1. WHO IS A MINORITY SHAREHOLDER?

The Companies Act of 2013 doesn’t define who counts as a minority shareholder, but usually means one who owns less than 50 per cent of the company’s voting rights or lack direct or indirect control over its management and decision-making processes.

A minority shareholder, as defined in the Merriam Webster Law Dictionary, refers to

“a shareholder whose proportion of shares is too small to confer any power to exert control or influence over corporate action”[1]

A minority shareholder, as defined in the Oxford Reference by Oxford University Press’s Dictionaries, refers to

“a shareholder who owns only a minority of the voting shares of a company. The vast majority of shares are in fact held by minority shareholders. A minority shareholder can always be voted down by the majority if that majority is united, but usually there is no single majority shareholder.”[2]

The core idea of shareholder democracy is that the majority should steer the company’s direction. However, it’s vital that this power is used fairly and doesn’t harm minority shareholders or lead to poor management. Minority shareholders need a way to share their perspectives and be considered in decisions. The law should provide a way to protect their interests, particularly when they’ve been treated unjustly.

  • RIGTS OF A MINORITY SHAREHOLDER

Minority shareholder rights are essential to preserving equity and balance in a company. Minority shareholders are guaranteed a voice and defense against potential abuses by the majority. They usually consist of the ability to vote on important business decisions, information access, and the right to file a complaint when oppressed or treated unfairly. By defending these rights, the law promotes the general integrity of corporate governance and aids in preventing the abuse of majority power.

The Chapter XVI, Sections 241–246[3] lays out guidelines for dealing with mismanagement and oppression in companies. Shareholders may plea to the Tribunal for relief if they believe that company’s activities are oppressive of them or detrimental to public interest. If shareholders or the Central Government feel that the company’s operations are being conducted in a way that is oppressive to members or detrimental to the public interest, they may apply to the Tribunal under Section 241. The Tribunal is given extensive right under Section 242 to address such problems, including buying shares, removing directors, and regulating future behavior. The consequences of ending or changing agreements are described in Section 243, along with limitations on reappointment and sanctions for non-compliance. The eligibility requirements for applications, which include minimum numbers of members needed, are outlined in Section 244(1). Formerly, Section 399(1) of the Companies Act, 1956 specified the requirements for members to submit applications pertaining to mismanagement and oppression, but it lacked a waiver clause. Section 399 of the Companies Act of 1956 has been replaced by Section 244 of the Companies Act of 2013. The eligibility criteria for submitting these applications are kept the same, but a major addition is made by giving the National Company Law Tribunal (NCLT) the power to disregard them. This waiver process is especially crucial for members who don’t fit the requirements outlined in Section 244(1) (a) and (b). The class action provisions introduced in Section 245 allow depositors and members to pursue remedies for the company’s mismanagement, including director and auditor accountability. These sections when taken as a whole offer strong safeguards for minority shareholders and equal and fair management procedures.

  • WHAT CAN BE TERMED AS OPPRESSION AND MISMANGEMENT?
  • Oppressive manner in conducting the affairs.
  • Acts of omission or commission.
  • Usurpation of office of Director.
  • Majority undermining the minority by exercising their rights.
  • Invalid or Illegal Acts.
  • Diverting of company funds.
  • Private agreements for investments in order to divert funds or for changing the shareholding.
  • Clandestine Loans to Directors.
  • Non-cooperation by the majority members.
  • Refusal to accept transfer of shares.
  • Breach of any shareholders agreement.

In S.P. Jain v. Kalinga Tubes Ltd.[4], the Supreme Court outlined the fundamental rules governing acts of oppression;

“The conduct must be burdensome, harsh and wrongful and mere lack of confidence between the majority shareholders and the minority shareholders would not be enough unless lack of confidence springs from oppression of the minority by a majority in the management of            the company’s affairs, and such oppression must involve at least an element of lack of probity or fair dealing to a member in the matter of his proprietary rights as a shareholder.”

The aforementioned decision, along with other landmark rulings that followed after, clarifies the possibility that only a single act may not satisfy the criteria for oppression. The evidence of multiple or persistent misconduct by the company’s majority shareholders is usually what supports allegations that the business is run in an oppressive manner.

