Rights and benefits available to minority shareholders - A comparative study
JITENDRA KUMAR PANDA
CS
INTRODUCTION
1. In general, the majority of shareholders have the key power to control most of the important affairs of a company. They can dominate the minority shareholders by using their power of majority in any proceeding or meeting of the company and can take undue advantage of their power. The law has prescribed different provisions in which the approval or consent of majority shareholders is required. The meeting of a company may be sometimes organised so as to deprive the minority of an effective hearing. However, the position of the minority shareholders has been protected by the law under different situations. In some situations, the Court/Tribunal requires the consent of the minority shareholders or approval of minimum number of shareholders to take any proceedings or entertain any application. Hence, some safeguards have been provided to the minorities in order to protect their interests against the matters or affairs which are harmful and prejudicial to the conduct of the affairs of a company.
Both Companies Act, 1956 and the Companies Act, 2013 prescribe different provisions which protect the interest of the minority shareholder and provides rights and benefits to them. A comparative study of the rights and benefits provided to the minority shareholders under the provisions of the Companies Act, 1956 and the new Companies Act, 2013 has been carried out in this article.
2. OPPRESSION & MISMANAGEMENT
2.1 Under the Companies Act, 1956 (Section 399) - The old Act prescribes that not less than 100 members or 1/10th of total number of members, whichever is less or any member or members holding not less than 1/10th of issued share capital will have the right to make an application to the Company Law Board ("CLB") for relief, if there is oppression or mismanagement in the company. The CLB is empowered to order a number of remedial measures for protection of their interest.
2.2 Under the Companies Act, 2013 (Section 244) - The same provision has also been prescribed under the new Companies Act, 2013. However, under the new law, the application has to be filed with the National Company Law Tribunal ("NCLT").
Hence, the minority shareholders may file complaint if the affairs or management of the company is being conducted in a manner prejudicial to public interest or oppressive to any member(s) of the company.
3. PURCHASE OF MINORITY SHAREHOLDING
3.1 Under the Companies Act, 1956 - The concept of purchase of stakes held by minority shareholders did not exist in the provisions of the Companies Act, 1956.
3.2 Under the Companies Act, 2013 (Section 236) - This new concept with regard to the purchase of minority shareholdings has been introduced in the new Companies Act, 2013. It states that in the event of an amalgamation, conversion of securities or for any other reason, if an acquirer or a person acting in concert with such acquirer, holding ninety per cent (90%) or more of the issued share capital of a company or any person or group of persons becoming ninety per cent (90%) majority or holding ninety per cent (90%) of the issued share capital of a company, such acquirer or person or group of persons shall notify the company of the intention to buy the remaining equity shares.
The acquirer or person or group of persons shall offer the minority shareholders buying the equity shares held by them at a price determined on the basis of valuation by a registered valuer in accordance with the rules prescribed in this behalf. The minority shareholders of a company may offer to the majority shareholders to purchase their shares at a price determined in accordance with the rules prescribed in this behalf.
Further, as per the draft rules (Chapter XV-Compromise, Arrangement and Amalgamation) issued by the Ministry of Corporate Affairs ("MCA") with regard to the aforesaid pricing, the price for purchase of minority shareholders will be as per the following procedure-
| (1) | In case of a listed company: | |
| The offer price shall be determined in the manner as may be specified by the Securities and Exchange Board by making regulations in this behalf; and | ||
| (2) | In case of an unlisted company and a private company: |
The offer price shall be determined after taking into account the following factors:–
| (a) | the highest price paid by the acquirer, person or group of persons for acquisition during last twelve months; | |
| (b) | the fair price of shares of the company to be determined by the registered valuer after taking into account valuation parameters, including return on net worth, book value of shares, earning per share, price earning multiple vis-à-vis the industry's average, and such other parameters as are customary for valuation of shares of such companies. |
Hence, in the aforesaid situation the law provides an opportunity to the minority shareholders to sell their shares at a price to be determined in accordance with the prescribed rules.
