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Majority rules and Minority rights - CS Executive Company law

Companies Law – Majority Rule and Minority Rights

Majority and minority define who has the power to rule. The structure of democracy is as such, where the majority has the supremacy. In the corporate world, also the rule and decisions of the majority seem to be fair and justifiable. The power of the majority has greater importance in the company, and the court tries to avoid interfering with the affairs of the internal administration of the shareholders. With the superiority of the majority, there is always inferiority among the minority, which shows an unbalance in the company. The Companies Act, 2013 reduces the inferiority of the minority. This article details the rules of the majority and also the rights of the minority in a company.

Powers of Board of Directors

The Companies Act distributes the power between the board of directors and the shareholders. The board and the shareholders exercise their powers through meetings in a democratic way. The meetings include the meetings of the board of directors and the general meetings. The shareholders entrust certain powers on the board of directors, which is through the Memorandum of Association (MoA) and Articles of Association (AoA). The board of directors have all the powers and can to do all the things and acts just the same as the company exercises its powers. But the Act restricts the board of directors from the powers that only the shareholders can do in the general meetings.

Majority Powers

Majority Rule

According to section 47 of the companies act, 2013, holding any equity shares shall have a proper to vote in respect of such capital on every decision placed before the company. Member’s proper to vote is recognized because the proper of assets and the shareholder can also workout it as he thinks in shape consistent with his interest and preference. A special resolution requires a majority of 3/4th of these votes at the meeting. consequently, wherein the act or the articles require a unique resolution for any cause, a 3/4th majority is important and a simple majority isn’t sufficient. The resolution of a majority of shareholders handed at a duly convened and held general meeting, upon any question with which the business enterprise is legally competent to deal, is binding upon the minority and consequently upon the company.

A company stands as an artificial entity. The directors run it but they act according to the wish of the majority. The directors accept the resolution passed by the majority of the members. Unless it is not within the powers of the company. The majority members have the power to rule and also have the supremacy in the company. But there is a limitation in their powers. The following are two limitations:

Limitations

  1. The powers of the majority of the members are subject to the MoA and AoA of the company. A company cannot authorise or ratify any act legally outside the memorandum. This will be regarded as the ultra vires of the company

  2. The resolution made by the majority should not be inconsistent relating to The Companies Act or any statutes. It should also not commit fraud on the minority by removing their rights.

Principle of Non-Interference

The general rule states that during a difference among the members, the majority decides the issue. If the majority crushes the rights of the minority shareholders, then the company law will protect it. However, if the majority exercises its powers in the matters of a company’s internal administration, then the courts will not interfere to protect the rights of the majority.

Foss Versus Harbottle

Foss v. Harbottle lays down the basics of the non-interference principle. The reasons for the rule is that, if there is a complaint on a certain thing which the majority has to do if there is something done irregularly which the majority has to do regularly or if there is something done illegally which the majority has to do legally, then there is no use to have a litigation over such thing. As in the end, there will be a meeting where the majority will fulfil their wishes and make decisions.

Benefit and Justification

The benefit and the justification of the decision of the case are:

  1. Recognises the country’s legal personality

  2. Emphasises the necessity of the majority making the decisions

  3. Avoid the multiplicity of suits

Exceptions to the Rule

The rule is not absolute for the majority; the minority also have certain protections. The Non-interference principle does not apply to the following:

Ultra Virus Act

An individual shareholder can take action if they find that the majority has done an illegal act or ultra virus act. The individual shareholder has the power to restrain the company. This is possible by the injunction or the order of the court.

Fraud on Minority

If the majority commits fraud on the minority, then the minority can take necessary action. If the definition of fraud on the minority is unclear, then the court will decide on the case according to the facts.

Wrongdoer in Control

If the company is in the hands of the wrongdoer, then the minority of the shareholder can take representation act for fraud. If the minority does not have the right to sue, then their complaint will not reach the court as the majority will prevent them from suing the company.

In Glass v. Atkins (1967) 65 D.L.R. (2d) 501, a company was controlled equally by the two defendants and the two plaintiff. The plaintiff brought an action against defendants alleging that they had fraudulently converted the assets of the company for their own private use. The Court allowed the action and observed. While the general principle was for the company itself to bring an action, where it had an interest, since the two defendants controlled the company in the sense that they would prevent the company from taking action.

