 The

management of a company is based on the majority rule. Like any democratic set up, the majority has its way in a company though due provision must also be made for the protection of minority interest. This principle that the will of the majority should prevail and bind the majority is known as the principle of majority rule.

 It was established in the case of FOSS VS. The shareholders in general meeting by majority resolved not to take any action against the directors alleging that they were not responsible for the loss which had been incurred. . therefore. It further held that the company can act only through its majority shareholders. The court ( before amendment of the Act in 2002) dismissed the suit on the ground that the acts of directors were capable of confirmation by the majority of members and held that the proper plaintiff for wrongs done to the company is the company itself and not the minority shareholders. HARBOTTLE where two minority shareholders in a company alleged that its directors were guilty of buying their own land for act of the directors resulted in a loss to the company. The minority shareholders. decided to take an action for damages against the directors.

Held. it was open to the company to ratify the resolution even it was irregular and the plaintiffs were not under these circumstances entitled to maintain the suit and ask the court to interfere  . Some of the directors brought a suit for a declaration that the resolution was invalid on the ground of certain irregularities.The following Indian case illustrates the rule in FOSS VS. HARBOTTLE:  Bhajekar vs. The resolution was confirmed by the company in general meeting with full knowledge of all the material facts. Shinkar  The Board of directors of a company passed a resolution on appointing certain persons as managing agents (now abolished).

As such if any wrong is done to the company.C. Earle(1902) A. it is the company (and not the individual members) which can bring an action. This follows from the rule that only the injured party may sue.  The plaintiff must show that the injury has been caused by a breach of duty to him. as it must always act. The decision in FOSS VS. If a company suffers injury through breach of duty owed to it. HARBOTTLE is the logical result of the principle that a company is a separate legal entity from the members who compose it. through its majority [ Burland vs. then the only plaintiff is the company itself. 83] .

” . Moreover. Ltd. Vs. the minority shareholders can. if the directors are supported by the majority of the shareholders in what they do. (1956) 26 Comp. in general. Nageshwara Rao. do nothing about it. Case 55 (S. in general. In Rajahmundry Electric Supply Corpn. intervene at the instance of shareholders in matters of internal administration and will not interfere with the management of a company by its directors so long as they are acting within the powers conferred on them under the Articles of the company.C) the supreme court observed:  “The courts will not.

HARBOTTLE is that the will of the majority should prevail. and the Memorandum and the Articles. the member agrees to submit to the will of majority of the members expressed in a general meeting and in accordance with the law. Therefore. an action at the suit of minority should not lie. On becoming a member of the company. . The basis of the rule in FOSS VS. whenever the majority could confirm an act.

Being a shareholder requires a person to own at least one full share in a corporation.  Shareholders are people who have purchased interests in a company that makes them partial owners of the company. bring resolutions. This means it generally has more power than all of the other shareholders combined. such an individual may have the right to attend annual meetings. . The majority shareholder is the individual who owns most of a company’s shares. the shareholder is usually afforded certain rights in regards to the company he invested in. Such situations are usually more common with private companies than with public companies. and vote on matters regarding operations. For example. If this is the case.

The disadvantages to minority shareholders are also the reasons why prospective majority shareholders are willing to pay a control premium. The “minority” may have more shares.    Minority shareholders are shareholders who have minority stakes in a company that is controlled by a majority shareholder. and they may find that the company is run in a way which benefits the majority at their expense. but lack control due to how the company is structured: for example. . Minority shareholders are often effectively deprived of any real say in the running of the company. they may include non-voting shareholders.

. They are also adopting more healthy governance practices. In response to this power. the more progressive companies are voluntarily accepting tougher accounting standards and more stringent disclosure norms than are mandated by law. The past few years have witnessed a silent revolution in Indian corporate governance where managements have woken up to the power of minority shareholders who vote with their wallets. It is evident that these tendencies would be strengthened by a variety of forces that are acting today and would become stronger in years to come.

Disintermediation: Meanwhile.The reasons due to which corporate governance has seen improvements are as follows  1. This means that in order to survive companies will need to invest continuously on a large scale.  . but they have also made markets more competitive. financial sector reforms have made it imperative for firms to rely on capital markets to a greater degree for their needs of additional capital.  2. Deregulation: Economic reforms have not only increased growth prospects.

 . the increasing institutionalization of the capital markets has tremendously enhanced the disciplining power of the market. Globalization: Globalization of our financial markets has exposed issuers. Institutionalization: Simultaneously.  5.  4. investors and intermediaries to the higher standards of disclosure and corporate governance that prevail in more developed capital markets.3. Tax reforms: Tax reforms coupled with deregulation and competition have tilted the balance away from black money transactions. This makes the worst forms of mis-governance less attractive than in the past.

The corporate governance framework should ensure the equitable treatment of all shareholders.  These basic rights with their constituents are mentioned below:  Equitable Treatment. AGM processes and procedures to allow for equitable treatment. All shareholders should have the opportunity to obtain effective redress for violation of their rights. 4. Avoidance of undue difficulties and expenses in  . 2. 1. 3. Ability to obtain information about voting rights attached to all classes before share acquisition. including minority shareholders. Same voting rights for shareholders within each class. 5. Vote by custodians or nominees in agreement with beneficial owner. Changes in voting rights subject to shareholder vote. 6.

 . Right to inspect the Register of Members.The right to seek information 1. etc and get copy thereof. 6. 7. 4. 8. 2. Charges. 3. Right to be kept fully informed of what is happening in the company. Right to receive Notice of General Meetings (the AGM or the EGM). Right to inspect the Minutes of General Meetings. Rights to receive annual report and audited accounts. Right to receive quarterly and annual accounts. Fairness to all shareholders irrespective of each individual’s shareholdings. 5. Directors. Debenture Holders. Right to know about the price sensitive information of the company.

