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
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

 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
 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:

 Recognises the country’s legal personality

 Emphasises the necessity of the majority making the decisions
 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.

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.
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.

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

Prevention of Oppression and Mismanagement

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

Remedies against Oppression, Mismanagement and Prejudice

Sections 241-246 of the 2013 Act provide relief and protection to members of a company,
(subject to meeting a minimum numerical threshold), against acts of oppression,
mismanagement, as also acts of the majority/ management of a company that are prejudicial
to the interests of the company or public interest.

If the NCLT, on an application made to it, is satisfied that facts justify the winding-up of the
company on just and equitable grounds, but that such an order would not do complete justice,
it may make such orders as it thinks fit, to bring an end to the matters complained of. The
powers of the NCLT are wide-ranging in this regard.

Oppression:

Conducting the company’s affairs in a manner prejudicial to public interest or interests of the
company or in a manner oppressive to any member or members amounts to
oppression. Oppression of a person in a capacity other than as member – such as a director
(unless it is in relation to a shareholder nominee/ appointed director and so relatable to the
shareholder himself), would not be redressable under this provision.

The bedrock of principles that govern acts of oppression were laid down more than fifty years
ago in S.P. Jain v. Kalinga Tubes Ltd., where the Supreme Court expounded the principles
determining the concept of oppression, i.e. that the conduct must be burdensome, harsh and
wrongful, involving lack of probity or fair dealing to a member in the matter of his
proprietary rights as a shareholder. Further, a mere lack of confidence between the majority
and minority shareholders would not be enough, unless the lack of confidence springs from
oppression of a minority by a majority in the management of the company’s affairs.

These principles were applied and amplified in other cases. In Needle Industries India Ltd. v.
Needle Industries Newey (India) Holdings Ltd., the Supreme Court held that an illegal act
will not in and of itself be treated as oppressive, unless it is accompanied by a mala fide
intention or if otherwise such an act was harsh, burdensome and wrongful. However, where
there has been a series of illegal acts directed against a person, it would be justifiable to
conclude that they are a part of the same object of committing oppression. In V.S. Krishnan v.
Westfort Hi-Tech Hospital Ltd., the Supreme Court relied on the Needle Industries case,and
ruled that the test to gauge whether an action is oppressive – is not whether it is illegal, but
rather, whether the act of oppression entailed the absence of probity, good conduct, or an act
that was mala fide, harsh burdensome and wrong or for a collateral purpose. Going further, it
observed that although the ultimate objective of such an action may be in the interest of the
company, the immediate purpose would result in an advantage for some shareholders vis-à-
vis others.

These cases make it clear that just one act may not be sufficient to meet the test of
oppression. In general, several/ continuous acts on the part of majority shareholders,
continuing up to the date of the petition, would establish that the affairs of the company were
being conducted in an oppressive manner. However, this is not a rule of law but only a rule of
prudence, which has been evolved by courts to prevent frivolous litigation so that a
dissatisfied group of shareholders do not obstruct the regular working of the company by
complaining of any trivial or one-off act of oppression. That said, even one single and
egregious act of oppression may nevertheless qualify – particularly if the effects are of a
continuing nature, and the members concerned are deprived entirely of any important
right(s)/ privilege(s). For instance, the single act of issuing additional shares at a meeting
without complying with legal requirements and made to a single member without a
simultaneous offer to others on a pro rata basis – was considered to be an act of oppression.

Using the same example, illegality of the oppressive act complained of, while it may be more
extreme, is not a sine qua non for being entitled to protection. The remedy can be invoked
even where the act is lawful For instance, an allotment of shares, where such allotment
reduced the petitioners to frail minority, would be treated as being oppressive – despite such
conduct being perfectly legal. Similarly, a rights issue made for the sole purpose of diluting
minority shareholding, or a preferential allotment to one section of the shareholders at a steep
discount etc., are examples of conduct that are legally kosher, but could nevertheless be
interdicted on the grounds of being oppressive. However, where the allotment or issuance of
shares was bona fide and in the interest of the company, it will not amount to oppression even
if it incidentally leads to majority shareholders losing control over the company, or becoming
a minority

Some instances of oppression include breach of shareholders’ agreement on terms relating to

the management of the company, such as, failure to vote in favour of the appointment of
managing director, contrary to the agreement.[19]

Mismanagement:

The term ‘mismanagement’ generally refers to gross mismanagement of a company’s affairs

and acts that are prejudicial to its interest. The 2013 Act extended the scope to also include a
change that is prejudicial to the shareholders or any class thereof. It may include (a) diversion
of public money for unknown/ unwanted purposes, affecting grossly the financial state of the
company[21], (b) gross negligence in managing the affairs, and (c) inaction.

An act of mismanagement may be alleged if a material change takes place in the management
or control of the company, either by alteration of the board of directors, manager and
ownership of the company’s shares or alteration to the company’s membership or in any
other manner whatsoever. This change is then the reason there is actual mismanagement in
the company’s affairs or it is likely that the affairs of the company will be conducted in a
manner prejudicial to public interest, or in a manner prejudicial to the interests of the
company or its shareholders or any class thereof.

Relief will only be granted if it can be proved that such change will lead to the affairs of the
company being conducted in a manner prejudicial to public interest or interests of the
company.
Some instances of mismanagement include sale of the assets of the company at a low price
without compliance with law, resulting in loss of the substratum or business of the
company. However, mere unwise or loss making business decisions, etc., cannot in and of
themselves, amount to mismanagement.

Prejudicial Acts:

Newly introduced in the 2013 Act, members also have recourse against affairs of a company
being conducted in a manner prejudicial to their interest.

