Minority shareholder's rights upgraded

The majority rule has been applicable to the management of the affairs of the companies always. Democratic decisions are made in line with the majority decision and are deemed to be fair and justified while ignoring the minority concerns. The corporate world has adopted this majority rule in decision making process and management of the companies. Statutory provisions in this regard have been provided under the Companies Act, 1956 ("CA 1956"), which is being replaced by the Companies Act, 2013 ("CA 2013"). This Article will examine the rights of minority shareholders rights which may be regarded as a game changer in the tussle between the majority and minority shareholders.

A ‘Freezeout’ or “Squeeze-Outs” is a situation where in a transaction, controlling shareholder buys out the minority shareholders in a publicly traded corporation, for cash or the controller’s stock. It is basically a way to oust the minority shareholders from their respective positions. The only provision which deals with minority Squeeze-Outs is section 395 of the old Act. Section 395 of the Act is a rarely used provision under which an acquirer company can make an offer to shareholders of a target company and if 9/10th of the shareholders accept the offer, the rest of the shareholders can be squeezed out by giving them notice. However, in absence of any corresponding Rules and Regulations dealing with Squeeze-Outs, the minority groups have only option to seek protection from the Company Law Board (“CLB”). But the judicial trend so far suggests that the CLB would allow the scheme or contract if the fairness standard is met and the onus to prove otherwise shall be on the dissenting shareholders.  The Bombay High court division bench has approved such an arrangement scheme in the case of Sandvik Asia Limited v. Bharat Kumar Padamsi[1] as there was nothing contrary to law in it. It is not proper to uphold the convening of a meeting of two classes together who falls into two different classes having different rights and interest regarding the resolution of a meeting. Thus S.395 of the Companies Act allows squeeze out of only the dissenting minority shareholders of a company. 

In the Sandvik Asia Ltd. case[2], the parent foreign company held 95.54 % of the share capital. A scheme of reduction of capital was proposed under which the 4.46 % shares held by the public was proposed to be bought back at Rs. 850 per share. It was claimed by the company that 99.50 % of the shareholders approved the scheme at the meeting but the court noted that 95.54 % of the shares were held by the promoters themselves who were, in any case, not selling their shares.

In Miheer H. Mafatlal vs. Mafatlal Industries[3], On January 2009, India’s capital MARKET witnessed their biggest corporate scandal widely compared with the Enron scandal of United States (US). The ‘Satyam scandal’ referred to as ‘India’s Enron’, whereby 300,000 shareholders of Satyam Computer Services (now Mahindra Satyam) sued the company for their fraudulent activity. Satyam’s founder Ramalinga Raju confessed to misstate the accounts and the company stock. Consequently, the shareholders claimed damages worth Rs. 5,000 crore. However, due to lack of any legal mechanisms to safeguard the interest of such shareholders, Satyam’s shareholders were denied of their right to claim back their invested amounts. Aiming to end this, the Indian Parliament drafted the Companies Bill, 2009 and introduced provisions enabling such affected shareholders to file ‘class-action suit’ similar to ‘class-action suit’ prevalent in US and UK. ‘Class Action’, which is known as ‘Representative Action’, is actually a form of lawsuit where a large group of people collectively brings a claim to the court through a representative. Similar provisions were introduced in the Companies Bill, 2011 (Bill) pursuant to the Dr. J.J.Irani Committee Report. Recently, the President of India has given his assent to the Bill which consequently repealed the earlier Companies Act, 1956, with the Companies Act, 2013 (Act).

COMPARATIVE STUDY ON MINORITY RIGHT UNDER COMPANIES ACT, 1956 AND COMPANIES ACT, 2013

1. Combined Provisions for relief related to oppression and mismanagement:

Section 397 and 398 of the companies act talks about oppression and mismanagement respectively. The circumstances for granting relief has been specified only for mismanagement and not for oppression under companies act, 1956. It does not clearly specify as to which circumstances are to be included under the term oppression. The Section only mentions about the act of the company prejudice to public interest or oppressive to one or more than one member of the company. But the Section 241 of the Companies Act, 2013 combines both the provisions of oppression and mismanagement as one. So the circumstances for granting relief to mismanagement will also be now applicable to oppression as both have come under the same provision.

