder has more power than all of the other shareholders combined and in fact, the majority shareholders are often the founders of the company.
The Corporate Governance framework should ensure equal treatment of all the shareholders. When we discuss about the Minority shareholder, the most important question that arises in our mind is “what minority can be”? It is a comparative legal concept whose definitions entirely depend on the notion of majority.
The Bhaba Committee on examination of the Companies Act, 1913 felt that a reasonable framework should be enabled through specific provisions to be brought in the new Act to define “Minority”. However, to reflect the interest of the “Minority”, 10% criteria in case of companies having the share capital and 20% criteria in the case of other companies is provided for the interest of the minority in the current Act.
In Section 395 of the Act, the dissenting shareholders are placed in the limit of 10% of shares. Thus “Minority” can be defined as holding not more than 10% shares for the limited purpose of their rights before the appropriate forum.
The Company Act, 1956 nowhere defines the term “Minority shareholders” as “Minority shareholders” are those shareholders who have minority stakes in a company that is controlled by a majority shareholder. The majority shareholders are usually the company’s parent but may also be an individual or a group of connected shareholders. It is more common with smaller companies and in emerging markets. It is understood as a shareholder who individually holds less than half of the shares of the company and who accordingly, does not have management rights or voting control.
Generally Speaking, Minority shareholders are those who have a minimum number of shares in the company. A minority shareholder is not entirely impotent. The Companies Acts have always contained provisions giving a minority shareholder leverage to prevent the overpopulation of the majority.
A minority shareholder can give himself additional rights if things do not turn out as expected. Can a person who holds shares in a company, but not in the majority have a meaningful say in the affairs of the company? Here the word “company” is used in the context of the Companies Act 1965.
Decisions are made by voting and on the basis of a majority vote. The management of the company is in the hands of the directors who constitute the board and are elected forever by the majority of the members present at a general meeting.
Usually, decisions at board meetings are also made with one vote of a director. The chairman will vote, if so provided, have a casting vote in the case of equality in the number of votes for or against a particular resolution. On the other hand, decisions will be taken by shareholders at general meetings. This is usually by hand show.
However, any member has a right to demand a voting poll. This means that the vote will be considered, based on the number of shares held and not just the hands put up in support or opposition. A person, who does not hold a majority of shares and is therefore a minority shareholder will not be able to influence any decision with regard to the appointment of directors or other decisions taken at a general meeting.
Whether such a person was originally the majority shareholder but gave up his majority to accommodate the new shareholders or whether he came into the existing company as a minority shareholder does not really makes any difference and the fact of the matter is that it is the will of the majority that will prevail. The minority shareholder, even if they hold a substantial number of shares, cannot be assured on their own that they will be elected as directors. The majority may sometimes wish to identify a minority shareholder by appointing him or his nominee as a director.
The Companies Act 1956 was enacted on the recommendations of the Bhaba Committee set up in 1950 with the aim of strengthening the existing corporate laws and to provide a new basis for corporate operation in independent India. With enactment of this law in 1956, the Companies Act 1913 was repealed.
One of the major approaches during modification to the Companies Act, 1913 was also to find out measures to protect the interests of stakeholders and investors, through the legal basis for sound corporate governance practices including small investors. In order to maintain a viable sound environment within a company and to run the company, the rights of the shareholders must be effectively and efficiently should be confirmed. Some of the methods which are inherent to them through statutes are as follows:
- An aggrieved shareholder can appeal against the company’s refusal to the tribunal to register the transfer of shares.
- A specified number of members can apply to the Central Government for the appointment of such number of persons as directors of the company as the Central Government can look after the interest of the oppressed minority.
- The contribution of a company is entitled to submit a petition to the court for its winding up on just and equitable ground.
- Any member can rebuild the reconstruction of amalgamation of a company.
- In the course of winding up of a company, the liquidator or any creditor or contributor to a company may apply to the tribunal to investigate into the conduct of a delinquent officer and take action.
Increasingly, companies are attracting skilled employees by offering stock options. While such stock offerings can attract and create incentives for key employees, they also create a category of minority shareholders — an individual with ownership interests but little practical power to influence corporate governance.
