Minority Shareholders & Their Rights in a Company

The article 'Minority Shareholders & Their Rights in a Company' delves into the legal remedies available to minority shareholders in cases of oppressive conduct or actions that unfairly prejudice their interests. 

To safeguard the interests of minority shareholders, the 2013 Companies Act offers strong remedies against discrimination, poor management, and oppression. The Companies Act, 2013 (referred to as CA, 2013) defines a thorough and well-considered strategy meant to protect the interests of minority shareholders and promote caution and openness in a company's overall operations. Minority shareholders frequently have concerns about a company's management, but they lack sufficient evidence to support their concerns. This article examines the rights of minority shareholders in a corporation.

Introduction

Minority shareholders are people or organisations with a small or non-controlling ownership interest in a firm. They typically hold less than a significant percentage of the company's total shares or voting rights. Compared to majority shareholders who own a significant share of the company, these owners frequently have less influence on the company's decision-making processes. Minority shareholders still have some legal rights and protections, nonetheless, to preserve their ownership stakes in the corporation.

The CA, 2013 introduced the National Company Law Tribunal (NCLT) as the authorized body, with the power to address these matters of minority shareholders, oppression and mismanagement, etc. The NCLT is vested with additional powers under Section 242 of the Act. The introduction of class action suits has facilitated transparent decision-making by company management, thereby enhancing protection for all categories of shareholders. The CA 2013 incorporates provisions for the same in its Chapter XVI, titled "Prevention and Oppression of Management," encompassing Sections 241 to 246.

Who are Minority Shareholders?

Minority Shareholders have less ownership in a corporation than majority shareholders, which limits their control over decision-making. A minority shareholder is a person who owns less than 50% of the company's stock. The benefits received by a majority holder are not available to a minority holder. Minority shareholders have few opportunities to profit from a company's operations, such as getting dividends or being able to sell their shares at a profit. The minority shareholder might not be able to vote and has no management authority over the business.

The Foss v. Harbottle, (1843) 2 Hare 461 decision, which is a prime example of the corporate democracy principle that holds that the majority determines what is best for the company, led to the development of the rule of the majority. Although the rule initially appears fair, it raises concerns over the rights of minority shareholders.

Rights of Minority Shareholders under the Companies Act, 2013

Minority shareholders possess certain contractual and statutory rights, which include the following:

1. Oppression and Management:

If any member or members hold a minimum of 100 or 10% of the total number of members (whichever is lower), or at least 10% of the company's issued share capital, they have the right to approach the NCLT if they think that:

• The company's affairs are being run in a way that is detrimental to the interests of the company or the public.
• Any of the company's members are being treated oppressively in the course of business.
• The interests of the firm's members or the company itself are harmed by management errors or significant changes that have an impact on how the organisation is run.

Such oppression may take the form of a majority shareholder breaching fiduciary obligations, misusing management control, withholding dividends, or making personal gains.

2. Class Action Suits:

Minority shareholders who consider that the firm's affairs are being managed against the interests of the company, its members, or depositors may bring a class action lawsuit to the NCLT under Section 245 of the CA, 2013. The following conditions must be met in order to bring a class action lawsuit:

A minimum of 100 members are required, or 5% of the total number of members, whichever is fewer. Additionally, any member or members who possess at least 5% of the issued share capital in the event of an unlisted company or at least 2% in the case of a listed company may also join.

3. General Meeting Request

Under Section 100 of CA of 2013, the board of directors may be asked to call an extraordinary general meeting if at least 10% of the company's voting shareholders demand it. In the case that the board fails to convene the meeting, it may be called by the shareholders themselves. They also have voting privileges at these meetings.

4. Cancellation of Variation of Rights:

Minority shareholders who have not consented to such modifications have the right to petition the tribunal to have any variation of rights attached to their shares revoked.

5. Right to Alter or Restrict Changes in the Company's Share Capital:

Minority shareholders have the right to alter or restrict changes in the company's share capital in cases where there has been an unjustified modification of rights or unjustified dilution of their shareholding. With the use of this privilege, they can safeguard their interests and stop any undesirable changes made without their permission.

