This Article is written by Atmiya & this article discuss the concept of Majority Rule and Minority Rights: Under Companies Act 2013
Content
- Introduction
- Majority Rule
- Exceptions to Majority Rule
- Minority Rights
- Conclusion
- References
Introduction
The first act which regulates the corporate entities after the independence was Companies Act, 1956. After that the act was amended several times. But major changes were brought and The Companies Act, 2013 was introduced. The major focus of the act was to regulate the healthy corporate culture and maintain friendly atmosphere among the members or basically shareholders of the company. The friendly atmosphere in the company is beneficial for the company and will lead it to make huge profits. The majority rule and minority rights is a fundamental principles which is essential for fostering fair and equitable corporate culture.
The majority rule, in corporate sector signifies the dominant shareholders, who are responsible for taking major decisions on behalf of the company. Also, for maximising the profit of the company these majority shareholders are responsible. However, with the trajectory of success, the rights of the minority shareholders must be protected. They may have limited voting rights but they also contribute to the success of the company.
This blog, hence will explore the concepts of majority rule and minority rights under the companies act, 2013. With the help of the landmark judgments, we will understand the evolvement of the concept and will also learn about the challenges while protecting minorities rights along with the prevalent majority rule.
In the case of Foss v. Harbottle, the court states that it will not interfere in the internal matters or irregularities of the company, which was defined in the case of Mac Dougall v. Gardiner. The Foss rule is based on the reasoning found in the case law of Edwards v. Halliwell.
The Supreme Court of India in the case of Rajahmundry electric supply co. v. Nageshwara Ra, 1956, held that court will not perform its jurisdiction into the internal matters or internal administration of the company unless it does violate AOA of the company. [AOA – refers Articles of Association, it contains rules and bye-laws and regulations for the conduct of the company’s business.]
Majority Rule
The title ‘Majority Rule’ suggests that the power to manage the affairs of the company lies with the majority people i.e., majority shareholders. The members of the company who hold more than 50% of the power of voting are called majority shareholders. The rule is evident in the corporate governance and all most every country abide by this rule. The rule of majority has put the majority shareholders in a dominant position in respect to the minority shareholders. This power puts the rights of the minority shareholder at risk and render them vulnerable in front of the majority shareholders. This creates an imbalance in the corporate culture, hence challenging the concept of corporate democracy. The Foss Rule, is the majority rule. But the Hon’ble Supreme Court of India, in the case of ICICI V. Parasrampuria Synthetic Ltd., observed that the country in which the Foss rule was originated is different from our country. In India, most of the companies are state owned or sate funded, hence it makes difficult for the government to ignore the rights of the minority shareholders. But in a case of Bhajekar v. Shinkar, there was a dispute in the appointment of certain individuals for the post of managing director. However, the court in this case ruled against the plaintiff. The reasoning was that plaintiff. The reasoning was that even if the appointment was irregular, it was approved by the majority. Hence, the minority is obliged to follow the decision of the majority. Similarly, in Parshuram v. Tata Industrial Bank, Ltd. Case, the Bombay High Court emphasized the idea of non-interference of the court in the internal functioning of the company.
Exception to Majority Rule:
Ultra Vires Act: Acts which are not included in the rules and regulations of the company and are against the terms specified in the companies act 2013, such acts could not be backed by claiming majority rule.
In the case of Bharat Insurance co. v. Kanhayalal 1935, the plaintiff a shareholder, brought a suit against the ultra vires to the object of AOA. The court agreed and said that the suit is maintainable.
Acts under special majority: Some acts need special majority i.e., 3/4th of the shareholders vote to pass certain rules and acts. Hence, Foss rule or majority rule fails here.
In case of Glass v. Atkin (1967), the defendant fraudulently converted the company’s assets for personal benefit. The court held, this case as an exception to the Foss Rule.
Fraud committed on minority : In the case of Menier v. Hooper, a minority shareholder i.e., the plaintiff brought action against the defendant. It was found that the defendant committed fraud, so even a single member of the company could bring legal action towards them.
When personal rights are infringed: if a majority shareholder violates the right of a person, then that person can challenge the decision. For instance, in a meeting if a chairperson ignores the vote of some minority shareholder, then he can raise his voice and challenge the decision.
