This article has been written by Anlyn E S a student of Government Law College, Thrissur

Generally, the shareholder of a company can exercise control over the affairs of the company through its general meetings. The shareholders outside the general meeting do not have any right to interfere. If some shareholders in their capacity as shareholders want to bring an action against directors for the wrongs of the directors against the company, they do not have any right to do so, because only the company may bring an action for the same. 

The management of a company is based on the majority rule. This principle where the will of the majority prevails and bind the minority is known as the Majority Rule. The principle of the majority rule and provisions concerning the protection of the minority are being discussed in the Foss v. Har Bottle case. 

Foss v. Harbottle

In this case two shareholders, Foss and Turton, in the Victoria Park Company brought an action on behalf of themselves and other shareholders against five directors, the solicitor and architect of the company charging them with “concerting and effecting various fraudulent and illegal transactions, whereby the property of the company was misapplied, alienated and wasted. The court dismissed the action holding that the conduct with which the defendants are charged, is an injury not to the plaintiff’s exclusively, it is an injury to the whole corporation and therefore the corporation alone could bring the action at law. The judgement in this case established that a suit filed by the minority the court will not interfere with the internal management of the companies acting within their powers even though negligence and inefficiency is proved. This is because in law, a company is a separate legal person from the members who compose it. This rule was then followed by many other cases.  

According to Palmer, “a proper balance of the rights of majority and minority shareholders is essential for the smooth functioning of the company. Mellish, L.J., observed that “if a thing complained of is a thing which, in substance, the majority of the company are entitled to do, or if something has been done irregularly which the majority of the company are entitled to do, or if something has been done illegally which a majority of the are entitled to do legally, there can be no use in having litigation about it, the ultimate end of which is only that a meeting has to be called and then ultimately the majority gets their wishes”. 

This Majority Rule is not applicable in all situations. There are some exceptions to it. In those cases, every shareholder can sue to enforce obligations owed to the company. In the American Literature a representative action of this kind is called the “derivative action”.

Protection of Minority Rights

As the general rule is that decisions of the majority shareholders in the company bind the minority. However, this can be misused by the majority shareholders. Therefore, a proper balance of rights of majority and minority shareholders is essential for the proper functioning of the company. The minority shareholders should be protected from the unjust or unfair conduct of the majority shareholders. The restrictive character of the rule in Foss v. Harbottle has led to the creation of statutory remedies for shareholders. The minority shareholders are protected under: 

1. Protection Under the Common Law
2. Protection under Company Law.

Protection under Common Law

The principle of the supremacy of majority of the rule in Foss v. Harbottle is not absolute and is subject to a number of exceptions. These exceptions constitute restrictions on the power of the majority shareholders. These have been recognized in England as well as in our country. 

In simple words, the company cannot confirm: 

1. Any act which is ultra vires the company or illegal
2. Any act which is fraud on the minority 
3. Any act passed with simple majority which requires special majority
4. Any wring act done by those who are in control
5. Any act which infringes the personal membership rights
6. Any act which amounts to breach of duty by directors and 
7. Any act which amounts to oppression of minority or mismanagement of the company.

Protection under Companies Act 

Minority shareholders have many rights under the Companies Act, 2013. Those are as follows:

1.  Section 151 of the 2013 Act, allows the minority shareholders to appoint a director representing them. The person who is appointed as minority shareholders representative in board, is called as independent director and if appointed he is serves for a time period of 3 years.
2. Section 241 and 242 of the Companies Act 2013, gives right to the minority shareholders to apply to NLCT for Oppression and Mismanagement.  
3. Companies act also provides the minority shareholders a right to file a ‘Class Action Suit’. It is type of law suit where a group of people, brings a claim to court through a representative.
4. Section 235 and 236 gives right to the minority shareholders for ‘Reconstructing and Amalgamation, of companies. Reconstruction means transfer of a company’s business to a new one. On the other hand, Amalgamation means a legal process where two or more companies join together to form a new one.
5. The Companies Act also gives right to ‘Adopt a Fair Valuation of Mechanism.
6. Section 108 of the Companies Act protect the minority shareholder’s voting right by the E- Voting process where they can exercise their voting rights even if they are not physically present.

Oppression of Majority

There are rights not only for the minority shareholders but also for the majority shareholders. In Sindhri Iron Foundry (P.) Ltd., Re [1964] 34 Comp. Cas. 510 (Cal.), Justice Mitra observed that if the court finds that the company’s interest is being seriously prejudiced by the activities of one or the other group of shareholders, that two different registered offices at two different addresses have been set up, that two rival boards are holding meeting, that the company’s business, property and assets have passed into the hands of unauthorized persons who have taken wrongful possession, and who claim to be the shareholders and directors, that the bank accounts of the company have been practically frozen, there is no reason why the court should not make appropriate orders to put  an end to such matters.

The Kerala High Court observed in Dr. V. Sebastian v. City Hospital (P.) Ltd. [1985] that Sections 397 and 398 are intended primarily to protect the minority interests. In ordinary cases, the majority will be able to protect itself by controlling the directors at general body meetings. But where the majority is prevented from doing so, despite the clear indication in the articles that the majority rule based on the right to demand poll should operate as a correcting influence, the majority becomes an artificial minority entitled to claim protection. When, majority is denied his/her legitimate right and is wrongfully reduced to minority, it was held to be an act of oppression and the Calcutta High Court set aside illegal allotment of shares. 

References

1. Company Law, N.C. Jain
2. Company Law, Avatar Singh
3. httpps://www.taxmann.com/post/blog/all-about-class-action-suits-under-the-companies-act-2013-section-245-and-246 
4. https://www.juscorpus.com/minority-shareholders-and-their-rights-in

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