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Rise of Minority Shareholders - Companies Act 2013

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Companies Act, 2013
Majority Rule
v
Minority Rights
By
Dhruv Seth
Partner at Seth & Associates
Chartered Accountants
dhruv...

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•Jurisprudence
•What is a minority
•1956 v 2013
•Applicable sections of CA 2013
•Important Case laws
Content

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Foss v Harbottle
Injuries caused to the corporation alone
and not to its members, must be
remedied not by the members but ...

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Rise of Minority Shareholders - Companies Act 2013

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A brief on the rights vested with the minority shareholders to secure their stakes and have a say in the functioning of the company.

A brief on the rights vested with the minority shareholders to secure their stakes and have a say in the functioning of the company.

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Rise of Minority Shareholders - Companies Act 2013

  1. 1. Companies Act, 2013 Majority Rule v Minority Rights By Dhruv Seth Partner at Seth & Associates Chartered Accountants dhruv@sethspro.com
  2. 2. •Jurisprudence •What is a minority •1956 v 2013 •Applicable sections of CA 2013 •Important Case laws Content
  3. 3. Foss v Harbottle Injuries caused to the corporation alone and not to its members, must be remedied not by the members but by corporate action. Jurisprudence
  4. 4. Principle of Majority Rule •Majority should prevail •Protection of the majority is supreme Jurisprudence
  5. 5. Bhajekar v. Shinkar •Board appointed some dubious agents •Ratified by the house in AGM •Minority directors filed a suit •Held – It was company’s right to ratify any type of agreement and no interference required in the internal matters. Jurisprudence
  6. 6. Rajahmundry Electric Supply Corpn Ltd. v. Nageshwara Rao The Courts will not interfere in the internal affairs of the Company or the management of the directors as long as they act within the ambit of the powers conferred on them under the Articles of Association of the company. Jurisprudence
  7. 7. Shanti Prasad Jain v. Kalinga Tubes Ltd (Supreme Court) - Allotment of shares to outsiders to curtail the rights of existing shareholders - Held • Mere fact of allotment does not constitute oppression. • The court clarified that the facts should be there to justify any potent mismanagement or oppression. Jurisprudence
  8. 8. Miheer H. Mafatlal v. Mafatlal Industries Ltd • Court cannot intervene if sanctioned by the majority and it’s lawful. • Court can only go through the scheme and examine if it has complied with the requirements. • Will interfere if the majority’s action affects the class interest of other equity shareholders. Jurisprudence
  9. 9. Needle Industries (India) v. Needle Industries Newey (India) Holding Ltd • Foreign majority alleged oppression by the Indian minority shareholders. • The SC in this case rejected the plea of oppression. • SC directed the minority Indian shareholders to purchase the shares that were held by the foreign majority shareholders. Jurisprudence
  10. 10. Exceptions to Majority Rule •Ultra Vires Act •Special Majority is needed •Personal rights are infringed •Fraud is committed by those in control Jurisprudence
  11. 11. Minority 100 members ; OR 1/10th of the total members; whichever is less any member or members holding not less than 1/10th of the issued share capital Minority
  12. 12. Number of members Persons claiming Minority ? 1,000 80 Yes 500 125 No 11 2 No 10,000 150 No 10,000 150 with 20% share Yes 10,000 1 with 25% share with 2 calls unpaid No 10,000 2000 members with 9.98% shares No 4 1 – Jointly by Mr. A and Mrs. B with 25% Yes Minority
  13. 13. Comparative Companies Act 1956 Companies Act 2013 Circumstances for oppression not defined Oppression and Mismanagement both covered Covers existing oppression only Covers past act of oppressions as well Only shareholders covered Sec 245 includes depositors Absence of Class Action Class action possible under Sec 245 Say in reconstruction and amalgamation denied Much better rights u/s 235 and 236 Small shareholders director and Independent directors defunct Stringent rules with regard to small shareholder directors and independent directors
  14. 14. Companies Act 2013 Small shareholders (Sec 151) • Small shareholders (not minority) have a right to elect a specific shareholder. • To table a proposal with 1000 or 10% of small shareholders (whichever lesser).
  15. 15. Companies Act 2013 Oppression and Mismanagement (Sec 241) SC - Life Insurance Corpn. of India v. Escorts Ltd. Doctrine of Legitimate expectation (a) To elect directors and participate in the management. (b) To enjoy the profits of the company. (c) To apply for relief against oppression & mismanagement. (d) To apply to Court for winding up of the company. (e) To share the surplus on winding up of the company.
  16. 16. Companies Act 2013 Oppression and Mismanagement (Sec 241) Affairs of the company have been or are being conducted in - A manner prejudicial to public interest or - In a manner prejudicial (wrongful, harsh, and burdensome) or - Oppressive to him or any other member or members or - In a manner prejudicial to the interests of the company OR
  17. 17. Companies Act 2013 Oppression and Mismanagement (Sec 241) The material change has taken place - In the management or control of the company, - Whether by an alteration in the BOD or in the ownership of the company‘s shares - Or in any other manner whatsoever, and that by reason of such change, it is likely that the affairs of the company will be conducted in a manner prejudicial to its interests or its members or any class of members,
  18. 18. Companies Act 2013 Powers of NCLT (Sec 242) It may pass an order which includes • Regulation of the conduct of the affairs of the company • Purchase of shares by other members • Termination of prejudicial agreements • Restriction on the transfer or allotment of the shares • Removal of the managing directors, manager or any of the directors of the company, • Imposition of costs as may be deemed fit, etc.
  19. 19. Companies Act 2013 Class Action Suit (Sec 245) Lawsuit where a group of persons with a common interest approach NCLT against the company, its board or the management. - Can be filed by anyone - To restrain an prejudicial or ultra vires transactions - To claim damages from management, auditors, expert, advisor or consultant or any other person
  20. 20. Companies Act 2013 Minority Squeeze out(Sec 235 & 236) Section 235 and 236 offers protection to the interests of minority shareholders. These are: • On acquiring 90% of capital shall offer to minority for buying equity shares at the determined value. • The minority can make an offer to the majority shareholders to buy their shares • The transferor company will act as a transfer agent for making payments to minority shareholders
  21. 21. Companies Act 2013 Minority Squeeze out(Sec 235 & 236) AIG (Mauritius) LLC v. Tata Televentures (Holdings) Ltd. • The price paid to 90% of the shareholders need not be true to be applied blindly to the minority. Cadbury India Ltd, Company Petition No 1072 of 2009 • Court held that before it could object to the scheme the objector must show that the valuation is unreasonable. Sterlite Industries & Sandvik Asia v. Bharat Kumar Padamsi • the Act allowed companies to extinguish the share capital thereby significantly impacting minority rights
  22. 22. Companies Act 2013 Other Miscellaneous protections • Adoption of Fair valuation mechanism • In case of members in excess of 1,000 e-voting is mandatory to be done • Sec 188 with regard to Related party transactions • Sec 114 can help block special resolutions if minority greater than 25%
  23. 23. THANK YOU Dhruv Seth dhruv@sethspro.com Seth & Associates Chartered Accountants New Delhi | Lucknow

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