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PROPER BALANCE OF THE RIGHTS OF MAJORITY AND MINORITY SHAREHOLDERS IS ESSENTIAL FOR THE SMOOTH FUNCTIONING OF THE COMPANY – EXPLAIN AND ILLUSTRATE.

1. INTRODUCTION

A proper balance of the rights of majority and minority share holders is very much essential for the smooth functioning of the company. At first we need to know what a company is. To begin with we can say that company is an assemblage of persons for social purposes. In other words we can say that company is a number of persons united or incorporated for joint action, especially for business. The Company may also refer to: Organizations like The Central Intelligence Agency (CIA), an American agency or The Indian mafia, an organized body of criminals based in India. But here in this context company is a form of business organization 1. In a company there are two types of shareholders one is majority shareholders and other one is minority shareholders. Both the shareholders play an important role in the smooth functioning of a company.

Company Function

Following are the functions and salient business features of a machine dealer company:
1. Sale of Local machinery.

1.see in dictionary.com

2. Sale of machinery offered from Abroad.
3. To provide various services required by printing houses.
4. Sale of machinery brought from abroad (Dealers machinery).

2. MAJORITY SHAREHOLDERS:

The majority shareholder is most commonly the company’s parent but may also be an individual or a group of connected shareholders. This is more common with smaller companies and in emerging markets. 2

3. MINORITY SHAREHOLDERS:

Minority shareholders are shareholders who have minority stakes in a company that is controlled a majority shareholders.

The value of shares can be depressed by the existence of majority shareholders (including a group of connected shareholders). Minority shareholders are effectively deprived of any real say in the running of the company, and they may find that company is run in a way which benefits the majority at their expense.

4. IMBALANCE BETWEEN MAJORITY AND MINORITY SHAREHOLDERS:

A strict application of the general principle appears to be harsh and unjust with regard to minority shareholders, as although a substantive right has been accrued to them, still they are barred from obtaining justice under the rule and have to submit to

2. see in moneyterms.com (minority shareholders)

the wrongs done by the majority because at the end of the day it is the majority of the

members that control the company and the minority members have no say due to their small strength of number. However, in order to mitigate this harshness, four exceptions to the general principle have been laid down:

1. The first exception is where the alleged act is illegal. The cases might show that a member may by virtue of his right, sue against a threatened lawful act and may set aside an unlawful act by bringing a derivative action.

2. The second exception concerns a situation where the alleged matter was such that could only have been validly done or sanctioned, in violation of a requirement in the articles, by some special majority of members.3

3. The third exception relates to an alleged act which has caused the invasion of the claimant’s personal and individual rights in his capacity as a member.

4. Last but not the least, the fourth exception deals with a situation where a ‘fraud on the minority’ has been committed by the majority who themselves control the company.

3.An example of a case in which It was stated that the alleged act could have been done only by a two-thirds majority and not by a simple majority and thus the rule could not be relied upon as the members were suing in their own right only to protect their own rights in their capacity as members and were not infact suing in the right of the union because here the wrong has not been done against the union(in which case, the union would solely have been able to bring a cause of action). Instead, here the defendants had by breaching the rules of the union by which they are bound, had invaded the personal and individual rights of the minority.

It is noteworthy that even where an individual member has the right to bring a claim on behalf of the company less than one of the exceptions to the general principle, he may still be prevented from bringing a claim where the wrongdoer has a sufficient level of control over the company and is opposed to the litigation.