In case of C.L. Joseph v. Jos (1963) , the plaintiff was a shareholder who candidate in the elections of directors, but he lost. He stood for another position. To which director objected. Court held that, director acted beyond his power hence, suit is admissible.
Mismanagement and oppression: Oppression and mismanagement are critical principles safeguarding shareholders’ rights in company law. In India these protections are outlined in Chapter XVI of the companies act ,2013 sections 241 to 246. Previously in act of 1956, these were separate sections, but now fused into one.
Oppression is defined in the case of Elder v. Elder & Watson Ltd. Case, involves conduct that significantly departs from fair dealing, violating the trust shareholders place in the company. Mismanagement refers to the detrimental changes in a company’s management or control, prejudicing its members.
To file a complaint under section 241, shareholders must meet eligibility criteria specified in section 244. However, tribunals can waive these requirements under certain circumstances.
In the case of Tata Consultancy Services vs. Cyrus Investment Private Limited (2021), there was a significant dispute over the removal of Mr. Cyrus Mistry from directorship positions in Tata Group companies. Mr. Mistry, despite holding a minority stake, challenged his removal, alleging oppression and mismanagement. Initially, the National Company Law Tribunal (NCLT) ruled in favour of Tata Group, stating that the removal didn’t constitute oppression or mismanagement. However, this decision was overturned on appeal to the National Company Law Appellate Tribunal (NCLAT) by Mr. Mistry. Upon further appeal to the Supreme Court of India, it was determined that mere removal from a director position is not enough to prove oppression and mismanagement.
Minority Rights
The Companies Act, 2013 regulates both functions of majority and minority shareholders. There are several provisions in Companies Act, 2013. Some are listed as: –
Section 94 of the act states the rights of the minority people to review MOA and AOA of the company. And, expenses, annual returns, etc.
Section 100: Minority shareholders holding at least 1/10th of the total voting power can request extraordinary general meetings to discuss important matters. Electronic Voting (Section 108): Shareholders can use modern technology for voting in certain companies, making it easier for those unable to attend meetings in person. Notice of Meetings (Section 101): All shareholders, including minorities, must be notified of meetings within a specified timeframe, either in writing or electronically. Demanding Polls (Section 109): Minority shareholders can demand a fair voting procedure through a poll if they disagree with decisions made by a show of hands. Receiving Dividends (Section 123): Every registered shareholder has the right to receive a dividend declared by the company. Electing Directors (Section 151): Minority shareholders have a say in electing at least one director, ensuring their opinions are considered in company governance.
So the main proposition of the act is that even the minorities should be treated as vital during decision making of the company’s rules and regulations. They must be notified of the key developments and should be heard.
Conclusion
While wrapping up, I would say that it is very important for the corporate sector to create a balance between majority rule and minority rights to create a friendly working culture and for the growth of the company in a holistic manner. The Companies Act, 2013, lays down several guidelines for maintaining balance between majority rule and minority rights, but there is still a lot of work which need to be done.
The Company needs to make rules for the minorities to participate in the company’s decision and that they are not ignored and sidelined. Some of the ways can be to promote minority shareholders to actively put forth their opinions. And they should be given a chance to share their perspectives more than voting.
Moreover, to strike a balance between minority rights and majority rule is the need of the hour. Its not just about protecting the rights of the minority shareholders but also creating a corporate environment that’s fair, transparent, and sustainable for everyone.
References
- Phophalia, Shubham. “Majority Rule & Minority Protection under Companies Act, 2013.” TaxGuru, 16 May 2021
- Gupta, Yash Vardhan. “Majority Rule In Company Law.” Legal Service India
- Singh, Narendra. “MAJORITY RULE AND MINORITY RIGHTS- BALANCE NEEDED FOR CORPORATE DEMOCRACY: NARENDRA SINGH – ILSIJLM.” indian legal solution international journal of law and management (ILSIJLM), 17 April 2020.
- “Majority Powers and Minority Rights.” the intact one, 15 August 2022.
- Mahawar, Sneha. “Rights of minority shareholders: principle and provisions.” iPleaders, 3 October 2023
- “Section Details.” India Code: Section Details.
