This article is written by Gracy Shukla, an intern under Legal Vidhiya
Abstract
The aim of this paper is to answer the questions of minority shareholders’ rights and what corporate governance acts do to ensure their rights are protected. There are many entities which operate the corporate sector and provide corporate governance guidelines for free and fair market operation. The question on how these corporations act on the rights of minority shareholders who do not make up the majority but are one of the crucial parts of the corporations. The data used in this paper are all relevant to today’s context and provide the readers with insight on how corporate governance maintains the equilibrium of their corporation sector. This paper examines the importance of corporate governance in safeguarding minority shareholder’s rights. It delves into the grounds of which the minority shareholders can sue the corporations for hindering their rights. Additionally, this paper discusses the role of legal entities in safeguarding the rights of minority shareholders and analysis the case study and evidence to further develop the idea of how these regulatory bodies operate and protect the rights of shareholders. This paper highlights the positive impact of corporate governance in promoting the well-being of the company and the best interest of its shareholders.
Keywords
Corporate governance, minority shareholder, voting, rights, company law
Introduction
Before understanding the mechanism of corporate governance in safeguarding the rights of minority shareholders, let us first dive into the question of what corporate governance is and who are these minority shareholderswhose rights need to be protected. Further we will discuss the role of corporate governance and legal frameworks and regulatory bodies and the grounds on which shareholders can knock on the doors of courts for their rights. But for now, let us go back on our question as mentioned above.
The terms corporate governance refers to the entire system governing a company, with emphasis on their control. Corporate boards are the ones who are put in charge of their companies’ governance. There is also the role of the shareholders, but it is confined to the election of the directors and the auditors and satisfying themselves that there is a proper governance structure. M Responsibilities of the board comprise formulating the strategic objectives of the company, giving instructions to implement the strategic goals, overseeing the management of the company and authority of reporting to the shareholders regarding the management of their investments. It follows from the above discussion that corporate governance relates to the tasks performed by the board and to the norms espoused by the latter, while the day-to-day management of the company is the prerogative of the salaried managers. Nevertheless, a positive contribution to the increasingly numerous non-listed sector and international structures is still possible, as good governance practices are targeted at strengthening accountability and transparency within the existing structures. One of the interesting features in the past couple of years is that it uses the governance label to characterize an entire range of issues which do not pertain only to corporate governance. Now to our next question of who these minority shareholders are. Minority shareholders are individuals or groups who hold less than 51% of the company’s share and do not exercise any voting right which is why their opinion and grievances go unheard during major decision making. Less number of shares meaning less importance is a common perception held by many. However, minority shareholders are important in keeping the balance especially in the following situations: Range of perspectives: They promote deliberation by providing diverse opinions in the decision-making process, enhancing the discussion, and preventing anyone from predominating. The structure of the shareholding is likely to be financial stability in that the company is not reliant on a few investors. Advisory & control: Even if they invest a smaller percent, such minority shareholders can act as a positive majority and easily control whom the management in charge is ruining the organization[1]. Minority shareholders ensure many benefits for the company even if they do not make the majority but not protecting them can affect company’s valuation and credibility, leads to internal conflict and risk in decision making being biased. Corporate governance is an effective tool to overcome this issue but that also needs proper guidance and legal protection.
In the next section of this paper, we will investigate how corporate governance acts to safeguard the rights of minority shareholders and what are these rights that need to be protected.
Ways to Protect the Rights of Minority Shareholders
In this section we will understand how corporate governance can adopt diverse ways to protect the rights of minority shareholders.
Statutory protections are provided to the minority shareholders if their rights are being threatened. The companies act 2013 in India is one the example of corporate mechanism which operate to provide safeguard against any oppression performed towards minority shareholder. Signing shareholder agreements which include provisions that protect the rights of minority shareholders like fair escape plans and pre-emptive rights. Derivative actions can be brought by the shareholder if the director of the company is behaving in an unfair way and is not performing their duties[2]. Access to corporate documents is another way to ensure easy access to documents which will enable the minority investors to understand their legal rights in a better way without any problem. This practice will maintain transparency in transactions and promote transparency and faith among the parties. It also increases the credibility of the company for providing a non-discriminatory environment to all its investors. Holding the directors accountable for their misconduct is prejudicial as they are the authority, and they hold not only a crucial position in a company but also are an integral part of the company and will be held liable for not performing their fiduciary duties[3]. Minority shareholders’ rights need protection and increment. Their voting rights should be increased on a very crucial matter of the company. Major shareholders can be kept in check so that they do not misuse their power.
Although minority shareholders do not have power like major shareholders, they have considerable impact on the company and its operation. In the next section we will understand on what exception grounds a minority shareholder can file grievances.
