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Corporate Laws
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1
Content
Table of Cases..3
Table of Statutes..4
Table of Abbreviations4
Introduction..6
Research Questions..7
Literature Review.7
Research Methodology8
Study on the changes made in the statutory provisions of Companys Act 2013 for
improving the position of the minority share holders..18
Conclusion....26
Bibliography.28
2
Table of Cases
1. Bharat Insurance Co Ltd v. Kanhaiya Lal, AIR 1935 Lah 792;160 IC,
2. Burland v. Earle, [1902]A.C.83
3. Cadbury buyout case
4. Chander Mohan Jain v. CRM Digital Synergies P. Ltd, (2008) 142 Comp. Cas. 658.
5. Dale and Carrington (P) Ltd. v. P,K,Pradhan, 2005 1 SCC 212.
6. Dhakeswari Cotton Mills Ltd v. Nil Kamal Chakravorty, AIR 1937 Cal 645
7. Edward v. Halliwell, [1950] 2 All ER 1064.
8. Edward v. Halliwell, [1950] 2 ALL ER 1064.
9. Floating Services Ltd. v. MV San Fransceco Dipaloa (2004) 52 SCL 762 (Guj),
10. Foss v. Harbottle (1843) 2 Hare 461; 67 ER 189.
11. Griffith v. Paget, [1877] 5 Ch. D 894.
12. ICICI v. Parasrampuria Synthetic Ltd. (1998) 5 SCL342
13. Rajendranath Dutta v. Shibendra Nath Mukherjee,[1982] 52 Comp Vas.293 (Cal).
14. Kanika Mukherji v. Rameshwar Dayal Dubey, (1966)1 Comp LJ 65.
15. Lalit Surajmal Kanodia v. Office Tiger Database Systems India (P) Ltd., (2006) 129
Com Cases 192 Mad.
16. Mac Dougall v. Gardiner, [1875] 1 Ch.D 13 at 25.
17. Nagappa Chettiar v. Madras Race Club, ILR 1949 Mad 808,
18. Nagappa Chettiar v. Madras Race Club, ILR 1949Mad 808.
19. Namtech Consultants Pvt Ltd v. G.E. Termometrics India Pvt Ltd., ILR 2008 Kar 1187
20. Needle Industries (India) Ltd v. Needle Industries Newey Holding Ltd.,AIR 1981 SC
1298.
3
28. Re British Sugar Refining Co.,(1857) 4 J&K 408.
29. Sangramsinh P. Gaekwad and Ors v. Shantadevi P. Gaekwad (Dead) through L.Rs and
Ors, (2005) 11 SCC 314.
30. Sangramsinh P. Gaekwad and Ors v. Shantadevi P. Gaekwad (Dead) through L.Rs and
Ors, (2005) 11 SCC 314.
31. Satya Charan Lal v. Rameshwar Pd. Bajoria., [1950] S.C.R..394
32. Shri Gurmit Singh v. Polymers Paper Ltd, (2005) 123 Comp. Cas. 486
33. Smith v.Crofit,(1987) 3WLR 405.
34. Spokes v. Grosvenor Hotel Co., [1897] 2 QB 124
35. Tiesen v. Henderson, [1891] 1 Ch. 861; Mac Connell v. E. Prill & Co. Ltd. [1916] 2 Ch.
57.
36. TVS Employees Federation v. TVS and Sons Ltd., (1996) 87 Com Cases 37,
37. Union Bank of India v. Khader International Construction and Other [(2001) 42 CLA
296 SC].
38. Wallersteiner v. Moir, [1974] 1 WLR 991..
39. Wood v. Odessa Waterworks Co, [1889] 42 Ch. D 636.
40. Yashovardhon Saboo v. Groz- Beckert Saboo Ltd,(1995) 83 Comp
Table of Statutes
Companies Act, 1956
Companies Act, 2013
Table of Abbreviations
4
8. SCC Supreme Court Cases
9. U.P. Uttar Pradesh
10. v. Versus
5
Abstract
Section 397 to 409 of the Companies Act, 1956 and Section 241 and 245 of the Companies Act,
2013 lays down provision in order to protect the rights of minority shareholders and safeguard
their interest against the oppressive act of majority shareholders. The Rights of Minority
Shareholders is based on the principle of Natural Justice .The basic principal relating to the
administration of the affairs of a company is that the will of the majority prevails or majority is
supreme. Except the power vested in the Board of Directors, the overall powers of controlling
the issues of the company its with the shareholders which are exercised in the general meeting
of a company. Usually the general rule is that the decision of majority shareholders in a
company binds the minority. Therefore, it is only majority of members who can control the board
of directors. The majority is in the position where it connected in every parts of the company.
