A STUDY OF THE MAJORITY POWERS AND MINORITY RIGHTS UNDER THE COMPANIES ACT

1956 

SUBMITTED TO: DR. P. BHASKARA MOHAN( VISITING FACULTY)

SUBMITTED BY: SOHINI CHATTOPADHYAYROLL NO. FS11-016

INTRODUCTION The management of a company is based

on the majority rule. Like any democratic set up, the majority has its way in a company though due provision must also be made for the protection of minority interest. This principle that the will of the majority should prevail and bind the majority is known as the principle of majority rule.

It was established in the case of FOSS VS. HARBOTTLE where two minority shareholders in a company alleged that its directors were guilty of buying their own land for act of the directors resulted in a loss to the company. The minority shareholders, therefore, decided to take an action for damages against the directors. The shareholders in general meeting by majority resolved not to take any action against the directors alleging that they were not responsible for the loss which had been incurred. The court ( before amendment of the Act in 2002) dismissed the suit on the ground that the acts of directors were capable of confirmation by the majority of members and held that the proper plaintiff for wrongs done to the company is the company itself and not the minority shareholders. It further held that the company can act only through its majority shareholders.

The following Indian case illustrates the rule in FOSS VS. HARBOTTLE:

Bhajekar vs. Shinkar The Board of directors of a company passed a

resolution on appointing certain persons as managing agents (now abolished). The resolution was confirmed by the company in general meeting with full knowledge of all the material facts. Some of the directors brought a suit for a declaration that the resolution was invalid on the ground of certain irregularities. Held, it was open to the company to ratify the resolution even it was irregular and the plaintiffs were not under these circumstances entitled to maintain the suit and ask the court to interfere

PROPER PERSON TO SUE The decision in FOSS VS. HARBOTTLE is the

logical result of the principle that a company is a separate legal entity from the members who compose it. As such if any wrong is done to the company, it is the company (and not the individual members) which can bring an action. This follows from the rule that only the injured party may sue.

The plaintiff must show that the injury has been caused by a breach of duty to him. If a company suffers injury through breach of duty owed to it, then the only plaintiff is the company itself, as it must always act, through its majority [ Burland vs. Earle(1902) A.C. 83]

In Rajahmundry Electric Supply Corpn. Ltd. Vs. Nageshwara Rao, (1956) 26 Comp. Case 55 (S.C) the supreme court observed: 

“The courts will not, in general, intervene at the instance of shareholders in matters of internal administration and will not interfere with the management of a company by its directors so long as they are acting within the powers conferred on them under the Articles of the company. Moreover, if the directors are supported by the majority of the shareholders in what they do, the minority shareholders can, in general, do nothing about it.”  

MAJAORITY RULE The basis of the rule in FOSS VS.

HARBOTTLE is that the will of the majority should prevail. On becoming a member of the company, the member agrees to submit to the will of majority of the members expressed in a general meeting and in accordance with the law, and the Memorandum and the Articles. Therefore, whenever the majority could confirm an act, an action at the suit of minority should not lie.

STATUS OF MAJORITY SHARE HOLDERS Shareholders are people who have purchased

interests in a company that makes them partial owners of the company. The majority shareholder is the individual who owns most of a company’s shares. This means it generally has more power than all of the other shareholders combined. Such situations are usually more common with private companies than with public companies.

Being a shareholder requires a person to own at least one full share in a corporation. If this is the case, the shareholder is usually afforded certain rights in regards to the company he invested in. For example, such an individual may have the right to attend annual meetings, bring resolutions, and vote on matters regarding operations.

MINORITY SHAREOLDERS Minority shareholders are shareholders who have minority stakes in a company that is controlled by a majority shareholder.

Minority shareholders are often effectively deprived of any real say in the running of the company, and they may find that the company is run in a way which benefits the majority at their expense.

The “minority” may have more shares, but lack control due to how the company is structured: for example, they may include non-voting shareholders.

The disadvantages to minority shareholders are also the reasons why prospective majority shareholders are willing to pay a control premium.

