STATEMENT of FACTS

‘Mundus Ipsum Unitarum (MIU)’ is private company incorporated in India under the
Companies Act of 2013. The shareholding pattern of MIU divides its shares between its foreign
shareholders and Indian shareholders as 60% and 40% respectively. The foreign shareholders
not only constitute a majority among the shareholders, but one of foreign shareholders named
‘Palmer’ is also their representative director in MIU.

On January 27, 2020 Reserve Bank of India (RBI) passed a regulation under Foreign Exchange
Management Act, 1999 (FEMA) and the regulation was notified in the Official Gazette. The
regulation mandatorily restricted the extent foreign shareholdings in a private company to 10%.
This news was brought to the knowledge of the foreign shareholders and the probability of
dilution of their equity was duly conveyed. The foreign shareholders were not in favour of this
consequence.

Several deliberations took place through Board meetings, but the directors and the shareholders
could not come to a common consensus. On February 04, 2020 a notice was sent to MIU’s
registered office in Bengaluru for implementation of the afore-mentioned RBI regulation.
During these tensed circumstances, a hasty resolution for dilution of shares of foreign members
was passed by the Board of Directors without notifying the foreign shareholders. This resolution
was ratified by majority of the existing shareholders through an amendment of the Articles,
although they contravened the previous pre-conditions under the Articles. The Articles
prohibited such acts without prior approval of the shareholders of the Company because an
equitable pre-emption clause made this first right of offer available to the Directors of MIU. The
Managing Director also borrowed money from the bank beyond the powers granted to him
under the Companies Act, 2013. Consequently, the foreign shareholders charged him with a
case of oppression and mismanagement before NCLT.

Meanwhile, the Company continued to run its course of business. The foreign shareholders later
appointed a shareholder, who formed part of the Board. The Company was to acquire another
company and this awaited the approval of the Board. Palmer (now the minority director in MIU)
vehemently opposed the take-over. Subsequently, he was removed by the majority shareholders
and other Directors in accordance with the procedure provided under the Act.
 QUESTIONS PRESENTED

I.
WHETHER THE FIRST RESOLUTION FOR DILUTION OF SHARES OF FOREIGN
SHAREHOLDERS IS LAWFUL?

II
WHETHER THE FOREIGN SHAREHOLDERS’ HAVE A VALID CLAIM UNDER
WITHIN THE PURVIEW OF OPPRESSION AND MISMANAGEMENT?

III.
WHETHER REMOVAL OF PALMER (THE MINORITY DIRECTOR) WHILE A SUIT
IS PENDING BEFORE NCLT JUSTIFIED IN LAW?
 SOLUTION TO THE PROBLEM

I. WHETHER THE FIRST RESOLUTION FOR DILUTION OF SHARES OF

FOREIGN SHAREHOLDERS IS LAWFUL?

A. The first resolution for dilution of shares was unlawful and in contravention of Articles of
Association (hereinafter referred to as ‘Articles’). Further, a shareholder has the right to
raise an objection even if such act is ratified by the existing shareholders. The foreign
shareholders were also entitled to such opportunity of deliberation given that their shares
were to be diluted to the extent of 10%, which makes them ‘minority shareholders’ under
1
the Companies Act (hereinafter referred to as the ‘Act’). In the instant case, the foreign
shareholders are also the directors of the Company. Their consent is necessary for such
substantial change in shareholdings as they affect the working of the Company itself. The
ratification of the amendment of Articles should be taken by way of a majority vote.
Whereas, in the current factual matrix the amendment only took place through a simple
majority. Therefore, it is submitted that the amendment was discriminatory to the founders
as it enabled the majority shareholders to override them in matters relating to the company.
Hence, it was an act of oppression towards the foreign shareholders since the existing
shareholders were aware of the “mandatory” RBI Regulation.
B. This dilution of shares is also violative of the pre-emption clause contained in the Articles
which was an equitable right vested with each and every member of the Company. Any such
transfer of shares, although distributed on a pro-rata basis are still void ab initio 2 and
constitutes an act of oppression.3 The Articles of MIU bind the members to offer the shares
to the Directors before allotting them to any other investors. Violation of this clause of the
Articles also goes against the intention of the promoters to ensure that the capital of MIU
does not arbitrarily gets redistributed.4

Consequently, it is to be noted that any such transfer against the spirit of the Articles is
invalid.

1
Greenhalgh v. Arderne Cinemas Ltd, 1 All ER 512 (1946).
2
Sangramsinh P Gaekwad v. Shantadevi P Gaekwad, at ¶170, (11) SCC 314 (2005).
3
Bhubhaneshwar Singh v. Kanthal India Ltd, 59 CompCas 46 (1986).
4
Dale and Carrington Investment Pvt Ltd v. PK Prathapan, at ¶12, 1 SCC 212 (2005).
 The “mandatory” RBI Regulation or even the tensed circumstances of a deadlock are
immaterial.5 Therefore, this legal act done by illegal means does not have the force of law.

