RIGHTS OF MINORITY SHAREHOLDERS UNDER COMPANIES ACT, 2013

Introduction

In corporate world, all democratic decisions and management of a company are made with the majority rule which is deemed to be fair and justified. The majority rule of decision making, quite often than not overlooks the views of minority shareholders. A minority shareholder is a person in a company who does not enjoy much power in the management of the company and their interests are disregarded. Despite the provisions placed under Companies Act, 1956 of protection of the interest of minority shareholders, the minority shareholders found themselves incapable of exercising their rights due to lack of the resource or of time. Therefore, this resulted in the majority domination and suppression of minority shareholders rights in the decision making and management of the company and to overcome this problem faced by the minority, the Companies Act, 2013 came up with the solution to tackle the problems which are usually faced by the minority shareholders. However, the definitions of minority shareholders are not mentioned under the Companies Act, 2013 but under Section 235 (Power to acquire shares of the dissenting shareholders) and under Section 244 (Right to apply for the oppression and mismanagement) of Companies Act, 2013 the minority shareholders are given 10% of shares or minimum hundred shareholders, whatsoever, is less with share capital and 1/3 of the total number of its members in case of companies without the share capital.

This article throws light on the rights of minority shareholders protected under Companies Act, 2013.

Definition of minority shareholders

Minority shareholders are the equity holders of a firm who does not enjoy the voting power of the firm by the virtue of his or her below 50% ownership of the firm’s equity capital.

Rights of Minority Shareholders

Many provisions of Companies Act, 2013 deals with the situations where minority shareholders rights have been protected and the same can be divided into various major heads. The rights of minority shareholders are discussed below.

Oppression and Mismanagement

In Companies Act, 1956, the protection for the minority shareholders from oppression and mismanagement have been provided under section 397 (An Application to be made to company law board for relief in cases of oppression) and 398 (An Application to be made to company law board for relief in cases of oppression).

According to Section 397(1) of Companies Act, 1956, the term oppression has been defined as “when affairs of the company are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members‘”.

Whereas the definition of mismanagement has been defined under Section 398(1) as “conducting the affairs of the company in a manner prejudicial to public interest or in a manner prejudicial to the interests of the company or there has been a material change in the management and control of the company, and by reason of such change it is likely that affairs of the company will be conducted in a manner prejudicial to public interest or interest of the company”.

Therefore, right to apply to the company board for the oppression and mismanagement is provided under the Section 399, which is,  meeting 10% of shareholding or hundred members or one-fifth members limit. However, central government under their discretionary powers has allowed any numbers of shareholders to apply for the company board for the relief under Sections 397 and 398.

Whereas, on the other hand, under Companies Act, 2013, the relief from the oppression and mismanagement has been provided under Section 241-246 where the relief can be sought from the tribunal in case of mismanagement and oppression through section 244(1) which provides the right to apply to tribunal with the same minority limit mentioned in Companies Act, 1956 but however, the tribunal, while exercising discretionary powers, may allow any numbers of shareholders and to be considered as minority.

Further, under the Section 245, Companies Act, 2013, the new concept of class action has been introduced which was non-existent in Companies Act, 1956 wherein it provides for class action suits to be instituted against the company as well as against the auditors of the company.

Reconstruction and Amalgamation

In Companies Act, 1956 with respect to minority shareholder right for reconstruction and amalgamation of companies, under section 395 states that for the transfer of shares or any class of shares of a company to another company, consent of the holders of at least (9/10) i.e. 90% of the shareholders consent will be required, which is therefore referred to the majority suppressing the rights of the minority shareholders. It further states that the transferee can give a notice to any dissenting shareholder expressing his desire to acquire their shares within 2 months after the lapse of the 4 months. Whereas, to counter these shortcomings, Companies Act, 2013 under Section 235 grants the power to acquire the shares of shareholders dissenting from the scheme approved by the majority not less than 9/10 in value of the shares and can transferee company may give notice to dissenting shareholder for acquiring his shares. Therefore, under Section 235 it is made mandatory for the shareholders to notify the company regarding their intention of buying the remaining equity shares or by a group of persons holding 90% consent of the registered holder of the company. The Companies Act, 2013 further provides the shares need to be acquired at a price determined on the basis of valuation by a registered valuer in accordance with the rules and the regulations.

Minority Upgraded

Companies Act, 2013 has empowered the corporate decision making of the minority shareholders also. Under Section 151 of the Companies Act, 2013, listed companies are now required to appoint directors who are elected by the small shareholders i.e. shareholders holding shares of a nominal value of not more than twenty thousand rupees. Furthermore, the provision in this regard was elaborated where it is stated that the listed companies may elect a small shareholders’ director amongst the small shareholders by either suo-moto or by giving notice of not less than 500 or 1/10th of the total number of the small shareholders. It is important to note that the small shareholders are different from minority holders as the former ones are being ascertained according to their individual shareholding which can be less than INR 20,000. Whereas minority shareholders are collectively ascertained as by having non-controlling stake in the company.

Apropos, it has been further provided the procedures for the nomination of a small shareholder director with the information to be furnished along with. However, the Company Rules of 2013 also provides the majority and protection to the small shareholders for safeguarding their interests. The Company Rule further protects the interests of small shareholder director and ensures that the small shareholder director will not retire by the rotation and shall enjoy tenure of three years. However, the small shareholder director will not be further eligible for reappointment.

Furthermore, sub clause 4 of clause 11 of the companies rules provides that “such director shall be considered as an independent director subject to his giving a declaration of his independence in accordance with sub-section (7) of Section 149 of the Act”.

It is therefore clear from the aforesaid clause that the small shareholder director may or may not be an independent director, thus, making optional for small shareholder director to be an independent director.

This empowers the minority/small shareholders rights in the process of decision making and in the management of the company. Thus, it also states the provisions where the interest of the minority shareholders can be protected through the appointment of an independent shareholder directors.

E-Voting

E-Voting has been made mandatory for the listed companies with at least 1000 shareholders which indeed will enhance the active participation and offers a platform to the minority shareholders in the management of the company. This will also enable the minority shareholders to exercise their power in the company.

Protection of Minority Shareholders – Steps taken by companies

Piggy Backing – This provision states that if the majority sells their shares then the minority shareholder right has to be included in the deal. Moreover, “Piggy Backing” requires the party to consider the purchase of the business to sell 100 percent of the outstanding shares. To ensure the compulsory provisions of the minority shareholders.

Conclusion

After critically examining the provisions of Companies Act, 2013, it can be ascertained that the core intention of the legislation is to safeguard the interests of the minority shareholders but it requires the proper implementation of these provisions safeguarding and to give due consideration to their valuable rights. It may also be concluded that the minority shareholders back in Companies Act, 1956 were not considered as a major part of the company due to suppression of the majority rules and regulations in the company. But Companies Act 2013 has taken various crucial steps to safeguard the interest of the minority rights of the shareholders in the company irrespective of existence of oppression and mismanagement of the company affecting the rights of the minority shareholders. Therefore, this dual approach towards the enforcement of the minority rights guarantees proper administration of the corporate activities successfully only when it is implemented properly by giving importance and rights to the minority shareholders in the management of the company.

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