Minority and Majority Shareholders

Introduction

A majority shareholder is someone that holds more than 50% of shares in the company. As a
majority shareholder, a person or operating entity has a significant amount of influence over
the company, especially if their shares are voting shares. This presents an opportunity for the
majority Shareholder to take part in significant decisions of the company. A minority holder,
on the other hand, is someone who holds less than 50% shares in the company. A minority
holder will not enjoy all the privileges enjoyed by a majority holder. Minority shareholders
have limited rights to benefit from the operations of a company, including receiving
dividends and being able to sell the company’s stock for a profit. The minority holder may
not have voting rights and does not have control over the company. For example, to make
corporate decisions, appointing directors, etc. In this way, they can direct the company in the
way they desire since they can do so through voting power.

In a corporate democracy, the rule of majority prevails. Hence, in most jurisdictions,

shareholders’ resolutions may be passed by a simple majority, or, where the decision may be
critical to the operations or the future of a company, by a super/ special majority of at least,
three-fourths. In this way, the decision of the majority binds all members/ shareholders.

This is all well and good when interests of the company, majority, and minority shareholders,
are aligned. But a boardroom and shareholder standoff can occur, when a strong promoter or
management group considers (or is alleged to consider) only its own advantage, to the
detriment of the company and/or the minority shareholder(s). What redress is the minority
entitled to from majority oppression in such a scenario? What is the redress when the
majority in management, mismanage the company – harming both the company and its
minority shareholders?

Shareholder protection was one of the key drivers of the Companies Act, 2013, which
finessed measures to ensure that the supremacy of the majority is not abused through
oppression of the minority and mismanagement of the company. These measures ensure that
the balance of power remains intact and minority interests are protected.

Historical Background:

The first Companies Act of 1913 also gave protection to minority shareholders against acts of
oppression and mismanagement by the majority, mandating that if found just and equitable to
do so, the company concerned could be wound up. The redress was really using a cannon to
kill a mosquito, as it destroyed the company itself even if it was otherwise solvent; albeit
putting an end to the oppression/ mismanagement. Such a dissolution also harmed minority
shareholders, whom the remedy was meant to protect.

The Indian Companies (Amendment) Act, 1951, however, provided an alternative remedy by
empowering courts, if satisfied that a winding up order would not do justice, to “make such
order in relation thereto as it thinks fit” with a view to bring an end to the oppression of the
minority.

The subsequent Companies Act, 1956, (“1956 Act”), then bifurcated oppression and
mismanagement remedies into separate sections, and gave extensive powers to the erstwhile
Company Law Board (“CLB”) to grant wide ranging reliefs to protect minority shareholders
and provide them redress.

India’s corporate law regime was virtually overhauled by the Companies Act, 2013
(“2013 Act”), which, inter alia, once again combined the provisions relating to oppression
and mismanagement, as also the power of the Central Government to apply for redressal in
public interest, retaining the test for it being otherwise just and equitable to wind up the
company concerned.

The 2013 Act also consolidated all corporate jurisdiction into one forum with dissolution of
CLB and constitution of the National Company Law Tribunal (“NCLT”) and National
Company Law Appellate Tribunal (“NCLAT”). Established in order to centralise, streamline
and aid speedy disposal of corporate matters, the NCLT/ NCLAT have exclusive jurisdiction
in relation thereto. Jurisdiction of civil courts are thus barred, as is arbitration thereof, as a
consequence rendering issues relating to oppression, mismanagement and unfair prejudice
claims being not arbitrable in India (although it is arbitrable in other jurisdictions such as
Singapore, England and Wales).

Shareholder Agreement

Put simply, a Shareholder Agreement is a legally binding contract that defines the relationship
between the shareholders and the company. So basically, the rights and the obligations of
shareholders are given in the said Shareholder Agreement and are protected by them. The
Shareholder Agreement also protects the existing shareholder from situations when the
company’s management changes, or/and when the company is sold off to another and the
same shareholders remain, their rights are protected.

