Rights of the Minority Shareholders by Snigdha Mohapatra at LexCliq

The term ‘Minority Shareholder’ is not defined under any law. However, when one refers to Section 235 (Power to acquire shares of dissenting shareholders) and Section 244 (Right to apply for Oppression and Mismanagement) of the Companies Act, 1956, a minority shareholder been set out as ten per cent (10%) of shares or minimum hundred (100) shareholders, whichever is less, in companies with share capital; and one-fifth (1/3rd ) of the total number of its members, in case of companies without share capital. In simple words, minority shareholders are the equity holders of a firm who do not enjoy voting powers within the firm by virtue of them having less than 50% ownership of the firm’s equity capital.

Rights of a Minority Shareholders

The Companies Act, 2013 provides various rights to such shareholders to protect their interest in their companies and address issues of abuse by the majority of shareholders/ persons in control of their companies. The Act also provides various benefits to the minority shareholders who were not listed in the old Act.

1. Right to appoint Small Shareholder Directors

As per Section 151, the small shareholders, also termed as minority shareholders, have the right to nominate an individual as a small shareholder director on the Board of their listed Company. A small shareholder is the one who holds shares in any company, the aggregate face value of which does not exceed Rs. 20,000. For such a proposal, at least 1,000 such small shareholders or 10% of the total small shareholders of the Company, whichever is lesser, should come together and submit a notice to the Company along with their signatures. The individual, if appointed, will be classified as an independent director and will serve for a term of three years. Once the term of the director is over, neither can he be reappointed for a further period nor can he be associated with the Company for three years after the term is over.

2. Right to apply to NCLT for Oppression and Mismanagement

Minority shareholders have been bestowed with the rights to approach the NCLT to report any acts of oppression and mismanagement by the promoters, board or management of the Company. These rights are provided under Section 241 and 242 of the Act. For this, applying minority shareholders need:

  • To be at least 100 in number/ one-tenth of the total number of shareholders, whichever is lesser,
  • To hold at least 10% share capital of the Company (this includes both equity and preference shares)

Here, the term ‘oppression’ would mean exercising power or authority in an unjust manner such as:

 

 

  • Not calling a general meeting,
  • Depriving the member of the right to dividend, etc.

‘Mismanagement’ is said to occur if the affairs of the Company are conducted in a prejudicial manner where the interests of the public or the Company are jeopardised in any which way for example:

  • Making a personal profit out of the Company’s business,
  • Directors continuing to draw their salaries while the Company is suffering losses continuously,
  • Misusing the management control of the Company,
  • Violating any of the laws or statutes of the Company, etc.

If NCLT observes that the affairs of the Company are being conducted in a manner prejudicial or Oppressive to the interests of the Company; and winding up the Company would be unfairly prejudicial to the member(s); it may pass an order which includes the following:

  • Regulation of the conduct of the affairs of the Company in future,
  • The shares or interest of any member of the Company to be purchased by other members,
  • Restriction on the transfer or allotment of the shares of the Company,
  • Removal of the managing directors, manager or any of the directors of the Company,
  • Imposition of costs as may be deemed fit, etc. To be at least 100 in number/ one-tenth of the total number of shareholders, whichever is lesser,
  • To hold at least 10% share capital of the Company (this includes both equity and preference shares)

3. Right for Reconstruction and Amalgamation of Companies

There are concerns related to the interests of minority shareholders being suppressed in schemes related to mergers, amalgamations and reconstruction(s). To address these, the new Act, through Section 235 and 236 offer protection to the minority shareholders. These are:

  • Section 236 (1) and (2): the acquirer on becoming the holder of 90% or more of issued equity share capital shall offer the minority shareholder for buying equity shares at the determined value;
  • Section 236 (3): the minority shareholders can make an offer to the majority shareholders to buy their shares; and
  • Section 236 (5): the transferor company will act as a transfer agent for making payments to minority shareholders.

4. Right to file a Class Action Suit

The Companies Act 2013 also provides an opportunity for minority shareholders to file a class action suit. A class-action suit refers to a lawsuit where a group of individuals having a common interest approach NCLT against the Company, its board or the management. The suit can be filed by both the shareholders as well as lenders of the Company. This provision differs from the right provided under Section 241, wherein only the shareholders have the right to approach NCLT against mismanagement and oppression. The relief which shareholders and lenders may get under class-action suits is to:

  • Prohibit the Company from committing an act which is beyond the power of the company,
  • Prohibit the Company from committing a breach of any provisions of its memorandum or articles,
  • Prohibit the Company from acting contrary to the provisions of any law,
  • Prohibit the Company from taking action contrary to any resolution passed by its shareholders, etc.

5. Adoption of Fair Valuation Mechanism

The Company should adopt an independent valuation mechanism for evaluating the value of the shares of the Company, which will safeguard minority interests. The audit committee makes the appointment of the independent valuer, and the committee will take necessary steps to ensure that shareholders have the right to approach NCLT if the process appears to be unfair. These principles for the valuation of shares could also be applied in the case of companies that have not been listed and where the shareholder base is 1000 or more

Conclusion

The Companies Act, 2013 has, therefore made significant efforts to safeguard the interests of minority shareholders. However, lacunae remain, and awareness of the said Act is limited to certain quarters. It is in the interest of both controlling and minority stakeholders to familiarise themselves with the provisions of this Act so that the option of judicial redress is available to them if the need arises at any point in time.

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