Rights of Minority Shareholders

Protection of minority shareholders rights plays very crucial role under Sections 241-246 of the Companies Act, 2013. These provisions ensure that the supremacy of the majority is not abused through oppression of the minority and mismanagement of the company. These measures ensure that the balance of power remains intact and minority interests are protected. Here, we tried to find out answers to following questions: (1) What are the rights of shareholders holding 10% or less of the Share Capital of the Company? (2) What are the solutions available to the Company to avoid any problems caused by them?

II. ANALYSIS:

[*All the matters covered herein are after considering the Provisions of the Companies Act, 2013 (“the Act”) applicable to the Private Limited Companies]

VARIOUS RIGHTS OF SHAREHOLDERS HOLDING 10% OR LESS THAN 10% SHARES:

2.1 VARIATION OF SHAREHOLDERS RIGHTS AS PER SECTION 48(2) OF THE ACT:

2.1.1 Right to apply to Tribunal for cancellation of variation of Shareholders’ rights:

As per Section 48(2) of the Act, if, the holders of 10% or more of the issued shares of a particular class of shares do not wish to consent for the variation in the Shareholders’ right for that class of shares, then they can apply to Tribunal (“National Company Law Tribunal - NCLT”) for cancellation of said variation. In such case the decision of Tribunal shall be final and binding on all the shareholders of the Company.

The extracts of Sections 48 (2) & 48 (3) are as follows:

“Section 48(2): Where the holders of not less than 10% (Ten percent) of the issued shares of a class did not consent to such variation or vote in favour of the special resolution for the variation, they may apply to the Tribunal to have the variation cancelled, and where any such application is made, the variation shall not have effect unless and until it is confirmed by the Tribunal.”

“Section 48(3): The decision of the Tribunal on any application under sub-Section (2) shall be binding on the shareholders.”

2.2 CALLING OF EXTRA ORDINARY GENERAL MEETING:

2.2.1 Pursuant to Provisions of Section 100 of the Act, the holders of 10% (Ten Percent) or more of paid-up shares have a right to call Extra Ordinary General Meeting (EGM), by sending written requisition to the Board of Directors of the Company, for any matter which they deem necessary to be discussed in the EGM.

The extract of Section 100 (2) is as follows:

The Board shall, at the requisition made by,-

(a) in the case of a Company having a share capital, such number of members who hold, on the date of the receipt of the requisition, not less than one-tenth of such of the paid-up share capital of the Company as on that date carries the right of voting.”

2.3 DEMAND FOR POLL:

2.3.1 Pursuant to Provisions of Section 109 of the Act, the members present in person or by proxy, where allowed, having 10% (Ten Percent) or more of the total voting power shall have a right to demand for poll before or on the declaration of the result of the voting on any resolution on show of hands.

The extract of Section 109 (1) is as follows:

“Before or on the declaration of the result of the voting on any resolution on show of hands, a poll may be ordered to be taken by the Chairman of the meeting on his own motion, and shall be ordered to be taken by him on a demand made in that behalf,-

(a) in the case a Company having a share capital, by the members present in person or by proxy, where allowed, and having not less than one-tenth of the total voting power or holding shares on which an aggregate sum of not less than INR 5,00,000 (Rupees Five Lakh) or such higher amount as may be prescribed has been paid-up.”

2.4 RESOLUTIONS REQUIRING SPECIAL NOTICE:

2.4.1 Pursuant to the Provision of the Section 115 of the Act, where any Provision of the Act or the Articles of the Company require Special Notice of any Resolution, the members holding 1% (One Percent) or more of the total voting powers can give notice of their intention to move such resolution.

The extract of Section 115 is as follows:

“Where, by any Provision contained in this Act or in the articles of a Company, special notice is required of any resolution, notice of the intention to move such resolution shall be given to the Company by such number of members holding not less than one percent of total voting power or holding shares on which such aggregate sum not exceeding INR 5,00,000/- (Rupees Five Lakhs), as may be prescribed, has been paid-up and the Company shall give its members notice of the resolution in such manner as may be prescribed.”

The following matters shall be considered through Special Notice by the Company:

2.4.1.1 Retirement / appointment of the Auditors of the Company (Section 140 of the Act):

Pursuant to the Provisions of the Section 140 (4) of the Act, the members holding 1% (One Percent) of the total voting power by giving special notice to the Company can request for appointment of any auditor other than the retiring auditor.