II. WHETHER THE FOREIGN SHAREHOLDERS’ HAVE A VALID CLAIM

UNDER WITHIN THE PURVIEW OF OPPRESSION AND
MISMANAGEMENT?

A suit of oppression and mismanagement may be admitted on two conditions. First, if the cause
of action was prejudicial to the interests of the minority. 6 Secondly, if a substantial change took
place in the day to day governance of the company which affects the interests of its members.7

A. Both the essentials have been met in the current circumstances wherein the foreign
shareholders were not unaware of such resolution since no notice was given to them, let
alone the prejudicial effect of such resolution. Such resolution was re-allotted to existing
shareholders merely with the intention to personally benefit from such an act. In the case of
Scottish Cooperative Sales8 the House of Lords emphasized upon the significance of these
two requirements to prove any case of oppression and mismanagement. The dictum of the
case was reiterated by the Apex Court of India in Kalinga Tubes Case9.
As per this judgement, the majority must commit continuous acts till the date of the petition.
This is evident by the fact how subsequently, Palmer, who is the representative director of
the minority shareholders was removed after he protested against the Company’s decision to
be taken over by another entity. The Apex Court also held that such conduct must be
manipulated by the majority voting power of the Company. The existing shareholders by
way of simple majority have exercised their majority voting power since the equity of
foreign shareholders was reduced to 10% which amounts to a minority share as per Section
244 of the Act.10

5
Pushpa Prabhudas Vora v. Voras Exclusive Tools Ltd, 101 CompCas 300 (2001).
6
S. 241(1)(a), Companies Act, 2013.
7
S.. 241(1)(b), Companies Act, 2013.
8
Scottish Cooperative Wholesale Society Ltd v. Meyer, AC 324 (1959).
9
SP Jain v. Kalinga Tubes Ltd, AIR SC 1535 (1965).
10
Id. at ¶10.
B. The very fact that the members of MIU have not acted in consonance with the Articles
amounts to an unfair prejudice being caused to the foreign shareholders. 11 It is well
understood that the resolution is a result of the majority control of the existing shareholders,
supported by the RBI Regulation, and does not reflect the intention captured in MIU’s
Articles.12

Therefore, a valid suit is filed before the NCLT in light of these grievances.

III. WHETHER REMOVAL OF PALMER (THE MINORITY DIRECTOR)

UNDER THE GIVEN CIRCUMSTANCES JUSTIFIED IN LAW?

Palmer was not only the representative of the current minority in the shareholdings of MIU, but
also represented a class of shareholders whose rights were prejudiced. The Managing Director
illegally borrowed money from the Company and took the step to let it be taken over by another
entity against the interests of the Promoters (Directors). Therefore, the Managing Director of
MIU has traded without any reasonable return on the capital invested. This constitutes an act of
mismanagement of the Company since the existing shareholders have benefitted by virtue of
these acts of the Managing Director.33

A. The removal of Palmer from the Board appellants from the Board constitutes oppressive
and unfairly prejudicial conduct for two reasons: first, the foreign shareholders were not
given a reasonable opportunity of being heard. Secondly, it was violative of the
legitimate expectation of the foreign shareholders. As per the Act, a Director may be
removed by way of an ordinary resolution if : first, a special notice is given to the
members before the resolution is passed.13 Secondly, the Director was given a
14
reasonable opportunity of being heard. The second condition in the present case was
11
Re Saul D Harrison and Sons, 1 B.C.L.C. 14 (1995).
12
M.R. Duggar, Minority Shareholders Buying Out Majority Shareholders: An Analysis, 22(2) NATIONAL LAW
SCHOOL OF INDIA REVIEW 105, 106 (2010).
13
Sec. 169(2), Companies Act, 2013; Rule 23, Companies Management and Administration Rules, 2014.
14
Sec. 169(3), Companies Act, 2013.
 grossly violated when Palmer was removed on account of his protests against the take-
over-decision. Moreover, he was not even provided with an opportunity of being heard.
Therefore, such removal of Palmer (who is also a Director) in violation of these
requirements is invalid. 15

B. The claim of the foreign shareholders before the NCLT do not solely vest on grounds of
removal of Palmer from directorship since it is insufficient under the law. 16 It must be
noted that all members of MIU who have made investments in the Company are entitled
to participate in the management of the Company.17

Each member has a legitimate expectation to participate in such key decisions of the affairs of
the Company.18 Such exclusion from decision-making with perpetual tinge of discrimination
towards Palmer is unfair and prejudicial to the foreign shareholders.

15
Bhankerpur, at ¶117 86 CompCas 8427 (1996).
16
Elder v. Elder and Watson Ltd, S.C. 49 (1952).
17
Per Lord Hoffman L.J., O‟Neill v. Phillips, 1 W.L.R. 1092, 1102 (1999).
18
Id. at ¶17.
(NOTE: The names of the characters and entities are completely fictional and do not intend to
refer to any real life references.)