They maintain their rights without considering the interests of minority which creates sullen
effects. They misuse their power to exploit the rights of minority. In such a case a proper balance
of the rights of majority and minority shareholders is essential for the smooth functioning of the
company.
Introduction
Corporate world continues to suffer from the much prevalent disputes between shareholders. It
definitely is not a phenomenon specific to India but is and has always been a universal problem.
Allegations by the minority shareholders against the majority reverberate in courtrooms
throughout the world. Indian law provides for various reliefs for oppression and mismanagement
but how effective they are is a point of debate.
The main aim must be to strike a balance between the effective control of the company and the
interest of the small individual shareholders. The fundamental principle defining operation of
shareholders democracy is that the rule of majority shall prevail. However, it is also necessary to
ensure that this power of the majority is placed within reasonable bounds and does not result in
oppression of the minority and mis-management of the company. The minority interests,
therefore, have to be given a voice to make their opinions known at the decision making levels.
The law should provide for such a mechanism. If necessary, in cases where minority has been
unfairly treated in violation of the law, the avenue to approach an appropriate body for protecting
their interests and those of the company should be provided for. The law must balance the need
6
for effective decision making on corporate matters on the basis of consensus without permitting
persons in control of the company, i.e., the majority, to stifle action for redressal arising out of
their own wrong doing.
Despite the fact provisions have been in place under the Companies Act 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. Companies Act 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 Companies Act 1956.
Research Problem:
In this modern corporate world the dispute among the shareholders is still a matter of great
concern. There have been various instances where the allegations so raised by the minority
shareholders were not given due interest. This project tries to find out how the Companies Act
1956 through its statutory provision try to protect the interest of minority shareholder. The
project will also make a study of the new provisions that have been introduced in the
Companies Act 2013 dealing in this regard.
Literature Review:
Dr GK Kapoor and Sanjay Dhamija, Taxmanns Company Law and Practice, 19th Edition,
Tan Printing House, 2014:
This book makes a comparative study of the statutory provisions that are there in Companies Act
1956 and 2013 relating the protection of the interest of the minority shareholder. The book also
provides a detail analysis of the new provisions relating to safeguard of minority shareholders
interest, incorporated in the Companies Act 2013 to overcome the drawbacks that were there in
the Companies Act 1956.
7
Karn Gupta, Introduction to Company Law, LexisNexis Publications, 4th Edition, Gurgaon,
2011:
This books provides an indepth analysis of the landmark case Foss v. Harbottle and the
principles that have been taken into consideration by the judges before reaching to the
conclusion. This book also says how the Indian courts have interpreted the judgment and made
it applicable to various company cases by totally ignoring the allegations of the minority
shareholders .
The scope of the project is very much limited to section 106, 394- 398 of the Companies Act
1956 and section 149(8),151,235,236, 241, 245,395 of the Companies Act 2013.
1) To make an indepth analysis of the landmark case Foss v. Harbottle which established
rule of majority over minority decisions.
2) To find out how far the principles so adopted in the landmark case Foss v. Harbottle
has been made applicable in Indian by the Indian Judiciary.
3) To find out the circumstances through relevant case laws, where the objections raised by
the minority shareholders against the majority interest gets proper recognition.
4) To find out the statutory provisions that are there in the companies act 1956 which
ensures minority shareholders interest.
5) To find out the new provisions that are incorporated in the Companies Act 2013 for the
improvement of the minority shareholders interest.
Research Methodology:
For completion of the project the doctrinal method will going to be used where it will be
concerned with the documental research irrespective of the consideration of views and
perspectives of society and people as done in the non doctrinal research method. The secondary
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sources of data collections will be used where documents have gone through some
interpretations and has been used further for the study of research problem. Blue book citation
19th ed. will be used through out the project.
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Rule of Majority as held in the case Foss v. Harbottle
It was a general notion that whenever a dispute or issue arises regarding the companys internal
management, the members decide on it and accordingly pass a resolution either by simple
majority or three fourth of majority. Once the resolution is passed by the requisite majority then
it binds on all the members of a company. The court also in this regard cannot interfere into the
matters of the resolution to protect the interest of the majority share-holders view. It was always
presumed that the majority takes decisions that are beneficial for the companys interest, so the
interest of minority shareholders interest accordingly gets protected. Thus if a wrong is done to
1
the company, the company being a separate entity has a right to file a suit against the wrong
doer and the shareholder individual has no right to do so.