The extract of Section 140 (4) is as follows:

“Special notice shall be required for a resolution at an annual general meeting appointing as auditor a person other than a retiring auditor, or providing expressly that a retiring auditor shall not be re-appointed, except where the retiring auditor has completed a consecutive tenure of 5 (Five) years or, as the case may be, ten years, as provided under sub-Section (2) of Section 139.”

2.4.1.2 Removal of directors of the Company (Section 169 of the Act):

Pursuant to Provisions of Section 169 of the Act, the members holding 1% (One Percent) of the total voting power by giving special notice to the Company can request for removal of any Director of the Company or appoint somebody in place of a Director so removed.

The extracts of Sections 169(2) & 169(5) are as follows:

“169(2): A special notice shall be required of any resolution, to remove a director under this Section, or to appoint somebody in place of a Director so removed, at the meeting at which he is removed.”

“169(5): A vacancy created by the removal of a director under this Section may, if he had been appointed by the Company in general meeting or by the Board, be filled by the appointment of another director in his place at the meeting at which he is removed, provided special notice of the intended appointment has been given under sub-Section (2).”

2.5 INVESTIGATION INTO COMPANY‘S AFFAIRS IN OTHER CASES:

2.5.1 Pursuant to the Provisions of Section 213 of the Act, the Tribunal (“National Company Law Tribunal”) or (“NCLT”) can, on the application of Members holding 10% (Ten Percent) or more of the total voting power, initiate investigation into the Company’s affairs.

The extract of Section 213 is as follows:

“The Tribunal may,-

(a) on an application made by-

(i) not less than one hundred members or members holding not less than one-tenth of the total voting power, in the case of a Company having a share capital and supported by such evidence as may be necessary for the purpose of showing that the applicants have good reasons for seeking an order for conducting an investigation into the affairs of the Company.”

2.6 RIGHTS IN ARRANGEMENT, RECONSTRUCTION AND AMALGAMATION OF THE COMPANIES:

2.6.1 Right to apply to Tribunal in case of compromise or arrangement under Section 230 of the Act:

Pursuant to Provisions of Section 230 of the Act, persons holding 10% (Ten Percent) or more of the shareholding can object to the scheme of compromise or arrangement and can apply to the NCLT in this regard.

Extract of page No. 5376 of Taxmann’s Company Law, has been reproduced below for ready reference:

“Even single minority shareholder is entitled to oppose scheme of compromise and if court finds scheme to be unjust, it should not confirm proposed reduction of share capital- In Sandvik Asia Ltd., In re [2004] 50 SCL 413 (Bom.)

The extract of Section 230 (4) is as follows:

“A notice under sub-Section (3) shall provide that the persons to whom the notice is sent may vote in the meeting either themselves or through proxies or by postal ballot to the adoption of the compromise or arrangement within one month from the date of receipt of such notice:  

Provided that any objection to the compromise or arrangement shall be made only by persons holding not less than ten percent of the shareholding or having outstanding debt amounting to not less than five per cent of the total outstanding debt as per the latest audited financial statement.”

2.6.2 Power to acquire shares of dissenting shareholders from the scheme approved by the majority under Section 235 of the Act:

As per the Provisions of the Section 235 of the Act, where the holders of 90% (Ninety Percent) or more in value of the shares have approved the transfer of their shares to the Transferee Company; and offer has been made by the Transferee Company to the remaining holders of 10% (Ten Percent) or less in value of the shares for selling their shares as well, where said offer is dissented by such holders of 10% (Ten Percent) or less  in value of shares, then they have a right to approach to the NCLT, if they feel that such scheme is not in their interest.

Extract of page No. 5625 of Taxmann’s Company Law, have been reproduced below for ready reference:

Court (now NCLT) may disapprove scheme despite sanctioned by over 90% members:

In Bugle Press Ltd. Re [1961] 31 Comp. Cas. 369 (CA), Court refused to allow the scheme to go through, when it was found that the scheme was a trick to take over shares of minority shareholders at throw away price.

2.6.3 Purchase of minority shareholding under Section 236 of the Act:

Pursuant to Provisions of Section 236 of the Act, the holders of 10% (Ten Percent) or less of the Issued Equity Share Capital of the Company have a right to offer their shares to the majority shareholders to purchase at the price arrived as per valuation report submitted by registered valuer or at higher price i.e. shall have a right of negotiation.

The extracts of Sections 236 (3), 236 (8) & 236(9) are as follows:

“236(3): Without prejudice to the Provisions of sub-Sections (1) and (2), the minority shareholders of the Company may offer to the majority shareholders to purchase the minority equity shareholding of the Company at the price determined in accordance with such rules as may be prescribed under sub-Section (2).”

