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Who is a Minority Shareholder? Minority rights in company law

The term 'Minority Shareholder' is not defined under any law. However, when one refers to Section 235 (Power to acquire shares of rights of minority 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 percent (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 minority shareholders to protect minority rights in company law 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 and protects the rights of minority shareholders who were not listed in the old Act. We discuss some of these rights and

benefits in brief here:

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.

Examples range from:

• 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 

Some examples of mismanagement are:

• 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.

3. Right to file a Class Action Suit

The Companies Act 2013 also provides an opportunity for minority shareholders to file a class action suit and protects the rights of minority shareholders. 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.

4. 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.

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 valuation of shares could also be applied in case of companies that have not been listed and where the shareholder base is 1000 or more.

6. E-voting Process:

Section 108 of the new Act has made it compulsory for certain companies to offer e-voting facilities to shareholders to vote on shareholder meetings. This provision has enabled minority shareholders residing in or out of the country to exercise their voting rights without attending the meeting in person. This has caused an increase in participation of minority shareholders in meetings and allows them to voice their opinion on important matters related to their companies.

7. Majority of the Minority

Section 188 of the Companies Act, 2013, which talks about related party transactions, mandates companies to undertake such transactions only after receiving approval from the majority of non-interested parties. Since promoters/ majority shareholders are usually the interested parties, the minority shareholders are naturally considered as non-interested parties. Hence, it is the minority shareholders that get to approve such transactions. 

Challenges in Protecting the Rights of the Minority Shareholders in company law

While these provisions aim to protect the rights of the minority shareholders, efficient implementation of these provisions is still a challenge. Since the management of the Company remains in the hands of the majority stakeholders, the minority shareholders may not be able to obtain sufficient evidence, including information, accounts, or records to substantiate their claim for wrongdoing. However, the Companies Act (2013) provides remedies, but it remains to be tested. Moreover, litigation-based remedies have usually proven to be long and expensive. The costs have to be borne by the shareholder who files the claim and only gets a proportionate indirect benefit of a successful claim.

 When venture capital and private equity investors acquire a minority stake in a company, they obtain certain contractual rights from the promoters, who are generally the controlling shareholders. These contractual rights are commonly specified in the shareholders' agreement ("SHA"), who generally have the right to proportional board representation, veto rights on certain matters as well as information and inspection rights. Though these rights are important to safeguard the interests of the minority investors, the management of the Company continues to remain in the hands of the promoters, and minority investors have limited opportunities to question poor management decisions. 

The right of board representation is also effectively invalidated by the promoter's right to appoint majority directors. The veto rights can be used by the minority investors as a reactive right to block certain corporate actions, without necessarily conferring any affirmative right of guiding the management. Further, the information and inspection rights granted to the minority investors under the SHA are generally restricted to documents such as statutory records, periodic filings, books of accounts, and may not provide the investor the access to underlying documentation that may be necessary to uncover fraudulent conduct. 

The SHA additionally provides for exit rights to the minority investors. Practically, the SHA is not always strictly followed, and exit rights available to minority investors end up remaining on paper. An exit depends on the willingness and monetary capability of the Company and therefore the promoter, with the sole remedy for promoter's non-compliance with its obligations below the SHA, being a long-drawn dispute resolution process. If the promoter and the minority investors are at loggerheads, the promoter can make it difficult for the investors to get an exit.

If the Company isn't performing well, it can become difficult to find a third-party purchaser. In several instances, a minority investor could see the Company's worth deteriorating as a silent spectator. 

Shareholder democracy cannot simply be equated with the rule of the majority. Moreover, there cannot be a complete disregard for the investments made by the minority shareholders. Judicial precedents indicate that the absolute rule of the majority, as enunciated in Foss vs Harbottle, cannot be applied mechanically in India, and breach of fiduciary duty by controlling shareholders will entitle minority shareholders to obtain relief against the controlling shareholders. While the current regulatory framework does not explicitly specify the fiduciary responsibilities of the controlling shareholders, judicial precedents have noted that the controlling shareholders must not make any secret profit out of the Company, make full disclosures of all relevant facts, use their position fairly and reasonably in the interest of the Company, and must abstain from exercising undue influence and committing fraud. The Securities and Exchange Board of India (SEBI) in a consultative paper that reviewed Corporate Governance Norms in India (2012) had recognised the fiduciary duty of the controlling shareholder to the minority shareholder and proposed that the controlling shareholder of listed companies should enter into relationship agreements with the listed Company, and the minority shareholders, which will specify the duties and responsibilities of controlling shareholders. Various jurisdictions with sophisticated capital markets have long recognised the fiduciary duty of controlling shareholders to the minority shareholders. 

The rights of the minority shareholders can truly be protected only when the controlling shareholders realise that they have legal obligations to all shareholders and that they should engage with the minority shareholders during the decision-making process. Controlling shareholders should also provide adequate opportunity for minority shareholders to redress their grievances. The preservation of the company values is the board's righteous endeavour and not just catering to the interests of the controlling stakeholders.

Conclusion

The Companies Act, 2013 has, therefore made significant efforts to protect minority rights in company law. 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. 

There are hundreds of listed companies under the Insolvency and Bankruptcy Code (IBC), where the existing shareholders are expected to get a raw deal because of the new promoter or successful bidder bringing in fresh equity with majority control. The existing shareholders will get reduced to a minority in these companies. Take, for instance, the new promoter Vedanta in the Electrosteel Steels, one of the 12 companies, referred to in the bankruptcy code, is bringing in Rs 1,800 crore as fresh equity, which will give Vedanta a 90 per cent stake. The existing shareholders with an existing paid-up capital of Rs 2,400 will get crunched within the 10 per cent equity. In many other cases, the new promoters will own anywhere between 50-90 per cent equity. 

Hence, the minority rights guaranteeing appropriate organisation of the corporate exercises will be actualised appropriately only when the rights of the minority stakeholders are upheld.