Similar type of view was laid down in the land mark case of Foss v. Harbottle2 where it so
happened that a suit was filed by two shareholders of a company on behalf of themselves and all
other shareholders against the directors and the solicitors of the company alleging that the
business transactions that the directors had undergone are fraudulent and illegal in nature as a
result of which the companys assets were getting misapplied and wasted. It was prayed that the
defendant might be decreed to make good to the company losses.
The main issue that rose from the suit was regarding the maintainability of the suit as the suit
was filed by the two shareholders of the company (who were also not holding majority of the
shares).
The court held that the suit could not be brought by the minority shareholders. The wrong done
to the company was one which could be ratified by the majority of members. The company was
the proper plaintiff for wrongs done to the company and the company can act only through its
majority shareholders. The majority of the members should be left to decides whether to
commence the proceedings against the directors.
The same view was held by Jenkin, L.J. in Edward v. Halliwell3 where he says;
1
Rajendranath Dutta v. Shibendra Nath Mukherjee,[1982] 52 Comp Vas.293 (Cal).
2
Foss v. Harbottle (1843) 2 Hare 461; 67 ER 189.
3
Edward v. Halliwell, [1950] 2 ALL ER 1064.
10
The rule in Foss v. Harbottle, as I understand it, comes to no more than this. Firstly, the proper
plaintiff in an action in respect of a wrong alleged to be done to a company or association of
persons is prima facie the company or the association of persons itself. Secondly, where the
alleged wrong is a transaction which might be made binding on the company or association and
on all its members by a simple majority of the members , no individual members of the company
is allowed to maintain an action in respect of that matter for the simple reason that, if a mere
majority of the members of the company or association is in favour of what has been done, then
cadit quaestio (cannot be questioned).
The rule in Foss v. Harbottle4 was given its widest expression by Mellish L.J in the case Mac
Dougall v. Gardiner5 where he says;
In my opinion, if the things 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 regularly, or if something has been done illegally which the majority
of the company 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 its wishes. Is it not better that the rule should be adhered to so that if it is a thing which the
majority are masters of, the majority in substance shall be entitled to have their will followed?
In India also the same precedent has been followed by the Honorable Supreme Court in the case
of Rajahmundry Electric Supply Co v. Nageshwara Rao,6 where the apex court observed that
The Court will not in general, intervene at the instance of the shareholders in the matters of
internal administration, and will not interfere with the management of the company y its
directors so long as they are acting within the powers conferred on them under the articles of the
company. Moreover , if the directors of the company are supported by majority shareholders in
what they do, the minority shareholders can in general, do nothing about it.
In all these judgments minority shareholders interest has totally been ignored and this has been
so because the judiciary has given importance on the concept that the Company has a separate
4
Supra note 2.
5
Mac Dougall v. Gardiner, [1875] 1 Ch.D 13 at 25.
6
Rajahmundry Electric Supply Co v. Nageshwara Rao. AIR 1953 SC 213.
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legal personality on the basis of which it can sue someone or can be sued.7 So if any wrong has
been done to the company the company has its potentiality to file a suit on its own name rather
than allowing some shareholder to file a suit on its behalf.
Though it is true that the company has a separate legal personality, being an artificial person8 it
has to be depend on natural human beings without whom it cannot perform its actions. The
company is composed of members (shareholders). Their interests are similar to that of the
companys interest. If the company incurs a loss, it also had an adverse effect on the position of
members as well.
Then the question arises if any of the shareholder finds a particular transaction in the long run
will ultimately play a role that will be detrimental to that of the companys progress and
inconsequence of which his own interest will also get affected, the in that circumstance why he
should not have the right to resist it in order to protect his interest.
The court said that all the decisions regarding the companys management are taken by the
directors. Now if a shareholder suffers an injury then he has to show that that the injury has been
caused by a breach of duty to him. In that circumstances, the directors owe no duty to
individual members, but to the company as a whole. A company is a person and if it acting, as it
must always act through it suffers injury through the breach of the duty owed to it, the only
possible plaintiff is the company itself acting as it must always act, through its majority.
The Delhi High Court in the case ICICI v. Parasrampuria Synthetic Ltd.9tried to find out how far
this principle of Foss v. Harbottle10 can be made applicable in India and it came up with the
conclusion that application of this precedent in the Indian context will led to injustice. The
principle in the countries of its origin, owes its genesis to the established factual foundation of
shareholder power centering around private individual enterprise and realities in our country.
The Indian modern corporate entity is not the multiple contribution of small individual investor
but a predominantly and indeed overfunding up to 80% or more from financial institutions which
7
Floating Services Ltd. v. MV San Fransceco Dipaloa (2004) 52 SCL 762 (Guj), also see TVS Employees
Federation v. TVS and Sons Ltd., (1996) 87 Com Cases 37, Lalit Surajmal Kanodia v. Office Tiger Database
Systems India (P) Ltd., (2006) 129 Com Cases 192 Mad.
