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Protection of Minority Shareholders Rights Under Companies Act 2013
Protection of Minority Shareholders Rights Under Companies Act 2013
PROJECT TITLE
SUBJECT
CORPORATE LAW-I
Mr DAYANANDA MURTHY
literature review.........................................................................................................................3
bibilography:............................................................................................................................12
Protection of minority shareholders rights
under companies act 2013- critical
analysis
INTRODUCTION:
Companies Act 2013 doesn’t define the term shareholders explicitly but under sec 2(55), the
term member was defined as subscribers to the memorandum of the company. Based on this
we can define shareholders as those who hold shares in the company.
The shareholders who usually own more than 5o% of the shares of the company are defined
as majority shareholders. But as per sec 236 defines the shareholders who own less than 10%
pf the company’s shares are considered as minority shareholders. According to Black Law
Dictionary the shareholders with less 50% shares are considered as minority shareholders.
But the term minority shareholding is in respect of holding less than 10% of shareholders.
Sec 153 defines small shareholders are those who holds the nominal values of shares of value
not more than 20,000 or as prescribed. So, they can also be considered as minority
shareholders.
1
Report of the expert committee on company law, ”Background”, available at http://www.mca.gov.in/Ministry/
chapter1.html
2
Ibid
1. The shareholder can appeal to the tribunal in case of refusal of registration of transfer of
shares by the company.3
2. The specified number of shareholders can apply to the central government regarding the
appointment of directors as the number prescribed the central government for protection of
oppressed minority.4
LITERATURE REVIEW
Critical Analysis of Section 236 of the Companies Act, 2013, Dr. Sonika Bhardwaj1 &
Amrita Dasgupta
“The controversy relating to the rights of Minority shareholders and the Majority rule has
been the epicentre of discussion since ages. Foss v. Harbottle has marked the intrusion of
Majority Rule i.e. the majority shareholders has the control over the decision of the Board.
But this rule has time and again challenged the rights and interests of the minority
3
Companies Act,1956: Sec. 111(2)- Power to refuse registration and appeal against refusal.
4
Sec. 408- Powers of Government to prevent oppression or mismanagement.
5
Sec. 439(1)(c) -Provisions as to applications for winding up.
6
Sec. 394- Provision for facilitating reconstruction and amalgamation of companies.
7
Sec. 543-Power of Tribunal to assess damages against delinquent directors etc
shareholders. Though the concept of ‘squeezing out’ of the minority shareholders has always
been prevalent, but it lacked a backing statute under Companies Act, 1996. Under Section
236 of the new Companies Act 2013, the concept has been specifically introduced, but is to-
some-extent partipris in its approach. In this paper, we would focus on analysing the existing
scenario of the minority rights and compare the same with the ‘concept of squeezing out’
prevailing in various countries and thereby suggest what can be implemented to fill-up the
shortcomings of Section 236.”
Abetting the misgovernance in India, Corporate Governance Law Review, Vol. 3, Issue 3
(2007), pp. 313-350 Malla, Praveen B.; Jha, Shishir K.
This article discussed about the different cases where there is mis governanace and various
problems experienced by the minority shareholders. It also discussed about the rights of the
shareholders and different instances where the judiciary has intervened in protecting them.
The minority shareholders has right to appoint a shareholder on behalf of them as director in
a listed company who is termed as ‘small shareholders director’ under section 151 of the Act.
The company on application by shareholders not less than 1000 or one tenth of the total
minority shareholders can appoint small shareholders’ director who is considered as
independent director required to fulfil criteria under section 149(6) of the Companies Act,
2013. The listed also has power to appoint suo moto such director. The director cannot be
reappointed after end of his term.8
This section provisions were first brought into action by shareholder of Alembic Limited. The
minority shareholders holding less than 3% of the shares applied an application to appoint
their vice president as director which was rejected by the board in annual general meeting.
Even though this provision is enacted to protect the small investors but some times they can
be pawns in the hands large institutional shareholders who act whims of promoters. The
section should be used with proper balance and checks. Without proper checks and balance
this may end up compromising the interest of small shareholders rather than protecting them.