Grounds Over Which Minority Rights can be Protected
The underlying concept underpinning the framework within which the minority shareholder’s rights emerge is based on the principles found in the case of Foss v. Harbottle (1843) and this case was ruled by the House of Lords in the year 1843. In the general body meeting, the Board of Directors is elected by most of the shareholders to carry out the business of the company, and indeed, the majority drummed out every decision while the minority was silent on all the affairs of the company and treat poorly. On an appeal from the minority stakeholders becoming discontented with this oppression, it came to be held that the minority shareholders had no recourse to the court to resolve the internal affairs of the company, until and unless there was gross violation of the natural justice principles for all shareholders, especially those in the minority. In this manner, the case came to be viewed as a significant ruling on the safeguarding of the majority’s discretion in company management. Not so, however, the reasons violating the rule in Foss vs. Harbottle became the very salvation of the minorities’ rights.
We will investigate some of the exceptions on over which minority shareholders rights need protection. Vires act, fraud in the majority, prevention of oppression and mismanagement, wrongdoers in control and individual membership rights are some of the grounds over which actions by minority shareholders can be brought. We will understand these acts in brief: ultra vires act is those acts done by a company management which goes beyond its power and authority and minority has the right to bring action against it. Case law of Sh. Kanhaiya Lal vs. Bharat Insurance Co. (1933) in which the judgment of ultra vires came protecting the rights of minority shareholders. Fraud in the majority when the majority suppresses the rights of minority or treats them discriminatorily with the intention of committing fraud with the company. Case law of Menier vs. Hooper’s Telegraph Co. (1874) in which the judgment of fraud came to the majority. Prevention of oppression and mismanagement, although the majority decision prevails in corporate functioning but the risk of violation of minority rights is more and to strike a balance between them becomes very crucial. There are many legal institutes where the minority shareholders can appeal if there is any violation of rights and oppression of their will. Wrongdoers in control, when majority shareholders violate the provisions of Memorandum of Association and Articles of Association for their benefit putting the company’s growth at the stakes. Case law of Glass vs. Atkin (1967) in which the judgement came to the exception of Foss vs. Harbottle case, where the director violates his duties and compromises morals. Individual membership rights, where every shareholder can exercise his right to vote and contest the election of director. Case law of C.L. Joseph vs. Jos (1963) in which the judgement of protection of individual rights of plaintiff came upon the chairperson exercising his power by not allowing the nomination of the plaintiff[4].
Legal Framework for the Protection of Minority Shareholder’s Rights
The provisions related to the protection of minority shareholders right is engraved in the Companies Act of 2013 of India. To understand the current framework of minority shareholder rights in India we must investigate some provision of Companies Act of 2013. Section 2(84) of the act gives the definition of shareholder as an individual, corporation, association any company who purchase and hold ownership of shares. Section 2(55)(iii) states that shareholders are also known as members. The concept of majority or minority shareholder is not defined in the act but is based on the percentage of shares they hold, and we know shareholders who hold less than 51% of shares are known as minority shareholders. Section 94 of the act ensures the right of minority shareholders to access certain company records like MOA and AOA, annual returns and financial records. Section 56 act provides free transfer of shares of every shareholder according to their will. Section 100 allows minority shareholders to request extraordinary general meetings if they hold at least 1/10 of the total voting power, or a smaller percentage as outlined in the company’s articles. Section 101 of the act mandates the notice to be served for the meeting to all the shareholders at the prescribed time through any means. Based on the specification as outlined in Section 123 of the Act, every registered shareholder shall have the entitlement to receive a portion of the company’s profit as a dividend on the declaration made by the company for that year. As per the provisions of Section 151 of the Act, the minority shareholders shall be entitled to elect one director in the manner prescribed. This is among the most important provisions concerning the protection of minority shareholders’ rights as it provides for the ways in which the oppressive power of the majority may be contained and the views of the minority safeguarded. Pursuant to Section241 I of the Companies Act, justice may be sought by a member of the company from any tribunal for a remedy against oppression and mismanagement by most of the company in a manner prejudicial to the interest of that member or any other member/members or to the public at large. Section 242 in relation to section 241 deals with the application/appeal to the Tribunal and the powers of such Tribunal to deal with this issue. Which also adds other powers to the Tribunal such as the power to remove any directors and the power to suspend any agreement or dealings with the company. Section 245 of the Act prohibits the deprivation of the right of the members to undertake class action where such members find that the majority are working against the growth of the company. ‘Class action’ means any action pursued by a cluster of members with identical interests that is not addressed by the company’s management at important decision-making times. Section 241-246 of the act provides protection to shareholders of a company who meet the minimum criterion for any oppression and mismanagement. Also, against the act of majority\management that can potentially harm the company or the public interest. The principles that underpin acts of oppression were rooted more than 50 years back in S.P. Jain v. Kalinga Tubes Ltd., wherein the Supreme court laid down the principles that elucidate the meaning of oppression; that the conduct should be burdensome, harsh and wrongful, and such a member should be above fair dealing regarding his equitable rights as a shareholder. Further, it is not sufficient to say that the minority and majority shareholders do not agree completely, it must be that opposition has arisen out of the oppression of a small stockholder by a major shareholder in the management of the company. These principles were put into practice, and other cases added to them. In the case of Needle Industries India Ltd. vs. Needle Industries Newey (India) Holdings Ltd.[5], the Supreme Court stated that only illegal activities would not be considered as oppressive by itself unless attends nefarious motives or otherwise was extreme and unjust in character. On the other hand, if there are a number of illegal activities geared towards an individual, it would be reasonable in primary imbalance to assert that such activities are directed at the same goal as oppression[6].
