This article has been written by Mr. Yuvraj Singh Rathore, a penultimate student of BBA LLB (H.) at ICFAI Law School, The ICFAI University, Jaipur.

Abstract:

In the corporate sphere, decision-making is a process that proves to be a significant factor in deciding an organization’s fate whilst steering its path towards the scintillating future or sudden debacle. Albeit, within this framework, minority stakeholders often grapple with oppression and trouble in having their voices heard and their rights protected. Therefore, organization brings several policies, privileges, by-laws, rules & regulations to the fore, which are favourable to minority stakeholders, to avert and redress such circumstance. This article sheds light on the history encompasses the legislations & precendents pertaining to the rights of minority stakeholders. Moreso, it briefs the oppression and mismanagement in an organization with the remedies and reliefs thereof. It explores the dynamics of minority rights and protections within corporate decision-making processes. It delves into the principles, challenges, and mechanisms necessary for safeguarding the interests of minority stakeholders in corporate governance.

Introduction:

The concept of minority rights in corporate governance came in existence pari passu with the difference in ideologies and perception of shareholders, employees, and communities which further bifurcates them into minority stakeholders and majority stakeholders. Minority stakeholders subsumed shareholders, employees, and communities, who do not hold a significant portion of company’s shares/ownership/decision making power which rendered them a subject of oppression sometimes. This concept talks about the protection and empowerment of the rights of the minority stakeholders. It gives some privileges to minority stakeholders in terms of voting rights, representation, transparency, and accountability. Ensuring the just and fair treatment and participation of minority stakeholders is essential for fostering trust, sustainability, and long-term success in corporate operations.

Corporate decision-making is an anfractuous complex process that shapes the amorphous trajectory and outcomes in business spectrum. Involvement of strategic planning, financial management, or policy formulation renders these decisions to have so many implications. However, the interests of minority stakeholders are sometimes overlooked or marginalized in these processes. Therefore, in order to protect the interest of minority stakeholders, companies assimilate several precautions.

Historical Background:

During the afflux of years, manifold methods were brought in praxis to fill the unfair nuance between majority and minority stakeholders which can ultimately result in fiasco of company operations. Whereas, concerning authorities were never hold themselves back from establishing rules & principles, precedents, and enacting legislations in the sake of minority stakeholders. For instance-

Foundation stone for protection of the minority stakeholder’s interest was put in year 1843 by House of Lords in case of Foss vs. Harbottle. In this case Court decided that, unless grave violation of the principle of natural justice with concern to the minority shareholders, the Court should not interfere in the internal matters of the company. There are several exceptions to this rule also, which can be treated as the real sum and substance of the judgment, which allow the Courts to intervene in such matter for the protection of minority stakeholders. 

In year 1913, at the outset of 20th century, when Companies Act 1913 enacted, whereby, an immense freedom was conferred to the Court to pass orders pertaining to the winding up of the company on its own discretion, if Court found it just and equitable to do so. By virtue of the said power of the Court, Court could also deal with the oppression/mismanagement going on with minority stakeholders.[1]

In Companies Act, 1956, relief against the oppression and management were talked about for the first time explicitly, whereto, an extensive power was conferred to the erstwhile Company Law Board (substituted with ‘Tribunal’ by the virtue of the Companies Second Amendment Act, 2002) to grant warranted reliefs so as to protect minority shareholders.[2]

Currently, in Companies Act 2013 (“2013 Act”), there is whole chapter given, viz. Chapter XVI, about ‘Prevention of Oppression and Mismanagement’, whereto, procedure to apply for relief, powers of tribunal, consequences of termination and modification of certain agreements were given, which will be discussed further in length in this article itself. 

Remedies against Oppression, Mismanagement and Prejudice

Oppression:

In the utmost simple terms, it includes the manner in which company’s affairs have been or are being conducted, which is oppressive to any member. [3]

In the case of S.P. Jain v. Kalinga Tubes Ltd[4], Supreme Court laid down several rudimentaries which the pave the path to deal with matters of oppression for 50 years. In the said case Supreme Court observed that oppression includes only those conducts which is burdensome, harsh and wrongful in nature, and mere lack of confidence between the majority and the minority shareholders would not be enough, and such oppression is required to 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.

This removes the obfuscate layer of the presumption that mere an act would be enough to substantiate oppression. Continuous acts, which is prejudicial to public interest or oppressive to any member or which is prejudicial to the interests of the company, on majority shareholder’s part till the date of petition would constitute oppression[5] (mere a rule of prudence evolved by court to prevent bogus litigation). It is to be noted that even a single act in the aforesaid manner would be sufficient to term as ‘oppression’. 

Mismanagement:

In companies Act 2013, the lexicon ‘Mismanagement’ is not explicitly define anywhere, but it encompassed in the section 241(1)(a), whereto, application to Tribunal for relief in cases of oppression, etc is given. In other words, a single definition is given to deal with both ‘Oppression’ & ‘Mismanagement’.