RISE OF MINORITY SHAREHOLDERS

The past few years have witnessed a silent revolution in Indian corporate governance where managements have woken up to the power of minority shareholders who vote with their wallets. In response to this power, the more progressive companies are voluntarily accepting tougher accounting standards and more stringent disclosure norms than are mandated by law. They are also adopting more healthy governance practices. It is evident that these tendencies would be strengthened by a variety of forces that are acting today and would become stronger in years to come.

The reasons due to which corporate governance has seen improvements are as follows

1.   Deregulation: Economic reforms have not only increased growth prospects, but they have also made markets more competitive. This means that in order to survive companies will need to invest continuously on a large scale.

2.   Disintermediation: Meanwhile, financial sector reforms have made it imperative for firms to rely on capital markets to a greater degree for their needs of additional capital.

3.   Institutionalization: Simultaneously, the increasing institutionalization of the capital markets has tremendously enhanced the disciplining power of the market.

4.   Globalization: Globalization of our financial markets has exposed issuers, investors and intermediaries to the higher standards of disclosure and corporate governance that prevail in more developed capital markets.

5.   Tax reforms: Tax reforms coupled with deregulation and competition have tilted the balance away from black money transactions. This makes the worst forms of mis-governance less attractive than in the past.

MINORITY RIGHTS The corporate governance framework should ensure the

equitable treatment of all shareholders, including minority shareholders. All shareholders should have the opportunity to obtain effective redress for violation of their rights.

These basic rights with their constituents are mentioned below:

Equitable Treatment.1.    Same voting rights for shareholders within each class.2.   Ability to obtain information about voting rights attached

to all classes before share acquisition.3.   Changes in voting rights subject to shareholder vote. 4.   Vote by custodians or nominees in agreement with

beneficial owner.   5.   AGM processes and procedures to allow for equitable

treatment.6.   Avoidance of undue difficulties and expenses in

The right to seek information 1.   Right to know about the price sensitive information

of the company,2.   Fairness to all shareholders irrespective of each

individual’s shareholdings.3.   Right to inspect the Register of Members,

Directors, Charges, Debenture Holders, etc and get copy thereof.

4.   Right to receive Notice of General Meetings (the AGM or the EGM).

5.   Rights to receive annual report and audited accounts.

6.    Right to receive quarterly and annual accounts.7.     Right to inspect the Minutes of General Meetings.8.      Right to be kept fully informed of what is

happening in the company.

The right to voice opinion1.      Right to attend general meetings.2.      Right to requisition for a general meeting.3.      Right to get the court to direct the company to

call a general meeting.4.      Right to appoint proxies to attend and vote at

a general meeting.5.      Right to be heard and make proposals at

shareholders’ meeting.6.      Right to vote and elect directors and fix their

remuneration.7.      Right to nominate director.8.      Right to appoint auditors and fix their

remuneration.9.      Right to receive dividends, if declared

Disclosure and Transparency 1.      Disclosure of material information2.      Financial and operating results 3.      Company objectives  4.      Major share ownership and voting rights 5.      Board members, key executives and their

remuneration 6.      Material foreseeable risk factors  7.      Material issues regarding employees and

other stakeholders  8.       Governance structures and policies

The right to seek redress1.      Common law derivative action2.      Redress mechanism under the Companies

Act3.      Redress mechanism under the Securities

Laws

LEGISLATIVE MEASURES Protection of Minority Shareholders

Company law provides that a company can be wound up if the Court is of the opinion that it is just and equitable to do so. This is, of course, the ultimate resort for a shareholder to enforce his ownership rights.

Company law also provides for another remedy if the minority shareholders can show that the company’s affairs are being conducted in a manner prejudicial to the interests of the company or its shareholders to such an extent as to make it just and equitable to wind it up.

Special Majority Another safeguard in the company law is the

requirement that certain major decisions have to be approved by a special majority of 75% or 90% of the shareholders by value. This may not be an effective safeguard where the dominant shareholders hold a large majority of the shares so that they need to get the approval of only a small chunk of minority shareholders to reach the 75% level.

