“DEMOCRACY MEANS PROTECTION OF RIGHTS OF MINORITY SHAREHOLDERS”

Submitted By
Arjun Pandit
Division – B
PRN – 17010224097
Programme – BBA LLB
Batch: 2017-2022

Symbiosis Law School, NOIDA

Symbiosis International (Deemed University)
Under the guidance of
Dr. Mohit Sharma
Faculty Company Law-II

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 CERTIFICATE

The Project entitled “Democracy Means Protection of Rights of Minority Shareholders” submitted to
the Symbiosis Law School, NOIDA for Property Law as part of internal assessment is based on my work
carried out under guidance of Dr. Mohit Sharma from December to APRIL 2019. The research work
has not been submitted elsewhere for award of any degree.

The material borrowed from other sources and incorporated in this project has been duly
acknowledged. I understand that I myself could be held responsible and accountable for plagiarism, if
any, detected later on.

Signature of the candidate

Date: 03/02/2020

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 ACKNOWLEDGEMENT

I have taken efforts in this project. However, it would not have been possible without the kind support
and help of many individuals and organizations. I would like to extend my sincere thanks to all of
them. I am highly indebted to Prof. Dr. Mohit Sharma for his guidance and constant supervision as
well as for providing necessary information regarding the project & also for her support in completing
the project.

I would like to express my gratitude towards my parents & member of Symbiosis Law School, NOIDA
for their kind co-operation and encouragement which help me in completion of this project.

I would like to express my special gratitude and thanks to industry persons for giving me such
attention and time.

My thanks and appreciations also go to my colleague in developing the project and people who have
willingly helped me out with their abilities.

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 Introduction
Small Shareholder: a shareholder who is holding shares of nominal value of INR 20,000 or
such other sum as may be prescribed. Minority Shareholder: Equity holder of a firm who
does not have the voting control of the firm, by virtue of his or her below fifty percent
ownership of the firm's equity capital

1. The objective of the policy is to protect the rights of the minority shareholders and keep
them updated about their rights from time to time.

2. To check that the Shareholder Relationship Committee is redressing the grievance of the
minority shareholders.

Although the term ‘minority shareholder’ does not have any proper definition, it is widely
referenced to any shareholder who owns less than 50 percent of the total voting rights of the
company and is not in direct/ indirect management control of the company. So technically,
such a shareholder doesn’t have: • Voting control over the company, and • Management
control over the company. A simple way to prevent minority shareholders from “meddling in
the affairs” of majority owners was to change the date and location of the general assembly
meeting a day or two before the meeting would take place. Thus, minority owners would not
get the information in time and could not adjust their schedules. Minority owners would show
up at an empty meeting hall, while the actual meeting was held

The Role of Associations The minority shareholders rights can be protected by good
corporate governance. These practices can create transparency, responsible and accountable
business. As the OECD’s Corporate Governance Principles State, “Minority shareholders
should be protected from Abusive actions by, or in the interest of, controlling Shareholders
acting either directly or indirectly, and should have effective means of redress.” (OECD,
2004) CIPE (Center for International Private Enterprise) partner the Corporate Governance
Center in Kenya is an illustrative example. It arranges an awareness-building campaign on
corporate governance rules so that shareholders know their rights and ensure that their rights
are properly protected (Shkolnikov, 2006)
Rights under the Memorandum and Articles of Association The M&A are important
documents as they set out and regulate the company affairs and the manner in which the
company is to be managed. The M&A take effect as all contracts are made under the
provisions of these, whether between the shareholders and the company or between each
individual shareholder and every other. Generally, every individual shareholder who is
affected can bring an action in court to prevent any proposed breach of the M&A, and the
court may also set aside acts done in breach of the M&A. The law provides that the M&A

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can only be amended by a special resolution, that is to say a resolution passed by a majority
of not less than three-fourths of the shareholders voting either in person or by proxy at the
general meeting of the company. The M&A is therefore an important starting point for a
shareholder who may feel aggrieved. A shareholder is entitled at law to have a copy of the
M&A and, on request, the company is required to send a copy of the M&A to the
shareholder.

Rights of the Minority Shareholders

The Companies Act, 2013 provides various rights to such shareholders to protect their
interest in their companies and address issues of abuse by the majority shareholders/ persons
in control of their companies. The Act also provides various benefits to the minority
shareholders that were not provided under the old Act. We discuss some of these rights and
benefits in brief here:

1. Right to appoint Small Shareholder Directors

Section 151 empowers small shareholders, who are also minority shareholders, to elect an
individual as a small shareholder director on the Board of their listed company. A small
shareholder is defined as a shareholder who holds shares in any company, the aggregate face
values of which does not exceed Rs. 20,000. To table 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. The director cannot be reappointed for a further term nor can be
associated with the company for three years after his/ her term is over. The approval for his
appointment must be sought through a postal ballot.