So it is important the small shareholders’ director in the first place.
8
Rule 7 of the Companies (Appointment and Qualifications of Directors) Rules, 2014
There is no provision in the Act which allows the shareholders with certain holding in the
company can appoint a director. However, section 151 of the Act allows the small
shareholders to appoint a elected director. He is appointed by an ordinary resolution in the
general meeting for a term of 3 years.
The Board of Directors of the company in manner to maximize the value of shareholders and
in their best interest. The shareholders of same class have equal voting rights and thus, the
majority shareholders have more power than minority shareholders and has better position in
the affairs of the company. Most of these are in the scope of law and valid having binding
affect on the minority shareholders also.
There are scenarios where those are not in favour of minority shareholders. The comoany
might take a decision in the interest of majority at the expense of the minority. “In such cases
the minority shareholders can approach the National Company Law Tribunal (hereinafter
referred to the NCLT) under the provisions of the Companies Act, 2013. Chapter XIV of the
Act lays down the remedies that minority shareholders can resort to in cases of oppression
and mismanagement. Section 241, 242 and 244 that relates to oppression and
mismanagement were made effective from 1st of June, 2016.”9
Section 24110 of the Companies Act states that any member can approach NCLT in case of
oppression and mismanagement. They can base their claims on any grounds provided under
section.
The term ‘any member’ has been defined in many cases. One of such cases is S.V.T. Spg.
Mills (P.) Ltd. v. M. Palanisami, “where the court held that the term ‘member’ under section
2(27) of the 1956 act (corresponding to section 2(55) of the 2013 act) has to be construed on
a larger connotation, which means persons other than bearers of share warrants are to be
treated as members. The applicability of section 397 and 398 (corresponding to sections 241,
242 and 244 of the 2013 act) is an equitable jurisdiction which is intended to protect the
minority members of the company from any oppression and mismanagement at the hands of
majority of members.”11
9
http://www.mca.gov.in/Ministry/pdf/Notification_02062016_I.pdf
10
Sec 241, companies Act,2013
11
(2009) 95 S.C.L. 112 (Mad.)
The Madras High Court, in Amalgamations Limited (Now Amalgamations (P) Ltd) & Others
v. Shankar Sundaram & others, “cleared the position as to the question that whether a
member of a holding company can file a petition in the affairs of a subsidiary company? The
Madras High Court upheld the decision of the Company Law Board and said that it had
rightly arrived at a conclusion that it will be improper and illegal to join subsidiaries in the
company application on facts and circumstance of the case. It was stated that when a person
is not a member of a company, his alleging oppression and invoking the provisions of section
397 (Companies Act, 1956) against that company does not arise. Therefore, a shareholder of
a holding company cannot complaint of oppression by a subsidiary in which he is not a
member as there is no legal relation between him and the subsidiary company. Central
government is also empowered to make an application to the NCLT.”12
Section 244 enlists the members who are eligible to make an application under section 241.
“As per the provisions of the section, in the case of a company having a share capital, at least
one hundred members of the company or one-tenth of the total number of its members,
whichever is less, or any member or members holding not less than one-tenth of the issued
share capital of the company, subject to the condition that the applicant or applicants has or
have paid all calls and other sums due on his or their shares and in the case of a company not
having a share capital, at least one-fifth of the total number of its members. But the eligibility
criteria as given under this section may be done away with if it allowed by the tribunal on an
event of an application made to it on this behalf. This is allowed under the proviso of the said
section.”13
A very recent example of maintainability of suit under section 241 and waiver of the criteria
given under section 244 is the ruling of the National Company Law Appellate Tribunal in the
famous case of Cyrus Investments Pvt. Ltd. v. Tata Sons Ltd. “The appeal arose out of the
order of NCLT that rejected the petition filed by the Mistry group alleging oppression and
mismanagement by the TATA sons on the basis that it held only 2.17% of the total share
capital of TATA sons as against the minimum the requirement of 10% given under section
244 of the Companies Act. While deciding an application waiver under this section. It further
clarified that these parameters are not exhaustive but other factors may also be considered.”14
12
C.D.J. (2011) M.H.C. 4938
13
Section 244, companies act 2013
14
Company Appeals (AT) No.133 and 139 of 2017.