8
Union Bank of India v. Khader International Construction and Other [(2001) 42 CLA 296 SC].
9
ICICI v. Parasrampuria Synthetic Ltd. (1998) 5 SCL342.
10
Supra note 2.
12
are entirely state controlled or represent substantial interest and thus their shareholding may be
small but it is these financial institutions which provide the entire fund for the continuous
existence and corporate activities. If the precedent is applied mechanically, it would give
weightage to the majority of the shareholding having notionally holding more percentage of
shares though contributed 80% or more in terms of the finances of such companies. It is these
financial institutions which have really provided the finance for the companys existence and
therefore to exclude them or to render them voiceless on an application of the principle of Foss v.
Harbottle11 rule would be unjust and unfair.
The majority supremacy rule as held in Foss v. Harbottle12 does not prevail in all the situations.
The rule mainly operate in situations where the corporations are competent to ratify the
managerial sins. But there are certain acts in which no majority of shareholders can approve or
affirm. In such cases each and every shareholders may sue to enforce obligation owed to the
company where he brings the actions as a representative of the corporate interest. The following
are the situation in which the minority can bring action are discussed below;
A shareholder is entitled to bring an action against the company and its officers in respect of
matters which are ultra-virus in nature and no majority shareholders can sanction it. This was
seen in the case Bharat Insurance Co Ltd v. Kanhaiya Lal13 where the plaintiff was the
shareholder of the company and he complained that the company had made several investments
without keeping adequate amount of asset as security and the procedure by virtue of which these
investments were made did not match with the provisions relating to the procedure so mentioned
in the memorandum. Accordingly he filed a case of perpetual injunction. The court observations
in this case are as follows.
The board rule in such case is no doubt that in all matters of internal management of a
company, the company itself is the best judge of its affairs and the court could not interfere. Gut
11
Supra note 2.
12
Supra note 2.
13
Bharat Insurance Co Ltd v. Kanhaiya Lal, AIR 1935 Lah 792;160 IC, see also Nagappa Chettiar v. Madras Race
Club, ILR 1949 Mad 808, Smith v.Crofit,(1987) 3WLR 405.
13
application of the assets of the a company is not matter of mere internal management. It is
alleged that directors are acting ultra vires in their application of the fund of the company.
Under these circumstances a single member can maintain a suit for declaration to the
construction of the article in question.
The plaintiffs own conduct also plays a vital role. Since the minority shareholders action in
which the plaintiff sues on behalf of the company is a procedural device for the purpose of doing
justice for the benefit of the company where it is controlled by miscreant directors or
shareholders, the court is entitled to look at the conduct of the plaintiff to satisfy itself is a
proper person to bring action.14 Thus, if the plaintiffs conduct was so tainted as to bar equitable
relief or if there was an unacceptable delay in bringing the action, the plaintiff might well be held
not to be a proper person to bring the action.
Where the majority of a companys members use their power to defraud the minority, their
conduct is liable to be impeached even by a single shareholder.15 The fraud or oppression need
not amount to tort at common law, but it must involve an unconscionable use of the majoritys
power resulting, or likely to result, either in financial loss or in unfair or discriminatory treatment
of the minority, and it must certainly be more serious than the failure of the majority to act in
the interest of the company as a whole, which will induce the court to annul a resolution altering
the companys memorandum or articles.
In the words of Lord Davey, in Burland v. Earle16 fraud embraces all cases where the
wrongdoers are endeavoring, directly or indirectly, to appropriate to themselves money,
property, or advantages which belong to the company or in which the other shareholders are
entitled to participate.
14
Nurcombe v. Nurcombe, (1985) 1 All ER 65 (CA).
15
Edward v. Halliwell, [1950] 2 All ER 1064.
16
Burland v. Earle, [1902]A.C.83.
14
There are certain cases which can only be done by passing a special resolution at the general
meeting of shareholders.17Accordingly, if the majority purport to do any such act by passing only
an ordinary resolution or without passing special resolution in the manner required by law, any
member or members can bring an action to restrain the majority. Such actions were allowed in
Dhakeswari Cotton Mills Ltd v. Nil Kamal Chakravorty18 and Nagappa Chettiar v. Madras Race
Club .19
In the case of Kanika Mukherji v. Rameshwar Dayal Dubey20 Justice Sinha of the Calcutta High
Court stated that the principle of the section embodied in Companies Act which provide for
prevention of the oppression and mismanagement, is an exception to the rule in Foss v. Harbottle
21
which lays down the sanctity of the majority rule.
