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:
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
- 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.
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.
Fraud or oppression against minority: When the majority of the company’s members use their power to defraud or oppress the minority, their conduct is liable to be impeached even by a single shareholder. The fraud or oppression must involve an unconscionable use of majority’s power resulting or likely to result, either in financial loss or unfair or discriminatory treatment of the minority. Court will annul such resolution that tries to amend MOA/AOA that:
- Indirectly or directly appropriating property of company to themselves.
- Appropriating money to themselves.
- Actions where shareholders are entitled to participate but are prevented by the amendment in MOA/AOA.
Inadequate Notice of a resolution passed at meeting of members: When a GM is called and a proposed resolution is mention then, the insufficient information of the same arises when:
A member could be attending meeting & voting against the resolution.
- A member may decide not to attend.
- Therefore, these two types of member may bring a representative suit to restrain the company and its directors from carrying out such resolution.
Oppression and Mismanagement
In Companies Act, 1956, the protection for the minority shareholders from oppression and mismanagement have been provided under section 397 (An Application to be made to company law board for relief in cases of oppression) and 398 (An Application to be made to company law board for relief in cases of oppression).
Reconstruction and Amalgamation
In Companies Act, 1956 with respect to minority shareholder right for reconstruction and amalgamation of companies, under section 395 states that for the transfer of shares or any class of shares of a company to another company, consent of the holders of at least (9/10) i.e. 90% of the shareholders consent will be required, which is therefore referred to the majority suppressing the rights of the minority shareholders. It further states that the transferee can give a notice to any dissenting shareholder expressing his desire to acquire their shares within 2 months after the lapse of the 4 months. Whereas, to counter these shortcomings, Companies Act, 2013 under Section 235 grants the power to acquire the shares of shareholders dissenting from the scheme approved by the majority not less than 9/10 in value of the shares and can transferee company may give notice to dissenting shareholder for acquiring his shares. Therefore, under Section 235 it is made mandatory for the shareholders to notify the company regarding their intention of buying the remaining equity shares or by a group of persons holding 90% consent of the registered holder of the company. The Companies Act, 2013 further provides the shares need to be acquired at a price determined on the basis of valuation by a registered valuer in accordance with the rules and the regulations.
E-Voting has been made mandatory for the listed companies with at least 1000 shareholders which indeed will enhance the active participation and offers a platform to the minority shareholders in the management of the company. This will also enable the minority shareholders to exercise their power in the company.
This provision states that if the majority sells their shares then the minority shareholder right has to be included in the deal. Moreover, “Piggy Backing” requires the party to consider the purchase of the business to sell 100 percent of the outstanding shares. To ensure the compulsory provisions of the minority shareholders.