In Shanti Prasad Jain V. Kalinga Tubes Ltd, “the court held that, there must be continuous
acts on the part of the majority shareholders, continuing up to the date of the petition showing
that the affairs of the company were conducted in a manner oppressive to some part of the
members. 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
the lack of confidence springs from oppression a minority by a majority. It must involve at
least an element of lack of probity or fair dealing to member in the matter of his proprietary
rights as a shareholder.”15
It is different type of protection given to minority shareholders. A class action suit is applied
before NCLT when a group persons sharing common interest approach NCLT when they feel
that the affairs of the company are conducted in manner that is prejudicial to the interests of
the members.
The concept of class action suits in India finds its genesis in the J.J. Irani Committee Report. 16
This report suggested when the wrongdoers committed fraud on the minority shareholders
who has control to prevent the company to bring an action on its own name, the court may
accept the action brought by the shareholders on behalf of the company. This action is not
brought on personal capacity but on behalf of the company, similarly in principle of standi. If
a person brought action on behalf of other persons all such persons has locus standi. Even
though this principle was upheld in many cases still it is yet to be reflected in law.
The main aim insertion of this principle in the companies act 2013 is to ensure greater
accountability of auditors and protection of minority shareholders from frauds and scams.
“The rationale offered by the Ministry of Corporate Affairs for insertion of this provision was
to see that ‘the shareholder feels like a king’ in matters such as managerial remuneration.”
The satyam scam has highlighted the need of the principle in recovering the losses of the
shareholders which they cannot recoverd from going national consumer rederessal
commission along with supreme court. They only received which did not compensate their
losses. The absence of this provision caused the indian shareholders to lose an amount of $
125 million and even foreign investors has lost so much money in investment. Even though
15
A.I.R. (1965) S.C. 1535
16
Expert Committee on Company Law, Ministry of Corporate Affairs, Government of India, Report on
Company Law,(dated 31st 2005), available at http://resource.cdn.icai.org/8315announ854.pdf
they were prosecuted under SEBI Act and rules the shareholders lost a great amount of their
money due to fraud committed by the company.17
Section 245 empowers the depositors to go against the auditors, promoters, company,
directors or any expert or advisor if they engaged in unlawful or fraudulent act or omission of
the company.
The tribunal along with factors mentioned in the section 245(4) of the Act shall also take into
account rule 85 of the National Company Law Tribunal Rules, 2016 which sets out the
criteria for admitting a class action. The following factors shall be considered for the same:
a) It should be considered whether the depositor made the application with bonafide interest
or not
b) Whether there is any in evidence in relation to involvement of third matter other than the
directors in relation matter stated in section 245(1)(a)-(g).
c) The cause of action is such that the depositor can also take action in his personal capacity
rather than approaching this route.
d) The matter on which the depositor approached the tribunal, he has any direct or any
indirect personal interest in the matter.
e) The cause of action is such that it is not occurred but likely going to occur and the
company is going to ratify it.
f) The cause of action is such so many class persons will approach the tribunal so it better to
consider the class action.
g) there are certain questions on the facts or law that are common for class of persons.
h) The claims made or defences put forward are such that they are common for particular
class.
i) Whether it fair and adequate to allow a representative on behalf of the class on the class.
17
Midas Touch Investors Association v. M/S Satyam Computer Services Ltd. & Ors, Civil Appeal No. 4786 of
2009 (S.C.)
Normally, the minority shareholders have sufficient rights and capacity individually and are
often supressed. Section 245 enables them to come together and take legal action against the
auditors, directors, company, any expert or advisor in case fraudulent and unlawful acts and
omissions committed by them and claim damages. Such legal action cannot achieved by
shareholder if goes under his individual capacity compared to class action suit.