Resolution Requiring Special Majority

If the act requires a special majority, but it passes by a simple majority, then an individual shareholder can take action.

An individual shareholder has the right of action to restrain the company from acting on a special resolution to which the insufficient notice is served [Baillie v. Oriental Telephone and Electric Co. Ltd., (1915) 1 Ch. 503 (C.A.) and Nagappa Chettiar v. Madras Race Club, 1 M.L.J. 6621.

Personal Action

The majority of shareholders always oblige to the rights of the individual membership. The individual member has the right to insist on the majority on compliance with the statutory provisions and legal rules.

Provisions in the memorandum and the articles are mandatory in nature and cannot be waived by a bare majority of shareholders [Salmon v. Quin and Aztens, (1909) A.C. 4421.

In Nagappa Chettiar V. Madras Race Club, (1949) 1 M.L.J. 662 at 667, it was observed by the Court that 'An individual shareholder is entitled to enforce his individual rights against the company, such as, his right to vote, the right to have his vote recorded, or his right to stand as a director of a company at an election'.

Where the candidature of a shareholder for directorship is rejected by the Chairman, it is an individual wrong in respect of which a suit is maintainable [Joseph v. Jos, (1964) 1 Comp LJ 1051.

Breach of Duty

If there is a breach of duty by the majority of shareholders and directors, then the minority shareholder can take action.

In Daniels v. Daniels, (1978) 2 W.L.R. 73, the plaintiff, who were minority shareholders of a company, brought an action against the two directors of the company and the company itself. In their statement of the claim they alleged that the company, on the instruction of the two directors who were majority shareholders, sold the company's land to one of the directors (who was the wife of the other) for £ 4,250 and the directors knew or ought to have known that the sale was at an under value. Four years after the sale, she sold the same land for E 1,20,000. The directors applied for the statement of claim to be disclosed on reasonable cause of action or otherwise as an abuse of the process of the Court.

Prevention of Oppression and Mismanagement

To prevent the majority of shareholders from oppression and mismanagement, the minority can take action against them.

Piggy Backing – This provision states that if the majority sells their shares then the minority shareholder right has to be included in the deal. Moreover, “Piggy Backing” requires the party to consider the purchase of the business to sell 100 percent of the outstanding shares.

Minority protected

Companies Act, 2013 has empowered the corporate decision making of the minority shareholders also. Under Section 151 of the Companies Act, 2013, listed companies are now required to appoint directors who are elected by the small shareholders i.e. shareholders holding shares of a nominal value of not more than twenty thousand rupees. A listed company, may upon notice of not less than 1000 or one-tenth of the total number of small shareholders, whichever is lower, have a Small Shareholders’ Director elected by the small shareholders. A listed company may suo moto (on its own accord) opt to have a director representing small shareholders. Thus the Small Shareholder’s Director’s appointment is optional and made available to listed companies only.

Apropos, it has been further provided the procedures for the nomination of a small shareholder director with the information to be furnished along with. However, The Companies (Appointment and Qualifications of Directors) Rules, 2014

also provides the majority and protection to the small shareholders for safeguarding their interests. The Companies (Appointment and Qualifications of Directors) Rules, 2014 further protects the interests of small shareholder director and ensures that the small shareholder director will not retire by the rotation and shall enjoy tenure of three years. However, the small shareholder director will not be further eligible for reappointment.

Furthermore, sub clause 4 of clause 11 of the The Companies (Appointment and Qualifications of Directors) Rules, 2014 provides that “such director shall be considered as an independent director subject to his giving a declaration of his independence in accordance with sub-section (7) of Section 149 of the Act”.

It is therefore clear from the aforesaid clause that the small shareholder director may or may not be an independent director, thus, making optional for small shareholder director to be an independent director.

This empowers the minority/small shareholders rights in the process of decision making and in the management of the company. Thus, it also states the provisions where the interest of the minority shareholders can be protected through the appointment of an independent shareholder directors.

E-Voting

E-Voting has been made mandatory for the listed companies with at least 1000 shareholders which indeed will enhance the active participation and offers a platform to the minority shareholders in the management of the company. This will also enable the minority shareholders to exercise their power in the company.

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