The individual right of a member arise in part from the contract between the company and
himself which is implied on his becoming a member, and in part from the general law. 22 Under
the contract implied from his membership, he is entitled to have his name and shareholding
entered on the register of members and to prevent unauthorized additions or alterations to the
entry,23to vote at meeting of members,24to receive dividends which have been duly declared or
which have become due under articles25to exercise pre-emption rights over other members share
which are conferred by the articles26 and to have his capital returned in the proper order of
priority in the winding up of the company or a duly authorized reduction of capital. 27 He has the
right to exercise all the rights conferred on him by Companies Act 1956 and 2013 such as his
right to inspect various documents and registers kept by the company, to have a share certificate
17
Avtar Singh,Company Law, Eastern Book Company Publishers,16 th ed., 2015, at p. 489.
18
Dhakeswari Cotton Mills Ltd v. Nil Kamal Chakravorty, AIR 1937 Cal 645.
19
Nagappa Chettiar v. Madras Race Club, ILR 1949Mad 808.
20
Kanika Mukherji v. Rameshwar Dayal Dubey, (1966)1 Comp LJ 65.
21
Supra note 1.
22
Karn Gupta, Introduction to Company Law, LexisNexis Publications, 4th Edition, Gurgaon, 2011
23
Re British Sugar Refining Co.,(1857) 4 J&K 408.
24
Pender v. Lushington,[1877] 6 Ch, D 70.
25
Wood v. Odessa Waterworks Co.,[1889] 42 Ch. D 636.
26
Rayfield v. Hands, [1960] Ch1.
27
Griffith v. Paget, [1877] 5 Ch. D 894.
15
issued to him in respect of his share and appoint a proxy to vote on his behalf at meetings of
members.28 In all these situations, the majority rule as described in the case Foss v.
Harbottle29does not get apply.
A derivative actions may be brought against the directors and promoters who have been guilty of
a breach of their fiduciary duties to the company, if they are able to prevent the company from
suing them in its own name because they control a majority of the votes at the general meeting,
or because they are otherwise able to prevent a general meeting from resolving that the company
shall sue them.
Thus derivative actions have been permitted against the directors who were in control of the
company for misappropriating the companys property30 or carrying out activities in breach of
Companies Act.31 In the case Satya Charan Lal v. Rameshwar Pd. Bajoria32it was observed by
the Supreme Court that when a director is in breach of fiduciary duty, every shareholder may be
regarded as an authorized organ to bring the action.
It has been held in many cases that if an insufficiently informative notice is given of a resolution
to be proposed at general meeting, any member who does not attend the meeting or who votes
against the resolution, may bring a representative action to restrain the company and its
directors from carrying out the resolution.33
In the practical world it has been seen in various circumstances where the majority shareholders
by the virtue of holding the dominant position try to abuse the rights of the minority
28
Supranote 20.
29
Supranote 1.
30
Spokes v. Grosvenor Hotel Co., [1897] 2 QB 124.
31
Wallersteiner v. Moir, [1974] 1 WLR 991..
32
Satya Charan Lal v. Rameshwar Pd. Bajoria., [1950] S.C.R.394.
33
Tiesen v. Henderson, [1891] 1 Ch. 861; Mac Connell v. E. Prill & Co. Ltd. [1916] 2 Ch. 57.
16
shareholders. In order to protect the interest of such minority shareholders the Companies Act
1956 provides various provisions stated as follows;
(i) Variation of class rights [section 10634]- Where the share capital of a company is
divided into different classes of shares, the rights attached to the shares of any class
can be varied as provided in the memorandum or articles of the company with the
consent of the th of the majority of the shareholders of that class. Where this is done
and the rights are varied by the requisite majority votes, the holders of not less than
10% of the issued shares of that class who had not assented to the variation may apply
to the court for cancellation of the variation under section 107 of the Act.
(ii) Scheme of reconstruction and amalgamation- Section 394 provides for scheme of
reconstruction also gives protection to minorities. Proviso to section 394(i) provides
that no compromise or arrangement in connection with a scheme for the
amalgamation of the company which is being wound up shall be sanctioned by the
court unless the court has received a report from the CLB or the Registrar that the
affairs of the company have not been conducted in a manner prejudicial to the interest
of its member to public interest.
(iii) Oppression and mismanagement- the principle of majority rule does not apply to
cases where section 397 and 398 are applicable for prevention of oppression and
mismanagement. A member who complains that the affairs of the company are being
conducted in a manner oppressive to some of the members including himself, or
against public interest, he may apply to the court by petition under section 397 of the
Act. In O.P. Gupta v. Shiv General Finance Pvt Ltd.35 the Delhi High Court held that
a members right to move the Court under section 397 was a statutory right and
cannot be affected by an arbitration clause in the articles of association of the
company.
