A proper balance of the rights of majority and minority shareholders

Shareholders are part of a company. A “Shareholder" denotes a person who holds or owns the shares. In most of the cases, shareholders are also the members of the company. Usually an unlimited company or a company limited by guarantee has no shareholders. But the limited company has its own shareholders. The Memorandum of Agreement is enabling the opportunity to be the shareholders of a company.

A more broad definition of Shareholder is:

One who owns shares of stock or mutual fund in a corporation along with the ownership come a right to declared dividends and the right to vote on certain company matters, including the board of directors. They are also called Stockholders. [1] 

A limited company has two types of Shareholders.

Majority Shareholder

Minority Shareholder

Majority Share holders: A single shareholders who owns & controls more than half of a corporation’s outstanding shares, or sometimes, a small group of shareholders who own & collectively control more than half of a company’s outstanding shares. [2] 

Or we can say, when a person or company has owns the majority of the shares (50 %++) in a limited company, has the outright control of the company’s operations, especially the election of its board of directors. Usually they are the founder of the company. [3] 

The majority shareholder is most commonly the company’s parent but may also be an individual or a group of connected shareholders. This is more common with smaller companies and in emerging market.

On the other hand, Minority shareholders are shareholder who owns minimum percentages shares in a company that is controlled by majority shareholder. [4] 

They only have certain basic rights.

Based on the class of stock shareholders are granted extra privileges. It also includes the rights of the voting for example- election to the board of directors, the rights to buy new shares issued by the company, the right to a company's assets during a liquidation of the company, the rights to share in distribution of the company’s returns.

The Basic Rights of Shareholder [5] 

1. Recognition of basic shareholder rights

2. Shareholders have the right to participate in decisions concerning fundamental corporate changes

3. Voting rights of shareholders

4. Disclosure of disproportionate voting rights of certain shareholders to obtain a degree of control

5. Markets for corporate control should be allowed to function

6. Shareholders should consider the costs and benefits of exercising their voting rights.

Violation of Rights:

The basic principal relating to the administration of the affairs of a company is that “the will of the majority prevails or majority is supreme". Except the power vested in the Board of Directors, the overall powers of controlling the issues of the company it’s with the shareholders which are exercised in the general meeting of a company. Usually the general rule is that the decision of majority shareholders in a company binds the minority. Therefore, it is only majority of members who can control the board of directors. The majority is in the position where it connected in every parts of the company. They maintain their rights without considering the interests of minority which creates sullen effects. They misuse their power to exploit the rights of minority. In such a case a proper balance of the rights of majority and minority shareholders is essential for the smooth functioning of the company.

In such a case, Oppression of minority or mismanagement by majority can occur where it has some remedial actions.

But the Companies act 1956 has laid down certain provisions which restrict the unbridled supreme majority and confer rights on minority to apply to the National Law Company Tribunal or Central Government in case of Oppression or Mismanagement.

Oppression: [6] 

The word oppression has not been defined in Companies act. “When the ownership of rights of a member is violated or he is not given fair play towards his rights, called oppression." Or we can say that when a member does not get the proper ownership power & his rights called oppression. It means not keeping to the accepted standards of honesty and fairness and a lack of regard of other shareholders’ interest

According to Section 397 of the companies Act, there will be oppression if the majority shareholders misuse their rights and take company’s business as their personal property resulting loss to the minority shareholders. In oppression the minority shareholder are underneath a burden that is created by majority shareholders where there rights have been violated.

Oppression may be various types. It is not only committed for the economic reason but may committed for seizing power or charge or taking revenge.

Conditions of Oppression:

According to decisions of the Courts, some of the conditions of oppression are given below

1. Where a majority shareholder persistently flouts the decisions of the Board of Directors and makes it impossible for the company to function properly.

2. Where the majority shareholders try to force new and more risky objects upon an unwilling minority.

3. Where the members of a company are deprived of their right to vote, to elect directors and to receive dividends.

4. Where there is an unreasonable and consistent refusal to accept a transfer or transmission of shares, thereby not permitting some shareholders to have voting rights in the company. Refusal once by the company may not be oppressive but a continuous refusal by the company to register the shares with an ulterior motive of retaining control over the affairs of the company may be a case of oppression.

5. Where the affairs of a company are being conducted by the directors doing nothing to defend its interest when they ought to do something.

6. Where the directors issue and allot shares in a manner by which an existing majority of shareholders are reduced to a minority.

Mismanagement: [7] 

If the affair of the company are being conducted in a manner prejudicial to the interest of the company or public interest , or that by reason of any change in the management of control of the company, it is likely that the affairs of the company will be conducted in that manner it is called mismanagement.

It usually occurs when the majority shareholders, who control the operation, cannot run properly in an effective way to keep up with a sound viable environment where rights of every shareholder are being protected.

Procedures for Prevention of Oppression:

1. Application to National Company Law Tribunal: Sec 397 provides that a requisite number of shareholders of a company who are affected by the company’s prejudicial manner may apply to NCLT for appropriate relief.

According to Sec 399, the requisite number of members who may apply to the NCLT is as follows:

In the case of a company having a share capital

Not less than 100 members or not less than 1/10th of total member, whichever is less, or

A member or members holding not less than 1/10th of the issued share capital of the company on which all calls and other sums have been paid.