6. Contractual Rights under Shareholders Agreements:

Minority shareholders may include clauses restricting changes or changing the share capital of the company in the shareholders' agreement. These clauses could state that shareholders have the right to vote, prohibit share transfers, give preemptive rights, and more. The agreement can also contain rights like board representation, veto power, and termination rights. These clauses are frequently included in the articles of association for the corporation as well.

7. Rights during Amalgamations and Mergers:

Sections 235 and 236 of CA 2013 define the right to corporate reconstruction and fusion. During mergers and amalgamations, minority shareholders have distinct privileges that can be considered by the companies concerned. To guarantee that the interests of the minority shareholders are protected, these safeguarding provisions are often inserted following talks with the firms.

8. The Right to appoint a small shareholders' director

According to Section 151 of the Companies Act of 2013, a listed company may elect one director in the manner and under the terms and conditions specified by such small shareholders. The director must be impartial and serve a three-year term. "Small shareholders" are those with a nominal share value in excess of Rs 20,000 in their total holdings.

9. E-voting Rights:

Under Section 108 of the CA, 2013, certain businesses are required to offer their shareholders electronic voting (E-voting) options. Minority shareholders are given the chance to actively participate and use their voting rights in corporate activities thanks to this provision. These businesses encourage increased participation and diversity among minority owners by introducing E-voting.

Remedies against Oppression and Mismanagement of Minority Shareholders

Sections 241-246 of the 2013 CA establish remedies for oppression and mismanagement. These provisions aim to protect and provide relief to company members who are subjected to oppression, mismanagement, or actions by the majority or management that harm the company's or public interest. The NCLT is empowered to address these problems and provide the necessary directives to put them to rest.

Oppression in the company means that the company’s affairs are conducted in a way that is harmful to the company's interests, the public interest, or the rights of any of its members. The concept of oppression was established in the landmark case of S.P. Jain v. Kalinga Tubes Ltd, 1965 where the Supreme Court outlined that oppressive conduct must be burdensome, harsh, and wrongful, involving a lack of fairness towards minority shareholders. A claim of oppression must be supported by a series of oppressive and unlawful conduct by the majority shareholders, though in some cases a single egregious act may also be sufficient.

Mismanagement in the company's affairs or acts prejudicial to its interests. The scope of mismanagement under the CA, 2013 includes changes that are prejudicial to shareholders or any specific class of shareholders. include the diversion of public money, gross negligence in managing the company's affairs, or inaction. In the case, Chandra Krishan Gupta v. Pannalal Girdharilal Pvt. Ltd., 1982 Delhi High Court made it clear that failing to maintain books of accounts, registers of assets, etc., would result in cases of mismanagement rather than oppression. Additionally, failing to hold Board Meetings and filing of unaudited financial statements, are considered as mismanagement.

Conclusion:

By giving them a variety of rights, the Companies Act of 2013 recognises the importance of minority shareholders in corporate governance. These rights guarantee fair treatment and the protection of their investments while serving as safeguards against potential misuse by majority owners. The rights of the Minority shareholders ensure that they actively engage in decision-making processes and contribute to the general growth and stability of the company. Both minority and majority shareholders must protect and respect these rights in order to promote an open and accountable company culture.

The Companies Act of 2013 has done a lot to protect the rights of minority shareholders. The Act provisions, which include giving relief through the NCLT to resolve accusations of oppression, management failure, and prejudice, are meant to safeguard the interests of minorities. It strikes a balance between the interests of the majority shareholders, the minority shareholders, and the firm as a whole.

References

[1] Shubhendu, Prevention of Oppression and Mismanagement, Available Here

[2] Samriddhi Pandey, Majority Powers and Minority Rights, Available Here

[3] S.P. Jain v. Kalinga Tubes Ltd, AIR 1965 SC 1535

[4] Explain Oppression and mismanagement in Company Management under Indian Companies Act and who can approach can approach the Court, Available Here

[5] Chandra Krishan Gupta v. Pannalal Girdharilal Pvt. Ltd,  1982 (3) DRJ 295

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