The Protection of Minority Shareholder’s Rights

Kiran Malik

29 Apr, 2023

When making decisions concerning a company, the interests of the majority of shareholders are typically taken into account. All decisions, whether monetary or managerial, are made by majority vote. The majority’s decisions are regarded as being equitable, fair, and advantageous to the company. However, the opinions of minority shareholders are not always taken into account. Employee rights and interests are routinely ignored since they have little say in how the company operates. The corporate world works to maintain a balance between effective and efficient control over the company by safeguarding the interests of minority shareholders.

A company can only succeed if all its employees respect one another’s opinions and methods while collaborating to achieve a common objective. The rights and interests of the minority owners can occasionally be taken over by the majority shareholders, which can result in biased management within the company. The Companies Act, 2013 protects the rights and interests of minority shareholders. The laws established to protect the interests of minority shareholders are meant to make sure that corporations exercise their power in a way that is consistent with natural justice and fair play principles.

Difference Between Companies Act, 1956 and Companies Act, 2013

Minority shareholders have recourse rights for oppression and mismanagement under Sections 397 and 398 of the Companies Act 1956. Under this Act, the Company Law Board was the authorized authority to deal with these problems, and the Central Government had the ability to waive qualifying restrictions in specific circumstances. However, the NCLT is the authorising body under Companies Act, 2013 and has the discretion to waive qualifying conditions in particular cases. Section 242 grants it additional rights. Class action litigation has benefited management in making more informed decisions, therefore improving protection for all classes of shareholders. This clause is included in Chapter XVI of CA, 2013 “Preventions and Oppression of Management”, under Section 241 – 246.

Rights Of Minority Shareholders

An individual who holds a minority stake in a corporation is one who has limited influence over how the firm is run. The rule of the majority, which states that whoever has majority shares in the business regulates its affairs, was established by the Companies Act, 1956. In the Companies Act, 2013, this premise was changed by giving some authority and influence on minority shareholders.

In the case of “VN Bhajekar v. KM Shinkar”, the court determined that the few minority shareholders with limited power are not permitted to initiate a lawsuit seeking the court to become involved in decisions about the company’s management. These rules were put in place to safeguard the interests of minority shareholders and to inform them of those rights. The Companies Act 2013 was introduced to address these issues.

Issus WithThe Rights of Minority Shareholders

The majority shareholders, who possess the majority of the company’s power and influence, frequently violate the rights of minority shareholders out of greed. As a result, the company’s finances may be diverted, profits may be reinvested, and minority shareholder’s payouts may be delayed. Although the majority owners owe the minority shareholders fiduciary responsibilities to pay their returns honestly and loyally, they disobey these obligations by raising their own wages or selling only the company’s stocks that are advantageous to them. So that their rights and interests in the firm are not disregarded.Minority shareholders need a legal framework forwhen the business fails, they have a right to receive a refund.

1. Unfair prejudice

A minority shareholder may, under exceptional circumstances, petition the court based on actions that constitute unfair prejudice. There is no specific law that defines “unfair prejudice”. The word unfair indicates “wrong”, whereas prejudice refers to any damage caused to a person’s legal rights or claims. The court has the authority to investigate unfair prejudice in cases:

• When the company’s affairs are managed in such a way that some shareholder’s rights are being violated and justice is not being served
• When the company is omitting any clause of the article and thereby jeopardizing the interests of minority shareholders
• When there is serious mismanagement of the company’s affairs

A minority shareholder has the right to file a lawsuit for unfair prejudice. If the court decides that anything is unfair and biased, they can:

• Order the organization to stop engaging in such acts.
• Controls the affairs of the organization.
• Demand that the organization amends its articles of association (AOA).

2. Oppression and mismanagement

These are two terms used to describe the unjust or unfair use of authority in a company. Oppression is when the matters of the company are decided unfairly or in a manner unfair to any member, Examples of oppression include:

• Depriving a member of the dividends
• Issue of further shares only benefitting a section of shareholders
• Not maintaining the statutory record of the company
• Not calling the general meeting
• Keeping the shareholders in the dark.

While mismanagement is when the matter of the company is done in a manner prejudicial to the interests of any member. Mismanagement includes:

• Handling of the company’s bank account by an unauthorized person
• Violation of the memorandum
• Serious issues between the directors
• Not taking action against illegal activities

Protecting Minority Shareholder’s Rights:

The National Company Law Tribunal (NCLT)^[1] is a special tribunal established by the Companies Act 2013 to defend the interests of minority shareholders. The Supreme Court established this body to address matters involving the firm. Sections 241 to 246 deal with the company’s unfair prejudice, oppression, and mismanagement.

1. Section 241: Any member of the company may bring a claim against the corporation under Section 241 of the Act if it is determined that:

• The company’s affairs are being conducted in a way that is prejudicial to the interests of any of its members.
• If there are changes in the interests of any creditors, debenture holders, or shareholders, or in the company’s management, being prejudicial to only a specific class of members implies benefiting only a single set of individuals.
• The central government has the right to petition directly to the tribunal if it believes that a firm is acting improperly internally and compromising the interests of its members.

2. Section 242:If a petition is submitted in accordance with section 241, section 242 describes the tribunal’s authority. The following authorities belong to the tribunal:

• If the court determines that the company’s matters or affairs are being conducted in an unfairly discriminatory manner or in a way that is oppressive to any member of the company, the court may order the company to stop practising such discrimination and oppression. Winding up the company would not be recommended because it would be unfair to the other members.
• The company’s rules may be provided for or amended by the tribunal without any prejudice. They can even direct shareholders to buy the other shareholder’s shares.
• To address the issue of oppression and mismanagement, it is possible to lower the company’s share capital and impose limitations on the allocation and transfer processes.
• If the tribunal determines that the directors or managing directors have received improper benefits, it may dismiss them.

WaysTO Protect the Interest Of Minority Shareholders:

• Use of winding up action to protect minority shareholders:If it is “just and equitable” to do so, minority shareholders might petition the court to dissolve the business.
• Resolving disputes over payment of dividends to minority shareholders: Businesses may draft new Articles of Association (AOA) and a shareholder’s agreement, impose restrictions on how the company is to be operated, and assess any intellectual property to safeguard minority shareholders. Minority shareholders can utilize their collective authority to summon a shareholders’ agreement to settle dividend disputes.
• Protecting minority shareholders under crowdfunding: A minority shareholder’s agreement is being reviewed, Minority shareholder protection in crowdfunding safeguarding a minority shareholder’s shares against dilution.
• Protection against dilution of shares of a minority shareholder:If a company wants to draw in small minority investors, it should draft a new AOA and a shareholder’s agreement. Creating irreversible deedsto transfer intellectual property, safeguarding minority owners from share dilution.

Conclusion

Thus, Modern corporate law has established remedies for minority shareholders who are experiencing discrimination due to ownership of shares or voting rights. Minority shareholders now have the voice to speak out against discrimination, oppression, and mismanagement of the company’s operations. The company’s management committees will be more cautious in handling internal concerns as a result of the implementation of this new legislation. To achieve the company’s objectives, each employee must collaborate while respecting each other’s interests and opinions.

Read our Article: Recent development in Minority Shareholding in Demat Account