2. Right to apply to NCLT for Oppression and Mismanagement:

Minority shareholders are also provided the right to approach 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, the applying

minority shareholders need: • to be at-least 100 in number/ one-tenth of total number of

shareholders, whichever is lesser, or • to hold at least 10% share capital of the company (this
includes both equity and preference shares)

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Here, the term ‘oppression’ would mean exercising power or authority in unjust manner.
Examples range from: • not calling a general meeting, • depriving the member of right to
dividend, etc.

The term ‘mismanagement’ would mean conducting the affairs of the company in a manner
prejudicial to public interest or in a manner prejudicial to the interests of the company. Some
examples of mismanagement are: • making personal profit out of company’s business, •
directors continuing to draw their salaries while company is posting losses continuously, •
misusing the management control of the company, • violating any of the law and statute of
the company, etc.

If the NCLT finds that the company’s affairs are being conducted in a manner prejudicial or
oppressive and that winding up the company would unfairly prejudice such member or
members, it may pass an order which includes: • regulation of the conduct of the affairs of the
company in future, • purchase of shares or interest of any member of the company 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 opportunity to minority shareholders to file a class
action suits. A class action suit is a lawsuit where a group of persons with 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 way, it differs from the right
provided under Section 241 where only shareholders can approach NCLT against
mismanagement and oppression. The relief which shareholders and lenders may get through
class action suits is to: • restrain the company from committing an act which is beyond the
power of the company, • restrain the company from committing breach of any provisions of
its memorandum or articles, • restrain the company from acting contrary to the provisions of
any law, • restrain the company from taking action contrary to any resolution passed by its
shareholders, etc.

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 4. Right for Reconstruction and Amalgamation of Companies:

There are concerns of interests of minority shareholders being suppressed in schemes of

mergers, amalgamations and reconstruction. To address these, the new Act, through Section
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235 and 236 offers protection to the interests of minority shareholders. These are: • Section
236 (1) and (2): the acquirer on becoming holder of 90% or more of issued equity share
capital shall offer 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:

An independent valuation mechanism should be adopted by the company for evaluating the
value of shares of the company, which will safeguard minority interests. The appointment of
the independent valuer is required to be done by the audit committee and the committee will
ensure that shareholders must 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 are delisted and have a shareholder base of 1000 or more.

6. E-voting Process:

Section 108 of the new Act mandates certain companies to offer e-voting facility to
shareholders to vote on shareholder meetings. This provision has empowered minority
shareholders residing in or out of the country to exercise their voting rights without having to
attend the meeting in person. This has resulted in increased participation of minority
shareholders in meetings and having their say on important matters related to their
companies.

1
1. Anupam Chander, Minorities, Shareholders and otherwise, 113 YLJ 119,144-145(2014).

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OTHER RIGHTS AND PROTECTION GIVEN TO MINORITY
SHAREHOLDERS
The Right to Information The minority shareholder, who often by reason of not being
involved in the day to day management of the company, not possess detailed information on
the affairs of the company. All the details of the company are maintained in separate
registers. Shareholders have the rights to inspect the following registers:
1. The register of shareholders provides information as to the names and addresses of the
shareholders and their shareholdings.
2. The register of directors, secretaries, managers and auditors. Separately there is a register
of director's shareholdings show a director's shareholding in the company or in a related
corporation, and whether any director has rights or options to acquire or dispose of shares in
the company or a related corporation.
3. The register of substantial shareholders.
4. The register of debenture holders and the register of charges.
5. The minute book of general meetings. A shareholder may inspect without charge the
minute books which are required to be kept of proceedings of all general meetings of the
company.
6. The audited profit and loss accounts of the company, the auditors' report and the directors'
report. These reports are required to be sent to shareholders not less than 14 days before the
general meetings of the company at which the accounts are to be presented. These documents
provide useful information relating to the financial affairs of the company.
7. The prospectus of a public company making an offer to the public. The prospectus
provides useful information on the affairs of the company.
8. The Registry of Companies.
The Right to Attend, Vote and Call General Meetings of the Company
A shareholder has a right to attend and is also entitled to speak at the annual general meeting.
These meetings of companies are important occasions for minority shareholders, as it is an
occasion to meet and ask questions from the management. Further, shareholders are entitled
to vote on any resolution, but an exception is that the law allows a company to provide in its
Articles for suspension of such rights where his or her shares have not been paid.
Extraordinary General Meetings ("EGM") of a company may be called. Two or more
shareholders holding not less than 10% of the issued share capital of the company, or
suchlesser number as is provided in the Articles, may call for an EGM.
The General Right to Be Treated Fairly The general right of a shareholder, in particular a
minority shareholder, to be treated fairly. A shareholder may apply to court for assistance
where
a) The affairs of the company are being conducted or the powers of the directors are being
exercised in a manner oppressive to one or more shareholders or in disregard of his or their
interests as shareholders

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 b) Some act of the company has been done or is threatened or that some resolution of the
shareholders or any class of them has been passed or is proposed which unfairly discriminates
against or is otherwise prejudicial to one or more of the shareholders.

