RIGHTS & BENEFITS TO MINORITY SHAREHOLDERS

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1 RIGHTS & BENEFITS TO MINORITY SHAREHOLDERS UNDER COMPANIES ACT 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. We discuss some of these rights and benefits in brief here: 1. Right to appoint Small Shareholder Directors Section 151 empowers small shareholders, who are also minority shareholders, to elect an individual as a small shareholder director on the Board of their listed company. A small shareholder is defined as a shareholder who holds shares in any company, the aggregate face values of which does not exceed Rs. 20,000. To table 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. The director cannot be reappointed for a further term nor can be associated with the company for three years after his/ her term is over. The approval for his appointment must be sought through a postal ballot. Page 1

2 2. Right to apply to NCLT for Oppression and Mismanagement: Minority shareholders are also provided the right to approach 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, the applying minority shareholders need: to be at-least 100 in number/ one-tenth of total number of shareholders, whichever is lesser, or 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 unjust manner. Examples range from: not calling a general meeting, depriving the member of right to dividend, etc. The term mismanagement would mean conducting the affairs of the company in a manner prejudicial to public interest or in a manner prejudicial to the interests of the company. Some examples of mismanagement are: making personal profit out of company s business, directors continuing to draw their salaries while company is posting losses continuously, misusing the management control of the company, violating any of the law and statute of the company, etc. If the NCLT finds that the company s affairs are being conducted in a manner prejudicial or oppressive and that winding up the company would unfairly prejudice such member or members, it may pass an order which includes: regulation of the conduct of the affairs of the company in future, purchase of shares or interest of any member of the company 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. Rights & Benefits to Minority Shareholders Page 2

3 3. Right to file a Class Action Suit The Companies Act, 2013 also provides opportunity to minority shareholders to file a class action suits. A class action suit is a lawsuit where a group of persons with 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 way, it differs from the right provided under Section 241 where only shareholders can approach NCLT against mismanagement and oppression. The relief which shareholders and lenders may get through class action suits is to: restrain the company from committing an act which is beyond the power of the company, restrain the company from committing breach of any provisions of its memorandum or articles, restrain the company from acting contrary to the provisions of any law, restrain the company from taking action contrary to any resolution passed by its shareholders, etc. 4. Right for Reconstruction and Amalgamation of Companies: There are concerns of interests of minority shareholders being suppressed in schemes of mergers, amalgamations and reconstruction. To address these, the new Act, through Section 235 and 236 offers protection to the interests of minority shareholders. These are: Section 236 (1) and (2): the acquirer on becoming holder of 90% or more of issued equity share capital shall offer minority shareholder for buying equity shares at the determined value; Section 236 (3): the minority shareholders can make an offer to the majority shareholders to buy their shares; and Section 236 (5): the transferor company will act as a transfer agent for making payments to minority shareholders. Rights & Benefits to Minority Shareholders Page 3

4 5. Adoption of Fair Valuation Mechanism: An independent valuation mechanism should be adopted by the company for evaluating the value of shares of the company, which will safeguard minority interests. The appointment of the independent valuer is required to be done by the audit committee and the committee will ensure that shareholders must have the right to approach NCLT if the process appears to be unfair. These principles for valuation of shares could also be applied in case of companies that are delisted and have a shareholder base of 1000 or more. 6. E-voting Process: Section 108 of the new Act mandates certain companies to offer e-voting facility to shareholders to vote on shareholder meetings. This provision has empowered minority shareholders residing in or out of the country to exercise their voting rights without having to attend the meeting in person. This has resulted in increased participation of minority shareholders in meetings and having their say on important matters related to their companies. 7. Majority of the Minority Section 188 of the Companies Act, 2013 which talks about related party transactions, mandates companies to undertake such transactions only after receiving approval from the majority of non-interested parties. Since promoters/ majority shareholders are usually the interested parties, the minority shareholders are naturally considered as non-interested parties. Hence, it is the minority shareholders that get to approve such transactions. Rights & Benefits to Minority Shareholders Page 4

5 Conclusion It can be concluded that the Companies Act, 2013 has made efforts to safeguard the interests of minority shareholders but what is required is creation of awareness of the same so that shareholders are aware of the rights available to them and can utilize these rights whenever they feel the need to do so. Disclaimer This report is proprietary and may not be reproduced in any manner without the written permission of InGovern Research Services Pvt. Ltd. ( InGovern ). While we have taken due care and caution in the compilation and presentation of the information and data in this report, no warranty is made as to the completeness, accuracy or utility of this analysis. Rights & Benefits to Minority Shareholders Page 5