Mismanagement can be understood as the conducting the affairs of company in prejudice, dishonest or inept manner or material change in management of the company which renders the company’s functions mismanaged which ultimately results in the prejudice to the interest of public/company/stakeholders.    

Prejudicial Acts:  

Black’s Law Dictionary defines the lexicon ‘Prejudice’ as “the act which tending to harm, injure or impair; damaging or hurtful” and lexicon “Prejudicial” as “unfairly disadvantageous; inequitably detrimental”.[6]

2013 Act encompasses the term ‘Prejudicial Acts’ as the manner in which company’s affairs have been or are being conducted, which is prejudicial to public interest or the interests of the company. A prejudicial act can be defined as an act which is against the interests of petitioning shareholders.

Remedies and Relief

2013 Act assures the protection of the interest of minority stakeholder under Sections 241-246 of the 2013 Act, thereby, paving a path for seeking relief (subject to meeting a minimum numerical threshold) against acts of oppression, mismanagement & prejudice.

The minimum numerical threshold for initiating an action against oppression/ mismanagement/ prejudicial acts before the NCLT, is either, 

1. members holding at least 10% of the “issued share capital of the company”, or 
2. 1/10th of its total number of members, whichever is less; or, 
3. where the company does not have a share capital, not less than 1/5th of the total number of its members.[7] 

This is to protect the majority from vexatious suits by miniscule minorities. However, the said threshold can be waived, like waived by NCLAT in the Tata Sons case.[8]

The 2013 Act established of the National Company Law Tribunal (“NCLT”) and National Company Law Appellate Tribunal (“NCLAT”) whilst consolidating all corporate jurisdiction into one forum with dissolution of CLB. NCLT/ NCLAT established with aim to centralize, streamline and aid speedy disposal of corporate matters. Resultantly, the Jurisdiction of civil courts/arbitration are thus barred thereto.

The NCLT is conferred with ultimate power to pass order pertaining to winding-up of the company on just and equitable grounds in pursuance to serve complete justice, but it further required it should not be arbitrary on part of company.

For the purpose of availing relief hereunder, applicants are required establish their contentions whilst fulfilling the criteria of being on just and equitable grounds. Thorough loss of confidence in the conduct and management of the company’s affairs, loss of substratum of the company’s business, functional deadlock are regarded just and equitable grounds for winding up. [9] 

In case of Tata Consultancy Services Ltd. v. Cyrus Investments (P) Ltd.,[10] Mr. Cyrus Mistry, who was the Executive Chairman of Tata Sons Limited, was removed from the position along with the directorship in various companies of the Tata Group in pursuance to the resolutions passed at various board and shareholder meetings. A complaint was filed by Cyrus Investments Pvt. Ltd. and Sterling Investment Corporation Pvt. Ltd., in which Mr. Mistry had a controlling stake, who were the shareholders of Tata Group of Companies, alleging the said action by Tata Group of Companies to be prejudice, oppression and mismanagement before the NCLT. Initially, NCLT ruled against complainants, thereby, a appeal was filed by the complainants in NCLAT. The NCLAT, while ruling in favour of complainants, held the removal of Mr. Mistry oppressive/prejudicial and further ordered to reinstate Mr. Mistry as the Executive Chairman of Tata Sons and as the Director of companies from which he was previously relieved. 

The judgment of NCLAT was override by the judgment of Supreme Court came in furtherance of the appeal made by Tata Sons. The Supreme Court observed that the required standards for winding up of the company are not meeting here, thereby, ascertained that the “just and equitable clause” is triggered only in certain circumstances i.e. (a) Functional deadlock – conflict among the members which result in paralyses of the functioning of the company; and (b) Justifiable lack of confidence on the conduct of the directors. Further, it was observed that majority shareholders of Tata Sons are philanthropic Trusts and wherefore, the NCLAT’s decision render those charitable Trusts starving to death.

Exceptions in supra discussed case of Foss vs. Harbottle, are as follows-

1. Fraud– If in order oppress minority, majority commits a fraud by passing resolution, then the rights of minority are required to be protected via the intervention of Court. In  case of Menier vs. Hooper’s Telegraph Co. (1874)[11] court decided that inasmuch as majority was involved in the act which tantamount to fraud, the precedent of Foss vs. Harbottle will not be applicable.
2. Ultra Vires Act– These are the acts which are beyond the powers of a company mentioned in Memorandum of Association. Minority stakeholders are entitled to take actions against the same. In case of Sh. Kanhaiya Lal vs. Bharat Insurance Co. (1933)[12] observed the act of company as ultra vires and hence, protected the interest of minority shareholders.
3. Wrong doers in control– When majority shareholders commits an act, in order to fulfill their malice intentions, which is utterly in the tooth of Memorandum of Association and Articles of Association and such act is likely to harm growth of the company and the overall interests of the stakeholders, then in such conditions Court can intervene.   
4. Prevention of Oppression & Mismanagement– In case when there is oppression or mismanagement, Court becomes entitled to intervene.[13]

Minority Rights in Corporate Decision Making

Corporate Decision Making is the embarking stage where via relational decisions and strategies, such repugnancy can be averted. Inasmuch as minority confronts manifold challenges, for instance-