The term ‘prejudicial to the interest of its members or any class of members’ being a novel
concept has not yet been interpreted by Indian Courts in the corporate context. Black’s Law
Dictionary defines the term “prejudice” as “tending to harm, injure or impair; damaging or
hurtful” and “prejudicial” as “unfairly disadvantageous; inequitably detrimental”. A
prejudicial act refers to an act that adversely affects the interests of petitioning shareholders.
For instance, the single act of issuing additional shares for the sole purpose of altering the
shareholding pattern in certain shareholders’ favour and subsequent changes to the board of
directors, was held to prejudicially affect the interests of the petitioning shareholders by the
Andhra Pradesh High Court in the case of R.N. Jalan v Deccan Enterprises Pvt. Ltd.. In this
case, noting that the company was profitable (and so it would be inappropriate to order it to
be wound up), the Court appointed an interim administrator/ special officer to take charge
and conduct the affairs of the company in supersession of the Board of Directors, in order to
remedy the prejudice caused.

Just and equitable grounds for winding up a company:

To be entitled to relief for acts of oppression, mismanagement and/ or other prejudicial acts,
the applicants are required to establish that it would be just and equitable to wind up the
company concerned as a result of such acts, but that the passing of such order will cause
unfair prejudice to them.

Loss of substratum of the company’s business, functional deadlock, complete loss of

confidence in the conduct and management of the company’s affairs, (not a mere lack of
confidence between majority and minority shareholders) are regarded as grounds for winding
up on just and equitable grounds.

In Tata Consultancy Services Ltd. v. Cyrus Investments (P) Ltd.,[Mr. Cyrus Mistry was
removed from the position of Executive Chairman of Tata Sons Limited, and also removed
from directorship in various companies of the Tata Group, by resolutions passed at various
board and shareholder meetings. Considering the removal and the manner thereof as being
oppressive to minority shareholders, viz. Cyrus Investments Pvt. Ltd. and Sterling Investment
Corporation Pvt. Ltd. (shareholders of Tata Group of Companies and in which Mr. Mistry
had a controlling stake), this minority group filed a complaint alleging prejudice, oppression
and mismanagement before the NCLT. The NCLT ruled against the minority group. The
NCLAT ruled in favour of the minority group and held that the removal of Mr. Mistry was
oppressive/ prejudicial, and hence it ordered the reinstatement of Mr. Mistry as the Executive
Chairman of Tata Sons and as the Director of the various companies. Tata Sons, challenged
the NCLAT order before the Supreme Court, which finally held that the act of Mr. Mistry’s
removal as Executive Chairman of Tata Sons was not in fact, prejudicial and/ or oppressive to
the interests of the minority group. Further, it noted that in the factual matrix of the case, the
requisite standard to justify the winding up of the company was not met, ruling that the “just
and equitable clause” is triggered only in certain situations, for instance: (a) where there was
a functional deadlock – the inability of members to co-operate paralyses the company from
functioning and (b) where there is a justifiable lack of confidence on the conduct of the
directors. A mere lack of confidence of minority shareholders in relation to the majority in
management would not be sufficient. Further and specifically in the context that the majority
shareholding of Tata Sons (Private) Limited was held by philanthropic Trusts and not
individuals or corporate entities, the NCLAT’s decision that it was just and equitable to wind
up Tata Sons was flawed as it would only result in those charitable Trusts starving to death.

Numerical threshold:

The minimum numerical threshold for maintainability of an action for oppression/

mismanagement/ prejudicial acts before the NCLT, is either, (a) members holding at least
10% of the “issued share capital of the company”, or 1/10 th of its total number of members,
whichever is less; or, where the company does not have a share capital, not less than 1/5 th of
the total number of its members. This is to protect the majority from vexatious suits by
miniscule minorities.

The numerical threshold can however be waived if required, and was waived by the NCLAT
in the Tata Sons case, where the NCLAT ruled that the minority group could maintain the
action, notwithstanding that the number of members fell short of the 10% threshold. The
NCLAT held that if exceptional circumstances were made out (which it ruled, were made out
in that case), it could grant a ‘waiver’, and proceed with the application. For instance, if, (a)
the applicant(s) have substantial interest in the company, (b) there is fragmented shareholding
of cluster of multiple minorities, and (c) the act of oppression, for which waiver is sought, has
led to dilution of members below the 10% requirement, the waiver will be granted, despite
the applicant falling short of the 10% threshold.

Accordingly, while maintaining this threshold to discourage the filing of frivolous

proceedings, in the interest of justice, wherever required, the NCLT is empowered to
nevertheless entertain a proceeding through a smaller but prejudicially affected minority
shareholder group.

Grant of relief:

The NCLT/ NCLAT has been given wide-ranging power to grant relief to protect minority
interests, by passing orders to “bring an end to the matters complained of”, and to that end,
the NCLT is empowered, for the benefit of minority shareholders/ the company, to interfere
with the management of the company, including by supplanting its management and
regulating its affairs. On a temporary, or even on a permanent basis, the NCLT may appoint
administrator(s), or a special officer or committee of advisors to take charge of the company,[
or be appointed to the board of directors. However, as explained in the Cyrus Mistry case, the
Supreme Court clarified that this sweeping power is not absolute or unlimited and certainly
does not include power to order the reinstatement of a director or an officer. On this basis, the
Court set aside the NCLAT’s order reinstating Mr. Mistry as the Executive Chairman of Tata
Sons, holding that it had no foundation in pleadings and without any basis in law.

Conclusion:

To conclude, the rights of minority shareholders in Indian companies have been protected
under the 2013 Act, by the bouquet of reliefs that can be granted by the NCLT to redress
oppression, mismanagement and prejudice claims and redress minority interests. While the
conditional aspect of establishing that there is just and equitable case for winding up of the
company concerned, may seem difficult to meet, it balances the interests of the minority with
the majority and the company’s interests, so that true justice may be done.