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.