5. Right to vote and elect directors and fix their remuneration. 8. Right to get the court to direct the company to call a general meeting. if declared  .The right to voice opinion 1. 4. Right to appoint proxies to attend and vote at a general meeting. Right to receive dividends. 7. 2. Right to nominate director. Right to requisition for a general meeting. Right to appoint auditors and fix their remuneration. Right to be heard and make proposals at shareholders’ meeting. 3. 6. Right to attend general meetings. 9.

Financial and operating results 3. Material foreseeable risk factors 7. Board members. Disclosure of material information 2. Material issues regarding employees and other stakeholders 8.Disclosure and Transparency 1. Governance structures and policies  . Major share ownership and voting rights 5. key executives and their remuneration 6. Company objectives 4.

Common law derivative action 2. Redress mechanism under the Securities Laws  . Redress mechanism under the Companies Act 3.The right to seek redress 1.

This is. the ultimate resort for a shareholder to enforce his ownership rights. of course. .  Company law also provides for another remedy if the minority shareholders can show that the company’s affairs are being conducted in a manner prejudicial to the interests of the company or its shareholders to such an extent as to make it just and equitable to wind it up. Protection of Minority Shareholders  Company law provides that a company can be wound up if the Court is of the opinion that it is just and equitable to do so.

Special Majority  Another safeguard in the company law is the requirement that certain major decisions have to be approved by a special majority of 75% or 90% of the shareholders by value.  . This may not be an effective safeguard where the dominant shareholders hold a large majority of the shares so that they need to get the approval of only a small chunk of minority shareholders to reach the 75% level.

the company must provide all material facts relating to these resolutions including the interest of directors and their relatives in the matter. . Information  Disclosure and Audit Company law provides for regular accounting information to be supplied to the shareholders along with a report by the auditors. but it is a prerequisite for the minority shareholders to be able to exercise any of the other means available to them. Disclosure is also a vital element in the ability of the capital market to exercise its discipline on the issuers of capital. Disclosure does not by itself provide the means to block the dominant shareholders. It also requires that when shareholder approval is sought for various decisions.

 The approval of a minimum of 50% of the shareholders is required for an ordinary resolution. 1956) by the majority shareholders. including for alteration of the share capital . The approval of at least 10% of the shareholders is required for the requisition of an extraordinary general meeting for an application to the Company Law Board (CLT) for relief. if there is oppression or mismanagement (as defined in the Companies Act.

   Qualified  At least 75% of the shareholders must approve a matter before it is passed as a special resolution. a minority shareholder with more than 25% voting rights would have the ability to block special resolutions Minority Minority shareholders with qualified minority may initiate action against decisions of the majority in a court of law. or any shareholder(s) holding onetenth of the issued share capital of the company fully paid-up. Moreover. including for capital increases. therefore. . Therefore. alteration in the memorandum and articles of the company. According to section 399 of the act. impede the functioning of the company at some level. whichever is less. seek intervention of the CLT and. a qualified minority consists of at least one hundred shareholders or one tenth of the total number of shareholders. minority shareholders who hold more than 25% of the shares will have the ability to obstruct special resolutions.

 Company  Law Tribunal (CLT)  The Indian company law shields minorities’ interest by providing an adequate platform at CLT to raise grievances in case of oppression or mismanagement by the majority shareholders of a company. Further. if the minority shareholders wish to continue to be stakeholders in the company and do not want to sell their shares. they can obtain an injunction from CLT prohibiting the majority shareholders or acquirer from taking any action that may be averse to their interest . the minority shareholders can approach the CLT to seek appropriate relief. In circumstances when the minority is forced to exit the company by way of offering a nominal value for the shares held by them. The CLT can order the majority shareholders to purchase the shares of the minority shareholders at a fair price.

the Independent Directors (IDs) have an important role to play in ensuring minority shareholders’ interests are protected. Minority Representation  It is important for Corporations to ensure that board membership reflects the interest of minority shareholders. . In this regard. Minority shareholders can also nominate candidates for the ID position. The IDs also need to be easily accessible for minority shareholders to convey or raise their concerns.

Disclosure should be made of the control structure and of how shareholders or other members of the organization can exercise their control rights through voting or other means. . In order to make an informed decision about the company. This information is of particular interest to minority shareholders.  The beneficiary ownership structure of an enterprise is of great importance in an investment decision. investors need access to information regarding its ownership structure. It is recommended that this disclosure includes the concentration of shareholdings. for example the holdings of the top twenty largest shareholders. especially with regard to the equitable treatment of shareholders.

Where there is no local code on corporate governance. In relation to this “comply or explain” rule. The use of “comply or explain” mechanisms in many countries allows investors and other stakeholders greater access to information about the corporation and is to be encouraged. some countries now require companies with foreign listings to disclose the extent to which the local governance practices differ from the foreign listing standards. . enterprises should follow a “comply or explain” rule whereby they disclose the extent to which they followed the local code’s recommendations and explain any deviations. Where there is a local code on corporate governance. companies should follow recognized international good practices.

The regulator should pass on as much of the burden of ensuring corporate governance to the markets as possible. we have seen Indian companies voluntarily accepting international accounting standards though they are not legally binding. They have voluntarily gone for greater disclosures and more transparent governance practices than are mandated by law. In the last few years. . The regulator can then concentrate on making the markets more efficient at performing its function on capital market. They have sought to cultivate an image of being honest with their investors and of being concerned about shareholder value maximization.   Financial Institutions should act as gate keepers.

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