In the case of company not having a share capital; not less than 1/5th of the total number of member.

2. To Give Reasonable Order: When the NCLT is satisfied that the charges mentioned in the application are true and winding up the company would unfairly prejudice such member or members it may pass such order to prevent.

The NCLT may give relief if it is of the opinion:

That the company’s affairs are being conducted in manner prejudicial to public interest, or in a manner oppressive to any member or members.

That the facts justify the compulsory winding up order on the ground that it is just and equitable that the company should be wound up

That to wind up the company would unfairly prejudice the applicants

3. Information to Central Government by Tribunal: Under Sec. 400, the NCLT is required to give notice of every application made to it under Sec. 397 or 398 to the Central Government. It has also to take consideration the representation, if any, made to it by the Central Government before passing a final order.

Prevention of Mismanagement

Section 398 provides for relief against mismanagement. The procedure is:

1. Application to National Company Law Tribunal:

According to Sec 399, the requisite number of members who may apply to the NCLT is as follows:

That the company’s affairs are being conducted in manner prejudicial to public interest

That by reason of a material change in the management or control of the company, the affairs of the company, is likely to be conducted in a manner prejudicial to the public interest or in a manner prejudicial to the interests of the company.

2. To Give Reasonable Order: According to Sec 397, the requisite number of members who may apply for relief is as follows:

In the case of a company having a share capital

Not less than 100 members or not less than 1/10th of total member, whichever is less, or

A member or members holding not less than 1/10th of the issued share capital of the company on which all calls and other sums have been paid.

In the case of company not having a share capital; not less than 1/5th of the total number of member.

Number less than the requisite number of members, if so authorized by the Central Government.

Central Government itself.

Under Sec. 400, the NCTL is required to give notice of every application made to it under Section 397 or 398 to the Central Government. It has also to take consideration the representations, if any, made to it by the Central Government before passing a final order.

Protection of Minority Rights: [8] 

It is one of the important objects since the companies’ act 1956 was passed.

The minority shareholders should be protected from the unjust or unfair conduct of the majority shareholders. The restrictive character of the Rule in Foss v/s. Harbottle has led to the creation of statutory remedies for minority shareholders. The most impressive thing of this power is the permission to go to the court to prevention of oppression or mismanagement.

The minority shareholders are protected under:

The common law

The provision of the companies act, 1956

Protection under the common law:

The principal of the supremacy of majority of the rule in Foss v/s. Harbottle is not absolute and sometimes it has some exceptions. These exceptions restrict the powers of the majority shareholders.

In nutshell, the company cannot confirm:

Any act which is ultra vires the company or illegal

Any act which is fraud on the minority

Any act passed with simple majority which requires special majority

Any wrong act done by those who are in control

Any act infringes the personal membership rights

Any act which amounts to breach of duty by directors

Any act which amounts to oppression of minority or mismanagement of the company.

2. Protection under the provision of the companies act, 1956:

It usually takes place when:

An aggrieved shareholder can appeal to the company law board against the arbitrary action of the board of directors in refusing to register the transfer of shares. (Sec. 111)

A specified number of members can apply to the Central Government for the appointment of such number of persons as directors of the company as the Central Government may specify to look after the interest of oppressed minority. (Sec. 408)

Even a contributory of a company is entitled to present a petition to court for its winding up on just and equitable ground. (Sec. 439)

Any member can hold up the reconstruction of amalgamation of a company. (Sec. 494)

An arrangement between a company and its creditors may be amended varied, confirmed or set aside by the Court on the application of any creditor or contributory. (Sec. 517)

In the course of winding up of a company, the liquidator or any creditor or contributory may apply to the court to examine into the conduct of a delinquent officer and take action. (Sec. 543)

Protection of Majority Rights: [9] 

According to Sec. 397 and 398 is confined a majority shareholders who are oppressed may also apply. In an appropriate case, if the Court is satisfied about the acts of oppression or mismanagement, the relief application can be granted, who have been rendered completely ineffective by the wrongful acts of a minority groups.

Recommendation:

In order to maintain a viable sound environment within a company & to run the company effectively and efficiently following rights of the shareholders should be confirmed. In this case, majority shareholders of the company or Board of Directors have to ensure its future where any of the shareholders from the minority group cannot oppress or their interests should not be under prejudice. These are:

The right to vote for the election of directors and on certain extraordinary matters affecting the corporation. 

The right to expect the officers and directors of their corporation to perform their duties in accordance with established standards of conduct. 

The right to question the action of officers, directors and majority shareholders. 

The right to inspect certain records and to receive certain reports and other information from the corporation. 

The right to benefit from corporate operations. 

The right to maintain their percentage ownership of stock in the corporation. 

The right to force the dissolution of the corporation. 

The right to participate in distributions from the corporation upon its dissolution. 

To further develop their relationship through the use of a Shareholders’ Agreement. 

Conclusion:

When a company can establish a proper balance between its majority & minority shareholders then obviously the company runs smoothly which results increase in profit. Both of these shareholders are internal stakeholder where the total company functioning by them. So it is very essential to a company to maintain its own internal environment to function properly. Therefore, a company can ensure its sound environment through transparency in decision making, good accountability and safeguarding the interests of shareholders.