Minority Shareholders

Introduction

Ownership of shares grants equitable interest in the company to shareholders however, they do not right to manage the affairs of the company directly but they do so indirectly by way of electing directors. The categories of shareholders include majority shareholders, small shareholders, who hold shares of value of shares held is less than INR 20,000.00 and minority shareholders. Out of these, Minority Shareholders are those equity holders who do not have voting control. However, law protects the rights of a Minority Shareholders substantially if they are subject to oppression and mismanagement. They can take recourse to legal remedy under section 235 (Investigation of the affairs of the Company) and section 237 (Investigation of the affairs of the Company in other cases) and 397 (Application to Company Law Board in respect of Oppression) and 398 (Application to Company Law Board in respect of Mismanagement) read with section 399 (which provides right to apply under section 397 and 398) where they can approach the Company Law Board, if companies take recourse to oppression and mismanagement. Chapter XVI of the New Companies Act, 2013 deals with the similar provisions. The shareholders activism is key to good corporate governance and therefore the article reflects upon minority shareholders in wake of recent news of their role in Maruti Suzuki voting over a proposal to understand the Corporate law in India on subject.

Generally speaking Shareholders have following rights:

(a) Right to receive income in the form of dividends, issue of shares or bonus  shares;

(b) Right to vote in meeting/attend meetings either personally or through  proxies;

(c) Right to demand a poll for voting on any resolution, which can be  detrimental to their interest;

(d) Right to receive statutory reports of the company;

(e) Right to apply for investigation for affairs of the company

There can be disputes between majority group and minority shareholders in any company and these disputes come very frequently in closely held companies or Private Limited Companies. These disputes among shareholders normally come to Civil Court or High Court, and more frequently to the Company Law Board under section 397/398 of Companies Act, 1956.  Various petitions including Needle Industries case[1], S.P. Jain vs. Kalinga Tubes Ltd.[2] throw light on the issue as important precedents.

A. Illustrations of Shareholder’s Activism: Maruti Suzuki

Maruti Suzuki India recently received approval from its minority shareholders to let its Japanese parent Suzuki to invest and own upcoming plant in Gujarat, where a total investment of Rs 18,500 crore has been envisaged in the long term. The resolution has been passed quite comfortably. Significantly, out of the total minority shareholders who hold around 13 crore shares in the company, 50 per cent of them abstained from the voting, including LIC which has 6 per cent stake in the company. With the approval in place, the company will move ahead to transfer assets at the Gujarat plant, where it has already invested Rs 350 crore, to Suzukis wholly owned arm Suzuki Motor Gujarat Pvt Ltd.

Recent opposition put forth by the minority shareholders of Maruti Suzuki India Ltd to the firm’s plan to become a distributor of cars manufactured directly by the Japanese joint venture partner Suzuki Motor Corp. in India. The question institutional shareholders asked was that when the Indian firm has the expertise and cash to build and operate a proposed factory in Gujarat, and the marketing network to sell the cars, why does Suzuki need to throw its hat in the ring in India? At the behest of aggrieved shareholders, the company eventually decided to put the matter to vote, needing majority approval from the minority shareholders.

With minority shareholders getting a greater say in the important decisions taken by companies, it is essential for business leaders to ensure cordial relations with them. Maruti Suzuki India Limited had sought approval of the minority shareholders, pursuant to the Companies Act, 2013 and the Listing Regulations, for a related party transaction with Suzuki Motor Gujarat Private Limited for entering into:

a) A contract manufacturing agreement for the production and sale of vehicles; and
b) Lease deed for leasing land for purposes of implementing the contract manufacturing agreement.

The voting by the shareholders began on 16th November, 2015 and ended on 15th December, 2015.

The result of the voting as per the report issued by the Scrutinizer is as follows:

*One ballot, which had both positive and negative votes, is counted in both categories. The ordinary resolution has been passed with requisite majority.

B. Provisions relating to Minority Shareholders under the Old Companies Act

Rights of a shareholder, governed either by the Companies Act or by the Memorandum of Association or by the Indian Contract Act. The term ‘Minority shareholders’ is not defined under any law, however, by virtue of Section 395 (Power to acquire shares of dissenting shareholders) and Section 399 (Right to apply for Oppression and Mismanagement) of the Companies Act 1956 (“Old Act”), minority shareholders have been set out as ten percent (10%) of shares or minimum hundred (100) shareholders, whichever is less, in companies with share capital; and one-fifth (1/5) of the total number of its members, in case of companies without share capital. In general terms, minority shareholding can be understood to mean holding such amount of shares which does not confer control over the company or render the shareholder with having a non-controlling interest in a company.

The Corporate law in India is governed by the Old Act which provides for various provisions dealing with situations wherein rights of Minority Shareholders are affected and the same can be divided into two major heads, i.e.:

(i) Section 397 (Application to Company Law Board for relief in cases of oppression) and

(ii) Section 398 (Application to Company Law Board for relief in cases of mismanagement) of the Companies Act, 1956 (“Act”).

<p”>Oppression as per Section 397(1) the Old Act has been defined as ‘when affairs of the company are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members‘. It does not merely refers to opperession to the Shareholder but the affairs of the company to are carried in oppressive manners. Oppression means the affairs are carried in lack of probity and conduct is unfair while the term mismanagement has been defined under Section 398 (1) as ‘conducting the affairs of the company in a manner prejudicial to public interest or in a manner prejudicial to the interests of the company or there has been a material change in the management and control of the company, and by reason of such change it is likely that affairs of the company will be conducted in a manner prejudicial to public interest or interest of the company‘.

