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Published : August 31, 2017 | Author : nivedha krishnamurti
Category : Miscellaneous | Total Views : 641 | Rating :

nivedha krishnamurti
i am doing by UG in school of excellence in law, chennai.

Protection of Minority Shareholders In A Company Under The Companies Act 2013

Democratic decisions are made in accordance with the majority decision and same rule was also applicable in the Companies cases also. As per the Companies Act 1956, shareholders who hold the majority of shares, rule the company. This majority principle is recognised in a land mark case Foss vs. Harbottle (1843) . The decision taken by the majority shareholders was binding on the minority. Now this principal has been replaced and minority shareholders have been given greater power under Companies Act 2013.

1. The objective of the policy is to protect the rights of the minority shareholders and keep them updated about their rights from time to time.

2. To check that the Shareholder Relationship Committee is redressing the grievance of the minority shareholders.

Comparative Study On Minority Right Under Companies Act, 1956 And Companies Act, 2013:

Despite the fact provisions have been in place under the CA 1956 to protect the interest of the minority shareholders, the minority has been incapable or unwilling due to lack of time, recourse or capability- financial or otherwise. This has resulted in the minority to either let the majority dominate and suppress them or squeeze them out of the decision making process of the company and eventually the company. CA 2013 has sought to invariably provide for protection of minority shareholders rights and can be regarded as a game changer in the tussle between the majority and minority shareholders. Various provisions have been introduced in CA 2013 to essentially bridge the gap towards protection and welfare of the minority shareholders under CA 1956.

Presently, 'minority shareholders' are not defined under any law, however, by virtue of Section 395 and Section 399 of CA 1956, minority shareholders have been set out as ten percent (10%) of shares or minimum hundred (100) shareholders, whichever is less, in companies with share capital; and one-fifth (1/5) of the total number of its members, in case of companies without share capital. In general terms, minority shareholding can be understood to mean holding such amount of shares which does not confer control over the company or render the shareholder with having a non-controlling interest in a company. CA 1956 provides for various provisions dealing with situations wherein rights of minority shareholders are affected and the same can be divided into two major heads, i.e., (a) oppression and mismanagement of the company; and (b) reconstruction and amalgamation of companies.

Oppression And Mismanagement:

CA 1956 provides for protection of the minority shareholders from oppression and mismanagement by the majority under Section 397 and 398 Oppression as per Section 397(1) of CA 1956 has been 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' while the term mismanagement has been defined under Section 398 (1) as 'conducting the 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'. Right to apply to the Company Law Board in case of oppression and/or mismanagement is provided under Section 399 to the minority shareholders meeting the ten percent shareholding or hundred members or one-fifth members limit, as the case may be. However, the Central Government is also provided with the discretionary power to allow any number of shareholders and/or members to apply for relief under Section 397 and 398 in case the limit provided under Section 399 is not met.

On the other hand, CA 2013 provides for provisions relating to oppression and mismanagement under Sections 241-246. Section 241 Section 244(1) provides for the right to apply to Tribunal under Section 241, wherein the minority limit is same as that mentioned in CA 1956. Under CA 2013, the Tribunal may also waive any or all of the requirements of Section 244(1) and allow any number of shareholders and/or members to apply for relief. This is a huge departure from the provisions of CA 1956 as the discretion which was provided to the Central Government to allow any number of shareholders to be considered as minority is, under the new CA 2013 been given to the tribunal and therefore likely to be exercised by the tribunal.

To further briefly examine a few provisions of CA 1956 vis-a-vis the provisions of CA 2013:
1. Provision of Section 397 and 398 of CA 1956 are combined in Section 241 of CA 2013 and accordingly applications for relief in cases of oppression, mismanagement etc. will have to be directed to the tribunal.

2. While the powers of the Tribunal under CA 1956 on application under Section 397 or 398 and Section 404 were limited, CA 2013 granted additional powers to the Tribunal including to:

(a) restrictions on the transfer or allotment of the shares of the company;

(b) removal of the managing director, manager or any of the directors of the company;

(c) recovery of undue gains made by any managing director, manager or director during the period of his appointment as such and the manner of utilisation of the recovery including transfer to Investor Education and Protection Fund or repayment to identifiable victims;

(d) the manner in which the managing director or manager of the company may be appointed subsequent to an order removing the existing managing director or manager of the company;

(e) appointment of such number of persons as directors, who may be required by the Tribunal to report to the Tribunal on such matters as the Tribunal may direct; and

(f) imposition of costs as may be deemed fit by the Tribunal.

3. The requirement of establishing existence of 'just and equitable' circumstances to waive any and all requirements of the section pertaining to the meeting the minimum minority limits and providing 'security' while allowing such an application are excluded from the Companies Act, 2013.