4. RESOLUTIONS
4.1 Under the Companies Act, 1956 (Section 189) - A resolution shall be special resolution when the votes cast in favour of the resolution by members who, vote in person or through proxies are not less than three times the number of the votes, if any, cast against the resolution by members.
4.2 Under the Companies Act, 2013 (Section 114) - Nothing has been changed in the provision of resolution under the new Companies Act, 2013.
Hence, for matters requiring special resolution of the members, approval of at least 75% of the shareholders is required. Therefore, a minority shareholder with more than 25% voting rights would have the ability to block special resolutions and it may affect the decisions to be taken in any meeting of the company. The interest of the minorities has been effectively appreciated by the law.
5. PROPORTIONAL REPRESENTATION FOR THE APPOINTMENT OF DIRECTORS
5.1 Under the Companies Act, 1956 (Section 265) - The Articles of Association of a company may provide for the appointment of not less than 2/3rd of the total number of directors of a public company or a private company which is a subsidiary of public company, according to the principle of proportional representation, once in every 3 years.
5.2 Under the Companies Act, 2013 (Section 163) - The same provision has been prescribed under the new Company Act, 2013.
Hence, the Board of directors of a company may consist of directors nominated by the minority shareholders in accordance with the proportional representation, who will protect the interests of these shareholders.
6. RIGHTS OF MINORITY SHAREHOLDERS/DISSENTING SHAREHOLDERS DURING ANY SCHEME OR CONTRACT APPROVED BY MAJORITY
6.1 Under the Companies Act, 1956 (Section 395) - A transferee-company, which has acquired not less than nine-tenths in value of the shares of a transferor-company through a scheme or contract, may give notice to any dissenting shareholder that it desires to acquire his shares. When such a notice is given, the transferee-company shall be entitled to and bound to acquire those shares on the terms on which, under the scheme or contract, the shares of the approving shareholders are to be transferred to the transferee-company.
6.2 Under the Companies Act, 2013 (Section 235) - The old Act prescribed that besides holding not less than 90% in value of the shares whose transfer is involved, it should not be less than 75% in number of the holders of those shares. Section 235 of 2013 Act omits requirement of 75% in number. The new Act also provides for time-bound disbursal of purchase consideration received by the transferor-company to its shareholders, i.e., within 60 days from date of receipt by the transferor-company. This was not in the case of 1956 Act.
Hence, in the above case minority/dissenting shareholders have been provided with an opportunity to approach the Court or NCLT, as the case may be, by making an application.
7. DEMAND FOR POLL
7.1 Under the Companies Act, 1956 (Section 179) - The old Act states that before or on declaration of the result of the voting on any resolution on a show of hands, a poll may be ordered to be taken by the Chairman of the meeting of his own motion, and shall be ordered to be taken by him on a demand made in that behalf by :
In case of public company-members holding not less than 1/10th of the total voting power or shares on which aggregate sum of not less than Rs. 50,000 has been paid- up and,
In case of private company-one member having the right to vote on the resolution, if not more than seven such members are personally present, and by two such members, if more than seven such members are personally present.
Hence, the demand for poll can be made by shareholder(s) holding 1/10th of the total voting power or shares of paid-up value of not less than Rs. 50,000. The minority shareholders may make demand for poll in any matter required to be approved in a meeting of the company. So, the minority's interests have been appreciated in the aforesaid situation.
7.2 Under the Companies Act, 2013 (Section 109) - The same provision has been stated in the new 2013 Act. However, the person entitled to demand for poll is different from the old Act.
In case of a company having share capital-by members present in person or by proxy, and holding not less than 1/10th of the total voting power or shares on which aggregate sum of not less than Rs. 5,00,000 has been paid-up, and
In case of any other company by any member or member or members present in person or by proxy, and having not less than one-tenth of the total voting power.
Hence, the demand for poll can be made by shareholder(s) holding 1/10th of the total voting power or shares of paid-up value of not less than Rs. 5,00,000.