1. Concentration of Power: Corporate structures often concentrate decision-making power in the hands of majority shareholders or top executives, sidelining the interests of minority stakeholders,
2. Lack of Representation: Minority groups, including women, racial minorities, and marginalized communities, are underrepresented in corporate leadership positions and decision-making bodies, limiting their ability to influence outcomes,
3. Information Asymmetry: Minority stakeholders may face barriers in accessing timely and relevant information about corporate activities and decision-making processes, hindering their ability to make informed choices,
4. Legal and Regulatory Gaps: Weak or inadequate legal frameworks and regulatory oversight mechanisms can create loopholes that undermine the protection of minority rights in corporate governance,
5. Shareholder Activism and Hostile Takeovers: Minority shareholders may be vulnerable to hostile takeover attempts or shareholder activism campaigns that prioritize short-term gains over long-term sustainability and stakeholder interests, 

it becomes essentially significant for company to adopt requisite changes in order to bring amelioration and to avert further conflicts.

There are several areas where companies should aim to focus upon, while decision making, in order to protect the rights of Minority Stakeholders, like- Equality & Non-Discrimination, Representation & Participation, Transparency & Disclosure, Accountability & Oversight and so forth. Despite that if some conflict arises, then multifaceted approach that integrates legal, regulatory, and institutional mechanisms can be addressed to:

1. Legal Protections and Enforcement: Strengthening legal frameworks and regulations that govern corporate governance practices can enhance the protection of minority rights. Clear provisions for shareholder rights, disclosure requirements, and dispute resolution mechanisms are essential components of effective legal protection.
2. Board Diversity and Inclusion: Promoting diversity and inclusion within corporate boards and decision-making bodies can help amplify the voices of minority stakeholders. Companies should adopt policies and practices that promote the recruitment and retention of diverse talent.
3. Shareholder Engagement and Advocacy: Empowering minority shareholders through active engagement and advocacy efforts can amplify their influence and hold corporate leadership accountable. Proxy voting, shareholder resolutions, and collaborative initiatives with other stakeholders can leverage collective action for positive change.
4. Ethical Leadership and Corporate Culture: Fostering a culture of ethics, integrity, and social responsibility within organizations is critical for upholding minority rights. Leaders should lead by example and prioritize stakeholder interests over short-term profits or personal gain.
5. Stakeholder Dialogue and Collaboration: Facilitating constructive dialogue and collaboration between corporate stakeholders, including minority groups, investors, employees, and communities, can foster mutual understanding and consensus on key issues affecting corporate decision making.

Conclusion

In conclusion, the protection and empowerment of minority stakeholders in corporate governance are imperative for fostering trust, sustainability, and long-term success in business operations. Through historical precedents and legislative frameworks like the Companies Act, companies have been compelled to address issues of oppression, mismanagement, and prejudice against minority stakeholders.

The journey towards ensuring minority rights in corporate decision-making is ongoing and multifaceted. It requires a combination of legal protections, board diversity and inclusion, shareholder engagement, ethical leadership, and stakeholder collaboration to create an environment where minority voices are heard, respected, and valued.

By adopting proactive measures and embracing a culture of transparency, accountability, and fairness, companies can mitigate conflicts, enhance shareholder trust, and ultimately drive sustainable growth. Upholding minority rights isn’t just a legal obligation but a moral imperative that contributes to a more equitable and prosperous corporate landscape. As businesses navigate complex decisions and challenges, prioritizing the interests of all stakeholders, including minorities, is essential for building resilient and responsible organizations in the modern era of corporate governance.

REFERENCE

[1] Section 162 (vi) of the Companies Act, 1913.

[2] Section 397 & 398 of the Companies Act, 1956. 

[3] Section 241(1)(a) of the Companies Act, 2013

[4] S.P. Jain v. Kalinga Tubes Ltd. AIR 1965 SC 1535

[5] Sangramsinh P. Gaekwad v. Shantadevi P. Gaekwad (2005) 11 SCC 314

[6] Black’s Law Dictionary, Bryan A. Garner (editor in chief), (11th edn., 2019)

[7] Section 244 of the Companies Act, 2013

[8] This article was originally written by Shaneen Parikha & Namita Shetty, published on Conventus Law website. The link for the same is; India – Protection And Redressal Of Minority Shareholder Rights. – Conventus Law  

[9] Hind Overseas P Ltd. v. Raghunath Prasad Jhunjhunwalla 1976 3 SCC 25.

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

[11] LawTeacher. November 2013. Majority Rule Shareholders. [online]. Available from: https://www.lawteacher.net/free-law-essays/company-law/majority-rule-shareholders.php?vref=1 [Accessed 9 February 2024].

[12] Sh. Kanhaiya Lal vs. Bharat Insurance Co., AIR 1935 Lah74

[13] This article was originally written by Sneha Mahawar, published on iPleader website. The link for the same is; https://blog.ipleaders.in/rights-of-minority-shareholders-principle-and-provisions/#The_Foss_vs_Harbottle_case