34
Alteration of rights of holders of special classes of shares. Where the share capital of a company is divided into
different classes of shares, the rights attached to the shares of any class may be varied with the consent in writing of
not less than three- fourths of the issued shares of that class or with the sanction of a special resolution passed at a
separate meeting of the holders of the issued shares of that class--
(a) if provision with respect to such variation is contained in the memorandum or articles of the company, or
(b) in the absence of any such provision in the memorandum or articles, if such variation is not prohibited by the
terms of issue of the shares of that class.]
35
O.P. Gupta v. Shiv General Finance Pvt Ltd, [1977] 47 Comp Cas. 297.
17
(iv) Rights of dissentient shareholders under take over bid36- When an offer for the
purchase of all the shares is received and the offer is accepted by the holders of he
90% of the shares, the party making the offer may, on the same terms acquire the
remaining shares also. But a notice is to be given to the dissenting shareholders who
have a right to apply to the court praying that their shares should not be allowed to be
acquired on the terms of the schemes. On hearing the parties concerned, the Courts
makes an order, as it may think fit.
Study On The Changes Made In The Statutory Provisions Of Companys Act 2013 For
Improving The Position Of The Minority Share Holders
In the previous chapter it has been mentioned how the Companies Act 1956 tried to protect the
interest of the minority shareholders but unfortunately these provisions failed to fulfill their
purpose because in the practical world rule of the majority still exist, who by the virtue of
holding the dominant position, try to suppress or squeeze the minority interest while taking
decision on behalf of the company. Companies Act 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 the
Companies Act 1956 to bridge the gap towards protection and welfare of the minority
shareholders under Companies Act 1956.
1) Companies Act 2013 provides provisions relating to oppression and mismanagement under
Sections 241-246. Section 241 provides that an application for relief can be made to the Tribunal
in case of oppression and mismanagement wherein the minority limit is same as that mentioned
in Companies Act 1956. Under Companies Act 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 Companies Act 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 Companies Act 2013 been given to the Tribunal
and therefore is more likely to be exercised. This also indicates that the power of the Tribunal
36
Section 395 of the Companies Act 1956.
18
under Companies Act 1956 on application under Section 397 or 398 and Section 404 were
limited to that of Companies Act 2013.37
2) Companies Act 2013 by virtue of Section 245 comes across with the concept of Class Action
which was no where mentioned in the Companies Act 1956. Section 245 of Companies Act
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 (Number of members who can file an
application for class action). 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 Companies Act 1956
which provides for protection to only shareholder/members of the company, Section 245 of
Companies Act 2013 also extends this protection to the class of depositors as well.
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 Companies Act 2013 as including the subscriber to the memorandum of the company,
shareholders and person whose name is entered in the register of members; but lacunae remains
when the definition relating of the director arises as it is no where defined in the Companies Act
2013.38 .
Further, section 245 does not empower the Tribunal with discretionary power to admit/allow any
37
Akshat Sulalit, Companies Act, 2013: Rise of the Minority Shareholder, Indian Law Journal see at
http://indialawjournal.com/volume6/issue-2/article5.html.
38
Seen from http://www.lawctopus.com/academike/investors-protection/
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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.
3) 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 10039 of
39
Section 100. Special resolution for reduction of share capital.
(1) Subject to confirmation by the Court, a company limited by shares or a company limited by
guarantee and having a share capital, may, if so authorised by its articles, by special resolution,
20
Companies Act 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.
To counter these shortcomings, CA 2013 has provided for Section 235 (Power to acquire shares
of shareholders dissenting from scheme or contract approved by majority) and 236 (Purchase of
Minority Shareholding). 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.
Companies Act 2013, in addition to minor improvements to certain provisions of Companies Act
1956 has also introduced new provisions affecting the reconstruction and amalgamation
procedures. These, inter alia, include,
a. Companies Act 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 Companies Act
1956 which lacked clarity on this aspect.
reduce its share capital in any way; and in particular and without prejudice to the generality' of
the foregoing power, may--
(a) extinguish or reduce the liability on any of its shares in respect of share capital not paid up;
(b) either with or without extinguishing or reducing liability on any of its shares, cancel any
paid- up share capital which is lost, or is unrepresented by available assets; or
(c) either with or without extinguishing or reducing liability on any of its shares, pay off any
paid- up share capital which is in excess of the wants of the company; and may, if and so far as is
necessary, alter its memorandum by reducing the amount of its share capital and of its shares
accordingly.
21
b. 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;
c. 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
d. Section 236 (5) of CA 2013 requires the transferor company to act as a transfer agent for
making payments to minority shareholders.
