IS THERE A BALANCE BETWEEN MINORITY RIGHTS AND MAJORITY GOVERNANCE UNDER THE COMPANIES ACT OF 2013? BY - DIYA KULARNI, DIMPLE ASWANI & SRIKARA BADARI YS
IS THERE A BALANCE BETWEEN MINORITY
RIGHTS AND MAJORITY GOVERNANCE UNDER THE COMPANIES ACT OF 2013?
AUTHORED BY - DIYA KULARNI,
DIMPLE ASWANI & SRIKARA
BADARI YS
SAP ID
-500092185
BBA LLB
BATCH 1
INTRODUCTION
For a long
time, the corporate world has been experiencing shareholder disputes. This issue affects people all throughout the
world, not only in India. A fundamental component of sound corporate governance
is corporate democracy, since the term "governance" in public law
appears to have political connotations.
One of the
democratic pillars of contemporary company law is that all businesses function
on the principle of majority rule. This principle is based on the fundamental
idea that directors are the representatives selected by the business's members
and, as such, are empowered to manage all day-to-day operations. According to
the majority rule, the majority of shareholders have the authority to decide at
general meetings how the firm is administered. A majority of members make the
final decision in such a meeting.
The Rule of majority has been
followed in many countries including India. Since it is deemed
to be just, reasonable, and legitimate, this guideline is typically followed
when making judgments pertaining to the administration and operation of the
corporate world. It is beneficial to the nation's economy and legal system in
addition to the firm in many ways. It allows for collective action on the part
of enterprises. In the leading case of Mac Dougall v. Gardiner
(1875), 1 Ch. D[1].
it is said that it saves the court’s time and
people money by preventing infructuous actions of minority group. This
rule fosters business success, and the more prosperous businesses are, the
stronger the national economy becomes.
However,
the rights and privileges of minority shareholders are limited, which
frequently results in the violation of those rights over the history of the
company because their voice was previously ignored under the pretext that they
had insufficient or no effective say. There are a number of allegations made by
the minority group on the rule of majority. The company Act of 2013 has given
the minorities the rights to claim relief for oppression and mismanagement, but
the question is the effectiveness of these rights.
In this
research paper we will firstly understand the Rule of majority, secondly we
will discuss the effectiveness of the rights and privileges of the minority
stakeholder in the company in India. Lastly we will discuss the landmark
judgements briefly.
METHODOLOGY
The
methodology used to completely study the “Is there a balance between minority
rights and majority governance under the companies act of 2013?” is
philosophical in character and is based upon primary as well as secondary
sources.
primary
information such as Supreme Court rulings and legislative regulations.
secondary
data such as news stories, journals, and other like pieces.
MAJORITY
SHAREHOLDER
A
shareholder that owns and controls the majority of a corporation's stock or has
the ability to cast the majority of votes in a general meeting of the company
is considered to be a majority shareholder. As such, they have control over all
significant decisions pertaining to the management and appointment of
directors, among other things. It has an impact on minority shareholders'
rights since they are essentially denied a voice in how the business is
governed.
A majority
shareholder of a corporation is defined as an individual or group that holds
more than 50% of its outstanding shares. In particular, this gives the majority
shareholder complete control over the company's activities, including choosing
the company's board of directors. While not all majority shareholders
participate in the day-to-day activities of the business, the majority do.
The
majority of the shareholders are often the founders of the company and so the
generally have more power than other shareholders combined.
RULE OF
MAJORITY SHAREHOLDER
Rule of
majority shareholder means the day to day activities of the company are
governed by these shareholders. The hold the upper hand in the company and have
a dominating positions to the minority shareholders.