Few more provisions under the Companies Act, 2013 gives minority shareholders protection from the oppression, either directly or indirectly. Minority shareholders can request a poll under Section 109, if they are dissatisfied with the resolution being passed by a show of hands. This guarantees a transparent administration process for the company and fair voting process. Further, under Section 123 of the Act, every registered shareholder has the right to receive a dividend out of the profit of the company for that year as per the declaration made by the company. Additionally under Section 151, it is mandatory for listed companies to appoint directors who are chosen by small shareholders. Those who own shares with a nominal value of no more than twenty thousand rupees.

  • CASE LAWS

Tata Consultancy Services Ltd. v. Cyrus Investments (P) Ltd., 2021 SCC OnLine SC 272

Mr. Cyrus Mistry was removed from the directorship of various Tata Group companies through resolutions passed in shareholders’ meetings. Following this, Mr. Mistry and his company, which holds less than a 50% stake, became minority shareholders in Tata Group companies. He then challenged his removal in the National Company Law Tribunal (NCLT), citing grounds of oppression and mismanagement. The NCLT ruled that there was no oppression or mismanagement in the management’s actions. However, this judgment was overturned by the National Company Law Appellate Tribunal (NCLAT) upon Mr. Mistry’s appeal. Subsequently, when Tata Group appealed to the Supreme Court of India, the Court held that.

“That mere removal of a director or executive chairman cannot be termed as a ground for winding up a company. Naturally, in absence of grounds that would justify winding up, no relief for oppression and mismanagement can be granted. Even if the removal of a director is not as per the law unless it is shown to be oppressive or prejudicial to the shareholders’ relief cannot be granted. Since Mr. Mistry was not “representing” any shareholder in the Board, his dismissal would not amount to an act that is prejudicial or oppressive to minority shareholders. Further, chairman and director are posts that call for special personal qualification. Law does not permit to reinstate anybody who was removed from such a post requiring personal qualification.”

Brookefield Technologies Pvt. Ltd., v. Shylaja Iyer and Others, 2020 SCC OnLine NCLAT 829

It was held by the tribunal that;

“A company is an abstract entity in law. The right to complain about oppression and mismanagement lies with the members of a company. Fairness and probity rather than legality are the key factors to be taken into consideration by the Company Law Tribunal in case of oppression. The kind of oppression or prejudice or unfairness if any caused in a given case, depends on the injury caused to an affected person is to be determined according to Section 241 of the Companies Act, 2013.

The burden is on the petitioner to prove oppression or mismanagement. The Tribunal is to consider the entire material on record. The Rights Issue can be examined by the Tribunal in a petition under Section 241 of the Companies Act, 2013.

Under the Companies Act, 2013 the exercise of power by a Tribunal to waive the requirements to file a petition under section 241 of the Act is at its discretion which may be exercised on an application made to it in this behalf.”

Dale S Carrington Invt. (P) Ltd. And Ans v. P.K. Parthpan And Ors. 2004SCC OnLine SC 1067

The Supreme Court on the issue that a majority shareholder who by an act of oppression on the part of the management of the company is converted into a minority shareholder held that;

“The only relief that has to be granted in the present case is to undo the advantage gained by Ramanujam through his manipulations and fraud. The allotment of all the additional shares in favour of Ramanujam has to be set aside. The approach of the Company Law Board was totally erroneous inasmuch as after having found that there was oppression on the part of Ramanujam, he was still allowed to take advantage of his own wrong inasmuch as he was given the option to buy Prathapan’s shares and that too not for a proper price. In our view the Company Law Board was wrong in allowing purchase of shares of Prathapan and his wife by Ramanujam. Such an order amounts to rewarding the wrongdoer and penalising the oppressed party. In the circumstances of this case, asking the oppressed to sell his shares to the oppressor not only fails to redress the wrong done to the oppressed, it also results in heavy monetary loss to him. The relief granted by the High Court was a proper relief in the facts of the case.”

  • CONCLUSION

In conclusion, the Companies Act 2013 provides important protections to minority shareholders, from unfair treatment and oppression. Minority shareholders are able to exercise their rights and have a say in important company decisions. These safeguards are reinforced by court decisions, which confirm that majority shareholders’ repressive acts are subject to legal challenge. When taken as a whole, the legal system and case law support equity and proportionality in corporate governance, enabling minority shareholders to successfully defend their rights.

[1] Minority shareholder Definition & Meaning | Merriam-Webster Legal

[2] Minority shareholder – Oxford Reference

[3] Companies Act, 2013’s

[4] 1965 AIR 1535

Tanvi Anand, Associate, Ductus Legal

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Published by DUCTUS EDGE-A KNOWLEDGE ATLIER

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