After learning that there are two types of shareholders- majority and minority, we found that
the minority holder is in a vulnerable position. Letting the majority shareholder dictate the
decisions of the company without realizing that their action may not sync with the desire of
the minority shareholders can lead to disputes. A Shareholder Agreement can be used as an
instrument to protect the minority as well as the majority shareholders alike.

Shareholder Agreement Protect the Minority Shareholders

The presence of the Shareholder Agreement helps the minority Shareholders to influence the
function of a company. One can argue that the presence of Article of Association will protect
the Minority Shareholders too but since it can be easily amended by the Majority
Shareholders, there is no guarantee that they will not be abused.

The Companies Act 2013(to be known as the Act) has made efforts to safeguard the rights of
the minority shareholders. Let us mention in brief these rights that are mentioned in the Act to
protect the rights of the Minority Shareholders below:

1. Section 151 of the Act reserves the right to appoint Minority Shareholders Directors:
A Minority Shareholder Director is an independent director, and an individual elected
by the Minority Shareholders representing them. He/She will be on the Board of their
listed company. He will hold office for a term of three years and cannot be re-
appointed.
2. Section 241 and 242 of the Act reserve the right to apply to NCLT for oppression and
mismanagement: Oppression and mismanagement may come from the Board,
promoters, or the management team. Whenever Minority Shareholders face any
problems of being oppressed or/and mismanagement they can approach the National
Company Law Tribunal for expedient action.
3. Section 235 and 236 of the Act reserve the right to reconstruction and amalgamation
of companies: There is a fear amongst the Minority Shareholders that during the
process of amalgamation or reconstruction of companies, the interest of Minority
Shareholders may not be taken into consideration. However, the addition of these
provisions has helped to safeguard and assure the Minority Shareholders that they are
in safe hands.
 4. Section 108 of the Act mandates certain companies to offer e-voting facilities to
shareholders to vote on shareholder meetings: We are familiar with the concept of
virtual/online work and online shopping, etc. This section provides a similar notion
for Minority Shareholders to attend the meetings and exercise their voting rights
without being physically present in meetings. So, even if they cannot be present in
meetings, they can still access their voting rights.
5. Section 188 of the Act talks about accepting mandates from the majority only which
talks about related party transactions, mandates companies to undertake such
transactions only after receiving approval from the majority of non-interested parties.
6. Right to file a Class Action Suit: A class action suit is a suit where one person or
number of plaintiffs come together and file a suit against another party or person.
They will represent the entire interested group. In this case, the Companies Act,
2013 allows a group of Minority Shareholders (can include Majority Shareholders
too) combining with the lenders to approach the National Company Law Tribunal.
The suit may be against the operations of the company, or the management, or the
board.
7. Adoption of Fair Mechanism: Shares need to be evaluated accordingly. To avoid
unfair valuation, a fair mechanism needs to be adopted. The Act of 2013 provides for
an independent Valuation Mechanism to protect the interest of the Minority
Shareholders. The Minority Shareholders can approach the NCLT should there be any
unfair means.

These provisions attach power to the Minority shareholders and protect them from being
abused. The Shareholder Agreement can add all these provisions. If at any point in time, the
Majority of Shareholders abuses them, they can use the said Shareholder Agreement so that
they can protect themselves.

Shareholder Agreement Protect the Majority Shareholder

In any event, we are well familiar with the concept of majority rules. Whether in a political
election or any class of election or agreement. We are also aware that, to some extent, the
majority experiences supremacy over the minority. Then why does the majority shareholder
need protection in the Shareholder Agreement? After familiarising ourselves with the
minority rights and obligations, we are conscious that they are protected not only by the
Shareholder Agreements but also the provisions mentioned in the Companies Act, 2013. With
this, it becomes difficult for the Majority Shareholder to tell or stop the minority shareholder
from doing certain things. There are situations when decisions taken by Majority
Shareholders are in the interest of the company, but the Minority Shareholders may not be on
board with it. In this case, the majority Shareholders can add a provision that drags the
minority shareholders to cooperate with them in the best interest of the company.