The concept of squeeze out has become popular in past few years. So, it is important to
regulate the concept. It is a tool used by majority shareholders to exploit the minority
shareholders. Since the companies are controlled by major families it is important to regulate
it. It is a concept through which majority shareholders buy the shares of minority
shareholders for compensation. It is way to show how powerful the majority shareholders in
the company. They use this concept to flush out minority shareholders. It may be
advantageous to company but harmful interests of the minority shareholders. Though it is
legitimate it is detrimental to the interest of minority shareholders. They are four ways to
regulate the flush out under companies act 2013.
Section 236 of the Companies act “makes provision for squeeze out which puts forward the
criteria wherein the majority can buy the minority shareholding. If an aquirer or such person
acting in concert with him by reason of any merger, exchange of shares or conversion of
securities, becomes owner of at least 90% of the equity share capital (issued) of the company
then such person has the right to inform the minority shareholders i.e. the remaining 10%
shareholders about his intention to buy their shareholdings. The price offered for such
purchase shall be determined through valuation by a registered valuer. Sub-section (3) of
section 236 also empowers the minority shareholders to offer their shareholdings for purchase
to the majority shareholders.”18
The legal position of the concept was discussed in many cases. In Sandvik Asia Limited v.
Bharat Kumar Padamsi, “the question that was put before the court for its consideration was
that whether the decision to drive out the minority shareholders in exchange of a price can be
said to be unfair and inequitable. The court while giving its decision said that once it is
established that non-promoter shareholders are being paid fair value of their shares, at no
point of time it is even suggested by them that the amount that is being paid is any way less
and that even overwhelming majority of the non-promoter shareholders having voted in
favour of the resolution shows that the Court will not be justified in withholding its sanction
to the resolution.”19
Certain guidelines were laid down by the Bombay High Court in the case of Cadbury India
Limited and also defined the meaning of word prejudice. “The court said that in transactions
involving minority buy-outs it is the duty of the court to make sure that the scheme is not
against the public interest, is fair and just and not unreasonable, does not unfairly
discriminate against or prejudice a class of shareholders and draws a balance between the
commercial wisdom of the shareholders expressed at properly convened meetings. The term
‘prejudice’ in relation to valuation of a scheme would mean something more than just
receiving less than what a shareholder desires, being a concerted attempt to force a class of
shareholders to divest themselves of their holdings at a rate far below what is reasonable, fair
and just.”20
Section 188 of the Companies Act, 2013 does not prohibit such transactions but regulate it for
the benefit of the shareholders. As per the 1st proviso any company which has share capital
of more than 10 crores and interested to enter related party transactions then it can only do
after taking resolution to such effect. Further, the 2nd proviso prohibits the vote of such
member who is a related party. This proviso gives power to minority shareholders to allow
such transaction. It of an important position because most of the companies are controlled by
few families i.e. majority shareholders who are related to each other. Regulation 23(4) of the
SEBI (Listing Obligations And Disclosure Requirements) Regulations, 2015 also lays down
such prohibition.
It is also clarified by Ministry of Corporate Affairs the related party in the context refers only
to the party that is related party in the context of the transaction or contract for which the
resolution is being passed.
In U.K., the listing rules provide a better protection to their minority shareholders by making
the controlling shareholders agreement regarding their duties and responsibilities. The
controlling shareholders are those with person or with whom they are acting in concert with
has 30% of the votes of the company. If any transaction is being held in between the
company and controlling shareholders then there should be fair pricing and he should be
involved in the prevention of issuer in complying with listing rules. In case of withdrawl from
the listing agreement, it requires a majority of 75% votes in favour to protect minority
shareholders. This should be included in the Indian law for better protection of the minority
shareholders.
The rights of the minority shareholders are truly protected when the controlling shareholders
recognize the minority shareholders’ rights. The minority should be engaged in the decision
making process and given opportunity to redress their grievances. The board should take
broad approach in preserving the value of company and interests of all shareholders.
BIBILOGRAPHY:
http://ijrar.com/upload_issue/ijrar_issue_20542723.pdf
Critical Analysis of Section 236 of the Companies Act, 2013, Dr. Sonika Bhardwaj1
& Amrita Dasgupta
Abetting the misgovernance in India, Corporate Governance Law Review, Vol. 3,
Issue 3 (2007), pp. 313-350 Malla, Praveen B.; Jha, Shishir K.
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