General protection of minority shareholder - against unfair prejudice

A shareholder may apply to the court by petition on the ground that the company's affairs
are being or have been conducted in a manner which is unfairly prejudicial to the interests of
its shareholders generally or some of them (including at least the applicant), or that any
proposed act or omission of the company would be so prejudicial(DOV OHRENSTEIN, 26th
May 2011. If the petition is successful the court has wide powers to order redress for a
minority shareholder who has suffered unfair prejudice (Dignam & Lowry, 2008) Among
other things the court may make an order: Regulating the conduct of the company's affairs in
the future, Requiring the company to refrain from doing or continuing an act complained of
or to do an act it has omitted to do, Authorizing civil proceedings on behalf of the company,
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as appropriate, Providing for the purchase of the shares of any shareholder by other
shareholders or by the company itself.
Examples of unfair prejudice include failure to give accurate accounting information, serious
mismanagement, diverting business to another company in which the minorities have no
shareholding. There must be an unfair adverse effect on the minority. The unfairly prejudicial
conduct must affect the shareholder in that capacity not, for example, solely as a director or
creditor of the company.

Conclusion and suggestions

It can be concluded that the Companies Act, 2013 has made efforts to safeguard the interests
of minority shareholders but what is required is creation of awareness of the same so that
shareholders are aware of the rights available to them and can utilize these rights whenever
they feel the need to do so.

2
M. Rishi Kumar Dugar, Minority Shareholders Buying Out Majority Shareholders- An Analysis, 22 NLSIR
105, 109(2015)

3
K.R. Dixit, Minority Oppression: Corporate Control, 9 JILI 223,224(2017).

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 • Thus the minority share holders have a right to participate in the indoor management
of the company.

• The minority shareholders has two relives either to apply for winding up of a
company under section 433 or apply under section 397 and 398 of the companies act
of 1956. Under section 397 and 398 is a preventive remedy.

• These are intended to avoid winding up of a company and at the same time to give the
remedies to the minority shareholders.

The rights of the minority shareholders can truly be protected only when the controlling
shareholders recognize 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 to minority shareholders
to redress their grievances. The board needs to adopt a more rounded approach, and aim
towards preserving the value of the company rather than catering to the interests of the
controlling shareholders.

Examples of contractual protections which could be sought by a minority shareholder are as

follows:

 ensuring there is a list of reserved matters which require the consent of all of the
shareholders (as opposed to attaining a majority, such as 75%) before any action can
be taken on certain matters;
 reserving the right to appoint a director;
 ensuring the consent of all directors is obtained before a board resolution is passed;
 requiring the minority shareholder’s appointed director to be present at board
meetings in order to form a quorum;
 requiring the minority shareholder to be present at general meetings in order for there
to be a quorum;
 including “tag-along” rights requiring the majority shareholder(s) to include the
minority shareholder’s shares in any sale to a third party and on the same terms; and
 pre-emption rights requiring:

 shareholders to offer their shares to existing shareholders before they can transfer
them to a third party

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 BIBLIOGRAPHY

BOOKS

 Avatar Singh, Company Law,427(6 ed.2015).

 Dr. Avtar Singh : Company Law; Eastern Book Company, Lalbagh, Lucknow,
Seventeenth Edition, 2018
 C.R. Datta : Datta on the Company Law; Lexis Nexis, Butterworths Wadhwa,
Nagpur, 2016
 A.K. Majumdar, Dr. G.K. Kapoor, Sanjay Dhamija : Company Law and Practice;
Taxmann, 2019
 R. Suryanarayanan : Company Law Ready Reckoner; Commercial Law Publishers,
Delhi, 2016

JOURNAL ARTICLES

1. Anupam Chander, Minorities, Shareholders and otherwise, 113 YLJ 119,144-145

(2014).
2. K.R. Dixit, Minority Oppression: Corporate Control, 9 JILI 223,224(2017).

3. M. Rishi Kumar Dugar, Minority Shareholders Buying Out Majority Shareholders- An

Analysis, 22 NLSIR 105, 109(2015).

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