4. Further, by way of Section 245, CA 2013 has introduced the concept of class action which was non-existent in CA 1956.

Class Action: Section 245 of CA 2013 provides for class action to be instituted against the company as well as the auditors of the company. The Draft Companies Rules allow for this class action to be filed by the minority shareholders under Clause 16.1 of Chapter-XVI. On close reading of Section 245 of the Companies Act, 2013, it can be seen that the intent of the section is not only to empower the minority shareholder and/or members of the company but also the depositors. Unlike Section 399 of CA 1956 which provides for protection to only shareholder/members of the company, Section 245 of CA 2013 also extends this protection to the class of depositors as well. However, in the current scenario, the provision of representation of a class of members or depositors by a particular member or a depositor lacks clarity.

Sub-section (1) of Section 245 provides, "such number of member or members, depositor or depositors or any class of them, as the case may be, as are indicated in sub-section (2) may, if they are of the opinion that the management or conduct of the affairs of the company are being conducted in a manner prejudicial to the interests of the company or its members or depositors, file an application before the Tribunal on behalf of the members or depositors for seeking all or any of the following orders …". Besides, there being a typographical error in this sub- section (1) with respect to indicating sub-section (2) instead of sub-section (3) which provides for the minimum number of members who can apply for class action there is also some confusion as to the class on whose behalf such class action can be instituted. While 'member has been defined in the CA 2013 as including the subscriber to the memorandum of the company, shareholders and person whose name is entered in the register of members; definition for depositor is not provided under CA 2013.

Further, section 245 does not empower the Tribunal with discretionary power to admit/allow any class suit wherein class of members or depositors are unable to comply with the minimum number of members/depositors requirement to be laid down in the Companies Rules. Also, on a close reading of Section 241 and Section 245 of the Companies Act, 2013, we can find duplication in protection provided to the members in case affairs of the company are conducted in a manner prejudicial to the interest of the company/members.

Reconstruction And Amalgamation:

With respect to minority shareholder rights at the time of reconstruction and amalgamation of companies, CA 1956 under Section 395 states that transfer of shares or any class of shares of a company (transferor company) to another company (transferee company), has to be approved by holders of atleast nine-tenths (9/10) in value of the shares whose transfer is involved within four months after the offer has been made by the transferee company. Herein it is important to note that consent of 90% (ninety percent) shareholders is required, which is referred to as majority. The section further provides that within two months after the lapse of the aforementioned four months, the transferee company shall give a notice to any dissenting shareholders expressing its desire to acquire their shares. Herein, the term 'dissenting shareholder' is defined under Section 395(5)(a) as including shareholder who has not assented to the scheme or contract and any shareholder who has failed or refused to transfer his shares to the transferee company in accordance with the scheme or contract. As the ninety percent (90%) shareholders in this section are referred to as majority, the remaining ten percent (10%) dissenting shareholders can be referred to as minority. The section further goes on to provide that once the notice is provided to the dissenting shareholders, unless the dissenting shareholders make an application to the Tribunal within a month of such notice, transferee company shall be entitled to the shares of the dissenting shareholders and such shares shall be transferred to the transferee company. If the transferee already owns ten percent (10%) or more of such shares then the scheme needs to be approved by shareholders holding ninth- tenth (9/10) in value and being three-fourth (3/4) in number of the shareholders holding such shares. In such a case, the dissenting shareholder ought to be offered the same price as the other shareholders. However, this section has seldom been used and instead recourse has been to Section 100 of CA 1956 to eliminate the minority. Section 100 provides that the capital of the company may be reduced in any manner whatsoever by way of a special resolution i.e. assent of seventy-five (75%) shareholders present and voting subject to approval of the courts. This section ignores minority shareholding to the extent that special resolution does not reflect the intention of the minority shareholders.

To counter these shortcomings, CA 2013 has provided for Section 235 and 236 . Section 235 is corresponding to Section 395 of CA 1956 and provides that transfer of shares or any class of shares in the transferor company to transferee company requires approval by the holders of not less than nine-tenths (9/10) in value of the shares whose transfer is involved and further the transferee company may, give notice to any dissenting shareholder that it desires to acquire his shares. Section 235 makes it mandatory for the majority shareholders to notify the company of their intention to buy the remaining equity shares the moment acquirer, or a person acting in concert with such acquirer, or group of persons becomes the registered holder of ninety per cent (90%) or more of the issued equity share capital of a company. It further provides that such shares are to be acquired at a price determined on the basis of valuation by a registered valuer in accordance with such rules as may be prescribed.

CA 2013, in addition to minor improvements to certain provisions of CA 1956 has also introduced new provisions affecting the reconstruction and amalgamation procedures. These, inter alia, include:

1.CA 2013 vide Section 235(4) in respect of 'Dissenting Shareholders' provides that the sum received by the transferor company must be paid into separate bank account within the specified period of time as against the provision mentioned in Section 395(4)of CA 1956 which lacked clarity on this aspect.