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.
4) 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 be 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
22
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
Companies Act 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 Companies Act 2013,
provides that independent directors shall inter alia work towards promoting the confidence of
minority shareholders.
Over the last few decades it has been seen that whenever a dispute arises regarding the matters
relating to the oppression and mismanagement under section 397/398 of the Companies Act
1956, the Company Law Board generally give order in favor of the minority shareholder stating
the exit of the minority shareholder as it has been perceived that if the minority shareholders exit,
no dispute would arise in running the day to day affairs of the company and the company can run
by the majority efficiently and as the majority may please. Similar view was held by the
Company Law Board in the case Yashovardhon Saboo v. Groz-Beckert Saboo Ltd40 where the
Board stated that even if in a case, the allegation of oppression is not established but still to
provide a relief to both the parties, whose relationship has reached to a stage where reconciliation
was difficult, it was directed that the majority should purchase the share of the minority and at
any circumstances the majority should never be forced to sell its share to the minority.
At that point of time majority rule is considered to be an hallmark of Democracy. Slowly the
judiciary realize that the majority is not free from misuse or abuse. Corporate Democracy is more
40
Yashovardhon Saboo v. Groz- Beckert Saboo Ltd,(1995)83 Comp.
23
vulnerable to misuse because it is reckoned with the number of share that a shareholder holds
and not with the number of individuals involved.
The Supreme Court in the case Needle Industries (India) Ltd v. Needle Industries Newey Holding
Ltd41 for the very first time gave judgment in favor of the minority interest. In this case the
foreign majority alleged oppression by the Indian minority share holders as the latter appointed
additional directors and issued further shares. The Company Law Board and the Honorable High
Court gave judgment in favor of the majority by considering such act of the minority as
oppressive. But when the matter went to Supreme Court on appeal, the Honorable Apex Court
differed from the judgment of the CLB and the High Court and gave its decision in favor of
minoritys interest by rejecting the plea of opportunities and directing the minority Indian
shareholders to purchase the shares so held by the foreign majority shareholders.
In the case of Dale and Carrington (P) Ltd. v. P,K, Pradhan 42the Supreme Court reiterated the
principles laid down in Needle Industries (India) Ltd v. Needle Industries Newey Holding Ltd43.
In this case the Company Law Board provided for purchase of shares, but this time of the
minority shareholders by the majority shareholders even after holding that the allotment of
shares in question was an act of oppression. The High Court and Supreme Court set aside the
allotment of shares and applied the principle that a wrongdoer / oppressor cannot be allowed to
take further advantage of his/their own wrong and the oppressor cannot be permitted to buy out
the oppressed.
In the case Sangramsinh P. Gaekwad and Ors v. Shantadevi P. Gaekwad (Dead) through L.Rs
and Ors.44 the Apex Court has made similar observation in a dispute relating to the issue of
additional shares and issues concerning fiduciary duties of the shareholders. In the course while
interpreting the section 397 read with 402 of the Act and the jurisdiction of the court , it was
observed that there are wide powers to the court while exercising jurisdiction under section 402,
but it is not in all cases that relief can be provided. Relief must be provided depending on the
exigencies of the situations and a decision can be arrived at on analyzing the materials. It was
41
Needle Industries (India) Ltd v. Needle Industries Newey Holding Ltd.,AIR 1981 SC 1298.
42
Dale and Carrington (P) Ltd. v. P,K,Pradhan, 2005 1 SCC 212.
43
Needle Industries (India) Ltd v. Needle Industries Newey Holding Ltd.,AIR 1981 SC 1298.
44
Sangramsinh P. Gaekwad and Ors v. Shantadevi P. Gaekwad (Dead) through L.Rs and Ors, (2005) 11 SCC 314.
24
further observed that the jurisdiction of the court to grant appropriate relief under section 397 is
indisputably of wide amplitude. It was also held that a court while exercising its discretion is not
bound by the terms so contained under section 402 of the act if in a particular situation, a
further relief or relieves, the court may deem fit and proper, are warranted. The similar principle
was taken into consideration by the Apex Court while deciding the case Radharamanan v.
M.S.D. Chandrasekara Raja and Anr45 .
In recent, some of the decisions the Company Law Board has given decisions in favor of the
minority share holder where they ordered the majority to exit the company, to protect the interest
of the company as the minority would have the expertise to run the company. In Shri Gurmit
Singh v. Polymers Paper Ltd46 and in Chander Mohan Jain v. CRM Digital Synergies P. Ltd47
Company Law Board ordered the majority to sell the shares to the minority and it is interesting
that it also observed that the majority should never be directed to sell its shares to the minority.