Information Disclosure and Audit

Company law provides for regular accounting information to be supplied to the shareholders along with a report by the auditors. It also requires that when shareholder approval is sought for various decisions, the company must provide all material facts relating to these resolutions including the interest of directors and their relatives in the matter. Disclosure does not by itself provide the means to block the dominant shareholders, but it is a prerequisite for the minority shareholders to be able to exercise any of the other means available to them. Disclosure is also a vital element in the ability of the capital market to exercise its discipline on the issuers of capital.

VOTING RIGHTS The approval of at least 10% of the

shareholders is required for the requisition of an extraordinary general meeting for an application to the Company Law Board (CLT) for relief, if there is oppression or mismanagement (as defined in the Companies Act, 1956) by the majority shareholders.

The approval of a minimum of 50% of the shareholders is required for an ordinary resolution, including for alteration of the share capital

At least 75% of the shareholders must approve a matter before it is passed as a special resolution, including for capital increases, alteration in the memorandum and articles of the company.

Therefore, a minority shareholder with more than 25% voting rights would have the ability to block special resolutions

Qualified Minority Minority shareholders with qualified minority may initiate

action against decisions of the majority in a court of law. According to section 399 of the act, a qualified minority consists of at least one hundred shareholders or one tenth of the total number of shareholders, whichever is less, or any shareholder(s) holding one-tenth of the issued share capital of the company fully paid-up. Moreover, minority shareholders who hold more than 25% of the shares will have the ability to obstruct special resolutions, seek intervention of the CLT and, therefore, impede the functioning of the company at some level.

Company Law Tribunal (CLT) The Indian company law shields minorities’ interest by

providing an adequate platform at CLT to raise grievances in case of oppression or mismanagement by the majority shareholders of a company. In circumstances when the minority is forced to exit the company by way of offering a nominal value for the shares held by them, the minority shareholders can approach the CLT to seek appropriate relief.

The CLT can order the majority shareholders to purchase the shares of the minority shareholders at a fair price. Further, if the minority shareholders wish to continue to be stakeholders in the company and do not want to sell their shares, they can obtain an injunction from CLT prohibiting the majority shareholders or acquirer from taking any action that may be averse to their interest

Minority Representation It is important for Corporations to ensure that

board membership reflects the interest of minority shareholders. In this regard, the Independent Directors (IDs) have an important role to play in ensuring minority shareholders’ interests are protected. The IDs also need to be easily accessible for minority shareholders to convey or raise their concerns. Minority shareholders can also nominate candidates for the ID position.

CONCLUSION The beneficiary ownership structure of an enterprise

is of great importance in an investment decision, especially with regard to the equitable treatment of shareholders. In order to make an informed decision about the company, investors need access to information regarding its ownership structure. It is recommended that this disclosure includes the concentration of shareholdings, for example the holdings of the top twenty largest shareholders. This information is of particular interest to minority shareholders.

Disclosure should be made of the control structure and of how shareholders or other members of the organization can exercise their control rights through voting or other means.

Where there is a local code on corporate governance, enterprises should follow a “comply or explain” rule whereby they disclose the extent to which they followed the local code’s recommendations and explain any deviations. Where there is no local code on corporate governance, companies should follow recognized international good practices. The use of “comply or explain” mechanisms in many countries allows investors and other stakeholders greater access to information about the corporation and is to be encouraged. In relation to this “comply or explain” rule, some countries now require companies with foreign listings to disclose the extent to which the local governance practices differ from the foreign listing standards.

Financial Institutions should act as gate keepers. The regulator should pass on as much of the

burden of ensuring corporate governance to the markets as possible. The regulator can then concentrate on making the markets more efficient at performing its function on capital market.

In the last few years, we have seen Indian companies voluntarily accepting international accounting standards though they are not legally binding. They have voluntarily gone for greater disclosures and more transparent governance practices than are mandated by law. They have sought to cultivate an image of being honest with their investors and of being concerned about shareholder value maximization.

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