The shareholders democracy in today’s corporate world signifies the shareholders supremacy in the governance of the business and affairs of corporate sector either directly or through their elected representatives. The government of India has been endeavouring to scatter the shareholdership as widely as possible to avoid concentration of ownership in few hands. It is widely acclaimed fact that in any corporate enterprise the shareholders are the owners, but they are seldom able to exercise any ownership rights. In order to protect the rights of shareholders and enable them to have control over the affairs of the company, the concept of shareholders democracy has been introduced. Shareholders, through general meeting can appoint board of directors, who then manages the routine affairs of the company. Hence, Shareholders are not active participants in the governance of the corporate process, still the directors, as per law, are answerable to shareholders.
SHAREHOLDERS DEMOCRACY
Democracy means the rule of people, by people and for people it is the ability of the shareholder’s to directly or indirectly manage the affairs of the company by electing board of directors who carries the day-to-day affairs of the company.
The concept of shareholders democracy has been introduced to provide authority to the shareholders as economic viability of the company is directly concerned with the shareholders. In order to avoid concentration of powers and to provide authority to the shareholders so as to enable them to exercise control over the affairs of the company there is clear separation between the powers of board of directors and that of shareholders. Shareholders cannot encroach upon the power of board of directors and vice versa.
WHO ARE MINORITY SHAREHOLDERS?
“Minority shareholders are the equity holders of a firm who does not enjoy the voting power of the firm by the virtue of his or her below 50% ownership of the organizations equity capital”.
INTRODUCTION
Majority shareholders are those who own more than 50% shares of the company. A company being an artificial person with no physical existence, functions through the wishes of the majority. It is a cardinal rule of company law that prima facie all the resolutions are passed according to the will of the majority. The resolution of majority of shareholders, passed at a duly convened general meeting, upon any question with which the company is legally competent to deal, is binding upon the minority and consequently upon company. Thus, the majority members enjoy the supreme authority to exercise the powers of the company and generally to control its affairs.
Since the majority members are in advantageous position, they, can misuse their power and act oppressively against minorities. In order to protect minority shareholders from abuse of authority, company law provides certain rights to minority which imposes limitation on the powers of majority and allows minority to express their grievances against majority. These rights are called as minority rights which enables them to make an application to Tribunal and redress their grievances. However, these minority rights can be exercised only when the acts of majority are ultra vires or are not permissible under the Act. Thus, articles of the company are a protective shield for the majority shareholders.
Important Limitations of the powers of majority:
- The powers of the majority of members is subject to the provisions of the company’s memorandum and articles of association. A company cannot legally authorize or ratify any act which is outside the ambit of the memorandum of the company.
- The resolution of a majority must not be inconsistent with the provisions of the act or any other statute or constitute a fraud on minority depriving it of its legitimate rights.
PRINCIPLE OF NON-INTERFERENCE
This principle has been laid down in the famous case Foss v, Harbottle, Foss and Turton, two minority shareholders filed a complaint against the directors and alleged that the property off the company had been misapplied and wasted and hence, an adequate compensation should be paid to the company. Judge dismissed the claim of shareholders on the grounds of “Proper plaintiff rule” and “majority rule”. It was held that company functions on the concept of separate legal entity. Company can be sued and be sue in its own name. Hence, when the company is wronged by its directors only company has the right to sue, Foss and Turton are not a proper party to suit. Secondly, according to the concept of Majority rule if acts can be ratified by the majority members through a resolution in general meeting, then court will not interfere in the same.
JUSTIFICATION FOR THE PRINCIPLE
- Acknowledging the separate legal personality of company
- Need to protect right of majority to decide
- Multiplicity of futile suits avoided
- If majority does not wish it, Proceedings initiated by minority is of no use
EXCEPTION TO THE RULE OF NON-INTERFERENCE
- Ultra Vires Act
- Fraud on Minority
- Where Resolutions need to be passed with Special Majority Passed by simple Majority
- Breach of Duty
- Wrongdoers in Control
- Personal Actions
- Prevention of Oppression and Mismanagement:
Oppression and Mismanagement has not been defined specifically, when majority shareholders are either pass any resolution, which violates the rights of minority or deports from standards of fair dealing then, taking into consideration the circumstances, they may be held guilty of oppression and mismanagement. It means that the affairs of the company are being conducted in a manner that is oppressive and biased against the minority shareholders or any member or members of the company.