There may also be a situation when the minority shareholders will want to sell their shares,
however, the interested party, maybe a party that the Majority Shareholder may not want to
get involved with, such a situation like this case, the majority shareholders can stop the
minority shareholders from selling their share to the forbidden party.

Principle of Non-Interference: Foss vs Harbottle Case

The Foss vs Harbottle case is a significant English precedent in company law. According to
the rule established in this case, if the company suffers losses due to its members’ or
outsiders’ negligent or fraudulent actions, legal action can be taken to address those losses.
The company or a derivative action can initiate such action.

This rule gave rise to the principles of majority and minority shareholders’ rights. In matters
of company management, decisions are made through resolutions passed by a simple
majority or a three-fourth majority of the company’s members. The court generally does not
interfere in the company’s internal management and affairs, as most members decide them.
Consequently, the company becomes the appropriate plaintiff to institute a lawsuit or legal
proceedings, and it does not typically allow a single shareholder to take direct legal action
against the wrongdoer. The rule empowers the company to address irregularities through its
internal procedures.

However, there should be a balance between the effective control of the company and the
protection of individual shareholders’ interests. In certain circumstances, an individual
shareholder may also be allowed to bring legal action.

Minority shareholders have often faced challenges, as derivative claims usually cover them
and may not receive equal redress for discrimination. Some researchers have suggested that
the Rule of Foss v Harbottle may have been altered or repealed after the introduction of
current formal derivative actions. However, concerns about potential overlaps in derivative
claims and unequal remedies for prejudice have been raised. The fundamental values
established in the Foss vs Harbottle case remain critical in modern company law.
Facts of Foss vs Harbottle

In September 1835, the Victoria Park Company was established to acquire 180 acres of land
near Manchester (later known as Victoria Park, Manchester, after incorporation by an Act of
Parliament). However, instead of fulfilling the company’s objectives of developing the land
for ornamental and park-like purposes, constructing houses with gardens and fields and then
selling or renting them, certain individuals, including the directors and others, engaged in
unlawful misappropriation of the company’s property.

Richard Foss and Edward Starkie Turton, both minority shareholders, brought attention to
this matter. They reported that Thomas Harbottle, Joseph Adshead, Henry Byrom, John
Westhead, Richard Bealey (the five directors of the company), as well as lawyers and
architects Joseph Denison, Thomas Bunting and Richard Lane, along with H. E. Lloyd,
Rotton, T. Peet, J. Biggs and S. Brooks (Byrom, Adshead and Westhead’s assignees), were
involved in misapplying and falsely mortgaging the company’s assets, thus deviating from
the company’s intended purpose. They argued that these wrongdoers should be held
accountable for their actions and appointed a responsible receiver.

Their arguments in Foss vs Harbottle were based on three grounds. Firstly, they pointed out
fraudulent practices that misused the company’s funds. Secondly, they highlighted the lack of
qualified directors on the company’s board. And thirdly, they emphasised the absence of a
company clerk or office. These conditions left the owners with no recourse but to pursue
legal action against the directors instead of reclaiming their property directly.

Issues of the Case

The central issues at hand were twofold in Foss v Harbottle:

 Whether the company members had the authority to bring a lawsuit on behalf of the
company, in other words, could the shareholders or members of the Victoria Park
Company legally file a lawsuit to address the alleged misappropriation of the
company’s property and funds?
 Whether the individuals responsible for the wrongdoing could be held accountable for
their actions pertains to whether the directors, lawyers, architects and other involved
parties could be held legally liable and face consequences for their misapplication and
fraudulent mortgage of the company’s assets.