What the law needs to do is strike a balance. It can neither give more support to the majority (as the minority will then be prejudiced) and nor to the minority (who would then object on every action, resulting in the floodgates argument). However, it seems quite evident from these four exceptions and the various case law flowing as a result of them that under common law minority shareholders have been given protection to quite an extent and the law seems to have provided some remedies to meet those cases in which majority power has been abused.4

Nowadays we see the complications in the corporate world and especially about the protection to the shareholders in a Company.5 Because the majority does everything in order to deny the rightful share of the minority shareholders or the group; or to make the company a shell company. There are also companies with huge asset base functioning like a proprietorship concern without any regard to the corporate regulations or the provisions of the Companies Act, 1956. Many shareholders alleging that their interest in the Company running to several cores is at stake with

4.see in law teacher.com. Article: Majority Rule Shareholders | Free Company Law Essay

5. see in Articlesbase.com. Minority Shareholders In A Company – the protection? Edit Article | Posted: Dec 14, 2010 |

the oppressive attitude of the majority and the activities of mismanagement. There are serious grievances seen to the minority shareholders or group even in a listed Public Company.

However, the situation of the shareholders in a listed Public Company is different from a Private Limited Company. When it comes to the listed Public Companies, there is a chance of disposing their shares in the open market; but the same right is subject to regulations when it comes to the transfer of shares in a Private Limited Company. Again, it is a fact that no investor will be interested to buy the shares in a Private Limited Company if they do not trust at the existing shareholders.  As such, there are serious issues concerning the rights of the minority shareholders in a Company though we feel that the rights are well protected with the clear provisions in the Companies Act, 1956 and other regulations.

The legal framework may appear to be very clear, but, the practical issues deserve special consideration. In practice, many rules and regulations are violated in closely held companies especially and it is also very difficult to allege some malafides just because a Company could not follow the procedure strictly. As such, the issue of rights of shareholders and the protection to their interest is very complicated in view of the ‘majority rule’ and the protection to the minority against the oppression and mismanagement.

6. THE MAJOR PROBLEM BETWEEN MAJORITY AND MINORITY

SHAREHOLDERS:

We can begin it with an example of a company called ‘An Ltd’. ‘An Ltd’ is a SME with an annual turnover of £15–20m. It is owned and controlled by three old friends, business partners of longstanding who decided ten years ago to give up their day jobs and go into business together. All three are directors. They agreed from the outset to take broadly equal amounts out of the company.

However, the shareholding is not split equally between them. One member has 58% of the issued share capital; the other two have 21% each. All three directors play a full role in the management of A Ltd. They operate by consensus and formal board meetings are rare.6

This is how many SMEs and family companies are run. All is well whilst the members get on with one another and are happy with the direction the business is headed.

But the main problem arises when the majority shareholder sees the company as their own to do with as they like, or when they want to eject a director who is also a shareholder. The majority rules because they have the sufficient voting power to carry an ordinary or special resolution.

6. see in Spence, D. and Peasant, J. Articles: Minority Shareholders and Their Rights. (Examine what rights minority shareholders have in company disputes – a situation that could affect both practitioners and their clients.) Issue 62 – December 2003.

Minority shareholder faces an impossible task in attempting to force directors into bringing an action against themselves. In certain circumstances the courts will allow a minority shareholder to bring a claim in the company’s name. The minority shareholder has no greater right to relief than the company would have were it to bring an action itself. Any financial award accrues to the company itself.

A minority shareholder is not entirely impotent. The Companies Acts have always contained provisions giving a minority shareholder leverage to curb the excesses of the majority. However, generally these provisions are little use against a majority shareholder determined to execute their plans. In these circumstances, the minority shareholder will need to apply to the court for protection and relief.7

In many circumstances, a minority shareholder may be affected by a wrong done,   not to them personally but to the company by the majority. For example, diversion of contracts from the company to the directors personally.

The majority rule stands for the proposition that the decisions and choices of the majority will always prevail over those of the minorities. In practice, the greater the amount of shareholding of an individual member, the greater rights and powers accrued to that individual member within the company.

7. There is an attempt to make a specific provision to bar the jurisdiction of the Civil Court to entertain the corporate disputes in the proposed new Companies Act. However, as the law stands today, the shareholders can approach the Civil Court asking for a remedy against the management or the majority in the Company. The problem with approaching the Civil Court is that it is time consuming and technicalities to be followed at any cost. Again, the Civil Court may lack the expertise in dealing with the corporate disputes and there is a possibility of applying the provisions of the Companies Act, 1956 strictly and the result can be disastrous at times..

