CRITICAL ANALYSIS OF RIGHTS OF MINORITIES SHAREHOLDERS – By Aayush Akar & Shubhank Suman

Minority investors are the individuals of the corporation where the interest of these shareholders in the political processes of the business conflicts with the shareholders which hold the majority of the shares and to solve this challenge Company Act 2013 came out to resolve the issues posed by the minority in Company Act, 1956. Despite limited clauses in the 1956 Act, these shareholders were unable to assert their involvement due to paucity of time and requisite resources. However, minority shareholders are not described in the present companies’ legislation but still under Section 235 (authority to procure securities of dissident investors) and Section 244  (right to sue for exploitation or maladministration) of the Company Act, in 2013, “they are given 10 percent or a minimum of 100 shareholders, whichever is less in corporations with share capital and 1/3 of the overall number of its members in the case of a corporation without share capital”.

RIGHTS OF MINORITY INVESTORS

In the Indian company statute, various rights have been given to the minority investors to protect their interest and put a check on the power of majority so that they will be within their reasonable boundary and does not oppress minority and create mismanagement for the company. The “Companies Act, 1956” (“CA 1956”), which is now being substituted by the “Companies Act, 2013” (“CA 2013”), provides various statutory clauses in this regard that are divided into various major heads which are discussed below.

OPPRESSION AND MISMANAGEMENT

If we compare the rights given under both the Companies Legislation in 1956 and 2013 then we find that Companies Act 1956 protects the minority investors from dereliction and despotism. The Section under 397  “An Application to be made to company law board for relief in cases of oppression” and under 398  “An Application to be made to company law board for relief in cases of mismanagement” were some of the clauses in 1956 Act. Oppression as per Section 397(1) of CA 1956 h defined as “when affairs of the company are being conducted in a manner prejudicial to the public interest or a manner oppressive to any member or members” while Section 398 states “mismanagement as conducting the affairs of the company in a manner prejudicial to the public interest or 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 because of such change, affairs of the company will likely be conducted in a manner prejudicial to the public interest or interest of the company” and Section 399  provides “right to apply to the company board in the case of oppression and mismanagement providing requirement of 10% of shareholding or hundred members or one-fifth members limit” . Also, if the condition underneath Section 399 is not satisfied, the Union Government has certain unilateral authority to make any number of investors eligible to apply for redress under Sections 397 and 398 to the Board of directors.

Whereas In Companies Act 2013 relief for dereliction and despotism is mentioned under Sections 241 to 246. Firstly we will discuss Section 241 that deals with the plea for redress to a tribunal when oppression and mismanagement have happened. While the right to apply to Tribunal is mentioned underneath Section 244(1) where the limit for the minority is the same as mentioned in the previous Act of 1956. However, in present Act, the Tribunal has the power to waive all the requirement that is required by Section 244(1) and can make any number of investors to apply for relief unlike the Companies Act 1956 where discretionary power to waive the requirements was given to the Union Government.

RECONSTRUCTION AND AMALGAMATION

In the situation of reconstruction and amalgamation of the company, there is a requisite for corporation to protect the rights of small investors. In 1956 Act it was provided under Section 395 which says at the time of transfer of shares to another company, concurrence of 90% of investors is required within four months. This 90% of a shareholder is considered majority and the remaining 10% of a dissenting shareholder is considered as a minority. This Section also states that transferee company within two months after the four months which was required by the Section has lapsed then can give a notice to any dissenting investors for acquiring his share and after the notice is given if within one-month dissenting shareholders do not make a plea to the Tribunal then the transferee corporation shall have the rights over the shares of the dissenting shareholders.

To deal with this problem of an earlier act Companies Act 2013 made provision under Section 235  that mentions the power of Transferee Corporation to procure shares of dissenting investors. As per 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” this Section also further mentions that price for the shares to be acquired must be determined through a registered value.

CLASS ACTION

Also In this new Companies Act of 2013, a new provision of a class action has been coming into the picture which was not present in the previous Act of 1956. This action is provided under Section 245 which made provision for the class action that is to be instituted against auditors and the company. “Clause 16.1 of Chapter-XVI of Draft Companies Rules defines Number of members who can apply class action”.

TO BE INFORMED THROUGH CORRECT DISCLOSURES

As per this right, it is required for the company to provide correct accounting information along with the report of auditors to its shareholders. All the financial information and disclosures that are needed to provide to the members must be in a simple format and should be free from all complexities So that it will be understandable to minority shareholders who don’t actively participate in the company’s management.

RIGHTS DURING MEETING OF THE COMPANY

This right ensures the participation of minority shareholders in the company’s meeting because sometimes meetings are organised in a way that deprives minority of an also effective hearing hence they are provided with the rights to request the court for appointment of general meetings. This right focusses on to ensure the involvement of all the investors via the use of postal voting and E-voting.

REPRESENTATION OF MINORITY INTERESTS

Section 265 of Companies Act of 2013 made a provision that provides an option to the corporation for the nomination of independent directors to make the proper representation of minority shareholders however this option is rarely used.

MEASURES TAKEN BY CORPORATION TO SAFEGUARD MINORITY INVESTORS

1. CLAUSE OF PIGGYBACKING- When the shares are sold by majority shareholders, the small investors have the right to be mentioned in the deal. This is termed as “piggybacking.”It shields your investment if the corporation is to be sold. “Piggybacking" makes it compulsory that any party contemplating the acquisition of a corporation be able to procure 100% of the outstanding shares.

2. CLAUSE OF COMPULSORY DIVIDEND- Generally dividend is declared when the performance of the corporation is progressing. The dividend is distributed to shareholders even if that shareholder has a holding of 1 share and will be entitled to a dividend in case of closure of the business.

CONCLUSION

It is seen in any domain that perhaps the stronger portion dominates the weaker one. The weaker segment can never do anything besides obeying the decision of the dominant. This is to some degree the case with the minority shareholders in the corporation. The majority of investors or stockholders are valued highly because they have a significant investment in the corporation’s shareholding compared to the minority investors. It has been noticed that such two classes of investors often clash and that the rights of small investors are abused. To address this discrepancy, some rules were set down in the Companies Act, 2013, such that minor shareholders’  interests could be revived. Without such legislation, the small shareholders might have dwindled by now, but they are currently ensuring their trust in buying shares from various corporations.

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