Arguments of the Petitioner

The plaintiffs in Foss vs Harbottle contended that the Victoria Park Company should be
considered unique and distinct from ordinary companies due to its incorporation by an Act of
Parliament. They emphasised that the purpose of this incorporation was to benefit the
company as a whole, but the directors acted in their self-interests instead.

The petitioners further asserted that the directors had a fiduciary duty to act as trustees for the
company and that they should be held accountable for misappropriating its assets. According
to the petitioners, the Act of Incorporation granted the directors the authority to take legal
action against those who harmed the company. Still, it did not provide such rights to the
members of the company or external parties to sue the board of directors.

Arguments of the Defendants

On the other hand, the defendants in Foss vs Harbottle countered the plaintiffs’ claims,
arguing that the petitioners lacked the legal right to initiate a lawsuit against them on behalf
of the company. They contended that only the directors, as authorised by the Act of
Incorporation, possessed the standing to bring legal action against individuals who caused
harm to the company.

In their defence, the defendants in Foss vs Harbottle sought to challenge the petitioners’
authority to sue, asserting that it was outside their rights as company members.

Judgement in Foss vs Harbottle

In Foss vs Harbottle, Wigram VC, the judge, ruled in favour of the defendants and dismissed
the shareholders’ claims. The court held that individual shareholders or outsiders of the
company could not bring legal action against wrongs done to the corporation, as the company
and its shareholders are considered separate legal entities. This principle in Foss v Harbottle
is supported by Section 21(1)(a) of the Companies Act, which states that a company may sue
and be sued in its name, and a member cannot take legal action on behalf of the company. If
the company has a right against a party under a contract, it is the company’s responsibility to
sue.

The court in Foss v Harbottle emphasised that shareholders cannot sue because the company
has suffered the injury, not its individual members. Therefore, the company should be the one
to initiate legal action against those who misappropriated its property.
The judge based his decision in Foss vs Harbottle on previous judgments regarding
unincorporated companies and stressed that the minority shareholders must demonstrate that
they have exhausted all possibilities for redress within the internal forum. Suppose the
majority of shareholders can ratify the irregular conduct. In that case, the courts will not
intervene, which some consider unfavourable to the minority, as it restricts their ability to
take legal action in cases where misconduct can be ratified.

Rule in Foss v Harbottle

As a result, the court in Foss v Harbottle established two principal rules.

 The first is the “Proper Plaintiff Rule,” which states that only the company can sue
directors or outsiders for any wrong or loss due to fraudulent or negligent acts.
Members of outsiders cannot sue on behalf of the company because of the principle of
“Separate Legal Entity,” which treats the company as a distinct legal person from its
members.
 The second rule is the “Majority Principle Rule,” where the court will not interfere
if the alleged wrong can be ratified by a majority of members in a general meeting.

However, these strict principles seemed harsh and unjust for minority shareholders as they
were prevented from seeking justice despite having substantive rights. To address this, the
court in Foss vs Harbottle established four exceptions to the general principles where
litigation would be allowed.

Exceptions to Rule in Foss vs Harbottle

Exceptions to the Majority Principle Rule to protect minority shareholders:

 Ultra Vires: If an action is taken by the company that is beyond the scope of its
Articles of Association, any member can bring legal action against it.
 Fraud on Minority: When the majority oppresses the minority and commits fraud,
even a single shareholder can initiate legal action to protect the minority’s rights.
 Oppression and Mismanagement: Shareholders have the right to seek legal action if
there is oppression or mismanagement within the company. They can approach the
tribunal or court under specific sections of the Companies Act.
 Individual Membership Rights: Members can enforce their rights against the
company, such as the right to vote or stand in elections.
  Derivative Action: Shareholders can bring an action on behalf of the company for
wrongs done, acting as representatives of other members whose relief is sought. This
action is called a derivative action, and the company must be joined as a co-defendant
so that the company is bound by the judgment given.

These exceptions protect minority shareholders and allow them to seek justice in certain
circumstances despite the Majority Principle Rule.