2. Section 245 of the Companies Act, 2013:

It says that not only member/s but also depositor/s or any class of them as the case may be can file an application before the Tribunal if the affairs of the company are being conducted prejudice to the interests of the company, its members or depositors.

Thus, the Section 245 provides for the various orders which the members or the depositories can seek, the requisite number required for filing an application and also about the particulars the Tribunal take into account while considering an application. Hence, the new Act has expanded the scope for making an application as well as provides a concrete base on which an application can be considered and also as to what orders can be passed.

3. Class Action: 

Further, by way of Section 245, CA 2013 has introduced the concept of class action which was non-existent in CA 1956. It provides for class action to be instituted against the company as well as the auditors of the company. The Draft Companies Rules allow for this class action to be filed by the minority shareholders under Clause 16.1 of Chapter-XVI (Number of members who can file an application for class action). On close reading of Section 245 of the Companies Act, 2013, it can be seen that the intent of the section is not only to empower the minority shareholder and/or members of the company but also the depositors. Unlike Section 399 of CA 1956 which provides for protection to only shareholder/members of the company, Section 245 of CA 2013 also extends this protection to the class of depositors as well. However, in the current scenario, the provision of representation of a class of members or depositors by a particular member or depositor lacks clarity.

           
4. Reconstruction and amalgamation:

With respect to minority shareholder rights at the time of reconstruction and amalgamation of companies, CA 1956 under Section 395 states that transfer of shares or any class of shares of a company (transferor company) to another company (transferee company), has to be approved by holders of atleast nine-tenths (9/10) in value of the shares whose transfer is involved within four months after the offer has been made by the transferee company. However, this section has seldom been used and instead recourse has been to Section 100 of CA 1956 to eliminate the minority. Section 100 provides that the capital of the company may be reduced in any manner whatsoever by way of a special resolution i.e. assent of seventy-five (75%) shareholders present and voting subject to approval of the courts. This section ignores minority shareholding to the extent that special resolution does not reflect the intention of the minority shareholders. To counter these shortcomings, CA 2013 has provided for Section 235 (Power to acquire shares of shareholders dissenting from scheme or contract approved by majority) and 236 (Purchase of Minority Shareholding). Section 235 is corresponding to Section 395 of CA 1956. CA 2013, in addition to minor improvements to certain provisions of CA 1956 has also introduced new provisions affecting the reconstruction and amalgamation procedures.

5. Minorities upgraded:

Besides the above, CA 2013 has sought to empower the minority shareholders in corporate decision making also. Section 151 of the CA 2013 requires listed companies to appoint directors elected by small shareholders, i.e. shareholders holding shares of nominal value of not more than twenty thousand rupees (20,000/-). The Draft Companies Rules elaborates the provision in this regard under Clause 11.5 of Chapter XI. Here, it is important to note that small shareholders are different from the minority shareholders as small shareholders are ascertained according to their individual shareholding which should be less than twenty thousand rupees (20,000/-); whereas minority shareholders/shareholding is collectively ascertained and regarded as having non-controlling stake in the company. However, small shareholders can be included in and/or regarded as minority shareholders by virtue of their small shareholding amounting to non-controlling stake in the company.

While empowering the minority/small shareholders in the decision making process, the CA 2013 tries to further safeguard the interest of minority shareholders through appointment of independent directors. The 'Code of Independent Directors' provided pursuant to Section 149(8) in Schedule IV of the CA 2013, provides that independent directors shall inter alia work towards promoting the confidence of minority shareholders.

Thus, after comparing both Companies Act, 1956 and Companies Act,2013 it can be concluded that the proposed changes are very much useful to the minorities as it gives clear picture for the same. However, it not only requires proper implementation upon addressing the present lacunas but also requires instigating confidence in the minority shareholders. Nevertheless, the effort in the new Act to empower the minority shareholders is commendable.

[1]  (2010) 2 Comp LJ 255 (Bom).