Majority Rule and Minority Protection and it’s Exceptions

SHAREHOLDER’S DEMOCRACY: The concept of shareholders democracy in the present-day corporate world denotes the shareholders supremacy in the governance of the business and affairs of corporate sector either directly or through their elected representatives. Democracy means the rule of people, by people and for people.

Few businesses which are required to be transacted by shareholders:

• Alteration of Memorandum of Association and Articles of
• Association.
• Further issue of share capital.
• To transfer some portions of uncalled capital to reserve capital to be called up only in the event of winding up of the company.
• To reduce the share capital of the company.
• To shift the registered office of the company outside the local limits of any city, town or village where the registered office is situated.
• To decide a place other than the registered office of the company where the statutory books, required to be maintained.
• Payment of interest on paid-up amount of share capital for defraying the expenses on construction when plant cannot be commissioned for a longer period of time.

What Is Majority Rule

As a company is a juristic person and has a separate legal entity different from its members. Thus, it can sue and be sued in its own name. And since it is a legal person decision of the company are taken by its shareholders and board of directors through voting system. Hence the decision which gets the majority of votes are binding on everyone. It can be a special majority or special majority depending upon the requirements of the law. So once it is passed by the majority manners generally court do not interfere it’s decision as long as director are working within the power of Article of Association and Memorandum of Association. This concept is known as majority rule.

1.WHO ARE MAJORITY AND MINORITY SHAREHOLDERS: THEIR RIGHTS

Shareholders are part of a company. A “Shareholder’ denotes a person who holds or owns the shares. In most of the cases, shareholders are also the members of the company. Usually an unlimited company or a company limited by guarantee has no shareholders. But the limited company has its own shareholders. The Memorandum of Agreement is enabling the opportunity to be the shareholders of a company. A more broad definition of Shareholder is:

One who owns shares of stock or mutual fund in a corporation along with the ownership come a right to declared dividends and the right to vote on certain company matters, including the board of directors. They are also called Stockholders.A limited company has two types of Shareholders.

• Majority Shareholder
• Minority Shareholder

Majority Share holders: A single shareholders who owns & controls more than half of a corporation’s outstanding shares, or sometimes, a small group of shareholders who own & collectively control more than half of a company’s outstanding shares. Or we can say, when a person or company has owns the majority of the shares (50 % and more) in a limited company, has the outright control of the company’s operations, especially the election of its board of directors. Usually they are the founder of the company.The majority shareholder is most commonly the company’s parent but may also be an individual or a group of connected shareholders. This is more common with smaller companies and in emerging market.

Minority shareholders: shareholder who owns minimum percentages shares in a company that is controlled by majority shareholder. They only have certain basic rights.Based on the class of stock shareholders are granted extra privileges. It also includes the rights of the voting for example- election to the board of directors, the rights to buy new shares issued by the company, the right to a company’s assets during a liquidation of the company, the rights to share in distribution of the company’s returns.

Leading Case Law :

RULE IN FOSS v. HARBOTTLE

Facts of the Case – A company named “Victoria Park Company” had been established in September 1835. Two minority shareholders named Richard Foss and Edward Starkie Turton instituted a legal action against the promoters and directors of the company.

The claimants purported that the company has misapplied its property and assets along with several mortgages were given improperly and so the property of the company got wasted. So, the claimants prayed that the defendants should be held guilty and accountable to the company.

Judgement

Court dismissed the claim and held that when a company is wronged by its directors it is only the company that has standing to sue. In effect the court established two rules.

• Firstly, the “proper plaintiff rule is that a wrong done to the company may be vindicated by the company alone.
• Secondly, the “majority rule principle” states that if the alleged wrong can be confirmed or ratified by a simple majority of members in a general meeting, then the court will not interfere (legal term).

The court’s rationale was that Victoria Park Company is an incorporated body, and the conduct with which the defendants are charged in this suit is an injury not to the plaintiffs exclusively; It is an injury to the whole corporation by individuals whom the corporation entrusted with powers to be exercised only for the good of the corporation

In Rajahmundry Electric Supply Co. v. Nageshwara Rao AIR 1956 SC 213,

The Supreme Court observed that: “The courts will not, in general, intervene at the instance of shareholders in matters of internal administration, and will not interfere with the management of the company by its directors so long as they are acting within the powers conferred on them under articles of the company.

Justification and Advantages of the Rule in Foss v. Harbottle:

The justification for the rule laid down in Foss v. Harbottle is that the will of the majority prevails. On becoming a member of a company, a shareholder agrees to submit to the will of the majority. Moreover, a company is a person at law; the action is vested in it and cannot be brought by a single shareholder. Where there is a corporate body capable of filing a suit for itself to recover property either from its directors or officers or from any other person then that corporate body is the proper plaintiff and the only proper plaintiff.

Gray v. Lewis, (1873) 8 Ch. Appl. 1035].

