Rights of Minority Shareholders Under Companies Act 2013

The principle of majority rule dominates corporate governance, where the decisions made by the majority shareholders are binding on the minority. However, this majority rule can lead to oppression or exploitation of minority shareholders, especially when the majority engages in unethical practices. Although the majority has the power to control corporate decisions, the minority shareholders possess certain rights that should be protected to prevent abuse of power. This has been addressed by the Companies Act, 2013 to ensure that minority shareholders are not unjustly marginalized.

Provisions Under Companies Act 2013 Highlighting Rights of Minority Shareholders

The Companies Act, 2013, specifically Sections 241 to 247, addresses oppression and mismanagement. These sections provide a mechanism for minority shareholders to seek relief from the National Company Law Tribunal (NCLT) if they believe that their rights have been compromised. Some important provisions include:

1. Section 241: Allows minority shareholders (holding at least 10% of the shares or 100 members, or 1/5th of the total members if there is no share capital) to file a petition for the alleged oppression or mismanagement.

2. Section 242: Empowers the Tribunal to grant relief to shareholders, even if the majority has passed a resolution, to prevent acts that go against the company’s constitution or are unjust.

3. Section 244: This provision allows a single shareholder to approach the Tribunal if they believe that their interests are being harmed, offering a significant improvement over the previous law.

4. Class Action (Section 245): Minority shareholders can bring a class-action suit against the company or its auditors collectively, providing another layer of protection.

5. Sections 235 and 236: Concern the “minority squeeze-out,” where a majority shareholder who has acquired 90% of shares in a company can force the minority shareholders to sell their shares. However, dissenting minority shareholders can seek the Tribunal’s intervention to ensure fair valuation.

6. Section 151: Requires listed companies to have a director elected by small shareholders, providing a mechanism for small minority shareholders to have a voice in the company’s management.

7. Schedule IV: Enforces the role of independent directors in promoting the confidence of minority shareholders, further ensuring their rights are respected.

Analysis in the Light of Foss v. Harbottle

The Foss v. Harbottle case established the “majority rule,” stating that the majority shareholders have the discretion to decide on company matters, and minority shareholders cannot bring suits for acts that could be approved by the majority. However, exceptions exist, where minority shareholders can sue if:

1. Ultra Vires and Illegal Acts: If the actions of the majority go beyond the powers of the company or involve fraud, minority shareholders can bring a case.

2. Acts Requiring a Special Resolution: If the majority bypasses the need for a special resolution on matters that demand one, minority shareholders can challenge this in court.

3. Shareholder’s Personal Rights: If a shareholder’s personal rights, such as the right to vote or transfer shares, are violated, they can sue even if the majority supports the action.

4. Absence of Action Against Wrongdoers: If the majority shareholders refuse to act against wrongdoers, the minority can step in to bring the case forward.

5. Oppression: The Companies Act, 2013 has provisions that protect minority shareholders from oppression, as discussed under Section 241.

The Companies Act, 2013, significantly strengthens the protection for minority shareholders, offering remedies like class actions, greater Tribunal powers, and safeguards against oppression. The minority shareholders, while still subject to majority rule, are no longer powerless when faced with unfair treatment. The provisions provide an equilibrium between the authority of the majority and the rights of the minority.

However, for these provisions to be effective, awareness of the rights of minority shareholders is crucial. Often, minority shareholders are unaware of the protections available to them, and even when aware, proving oppression or mismanagement can be difficult. Ongoing education and awareness campaigns are essential to ensuring that minority shareholders can fully exercise their rights under the law.