In view of the facts of the matter, since the majority did not participate in the affairs of the
company and acted completely detrimental to the interest of the company and since the interest
of the company is the paramount rule of the company law, the minority were directed to buy out
the majority.
The Madras High Court and the Karnataka High Court in Prabir Kumar Mishra v. Ramani
Ramaswami and Ors48 and Namtech Consultants Pvt Ltd v. G.E. Termometrics India Pvt Ltd.49
respectively, have also gone to the extent of directing the purchase of shares by one among the
warring group of shareholders, through determining the value of shares by an independent expert
valuer and by way of competitive bidding respectively, not taking into consideration whether it
was majority or minority shareholders.
Recently in the Cadbury India Case, the Bombay High Court has discussed about minority
shareholders interest. In this case several takeover offers were made by Cadbury Plc (the
holding company) and buyback offers by Cadbury India,(the subsidiary company) and
accordingly the public shareholding of the company fell below the minimum required for
45
Radharamanan v. M.S.D. Chandrasekara Raja and Anr, AIR 2008 SC 1738
46
Shri Gurmit Singh v. Polymers Paper Ltd, (2005) 123 Comp. Cas. 486.
47
Chander Mohan Jain v. CRM Digital Synergies P. Ltd, (2008) 142 Comp. Cas. 658.
48
Prabir Kumar Mishra v. Ramani Ramaswami and Ors, MANU/TN/2194/2009.
49
Namtech Consultants Pvt Ltd v. G.E. Termometrics India Pvt Ltd., ILR 2008 Kar 1187.
25
continued listing. In consequence the company was also delisted from the stock exchange. The
Cadbury Group holding majority of the share started capital reduction scheme to buy out the
minorities. The price offered was supported by the reports of two independent valuers which
was also challenged by the dissenting minorities. The uniqueness of Cadbury lies in the fact that
the court first ordered the appointment of another valuer to conduct the valuation afresh (albeit
with the parties support) and then proceeded to announce a legal standard that made it difficult
for the minority to challenge this valuation.
In this regard the Court held that before sanctioning an application the court should consider
minimum of these three tests
1) Was a fair and reasonable value being offered to the minority shareholders?
If the answers to all of the above were in the affirmative, the Court was more likely than not to
sanction the application.50
On the question of whether there was prejudice against a class of shareholders, the court found
that an overwhelming majority of the non-controlling shareholders voted in favour of the
resolution. Out of a total of 7,51,120 non-controller shares voted at the meeting, only 12,784
voted against the resolution, thereby indicating that a majority of the minority (MoM) was in
favour of the capital reduction. This appears to have weighed heavily with the court, which
observed that the tyranny of the majority must be balanced with the essential democratic
discipline without which the functioning of any company would degenerate into mere chaos and
anarchy.
Conclusion
After making a careful examination of the provisions of the Companies Act 2013 it can be
ascertained that legislative intent in Companies Act 2013 is to safeguard the minority interest in
a more comprehensive manner. However, the provisions of Companies Act 2013 not only
50
Price Waters Coopers . Cadbury minority buy out approved, Tax Insights see
https://www.pwc.in/assets/pdfs/news-alert-tax/2014/pwc_news_alert-8_august_2014--cadbury_india_limited.pdf
26
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.
Judiciary is also playing a vital role in safeguarding the interest of the minority shareholders.
Every day a new precedent is getting set which ensures protection of minority shareholders
interest. The way the Honourable Apex Court has interpreted the provision of the Companies Act
in some landmark cases clearly shows that the objective of the authority is to provide adequate
justice to the minority shareholders who have been exploited by the other half for a long period
of time taking the help of the majority rule principle so held in the landmark case of Foss v.
Harbottle.
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Bibliography
Primary Sources
Secondary Sources
Books
Kapoor G.K. and Dhamija Sanjay, Taxmanns Company Law and Practice, 19th Edition, Tan
Printing House, 2014:
Karn Gupta, Introduction to Company Law, LexisNexis Publications, 4th Edition, Gurgaon,
2011:
Singh Avtar, Company Law, Eastern Book Company Limited, 16th Edition, Lucknow, 2015.
Articles
Akshat Sulalit, Companies Act, 2013: Rise of the Minority Shareholder, Indian Law Journal
M.Rishi Kumar Durgar, Minority Share Holders Buying out Majority Share Holders- An
Analysis, Manupatra.
Websites
https://www.pwc.in/assets/pdfs/news-alert-tax/2014/pwc_news_alert-8_august_2014--
cadbury_india_limited.pdf
http://indialawjournal.com/volume6/issue-2/article5.html.
http://www.lawctopus.com/academike/investors-protection/
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