The main advantages that flow from the Rule in Foss v. Harbottle are of a purely practical nature and are as follows:

1. Recognition of the separate legal personality of company: If a company has suffered some injury, and not the individual members, it is the company itself that should seek to redress.
2. Need to preserve right of majority to decide: The principle in Foss v. Harbottle preserves the right of majority to decide how the affairs of the company shall be conducted. It is fair that the wishes of the majority should prevail.
3. Multiplicity of futile suits avoided: Clearly, if every individual member were permitted to sue anyone who had injured the company through a breach of duty , there could be as many suits as there are shareholders. Legal proceedings would never cease , and there would be enormous wastage of time and money.
4. Litigation at suit of a minority futile if majority does not wish it: If the irregularity complained of is one which can be subsequently ratified by the majority it is futile to have litigation about it except with the consent of the majority in a general meeting.

Application of Foss v. Harbottle Rule in Indian context:

The Delhi High Court in ICICI v. Parasrampuria Synthetic Ltd. SSL, July 5, 1998

has held that an automatic application of Foss v. Harbottle Rule to the Indian corporate realities would be improper. Here the Indian corporate sector does not involve a large number of small individual investors but predominantly financial institutions funding atleast 80% of the finance.

Exceptions to the Rule in Foss v. Harbottle -Protection of Minority Rights and shareholders remedies:

The rule in Foss v. Harbottle is not absolute but is subject to certain exceptions. In other words, the rule of supremacy of the majority is subject to certain exceptions and thus, minority shareholders are not left helpless, but they are protected by the common law : Few exception of this rule are as :

1. Actions by Shareholders in Common Law: The cases in which the majority rule does not prevail are commonly known as exceptions to the rule in Foss. Harbottle and are available to the minority. In all these cases an individual member may sue for declaration that the resolution complained of is void, or for an injunction to restrain the company from passing it. The said rule will not apply in the following cases;
   1. Ultra Vires Acts: Where the directors representing the majority of shareholders perform an illegal or ultra vires act for the company, an individual shareholder has right to bring an action.
   1. Fraud on Minority: Where an act done by the majority amounts to a fraud on the minority; an action can be brought by anindividual shareholder. This principle was laid down as an exception to the rule in Foss v. Harbottle in a number of cases.

In Menier v. Hooper’s Telegraph Works, (1874) L.R. 9 Ch. App. 350, it was observed that it would be a shocking thing if the majority of shareholders are allowed to put something into their pockets at the expenses of the minority. In this case, the majority of members of company ‘A’ were also members of company ‘B’, and at a meeting of company ‘A’ they passed a resolution to compromise an action against company ‘B’, in a manner alleged to be favourable to company ‘B’, but un favourable to company ‘A’. Held, the minority shareholders of company ‘A’ could bring an action to have the compromise set aside.

• Wrongdoers in Control: If the wrongdoers are in control of the company, the minority shareholders’ representative action for fraud on the minority will be entertained by the court

  LEADING CASE LAW: [Cf. Birch v. Sullivan, (1957) 1 W.L.R. 1274]. The reason for it is that if the minority shareholders are denied the right of action, their grievances in such case would never reach the court, for the wrongdoers themselves, being in control, will never allow the company to sue

• Resolution requiring Special Majority but is passed by a simple majority: A shareholder can sue if an act requires a special majority but is passed by a simple majority. Simple or rigid, formalities are to be observed if the majority wants to give validity to an act which purports to impede the interest of minority. 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.
  • Personal Actions: Individual membership rights cannot be invaded by the majority of shareholders. He is entitled to all the rights and privileges appertaining to his status as a member. An individual shareholder can insist on the strict compliance with the legal rules, statutory provisions. Provisions in the memorandum and the articles are mandatory in nature and cannot be waived by a bare majority of shareholders (Salmon v. Ouin and Aztens, (1909) )

In Nagappa Chettiar v. Madras Race Club, (1949), 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.

• Breach of Duty: The minority shareholder may bring an action against the company, where although there is no fraud, thereis a breach of duty by directors and majority shareholders to the detriment of the company.

CONCLUSION

To conclude, as we have seen throughout the article , before the case of Ross v Harbottle, the stand of minority shareholders was minimal to nonexistent leading to miscarriage of justice. The common law principle of Majority Rule and Minority protection was insufficient to provide proper equity to all and as such new laws with regard to such, such as the provisions in Companies Act 1956 and 2013 had to be introduced.

And, after comparing both CA 1956 and 2013, it can be concluded that the proposed changes are very much useful to the minorities as it give a clear picture for the same. Though minority shareholder views were not being considered due to suppression of the majority rule in the company in the previous Companies Act, 1956. But if we see today’s scenario in the companies act 2013, then various steps have been taken to protect the minority rights of the shareholder in the company irrespective of the fact whether there is any oppression or mismanagement or any other affected rights of the minority shareholders. However, it not only requires proper implementation upon addressing the present lacunas, but also requires instigating confidence in the minority shareholders. Nevertheless, the effort in the new Act to empower the minority shareholders is commendable.