Ensuring the fair treatment of this minority category can sometimes be difficult, especially in small, closely-held corporations, where the shares are usually concentrated in the hands of some owners who are often relatives or business associates. To guard against oppressive behaviour, most state’s laws provide minority shareholders with certain rights. While precise rules vary from one state to another, several common law rights have emerged to protect all shareholders, including those in the minority, from oppression.
Additionally, shareholder agreements or corporate bylaws often have protections for minority shareholders. Because a corporation is the common property of all of its shareholders, majority shareholders, who often control corporate management, perform a fiduciary duty to the minority to act in good faith and exercise sound managerial judgment. The constitution of breach of this duty varies from state to state, but generally, the majority must not oppress the minority.
Oppression includes, but is not limited to the misuse of assets or the mismanagement of funds. Such behaviour may result from negligent management practices that cause unlawful shareholder losses such as granting “sweetheart” loans to shareholders or allowing them to use corporate funds to pay personal obligations.
Furthermore, conduct that might be harmless under one set of circumstances may be considered oppressive under another. For example, the payment of large salaries to officers during periods of high income may be considered reasonable, but oppressive when the officers are also majority shareholders and minority shareholders lose out of their share of the earnings by the large salaries.
Additionally, during transactions that affect the form of a corporation, such as mergers or acquisitions, the majority shareholders consider the minority a duty of intrinsic fairness. Intrinsic fairness can be shown by ensuring that the majority treats the minority equally in the transaction and the minority receives a fair value for their shares in case of a sale or merger. Any such transaction, moreover, must take place for valid independent business reasons for the majority’s personal interests, and majority shareholders must fully disclose all the facts and circumstances surrounding the transaction to the minority.
The Courts take accusations of oppression seriously and use their equitable jurisdiction to even the odds. The remedies available to the courts include the appointment of receivers, invalidation of or injunction against the proposed action, payment of damages to shareholders or the corporate, and in the most egregious cases, dissolution of the corporation.
Any complaint accusing the minority shareholder has been ‘unfairly prejudiced’ is a law suit brought against the other shareholders for their personal capacity. Where ‘unfair prejudice’ can be established, the Companies Act 2006 provides that the court ‘may make such order as it thinks fit’. Although this means that the court has very broad powers to make almost any order, by far the most common order made by the court is an order that one or more of the shareholders should purchase the stake of the other shareholder(s).
Indian Judicial System
The Indian Judicial System has endeavoured to ensure a balanced approach in order to safeguard the interest of minority over majority shareholders.
In Bharat Insurance Co. ltd v. Kanhaiya Lal, the plaintiff was the shareholder of the respondent company. One of the object clauses was to advance money at interest on the security of land, houses, machinery and other properties located in India. The plaintiff complained that a number of several investments have been made by the company without adequate security and is contrary to the provisions of the memorandum and therefore prayed for a permanent injunction to restrain it from making such investments.
The court observed, that the broad rule in such cases is no doubt that in all internal matters the management of a company itself is the best judge of its affairs and the court should not interfere. But the application of the assets of the company is not a matter of only internal management. It is alleged that the directors are working ultra vires in their application of the funds of the company. Under these circumstances a single member can maintain a suit for declaration as to the real construction of the article in question.
In another case, Sandvik Asia Ltd., the minority shareholder’s counsel argued that the majority has the right to reduce capital; however, it should be fair and equitable. In the instant case, under the proposal minority shareholders were not given any option. They were given a cut-off date and were told to accept the offer or leave the company after paying the offered amount. This, according to the court, was highly inequitable and unfair as minority shareholders had no choice but to leave the company and the majority shareholders could not bulldoze the minority in this manner.
Finally, there is another aspect where as a proposal to either relinquish the majority control or assuming the minority interest, the shareholder may have been given an assurance of the minimum results that will now be achieved by those or otherwise are in control of the company. Where there is a failure on this account, the shareholders do not want to be a part of the company. Their continuation shareholding with or without the right to participate and veto decisions in the circumstances may be of little value. In such a case, there would be nothing better than to include the provision of purchase so that the parties can go to their separate ways.
This article has been written by Kaushiki Ranjan, 4th Year, BBA, LLB(Hons) student at University of Petroleum and Energy Studies, School of Law, Dehradun.