Ways to Protect the interest of minority Shareholders:

Many provisions of Companies Act, 2013 deals with the situations where minority
shareholders rights have been protected and the same can be divided into various major heads. The
ways to protect the rights of minority shareholders are discussed below.

1. Use of winding up action to protect minority shareholder: This is obviously the most serious
route and so very strict guidance applies. A minority shareholder can petition the court to wind up
the company if it is “just and equitable” to do this. It is generally unlikely this will be in the interests
of any shareholder for various reasons, including the time it will take, the cost implications for the
process and that the company debts require repayment as soon as the process begins. The
shareholder has to show that there is a tangible benefit to the winding up order and that there is no
other alternative.

2. Protecting minority shareholders under crowd funding: Drafting new articles and a shareholders’
agreement for a business wishing to attract a number of small minority investors via crowd funding.
Placing limits on the running of the business via veto rights on salaries paid to the team and
restricted use of dividends. Review of the intellectual property created by the founders to make sure
that all rights were transferred to the company.

3. Resolving dispute over payment of dividends to minority shareholder: Where the majority
shareholder thought they could force the minority shareholders to sell their shares by not paying a
dividend. Minority shareholders may complain about the lack of dividends and if the company have
sufficient distributable reserves to pay a dividend. Because the majority shareholder controls the
board of directors, and the resolution to pay dividend were not being proposed. So, we can use the
power of minority shareholder combined to call a shareholders meeting to approve that a dividend
be paid.

4. Review of Shareholder agreement for a minority shareholder: Review of the articles and
shareholders’ agreement before a shareholder invested to acquire a 10% stake. We can make
suggestions to lessen the risks attaching to the shareholding. Risk reduction included securing
protections via the use of the right to veto key decisions such as review of regular management
accounts, substantial expenditure, sale or winding up of the business.

5. Protecting minority shareholders under crowd funding: Drafting new articles and a shareholders’
agreement for a business wishing to attract a number of small minority investors via crowd funding.
Enhancing the rights for investors whilst complying with the EIS legislation which prevents a
preference being given to investors. Building in control via rights to appoint directors and voting
rights. Placing limits on the running of the business via veto rights on salaries paid to the team and
restricted use of dividends. Review of the intellectual property created by the founders to make sure
that all rights were transferred to the company. Drafting irrevocable deeds of assignment to transfer
the intellectual property.

6. Protection against dilution of shares of a minority shareholder: Unless the articles of association
of a company have dis-applied a shareholder’s right of first refusal (also known as a pre-emption
right), any new shares that are being issued must first be offered to the existing shareholders in such
proportions as to preserve their percentage shareholding in a company. This is to ensure that their
investment is not diluted without first having the opportunity to invest further in a company to
maintain their current shareholding.