MINORITY SHAREHOLDERS AND THEIR RIGHTS IN A COMPANY

INTRODUCTION

In a company, shareholders play a major role. A company should take care of them because they too should be protected and they should be given an appropriate time-to-time bonus. A shareholder is an individual, corporation, or institution that owns at least one share of corporate stock and is also known as a stockholder. As shareholders are the owners of a company, they profit in terms of an increased stock assessment from the company’s successes.

Minority stockholders are individuals in an organization whose interest in democratic decisions made by the corporation is ignored by majority law. To overcome this challenging issue, the “Companies Act, 2013 addressed the problems of the minority in the Companies Act, 1956. A minority shareholder is a person in an enterprise that has little power to manage the company and their interests are ignored. Although the provisions of the Companies Act, 1956 protecting minority shareholders’ interests, they were unable to exercise their rights because of the lack of time or resources. In the end, their rights were never respected. This led to the predominance and abolition in the decision-making and management of companies of the minority shareholders’ rights.”

WHO ARE MINORITY SHAREHOLDERS?

The “Companies Act, 2013” does not specifically define “shareholders,” however the word “member” which includes a memorandum of the firm has been defined in “Section 2 (55), Companies Act 2013”. We can thus take the term ‘shareholder’ as the person holding a company’s shares. “Minority shareholders are the ones who own less than 50% of the shares in the company. According to Section 236, Companies Act, ‘minority shareholding’ implies shareholders holding not more than 10% of the shares of the company. Minority shareholders aren’t specifically defined anywhere under any law, regardless, under Section 235, Companies Act, 2013 – the power to acquire shares of the dissenting shareholders and under Section 244, Companies Act, 2013 – the right to apply for oppression and mismanagement, they have been provided 10% shares or minimum hundred shareholders whichever is less in companies with share capital and 1/3^rd of the total number of its members in case of companies without share capital.” According to the Black Law Dictionary, minority shareholders are stock investors who own fewer than 50% of the firm’s equity capital and have a negligible vote in the firm’s power.

RIGHTS OF MINORITY SHAREHOLDERS

“The Companies Act, 2013” gives minority shareholders diverse rights to protect their interests in the invested company and tackle the problems of abuse by a majority of shareholders. Such rights are as follows:

1. “Right to appoint Small Shareholder Directors – In accordance with Section 151, Companies Act, 2013, the small shareholders, also known as the minority shareholders, have the right to appoint a person on the board of their listed company as their small shareholder director. The person shall be classified as an independent director and serve a term of three years if appointed. Once the term for three years is over, the director can neither be reappointed for a further period nor can he be allowed to be linked to with the company for the next three years.”
2. “Right to apply to NCLT for Oppression and Mismanagement – The minority shareholders have the privilege to approach the NCLT to inform acts of oppression and mismanagement happening in the Company. These rights are granted by the Companies Act, 2013 under Section 241 and Section 242. The condition for minority shareholders is as such”:

• Have a minimum of 100 shareholders or one-tenth of the total number of shareholders, whichever is less,
• Must own at least 10% of the Company’s share capital (which includes all stock and preferred shares).

‘Oppression’ refers to the unjust and unfair manner of exercising the power or authority. ‘Mismanagement’ occurs when the affairs of the Company are biased either in the interests of the public, the company, the majority, or minority shareholders.  

The relief from oppression and mismanagement has been given under “Section 241-246, Companies Act, 2013”. The tribunal may request a relief in case of mismanagement and oppression by applying for “Section 244(1), Company Act, 2013”, which provides the right to apply to the tribunal. Further, under the “Section 245, Companies Act, 2013”, the concept of a class action has been introduced which was non-existent in the Companies Act, 1956 wherein it provides for class/collective action suits against both the company and the auditors of the company to be instituted.

3. “Right to file a Class Action Suit – The Companies Act, 2013 also offers minority shareholders the opportunity to file a collective action lawsuit. A class-action suit is a lawsuit wherein the NCLT is approached by a group of individuals (shareholders), having a common interest and reason against the Company; its directors, the board, or the management. Both the shareholders and the lenders of the Company are permitted to file a suit.”

Relief which both the shareholders and the lenders might get:

• Prohibiting the Enterprise from committing an act beyond its authority, power, and limit;
• Prohibiting the Enterprise from breaching the provisions of its memorandum or articles;
• Prohibiting the Enterprise from going against the laws in force;
• Prohibiting the Enterprise from acting against any decision of its stockholders, etc.

4. “Right for Reconstruction and Amalgamation of Companies – Due to rising concerns and pleas of the minority shareholders being neglected at the times of mergers, acquisitions, amalgamations, or reconstructions to the Company. The Companies Act, 2013 safeguard minority rights under Section 235 and Section 236.

• “Section 235 – Power to acquire shares of shareholders dissenting from scheme or contract approved by the majority”;
• “Section 236 (1) & (2) – the acquirer after becoming the holder of 90% or more of issued equity share capital shall offer the minority shareholder for buying equity shares at the determined value”;
• “Section 236 (3) – the minority shareholders are eligible for making an offer to the majority shareholders to buy their shares, known as ‘Squeezing Out’”;
• “Section 236 (5) – the transferor company acts as a transfer agent for making payments to minority shareholders.”

5. “Right to Adoption of a Fair Valuation Mechanism – In order to evaluate the value of the company’s shares, the company should adopt an independent valuation mechanism to safeguard minority interests. In order to ensure that shareholders are entitled to approach NCLT if the process appears unfair, the audit committee appoints the independent value, and the committee shall take the necessary measures.”
6. “E-voting Process – Under Section 108, Companies Act, 2013, it is mandatory for certain companies to offer e-voting facilities to the shareholders to vote on shareholders’ meetings. This provision has permitted the minority shareholders who are staying in the country or are outside to exercise their voting rights, without having to cast a vote physically/in person. This has caused the participation of minority shareholders in meetings to rise and enable them to express their opinion on major business issues.”
7. “Majority of the Minority – Section 188 of the 2013 Companies Act, dealing with related parties, requires firms to enter into such transactions only after the majority of the non-interested parties have approved them. The minority shareholders are obviously non-interested parties because promoters/majority shareholders are usually stakeholders. Therefore, these transactions are approved by minority shareholders.”

CONCLUSION

The key contention of the current provisions of the “Companies Act, 2013” can be interpreted to be to preserve and shield minority shareholders from being abused by and at the hands of the majority shareholders. It is also possible to infer that, prior to the repeal of majority rules and laws in the “Companies Act, 1956,” minority owners were not considered to be a member of the company. This approach to minority rights compliance guarantees good business control only when it is correctly applied by granting minority owners importance and rights in the company’s management and performance.

Author(s) Name: Tanisha Gautam (Institute of Law, Nirma University)

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References:

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