Thus it appears that a substantial amount of power has been placed in the hands of the majority shareholders and that by virtue of the majority rule, the minority shareholders are required to accept the decisions made by the majority shareholders.

In such circumstances, the minority shareholder cannot ask for court intervention because minority members who complain of a wrong done to the company provided that the majority shareholders do not wish to take any action against the wrong committed.

As a general principle, where it is alleged that a wrong has been done to the company then proper claimant in such an action is the company itself and where the company court8 is competent to settle the alleged wrong itself or, the company is competent to ratify an irregularity by its own internal procedure, then no individual member may bring action.

Minority shareholder faces an impossible task in attempting to force directors into bringing an action against themselves. In certain circumstances the courts will allow a minority shareholder to bring a claim in the company’s name. The minority shareholder has no greater right to relief than the company would have were it to bring an action itself. Any financial award accrues to the company itself.

8. when the shareholders raise the issue of oppression and mismanagement by the majority before the Company Court, the Company Court may ask the shareholders to avail the alternative remedy of approaching the Company Law Board to put an end to matters complained of or to regulate the company affairs.

7. SOLUTIONS:

All shareholders have rights that they can enforce against the company and other shareholders whether or not a formal shareholders’ agreement has been reached. There are serious issues concerning the rights of the minority shareholders in a Company though we feel that the rights are well protected with the clear provisions in the Companies Act, 1956 and other regulations.  In order to evaluate whether or not, the rights of minority shareholders have been improved by the enactment of the Companies Act 2006, it is essential to analyze the situation of minority shareholders prior its enactment and determine whether under the old common law, minority shareholders were given adequate protection. It is necessary to take a look at the various remedies offered to minority shareholders under it:

1. Firstly, further reform with regard to minority shareholders has been made by sections 260-269 of the Companies Act 2006 which have now replaced the common law rules. The new rules contain an exclusive list of grounds which further states that only where a cause of action arises from an actual or proposed act or omission involving negligence, default, breach of duty or breach of trust by a director of the company, can a derivative claim be made and that it is not material as to whether or not the person bringing the claim became a member before or after the cause of action arose.9

9. Its noteworthy that negligence is specifically allowed as a ground for bringing proceedings for bringing statutory derivative claims and that the claim is only allowed to be brought in respect of wrongs perpetrated by the company’s directors. In order to bring a derivative claim, an application for permission to do so must be made to the court.

2. Secondly, Secondly, the minority shareholders have been provided with a remedy under of the Insolvency Act1986.

Based on majority rule and in view of considering the functioning of the Company when the Company is a going concern, the minority shareholders should convince the appropriate and chosen forum as to the importance of their interest and should get the relief.  There is also a criticism that the most comfortable way of stealing huge money is through relying on the technicalities in the provisions of the Companies Act, 1956 and is through misusing the settled principles of Company Law.

There should be an agreement between the shareholders and the company as to how the company is to be run. The court will enforce a breach of that agreement. An otherwise proper attempt to vary the articles can be actionable if it affects rights already in existence or the majority has not acted in good faith.

8. Conclusion:

The minority may have more shares, but lack of control due to how the company is structured, they may include non-voting shareholders. Although legal protection exist again this danger, they are not always effective. A majority shareholder cannot blatantly cheat the minority, but there are more subtle ways in which the majority can favor itself, for example: by preferring to deal with group companies. The disadvantages to minority shareholders are also the reasons why prospective majority shareholders are willing to pay a control premium.

The Majority and minority shareholders have joined together to form the company and if they run it in a proper way it can give rise to an understanding that each of the shareholders would participate in management. Who is right depends very much on the facts. We can’t blame any of them totally. They both can misuse their power. But for smooth functioning in a company the proper balance in the rights of majority and minority share holders is very much essential.

Correspondence

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