8. APPOINTMENT OF THE SMALL SHAREHOLDERS' DIRECTOR
8.1 Under the Companies Act, 1956 [Section 252 and Rule 4 of the Companies (Appointment of the Small Shareholders' Director) Rules, 2001] - The old Act prescribes that a company may act suo motu to elect a small shareholders' director from amongst small shareholders or upon the notice of small shareholders, who are not less than 1/10th of total small shareholders and have proposed name of a person who shall be a small shareholder of the company.
In the aforesaid context, small shareholder means a shareholder holding shares of nominal value of Rs. 20,000 or less in a public company.
The above said provision is applicable only to public companies having paid-up capital of five crore rupees or more and one thousand or more small shareholders.
8.2 Under the Companies Act, 2013 (Section 151) - The new Act prescribes that a listed company may have one director elected by small shareholders in such manner and with such terms and conditions as may be prescribed. In the aforesaid context, small shareholder means a shareholder holding shares of nominal value of not more than Rs. 20,000 or such other sum as may be prescribed.
The MCA has issued in the first phase of the draft Rules (Companies Act, 2013) with regard to the small shareholders (Chapter XI Appointment and Qualifications of Directors). It states that for the purpose of section 151, a listed company may suo motu or upon the notice of not less than five hundred or one-tenth of the total number of small shareholders, whichever is lower, elect a small shareholders' director from amongst the small shareholders and such small shareholder 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.
Hence, the small shareholders may nominate a director in the Board of directors of a listed company to represent their interest. Therefore, this provision appreciates the minority's interests in the company.
9. CLASS ACTION
9.1 Under the Companies Act, 1956 - This provision did not exist in the old Act.
9.2 Under the Companies Act, 2013 (Section 245) - This is a new provision introduced by the new Companies Act, 2013. The class action suit may be filed by the members or small investors against the directors or auditors of a company. It states that the class-action may be taken by member(s) or depositor(s) by filing an application before the NCLT against the directors or auditors, if they are of the opinion that the management or conduct of the affairs of the company is being conducted in a manner prejudicial to the interests of the company or members or depositors.
The provision of the aforesaid section states that the requisite number of members or depositors for filing this class-action application is:
not less than one hundred members or depositors or not less than such percentage of the total numbers or depositors as may be prescribed, whichever is less, or any member or members holding not less than such percentage of the issued capital of the company as may be prescribed or any depositor or depositors to whom the company owes such percentage of total depositors of the company as may be prescribed.
Further, the MCA has issued in the first phase of draft Rules (Companies Act, 2013) with regards to the class action (Chapter XVI- Prevention of Oppression and Mismanagement) by members or depositors of a company. It states the following requisite members and/or depositors for filing the application.
| (a) | Members - For the purpose of section 245, the number of members that may file an application for class action shall be, in the case of a company having share capital-not less than one hundred members of the company or not less than ten per cent of the total number of its members, whichever is less, or any member or members singly or jointly holding not less than ten per cent of the issued share capital of the company; | |
| (b) | Depositors - For the purposes of section 245, the number of depositors that may file an application for class action shall be | |
| not less than one hundred depositors or not less than ten per cent of the total number of depositors, whichever is less or any depositor or depositors singly or jointly holding not less than ten per cent of the total value of outstanding deposits of the company. |
Enabling such class-action should help in improving the quality of corporate governance and protect the interest of the minority shareholders.
10. CONCLUSION
The above discussion shows that the new Companies Act, 2013 contains extra beneficial provisions for the safeguard of the minority shareholders like purchase of minority shareholdings, class-action, etc. The intention of the Legislature is to provide proper rights and benefits to the minorities in such a way that it cannot be misused by the majority shareholders and the business of the company can be conducted in an effective and efficient manner. In spite of large holdings by the majority shareholders in a company, the interest of the minorities has been protected by the statute in different ways.
Regards
Prarthana Jalan
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