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Minority Shareholders In A Company – The Protection
[Submitted by V. Durga Rao,
Advocate, Madras High Court]
December 14, 2010
I have been continuously focusing at the complications in the corporate
world and especially about the protection to the shareholders in a
Company. I have seen cases where the majority does everything in order to
deny the rightful share of the minority shareholders or the group; or to
make the company a shell company. I have seen the cases where companies
with huge asset base functioning like a proprietorship concern without any
regard to the corporate regulations or the provisions of the Companies
Act, 1956. I know many instances and I have heard many shareholders
alleging that their interest in the Company running to several crores is
at stake with the oppressive attitude of the majority and the activities
of mismanagement. Though it is felt that the listed Public Companies
function well in view of the SEBI regulations, the role of SEBI in
addressing the grievances of the shareholders and the listing agreement;
there are serious grievances to the minority shareholders or group even in
a listed Public Company. However, in view of the compulsory shareholding
patterns in a listed Public Company in view of SEBI (DIP) Guidelines etc.,
the situation of the shareholders in a listed Public Company is different
from a Private Limited Company. When it comes to the listed Public
Companies, there is a chance of disposing their shares in the open market;
but the same right is subject to regulations when it comes to the transfer
of shares in a Private Limited Company. Again, it is a fact that no
investor will be interested to buy the shares in a Private Limited Company
if they do not trust at the existing shareholders. As such, there are
serious issues concerning the rights of the minority shareholders in a
Company though we feel that the rights are well protected with the clear
provisions in the Companies Act, 1956 and other regulations.
I think that we have very good law dealing with the incorporation,
formation and functioning of the companies in India though it requires few
reforms. We have a law expecting the auditor to be independent and
protection is given to his appointment considering the interests of all
shareholders. We have the provisions of the Companies Act, 1956 as to how
the books of accounts are to be maintained and every Company is supposed
to follow the Accounting Standards prescribed by the ICAI while presenting
the financial statements and other connected documents. We have the
provisions where the minority or the shareholders of the Company can ask
for the winding-up of the Company too when they feel that it is just and
reasonable. We have a specialist forum like Company Law Board which can be
approached under section 397/398 of the Companies Act, 1956 when there is
oppression and mismanagement in the Company. The Company Law Board is
provided with enormous powers in order to put an end to the matters
complained of and in order to regulate the affairs of the Company. The
Company Law Board can even order investigation into the affairs of the
Company upon the specific request from the Petitioners in a Petition under
section 397/398 of the Companies Act, 1956. Again, even if a shareholder
is not qualified to approach the Company Law Board under section 397/398
of the Companies Act, 1956, he can very well approach the Company Court or
can approach even the Civil Court asking for remedial measures at times.
The legal framework may appear to be very clear, but, the practical issues
deserve special consideration. In practice, many rules and regulations are
violated in closely held companies especially and it is also very
difficult to allege some malafides just because a Company could not follow
the procedure strictly. As such, the issue of rights of shareholders and
the protection to their interest is very complicated in view of the
‘majority rule’ and the protection to the minority against the oppression
and mismanagement. I would like to expose my views as to what happens to
the minority shareholders or the group when they approach the competent
forum seeking relief and it is as follows:
Approaching Company Court:
Minority shareholders may approach the High Court or the Company Court
when there exist a just and reasonable cause for asking to wind-up the
Company. It is a fact that the High Court intervention in Company disputes
has been exercised so cautiously and in many cases the remedy is
effective. For example, handling any winding-up petition is a difficult
thing and the Court consider the issue as to whether the Company is a
going concern, the future prospects and the interests of the many other
stake holders too. Despite the complications, the High Court has been
exercising the power to wind-up the Company very cautiously. However, if
the High Court entertains the petition to wind-up the Company from the
Share holders very freely, then, the provisions providing for revival and
rehabilitation and also the powers conferred on the Company Law Board to
address the issues of oppression and mismanagement may not be justified at
all. As such, in a very cautious approach, when the shareholders raise the
issue of oppression and mismanagement by the majority before the Company
Court, the Company Court may ask the shareholders to avail the alternative
remedy of approaching the Company Law Board to put an end to matters
complained of or to regulate the company affairs. As such, it will be
difficult for the minority shareholders to convince the Company Court and
get the redressel for oppression and mismanagement in the Company. This is
the factual position according to me and my view. High Court, infact, has
the track-record of providing speedy and effective remedies in corporate
disputes. Due to technicalities as pointed-out, the minority shareholders
may be asked to approach the Company Law Board very often when they raise
the issue of oppression and mismanagement before the High Court.
