Minority Shareholder

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Minority shareholders are the persons in the company whose involvement in the company’s democratic decisions are overshadowed by the majority rule and to overcome this problem companies act 2013 has come up to tackle the problems faced by the minority in companies act, 1956. However minority shareholders are not defined under any law but still under section 235(power to acquire shares of dissenting shareholders) and section 244(right to apply for oppression and mismanagement) of companies act, 2013 have been given 10% shares or minimum hundred shareholders whichever is less in companies with share capital and 1/3rd of the total number of its members in case of companies without share capital.

Definition

Although the term ‘minority shareholder’ does not have any proper definition, it is widely referenced to any shareholder who owns less than 50 percent of the total voting rights of the company and is not in direct/ indirect management control of the company. So technically, such a shareholder doesn’t have: • Voting control over the company, and • Management control over the company

The Companies Act, 2013 provides various rights to such shareholders to protect their interest in their companies and address issues of abuse by the majority shareholders/ persons in control of their companies. The Act also provides various benefits to the minority shareholders that were not provided under the old Act.

Right to Minority Shareholder

  1. 1. Right to appoint Small Shareholder Directors

As per Section 151, the small shareholders, also termed as minority shareholders, have the right to nominate an individual as a small shareholder director on the Board of their listed Company. A small shareholder is the one who holds shares in any company, the aggregate face value of which does not exceed Rs. 20,000. For such a proposal, at least 1,000 such small shareholders or 10% of the total small shareholders of the Company, whichever is lesser, should come together and submit a notice to the Company along with their signatures. The individual, if appointed, will be classified as an independent director and will serve for a term of three years. Once the term of the director is over, neither can he be reappointed for a further period nor can he is associated with the Company for three years after the term is over.

  1. 2. Right to apply to NCLT for Oppression and Mismanagement:

Minority shareholders have been bestowed with the rights to approach the NCLT to report any acts of oppression and mismanagement by the promoters, board or management of the Company. These rights are provided under Section 241 and 242 of the Act. For this, applying minority shareholders need: • To be at least 100 in number/ one-tenth of the total number of shareholders, whichever is lesser, • to hold at least 10% share capital of the Company (this includes both equity and preference shares) Here, the term 'oppression' would mean exercising power or authority in an unjust manner. Examples range from: • Not calling a general meeting, • Depriving the member of the right to dividend, etc. 'Mismanagement' is said to occur if the affairs of the Company are conducted in a prejudicial manner where the interests of the public or the Company are jeopardized in any which way Some examples of mismanagement are: • Making a personal profit out of the Company's business, • Directors continuing to draw their salaries while the Company is suffering losses continuously, • Misusing the management control of the Company, • Violating any of the laws or statutes of the Company, etc. If NCLT observes that the affairs of the Company are being conducted in a manner prejudicial or Oppressive to the interests of the Company; and winding up the Company would be unfairly prejudicial to the member(s); it may pass an order which includes the following: • Regulation of the conduct of the affairs of the Company in future, • The shares or interest of any member of the Company to be purchased by other members, • Restriction on the transfer or allotment of the shares of the Company, • Removal of the managing directors, manager or any of the directors of the Company, • Imposition of costs as may be deemed fit, etc.

  1. 3. Right to file a Class Action Suit
              The Companies Act 2013 also provides an opportunity for minority shareholders to file a class action suit. A class-action suit refers to a lawsuit where a group of individuals having a common interest approach NCLT against the Company, its board or the management. The suit can be filed by both the shareholders as well as lenders of the Company. This provision differs from the right provided under Section 241, wherein only the shareholders have the right to approach NCLT against mismanagement and oppression.

The relief which shareholders and lenders may get under class-action suits is to: • Prohibit the Company from committing an act which is beyond the power of the company, • Prohibit the Company from committing a breach of any provisions of its memorandum or articles, • Prohibit the Company from acting contrary to the provisions of any law, • Prohibit the Company from taking action contrary to any resolution passed by its shareholders, etc.

  1. 4. Rights with respect to reconstruction and amalgamation-

• Purchase of shares of dissenting shareholders at a determined value by the registered value. • The minority have been given a right to make an offer to the majority shareholders to buy the shares of minority shareholders. • The transferor company shall be the agent for making payments to minority shareholders.

Steps taken by company to protect the rights of minority shareholders:

1. Provision of PIGGY BACKING-When a majority shareholder sells their shares; a minority shareholder has the right to be included in the deal. This is called "piggybacking." It protects your investment should the company be sold. Piggybacking requires that any party considering the purchase of the business be able to buy 100 percent of the outstanding shares. 2. Provision of compulsory dividends to the minority shareholders. Thus, the rights of minority shareholder are protected by the provisions in The Companies Act, 2013 which was lacking in The Companies Act, 1956. These minority shareholders were exploited but now they have their own rights.