Right to apply to the Company Law Board in case of oppression and/or mismanagement is provided under Section 399 to the minority shareholders meeting the ten percent shareholding or hundred members or one-fifth members limit, as the case may be. However, the Central Government is also provided with the discretionary power to allow any number of shareholders and/or members to apply for relief under Section 397 and 398 in case the limit provided under Section 399 is not met.

The New Companies Act provides that provisions relating section 337 to 341 of the Old Companies Act would apply mutatis mutandis in reference to application made under section 241 or 245 of the New Act.

C. Judgments relating to Shareholder’s Activism

Shareholders activism can be traced back to 2010 when SEBI introduced guidelines for domestic mutual funds to disclose their voting policy as well as their voting actions. The Bombay high court directed Cadbury India Ltd to pay Rs.2,014.50 per share to buy back its stock, 50% more than its original offer of Rs.1,340 made in 2009 to its minority shareholders. In the last two years many more cases of shareholders activism have come to be filed in taking on promoters and managements in cases where their interest has been compromised.

In the Needle Industries (Supra) the concept of minority shareholders buying out the rights of majority shareholders was the issue. The duty of the court in assessing the issue of oppression and mis-management is to assess that the company does not suffer in tussle between the shareholders. Hence, while exercising its powers and directing exit of certain groups of shareholders, the interest of the company should prevail in order to function normally and profitably. In spite of the above judgment Majority rule is the hallmark of democracy.

In case of Maharashtra Power Development vs Dabhol Power Co. And Ors.[3] the following issue were considered whether event subsequent to the filing of oppression petition could be considered? The petition as originally filed in 2002, made grievance only in respect of a single act, viz., meeting of the directors held on June 4, 2002, and the decisions taken thereat. Since the act was a single act, it was submitted, the petition could not have been filed under Section 397 of the Act. The petition was subsequently amended and further actions, viz., the decisions taken at the general meeting on September 9, 2002, and further nomination of four directors were also challenged as oppressive acts.

The Court held that the matter can be looked at from another angle. While it is true that normally the amendment relates back to the date of the institution of the proceedings, in some cases it is possible to hold that the petition is deemed to have been instituted, at least as regards the grounds added by an amendment, on the date when the amendment was made. If so construed, the petition would be deemed to be instituted qua the amended grounds on the date on which the amendment was carried out and the CLB would be entitled to take into consideration the events up to the date of the amendment of the petition. This would avoid multiplicity of litigation, for if the CLB was not to take into consideration the events subsequent to the filing of the original petition and if subsequent events have happened which are oppressive then the petitioner could always file a second petition in respect of the subsequent events giving rise to multiple proceedings. The courts strive to avoid multiplicity of litigation. The Supreme Court in the case of B. Banerjee v. Smt. Anita Pan adopted this course of treating a proceeding to be instituted qua the amended grounds on the date of the amendment, to avoid multiplicity of litigation. So, if it is possible for the court to avoid multiplicity of proceedings, by holding that the proceedings (i.e., the petition under Section 397 on the amended grounds of oppression were instituted on the date on which the amendment was allowed. So construed, the court would be entitled to take into consideration the oppressive actions up to the date of the amendment and avoid multiplicity of litigation.

This judgment also analysed whether it is necessary that oppression must be of minority shareholders by majority shareholders? On principle also, there seems to be no support for the proposition that the petition under Section 397 of the Act can be filed only by minority shareholders who complain of oppression by the majority. Section 397 begins with the words: “Any members of the company who complain …” indicating no requirement that the members who complain must be minority shareholders. The qualification of the members who can apply under Section 397 and/or 398 of the Act is prescribed in Section 399 of the Act. Section 399 lays down the qualifications discussed aforesaid. Section 399 of the Act does not put a cap on the maximum number of members or the maximum voting power of the members. A restriction, which is not imposed by the Legislature upon the right of members to file a petition under Section 397 or 398 of the Act cannot be introduced artificially by judicial interpretation. If a new right is created or conferred by a statute and the remedy for enforcement of the right is also provided therein, then the remedy can be enforced in the manner provided in the statute and no artificial restriction on the enforcement of that right in that manner can be imposed by judicial interpretation unless such restriction can be found expressly or by necessary implication in the statute itself. In today’s commercial world, it is possible that even a minority shareholder can cause oppression of the majority.

Conclusions

Corporate governance cannot be synonymous with the role of dominant shareholders alone. But role of minority shareholders in its fullest needs to be yet realized as yet because Independent directors or auditors neither protect the minority shareholders nor their value is appreciated. Activism can be achieved by direct dialogue with management, Board, writing open letters or by way of shareholder’s proposals.  Electronic voting is one such measure which enables minority shareholders in far flung areas to have say in shareholder’s resolution (Section 108 of the New Companies Act), related party transactions are required to approved by Minority Shareholders (Section 188 of the New Companies Act).  Section 245 of the Companies Act, 2013 allows you to bring in class action suits against the company and auditors by Minority Shareholders. The new Companies Act allows any number of minority shareholders to file proceedings against the company under section 241 of the Act. It is interesting to note that what constitutes minority in this regard is left to the discretion of the tribunal. Earlier this decision was left to the central Government. So, the new law has brought in many changes and recent developments in Siemens, United Spirits and Tata Motors too have witnessed terrain of shareholders activism but the same has long way to go before bring ground level changes in corporate governance.

[1] 1981 AIR 1298

[2] 1965 AIR 1535

[3] AIR 2004 Bom 38

Reference table: http://www.marutisuzuki.com/pressrelease17dec15.aspx