Approaching Civil Court:
According to me, there is no bar on the shareholders of a Company in
approaching the Civil Court seeking redressel at times. There is an
attempt to make a specific provision to bar the jurisdiction of the Civil
Court to entertain the corporate disputes in the proposed new Companies
Act. However, as the law stands today, the shareholders can approach the
Civil Court asking for a remedy against the management or the majority in
the Company. The problem with approaching the Civil Court is that it is
time consuming and technicalities to be followed at any cost. Again, the
Civil Court may lack the expertise in dealing with the corporate disputes
and there is a possibility of applying the provisions of the Companies
Act, 1956 strictly and the result can be disastrous at times. As such,
though there is no bar in approaching the Civil Court, the shareholders
normally hesitate to approach the Civil Court and even if they approach
Civil Court, at times, they may simultaneously approach the Company Law
Board under section 397/398 of the Companies Act, 1956. As such, the
minority may not get immediate and effective relief by approaching the
Civil Court.
Approaching Company Law Board:
If the minority shareholders are qualified to approach the Company Law
Board under section 399 of the Companies Act, 1956, they often approach
the Company Law Board for oppression and mismanagement. The Company Law
Board is provided with enormous powers to put an end to the matters
complained of and to regulate the affairs of the Company. It is true that
many may feel that the relief before the Board is not speedy and
effective. It is also true that technicalities overtake the subjective
scrutiny before the Board at times. There are complications and those are
inevitable and to be addressed by the Board with the co-operation from the
professionals and parties concerned. Based on the developments with the
interpretation of Constitutional Courts, technicalities are now ignored
under section 397/398 of the Companies Act, 1956. Again, even the Board
gives lot of preference to ensure that the company functions smoothly if
it is a going concern. Despite the complications and limitations, the only
effective legal recourse available to the minority shareholders against
oppression and mismanagement now is to approach the Company Law Board
under section 397/398 of the Companies Act, 1956. I do strongly feel that
the Company Law Board can put an end to matters complained of and can
regulate the affairs of the Company. The issues pertaining to execution of
the orders of the Company Law Board and the issues of contempt are to be
looked into and to be addressed in the proposed new Companies Act. If the
minority shareholders failed to get the protection from the Board and if
the proceeding gets delayed without protection, then, the minority
shareholders can never get justice and they may be forced to compromise
with their rights and they may forced to agree for a settlement. I most of
the cases, the minority shareholders leave the company by opting to sell
their shares to the majority.
Approaching Arbitral Tribunal:
The issue as to whether the jurisdiction of the Company Law Board
under section 397/398 of the Companies Act, 1956 be ousted upon showing
some Arbitration Clause is a complicated issue to deal with. According to
me, the issue of opting to approach the Arbitral Tribunal to settle the
disputes between or among the shareholders is a complicated thing. It
depends upon the facts and circumstances of the case. If all the
stake-holders are agreed to get their disputes settled to a mutually
acceptable Arbitration, then, there can not be any problem. However, there
can be argument that the Arbitrator may not effectively consider the issue
of public interest if he is provided with the powers of the Company Law
Board under section 3976/398 of the Companies Act, 1956. The issue as to
whether approaching an Arbitrator or Arbitral Tribunal is effective or
not, will depend upon the facts and circumstances of each case. No hard
and fast rule can be laid in this regard.
In view of laying emphasis on majority rule and in view of considering
the functioning of the Company when the Company is a going concern, the
minority shareholders should convince the appropriate and chosen forum as
to the importance of their interest and should get the relief. There is
also a criticism that the most comfortable way of stealing huge money is
through relying on the technicalities in the provisions of the Companies
Act, 1956 and is through misusing the settled principles of Company Law.
[Note: The views expressed are the author's personal.]
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