“236(8): Where the shares of minority shareholders have been acquired in pursuance of this Section and as on or prior to the date of transfer following such acquisition, the shareholders holding 75% (Seventy-Five Percent) or more minority equity shareholding negotiate or reach an understanding on a higher price for any transfer, proposed or agreed upon, of the shares held by them without disclosing the fact or likelihood of transfer taking place on the basis of such negotiation, understanding or agreement, the majority shareholders shall share the additional compensation so received by them with such minority shareholders on a pro rata basis.”

“236(9): When a shareholder or the majority equity shareholder fails to acquire full purchase of the shares of the minority equity shareholders, then, the Provisions of this Section shall continue to apply to the residual minority equity shareholders, even though,-

(a) the shares of the Company of the residual minority equity shareholder had been delisted; and

(b) the period of one year or the period specified in the regulations made by the Securities and Exchange Board under the Securities and Exchange Board of India Act, 1992 (15 of 1992), had elapsed.”

2.7 RIGHT TO APPLY TO TRIBUNAL FOR RELIEF IN CASES OF OPPRESSION:

2.7.1 Pursuant to Provisions of Section 244 of the Act, the holders of 10% (Ten Percent) or more of the Issued Share Capital can apply to the Tribunal for the matter covered under the Section 241 of the Act. The matters specified are as follows:

2.7.1.1 the affairs of the Company have been or are being conducted in a manner prejudicial to public interest or in a manner prejudicial or oppressive to him or any other member or members or in a manner prejudicial to the interests of the Company; or

2.7.1.2 the material change, not being a change brought about by, or in the interests of, any creditors, including debenture holders or any class of shareholders of the Company, has taken place in the management or control of the Company, whether by an alteration in the Board of Directors, or manager, or in the ownership of the Company’s shares, or if it has no share capital, in its membership, 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.

The extract of Section 244 is as follows:

The following members of a Company shall have the right to apply under Section 241, namely:-

“(a) in the case of a Company having a share capital, not less than one hundred members of the Company or not less than one-tenth of the total number of its members, whichever is less, or any member or members holding not less than one-tenth of the issued share capital of the Company, subject to the condition that the applicant or applicants has or have paid all calls and other sums due on his or their shares.”

2.8 PETITION FOR WINDING-UP BY TRIBUNAL:

Pursuant to Provisions of Section 272 of the Act, the contributory can apply for Tribunal for winding up petition.

[Contributory means a person liable to contribute towards assets of the Company in the event of its being wound-up. (Explanation - For the purposes of this clause, it is clarified that a person holding fully paid-up shares in a Company shall be considered as a contributory but shall have no liabilities of a contributory under the Act whilst retaining rights of such a contributory.)]

Thus we can state that contributory can also be the holder of 10% (Ten Percent) or less of the shares of the Company.

The extracts of Sections 272(1) & 272(2) are as follows:

“272(1): Subject to the Provisions of this Section, a petition to the Tribunal for the winding up of a Company shall be presented by-

(a) the Company;

(b) any contributory or contributories;

(c) any person authorised by the Central Government in that behalf;

(d) the Registrar;

(e) any person authorised by the Central Government in that behalf; or

(f) in a case falling under clause (b) of section 271, by the Central Government or a State Government.”

“272(2): A contributory shall be entitled to present a petition for the winding up of a Company, notwithstanding that he may be the holder of fully paid-up shares, or that the Company may have no assets at all or may have no surplus assets left for distribution among the shareholders after the satisfaction of its liabilities, and shares in respect of which he is a contributory or some of them were either originally allotted to him or have been held by him, and registered in his name, for at least six months during the eighteen months immediately before the commencement of the winding up or have devolved on him through the death of a former holder.”

III. CONCLUSION:

3.1 After analyzing all the above mentioned provisions, we can conclude that:

3.1.1 The Minority Shareholders have been given rights/ powers under various Sections of the Act, for cases involving conflict with respect to their interest in the Company and mismanagement and oppression from any Directors or Officer or Auditors or any Authorities.

3.1.2 There are some Provisions which entitle rights to the holders of 10% or less shares/ paid-up share capital/ voting power of the Company and there are some provisions which entitle rights to the holders of 10% or more shares/ paid-up share capital/ voting power of the Company, hence the scope of avoiding/ reducing the rights entitled to such number of shareholders is very limited.

Disclaimer:

The content of this article is only to provide knowledge and reference on the subject matter and should not be relied upon as it is without seeking advisory from professionals on the specific case and matter.