These are all the provisions related to minority shareholder’s right which are enforced by the Companies Act of 2013. In case of violation of their rights minority shareholders should consult legal advisors or experts who can provide them will valuable insights into the laws related to their rights protection.
Conclusion
From the findings of this paper we can conclude that the protection of minority shareholders’ rights is not only morally correct but also beneficial for the company as well, as they ensure correct practices and maintain the credibility of the company. Corporate governance has provided them with many legal mechanisms through which they can ensure their safety and dignity of their rights. We have investigated the grounds over which they can bring actions against the acts of the directors or majority of the company with some case laws in brief. They may not hold a major portion of the company, but they make a very strong impact on the function of the company. In this paper we have studied about the minority shareholder’s right safeguard with the reference of Indian laws, but these laws vary according to the country and their corporate structure so every shareholder either major or minor should be aware of the provisions related to their rights and seek legal professional’s help in case of violation. With all the case law references and the court’s judgment we have provided the shareholders a safety ground over which they can walk in case of contravention but the aspirations of accomplishing the objective of fortifying the rights of the minority shareholders were a long way off. The holders of over 50% equity share capital have always been, at least in this case, a key driving force in both the performance of the company and its downward spiral. Minor exceptions to the rule established in the case Foss v. Harbottle bring out the most important fundamental rights of minority shareholders which ought to be used in time of need. The interests of the minority, however, must be taken into account as it would not be prudent to disregard them for administrative efficiency.
References
- Rodolfo Salazar, Corporate Balance: Legal Protection of Minority Shareholders, BLP LEGAL (Oct. 29, 2024, 4:34 PM),https://blplegal.com/corporate-balance-legal-protection-of-minority-shareholders/.
- Katinka Beamish, Minority Shareholders: Rights and Protections, LEXOLOGY (Oct.30, 2024, 10:45 PM), https://www.lexology.com/library/detail.aspx?g=194f7230-e368-4d72-a51b-6d1013db4ac3#:~:text=Legal%20Protections%20for%20Minority%20Shareholders,of%20assets%2C%20or%20gross%20negligence.
- WORLD BANK, https://subnational.doingbusiness.org/en/data/exploretopics/protecting-minority-investors/good-practices (last visited Oct. 29, 2024).
- Rights of minority shareholders: principle and provision, BLOG.IPLEADERS (Oct. 30, 2024, 5:53 PM), https://blog.ipleaders.in/rights-of-minority-shareholders-principle-and-provisions/#respond.
- https://indiankanoon.org/docfragment/292160/?formInput=needle%20industries%20%28india%29%20ltd.%2C%20 .
- Shaneen Parikh, Namita Shetty, Protection and redressal of Minority Shareholder Rights, CYRIL AMARCHAND MANGALDAS BLOGS (Oct. 1, 2024, 9:30 PM) https://corporate.cyrilamarchandblogs.com/2023/03/protection-and-redressal-of-minority-shareholder-rights/#_ftn2.
[1] Rodolfo Salazar, Corporate Balance: Legal Protection of Minority Shareholders, BLP LEGAL (Oct. 29, 2024, 4:34 PM),https://blplegal.com/corporate-balance-legal-protection-of-minority-shareholders/.
[2] Katinka Beamish, Minority Shareholders: Rights and Protections, LEXOLOGY (Oct.30, 2024, 10:45 PM), https://www.lexology.com/library/detail.aspx?g=194f7230-e368-4d72-a51b-6d1013db4ac3#:~:text=Legal%20Protections%20for%20Minority%20Shareholders,of%20assets%2C%20or%20gross%20negligence.
[3] WORLD BANK, https://subnational.doingbusiness.org/en/data/exploretopics/protecting-minority-investors/good-practices (last visited Oct. 29, 2024).
[4] Rights of minority shareholders: principle and provision, BLOG.IPLEADERS (Oct. 30, 2024, 5:53 PM), https://blog.ipleaders.in/rights-of-minority-shareholders-principle-and-provisions/#respond.
[5]Indian Kannon, Last visited on Oct 1, 2024, https://indiankanoon.org/docfragment/292160/?formInput=needle%20industries%20%28india%29%20ltd.%2C%20.
[6] Shaneen Parikh, Namita Shetty, Protection and redressal of Minority Shareholder Rights, CYRIL AMARCHAND MANGALDAS BLOGS (Oct. 1, 2024, 9:11 PM), https://corporate.cyrilamarchandblogs.com/2023/03/protection-and-redressal-of-minority-shareholder-rights/#_ftn2.
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