This rule
was first established in the case of Foss v. Harbottle[2] a ruling in England when the judge decided that the
majority would always have the final say and that the court would not get
involved. Two shareholders, Foss and Turton, have filed an allegation in the
firm's general meeting that the directors had misappropriated and defrauded the
company of its assets. In a public meeting, however, the majority of
shareholders decided not to pursue legal action against the directors,
asserting that they had no liability whatsoever. Thus, the plaintiff filed a
lawsuit in a court of law, claiming that the defendants had deceived the firm
in multiple ways, including by selling the company its land at a price well in
excess of its true value and by fraudulently mortgaging the property. They
begged that the defendant would reimburse the company for all of its losses.
However,
the court dismissed the lawsuit on four reasons, one of which being the
majority rule. The court decided that whatever the directors did, the company's
majority group had already corrected it in a public meeting, so the court would
not become involved in this matter. The court noted the rationale that there is
no mechanism to take a matter to court if someone claims that anything is being
done illegally or irregularly and the majority is free to act lawfully or
regularly. The majority rule is beneficial in preventing infructuous
litigation, the court decided. Afterwards, several cases adopted this logic.
In
MacDougall v. Gardiner,[3]
Mellish LJ noted that the majority rule really helps to prevent pointless
litigation when he stated:
“If the thing complained of is
a thing which in substance the majority of the company are entitled to do, or
if something has been done irregularly which the majority of the company are
entitled to do regularly … there can be no use in having litigation about it,
the ultimate end of which is only that a meeting has to be called, and then
ultimately the majority gets its wishes.”
The court
also ruled that minority groups must abide by the "Majority Rule,"
which states that choices made by the majority are obligatory on them.
The
Bhajekar v. Shinkar[4]
case in India is the first to apply the proper majority rule in a legal dispute
involving the BOD's appointment of certain individuals as managing agents. The
BOD passes a resolution in favour of the appointment, but some directors
disagree, suing to claim the appointment was improper. The lawsuit was
dismissed by the court, however, on the grounds that it was not maintainable
because the majority group had approved it in a general meeting, despite its
irregularities. Though the Bombay High Court noted that “officious interference
by the court in such matters would paralyze the working of all joint-stock
companies” in Parshuram v. Tata Industrial Bank, Ltd., the court had already
acknowledged the non-interference principle in somewhat.
Occasionally,
the majority shareholder would adopt immoral actions that violated the rights
of minorities with the support of majority rule. Therefore, with the growth of
the corporate world, various exceptions to this rule arose for the protection
of minority rights because the rigorous application of majority rule might
occasionally prove to be harsh and unfair for minority shareholders.[5]
MINORITY
SHAREHOLDERS
All
shareholders should be treated equally within the corporate governance
framework. What minority can be is the most essential question that comes to
mind when we talk about minority shareholders. It is a concept of comparative
law whose meanings are based only on the idea of majority.
According
to the Bhaba Committee on the Examination of the Companies Act, 1913,
particular provisions defining "Minority" should be included in the
new Act to provide a reasonable framework. However, in order to represent the
interests of the "Minority," the current Act provides 10% criterion
for enterprises with share capital and 20% criteria for other companies.
"Minority
shareholders" are defined as shareholders with minority holdings in a
corporation controlled by a majority shareholder; nevertheless, this definition
is not included in the corporation Act of 1956. Usually the parent firm, the
majority owners can also be an individual or a network of related shareholders.
The
Suppressing shareholders are limited to 10% of shares under Section 395 of the
Act. For the restricted purpose of exercising their rights before the relevant
forum, a "minority" is defined as having no more than 10% of the
shares.
Those who
own a minimum number of shares in the corporation are often considered minority
shareholders. Minority shareholders have some degree of power. Provisions
granting a minority shareholder leverage to stop the majority from becoming
overly large have always been present in the Companies Acts.
RIGHTS AND PRIVILEGES OF THE MINORITY SHAREHOLDERS UNDER THE COMPANIES
ACT, 1956
On the advice of the Bhaba Committee, which was established in 1950 with
the intention of fortifying the current corporate rules and establishing a
fresh framework for corporate activity in independent India, the Companies Act
1956 was passed. The Companies Act 1913 was repealed in 1956 with the passage
of this legislation.