2. As per CA 2013, Section 236 (1) and (2), the Acquirer on becoming registered holder of niney percent (90%) or more of issued equity share capital shall offer minority shareholder for buying equity shares at the determined value;

3. Section 236 (3) of CA 2013 has provided the minority with an option to make an offer to the majority shareholders to buy its shares; and

4. Section 236 (5) of CA 2013 requires the transferor company to act as a transfer agent for making payments to minority shareholders.

Minority Upgraded:

Besides the above, CA 2013 has sought to empower the minority shareholders in corporate decision making also. Section 151 of the CA 2013 requires listed companies to appoint directors elected by small shareholders, i.e. shareholders holding shares of nominal value of not more than twenty thousand rupees (INR 20,000/-). The Draft Companies Rules elaborates the provision in this regard under Clause 11.5 of Chapter XI and provides that a listed company may either suo-moto or upon the notice of not less than five hundred (500) or one-tenth (1/10) of the total number of small shareholders, whichever is less, elect a small shareholders’ director from amongst the small shareholders. Here, it is important to note that small shareholders are different from the minority shareholders as small shareholders are ascertained according to their individual shareholding which should be less than twenty thousand rupees (INR 20,000/-); whereas minority shareholders/shareholding is collectively ascertained and regarded as having non-controlling stake in the company. However, small shareholders can be included in and/or regarded as minority shareholders by virtue of their small shareholding amounting to non-controlling stake in the company.

The Draft Companies Rules further provides for the procedure for nomination of a small shareholder director and the information and declaration to be provided in this regard. To safeguard the interest of the small shareholder and to maintain the independent decision making by such directors, the Draft Companies Rules provides that such director shall not be liable to retire by rotation and shall have tenure of three years. However, the small shareholder director will not eligible for reappointment.

.Sub-Clause (4) of Clause 11.5 of the Draft Companies Rules provides that "such director shall be considered as an independent director subject to his giving a declaration of his independence in accordance with sub-section (7) of Section 149 of the Act." Meaning thereby, that small shareholder director may or may not be an independent director. However, the Draft Companies Rules provides under Sub-Clause (5) of Clause 11.5 that such office shall be vacated if the director inter alia cease to be an independent director. Now, while Sub-Clause (4) of Clause 11.5 makes it optional for the small shareholder director to be an independent director; Sub-Clause (5) of Clause 11.5 makes it mandatory for the small shareholder director to be an independent director and to maintain its independence throughout its term thereby creating confusion. It is expected that this inconsistency may be addressed while finalizing the Draft Company Rules.

While empowering the minority/small shareholders in the decision making process, the CA 2013 endeavours to further its present provisions to safeguard the interest of minority shareholders through appointment of independent directors. The 'Code of Independent Directors' provided pursuant to Section 149(8) in Schedule IV of the CA 2013.

Upon careful examination of the provisions of the CA 2013 it can be ascertained that legislative intent in CA 2013 is to safeguard the minority interest in a more comprehensive manner. However, the provisions of CA 2013 not only requires proper implementation upon addressing the present lacunas but also requires instilling confidence in the minority shareholders with respect to the institutional and regulatory mechanism which ensures that interest of minority shareholders shall be given due consideration. This dual approach towards enforcement of minority rights shall only guarantee proper administration of the corporate activities. Nevertheless, Ministry of Corporate Affairs' effort in preparation of a framework, which endeavors to empower minority shareholders, is commendable.

# Bhandari, M.C., Guide to Company Law Procedures, 6th edition, Lexis Nexis.
# Kapoor, G.K and S. Dhamija, Company Law and Practices, 19th edn. 2014, Taxmann
# Singh, Dr. Avtar, Company Law, 15th edition 2013, Eastern Book Company
# Majumdar, A.K & Dr. G.K. Kapoor, Company Law and Practices, 16th edition 2010, Taxmann.

# http://lawfarm.in/blogs/minority-shareholders-right-in-india
# http://www.indialawjournal.org/archives/volume6/issue-2/article5.html
# https://blog.ipleaders.in/protection-minority-shareholders-companies-act-2013/
# https://www.indiafilings.com/learn/shareholder-rights-companies-act-2013/

# (1843) 67 ER 189
# Power to acquire shares of dissenting share holders
# Right to apply for oppression and mismanagement
# Application to company law board or relief in case of oppression.
# Application to company law board or relief in case of management.
# provides that an application for relief can be made to the Tribunal in case of oppression and mismanagement.
# Application to company law board or relief in case of oppression.
# Application to company law board or relief in case of management.
# Number of members who can file an application for class action
# transfer of shares or any class of shares of a company (transferor company) to another company (transferee company)
# Power to acquire shares of shareholders dissenting from scheme or contract approved by majority
# Purchase of Minority Shareholding
# independent directors shall inter alia work towards promoting the confidence of minority shareholders.


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