According to section 397(1) of companies act 1956 Oppression defined as “When affairs of the company are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members”
Whereas Section 398(1) states Mismanagement as “Conducting affairs of the company in a manner prejudicial to public interest or in a manner prejudicial to the interests of the company or there has been a material change in the management and control of the company and by reason of such change it is likely that affairs of the company will be conducted in a manner prejudicial to public interest or interest of the company”.
In the matter of Hindustan Co-operative Insurance Society Ltd it was observed that
“The authority which majority holds influence wrongfully, in a way harsh and burdensome. They tried to force the minority shareholders to invest their money in distinct business against their will. The minority put their money into a life insurance business with all its safeguards and statutory protections. But it was being mandated to invest where there would be no such protections or safeguards” Hence, the majority held guilty of oppression.
RIGHTS OF THE MINORITY SHAREHOLDERS.
Companies Act 2013 specifies various provisions at different situations to protect the minority rights which can be divided as various major heads as follows:
Rights of minority shareholders throughout the meetings of the Company:
Many a times meetings of the company held as to deprive minority an effective hearing. The procedure laid down under the act safeguard against such behaviour by the company. The use of postal ballot should be at large including electronic media to participate in meetings.
Rights in case of Oppression and Mismanagement:
The Companies Act 2013 prescribed certain provisions to prevent Oppression and Mismanagement. Minority, holding requisite percentage of equity capital representing the specified number of members are entitled to approach Tribunal for protecting their interest. The quasi-judicial authorities are empowered to order remedial measures for regulation of the conduct of affairs of the company. Tribunal has power to appoint such number of persons as necessary to effectively safeguard interest of the company.
Rights during Mergers/ Amalgamation/ Takeovers
Companies act mandates companies to take approval from Tribunal in case of corporate restructuring. The same has to be approved by the shareholder prior filling before Tribunal. The scheme for restructuring shall be circulated to all the shareholders, along with notice and explanatory statement for approving the scheme. The court while approving scheme shall follow judicial approach by mandating publicity about the proposed scheme to seek objections, if any, against the scheme from the shareholders.
Though there may not be any protection to dissenting minority shareholder on this issue as per SEBI (Substantial Acquisition of Shares and Takeovers) Regulation, 1997. SEBI has power to appoint investigation officer to undertake investigation, if there is any complaint from the investor, intermediaries or any other person on any matter having effect of such allegation on substantial acquisition, SEBI may also carry out such investigation Suo moto upon its own knowledge or breach of these regulations.
shareholders who are refusing have been provided with an opportunity to go before Tribunal. This scheme of things appears to be fair and should be continued, In a nutshell: –
- In order to dissent a scheme of amalgamation by investors, a limit shall be determined either according to the minimum number of members or according to the minimum percentage of shareholding.
- As prescribed In the section 395A of the Act which were incorporated in the Companies (Amendment) Bill, 2003 for acquisition of remaining shares may be considered as a basis for evolving an appropriate structure in this regard.
Fair valuation as a means of safeguarding minority interest:
To safeguard the Minority, interest the valuation of shares of a company should be done through independent valuation mechanism. Such independent valuer should be appointed by Audit Committee where it is mandated or by the Board in any other cases. Shareholders have right to approach Tribunal if they recognise the process to be unfair. Tribunal is is empowered to appoint an independent valuer.
Class Action/ Derivative Suit:
In case of fraud on minority by wrongdoers, who are in control and avoid the company itself bringing an action its own name, derivative actions in respect of such wrong non-ratifiable decisions, have been allowed by the courts. Such actions are brought out by shareholders on behalf of the company and not in their personal capacity, in respect of wrong done to the company.
After overseeing the provisions of the companies Act 2013, it can be seen that the core intension of the legislation is to safeguard the interests of the minority shareholders but it requires proper implementation of these provisions safeguarding the minority shareholders. Minority shareholders position in the companies act 1956 were not considered as prominent as it has taken in the companies Act 2013.
[i] REFERENCES
[i] Companies Act 2013 Bare Act
https://www.mca.gov.in/MinistryV2/minority+interests.html
ICSI Company Law Study material (Executive Programme)
SEBI Circulars
MCA notifications
https://indiankanoon.org/doc/1691005/
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