The Companies Act of 1913 was modified with the primary goal of
identifying ways to safeguard the interests of investors and stakeholders by
providing a legal framework for good corporate governance, which includes small
investors.
The rights of shareholders must be properly and efficiently affirmed in
order to manage the business and to maintain a viable, sound environment. The
following are some of the techniques that they have by virtue of statutes:
·
A disgruntled shareholder may file an appeal with the
tribunal challenging the company's denial of registering the share transfer.
·
To ensure that the Central Government can protect the
interests of the oppressed minority, a predetermined number of members may
appeal to the Central Government for the appointment of a certain number of
people as directors of the firm.
·
A company's contribution has the right to ask the
court to wind it up in a fair and reasonable manner.
·
Any member may rebuild a company's rebuilding or
merger.
·
During a company's winding up process, the liquidator
or any creditor or contributor may request that the tribunal look into the
actions of a delinquent official and take appropriate action.
PROTECTION OF THE RIGHTS OF MINORITY SHAREHOLDERS
Companies
are increasingly using stock options as a recruiting tool for talented workers.
Although these stock offerings can draw in and incentivize important staff
members, they also give rise to a new class of shareholders known as minority
shareholders, who have ownership interests but limited ability to actually
affect corporate governance. To preserve minorities' rights, this regulation
has developed with a few exceptions to the rule of majority shareholders, they
are:
·
Act Ultra Vires: The majority rule only applies when an act is permitted under the AOA or
MOA; if an activity is outside the scope of the MOA or is illegal under the
Companies Act, even a majority resolution will not be able to correct it.
Therefore, the majority rule will be meaningless in these kinds of ultra vires
act cases because any individual shareholder might file a suit to stop the firm
from engaging in such illegal conduct.
·
Those in authority
defrauding the minority: The most significant case
involving this idea is Menier v. Hooper[6],
where a defendant appointed a friend as a liquidator to shield himself from
claims made by the company during the winding up process. In response to a
lawsuit brought by a minority shareholder, the court found that Hooper had
engaged in fraud by permitting even one member to bring legal action against
him.When someone's rights are violated: By virtue of owning shares,
shareholders are entitled to certain rights, including the ability to
participate in general meetings, the right to receive dividends when they are
paid, and other rights outlined in the AOA and MOA. Even a single shareholder may file a
challenge if their right to vote, record their vote, or cast a ballot in a
director election is violated; majority consent is not necessary in this case.
·
Oppression
and mismanagement: Corporate oppression and mismanagement are enduring
problems that have long afflicted businesses and their workers. Reduced
productivity, low morale, and lower profitability have been the outcomes of
mismanagement in a variety of ways, including financial, ethical, and operational
mismanagement. The Companies Act, 2013, Sections 241–246, is Chapter XVI, and
provides protection against this kind of mismanagement and tyranny in India.
Oppression and mismanagement were covered by two separate parts in the 1956
statute; however, the 2013 statute's section 241 now includes both.
The meaning
of these terms should be inferred from the interpretation of judgments even
though no statute defines them. But according to Lord Cooper, the essence of
oppression is when "the conduct complained of seems to at the lowest
involve a visible departure from the standards of fair dealing, and a violation
of the conditions of fair play on which every shareholder who entrusts his
money to the company is entitled to rely," as was the case in the landmark
case Elder v. Elder & Watson Ltd.[7]
The meaning of these terms should be inferred from the interpretation of
judgments even though no statute defines them. But according to Lord Cooper,
the essence of oppression is when "the conduct complained of seems to at
the lowest involve a visible departure from the standards of fair dealing, and
a violation of the conditions of fair play on which every shareholder who
entrusts his money to the company is entitled to rely," as was the case in
the landmark case Elder v. Elder & Watson Ltd.
Furthermore, as Mr. Cyrus Pallonji Mistry was complicit in the illegal
conversion of the corporation from a "Public Company" to a
"Private Company," the case of Cyrus Investments (P) Ltd. v. Tata
Sons Ltd.[8]
concerned Mr. Mistry's reinstatement as Executive Chairman of Tata Sons
Limited. The National Company Law Appellate Tribunal granted Mistry's request
to be reinstated for the remainder of his tenure, initially as the Tata Group
of Companies' "Executive Chairman" and then as a
"Director."
·
The act requires a unique
majority vote: The majority rule as it
developed from Foss v. Harbottle cannot be invoked as a defense by a simple
majority in situations where a special majority is required, such as when
certain acts require consent from a special majority, or 3/4 of the company's
total members. Because of this, any individual employee of the firm has the
ability to stop the company from moving forward with such a basic resolution if
the crucial requirement of a special resolution is not taken into
consideration.[9]
LANDMARK JUDGEMENTS
The Indian
judiciary has made an effort to maintain a fair and impartial stance when
protecting minority shareholders' interests relative to those of large
shareholders.
The plaintiff in Bharat Insurance Co. ltd v. Kanhaiya Lal [10]was
the respondent company's shareholder. The advance of funds at interest on the
security of real estate, equipment, buildings, and other assets situated in
India was one of the aim provisions. The plaintiff requested a permanent
injunction to prevent the corporation from making further investments because
it claimed that the company had made multiple investments without sufficient
security and in violation of the memorandum's terms.
A single member may maintain a suit for declaration as to the true
construction of the article in question in these circumstances. The court noted
that the broad rule in such cases is undoubtedly that in all internal matters,
a company's management is the best judge of its affairs and the court should
not interfere. However, the application of the company's assets is not a matter
of only internal management; it is alleged that the directors are acting ultra
vires in their application of the company's funds.
The minority shareholder's attorney contended in a different case, Sandvik
Asia Ltd[11].,
that while the majority has the authority to lower capital, it must do it in a
fair and equitable manner. Minority stockholders in this instance were not
given any options under the proposal. They were given a deadline and instructed
to either accept the offer and pay the suggested sum or leave the company. The
court ruled that this was extremely unfair and unequal because minority
shareholders were forced to leave the company and the majority could not just
bully the minority out of existence.
The majority in Needle Industries (India) v. Needle Industries Newey
(India) Holding Ltd[12].
claimed oppression from a minority (Indian shareholder) because the minority
was buying out the majority in accordance with government mandate that foreign
shares (the majority) be sold to Indian shareholders. However, the court
decided that the government's mandate, which required Indian minority
shareholders to buy majority shares at market value, did not constitute an
oppressive conduct.
CONCLUSION
Even now, majority rule—which was once a symbol of democracy—is still in
place, but it is no longer mindlessly adhered to, and laws in many nations now
follow it, albeit not as strictly as they did when the Foss v. Harbottle case
became apparent. In the event that this account is not successful, the
shareholders desire no further involvement in the business. It may not be worth
much for them to keep their shareholding, with or without the ability to veto and
participate in decisions. Nothing would be preferable in this situation than to
incorporate a buy clause that would allow the parties to part ways.
A significant recommendation is that shareholders ought to be involved
in both the nomination and the election of directors. Another proposal is to
give shareholders an opportunity to be involved in the establishment of the
Audit Committee, Compensation Committee, etc. Furthermore, proxy members ought
to have the freedom to voice their opinions as well as the ability to vote.
[1] Mac Dougall v. Gardiner (1875), 1
Ch. D
[5] Mike Oluwaseyi Bamigboye, The True Exception to the Rule in Foss v. Harbottle: Statutory
Derivative Action Revisited, Available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2863851
(Visited on 30 Jan 2020)
[7] 1952
SC 49 Scotland.
[10] Sh.
Kanhiya Lal vs Sh. Bharat Bhushan on 16 May, 2015
[11] Sandvik Asia Ltd vs
Commissioner Of Income Tax-I, ... on 27 January, 2006