MAHARASHTRA NATIONAL LAW UNIVERSITY MUMBAI

FINAL DRAFT

CORPORATE GOVERNANCE

SUPREMACY OF MAJORITY RULE VIS-À-VIS PROTECTION OF MINORITY FROM OPPRESSION

SUBMITEED TO: PROF. RUSHABH DOSHI (COURSE INSTRUCTOR)

SUBMITEED BY: ASHISH KUMAR MISHRA ROLLNO.2017 011

 Table of Contents
Abstract ........................................................................................................................................... 2
Introduction ..................................................................................................................................... 3

Majority Rule in India..................................................................................................................... 4

Grounds For Filing Of Complaint Against Mismanagement And Oppression ............................. 5

Comparitive Study And Changes In The Companies Act, 2013 .................................................... 6

Judiciary and Minority Shareholders’ Rights ................................................................................ 8

Tata- Mistry Case Analysis ......................................................................................................... 9

Conclusion & Suggestions ............................................................................................................. 11

Abstract
The debate on the Majority rule and Minority rights has been the pivotal point of discussion
since a long time. The legal positioning that existed was that the rule of majority will prevail if
it is in accordance with the provisions of the company law. This was held in Foss v. Harbottle.
Therefore, it is only majority of members who can control the board of directors. The majority
in most cases maintained their rights without considering the interests of minority which results
in the violation of the rights of minority. But the recent amendments to the Company laws have
restricted this rule of majority supremacy to some extent. In this paper, the researcher attempts
to study the recent amendments to the majority rule and understand the rights of the minority
shareholders given in Companies Act of 1956 vis-à-vis the Companies Act of 2013. The
judicial pronouncements on this subject have also been considered. The objectives are to
understand the existing rights of the minority shareholders and to analyse the current situation
of the rights of the minority shareholders in India. The researcher for the purpose this paper
has undertaken doctrinal methodology. The researcher will scrutinise various commentaries,
books, treatises, articles, notes, comments, and other writings to incorporate the various views
of the multitude of jurists, with the intention of presenting a holistic view. The researcher will
present case analysis of recent stance of the Supreme Court in Tata v. Mistry case in this
project.
Key Words: Majority Shareholders, Minority, Rights, Class Action Suit, Companies Act,
2013, Foss V. Harbottle.

Introduction
The members holding the maximum shares are considered to be the majority shareholders in a
company. The Company Law does not define the term “minority shareholder”. But generally,
it is understood that those holding the minor shares are known as Minority shareholders. It can
also be understood by saying that minority shareholders are those who hold such amount of
shares which does not give them the control over the company. The management of a company
is usually based on the majority rule. The general rule in any company is that the directors are
the elected representatives of the company and hence, they have the right to manage the affairs
of the company. Those rights that are not given to the directors are exercised by the members
in their general meeting. This decision is usually decided on the basis of majority. Thus, the
majority rule means the right of the majority shareholders to run the company and manage its
affairs. This in turn means that the majority has its way in the general meeting. The rights of
the minority shareholders are hence, limited in any company and their rights have been violated
many a times. This principle is that the will of the majority should prevail and bind the minority
is known as the principle of majority rule.1 This is also known as the Foss v. Harbottle Rule2.
Foss v Harbottle is a leading English precedent in corporate law. Thus, injuries allegedly
caused to the corporation alone and not to its members, must be remedied not by the members
but by corporate action. This is known as the proper plaintiff rule and it is applicable here
because the company is considered a separate legal entity and hence only it can approach in
case of any wrong committed to the company and not individual shareholders. This was the
rule followed in India too since it is derived from common law. But there are few exceptions
to this rule but they were not proper redressal mechanisms. Presently, the rule has been diluted
to suit the changing needs and offer protection to the minority shareholders as well. The aim
of this study is to understand how far the majority rule and minority rights has evolved in India.

1
Dr. Ashok Sharma, Company Law and Secretarial Practice, V. K. Enterprises (India), New Delhi, 2010. 2
(1843)
2
67 ER 189
Majority Rule in India
Origin - Foss v. Harbottle

The majority rule originated in this case as mentioned earlier. In this case, two shareholders in
the Victoria Park Co. filed a case against the five directors. They had claimed that the
company’s property had been misapplied and squandered. They also held that the defendants
should be held liable for the company and sought for the appointment of a receiver. It was
however, ruled that the plaintiffs were incompetent to bring any such proceedings and the sole
right to do so was with the company or its representatives. “It is only necessary to refer to the
clauses of the Act to show that, whilst the supreme governing body, the proprietors at a special
general meeting assembled, retain the power of exercising the functions conferred upon them
by the Act of Incorporation, it cannot be competent to individual corporates to sue in the
manner proposed by the Plaintiffs.”3 It was also held that the minority shareholders are bound
by the actions of the majority shareholders. This is known as the Majority rule.

Rationale Behind the Rule-The principle is that “the proper plaintiff in an action in respect of
a wrong alleged to be done to a company or association of persons is prima facie the company
or association itself4”. It springs naturally from the treatment in law of the corporation as a
“person” separate from the members of which it is composed; and it was well established by
the nineteenth century that “the individual members in a corporation are quite as distinct from
the metaphysical body called „the corporation‟ as any others of his Majesty’s subjects are.
Thus, the injuries caused to the corporation alone and not to its members, must be remedied.
Again, that should not be by the members‟ action but by corporate action.5 The rationale behind
this specific rule is that the protection of the majority shareholders is supreme. When a person
becomes the member of a company, it is completely understood that he gives his implied
consent to accept the decision of the majority in the general meeting of their company.

Exceptions

Few important exceptions have also been developed. The exceptions protect the rights of the
minorities, regardless of the majority's vote because they are also a method to safeguard the
minority’s interests. Palmer’s Company Law. recognises the exceptions to the rule in Foss v.

3
Stephen D. Girvin and Sandra Frisby, Charlesworth’s Company Law. Thomson Reuters, UK, 18th Ed., 2010,
p. 509.
4
Jenkins L. J in Edwards v. Haliwell, [1950] 2 All E. R 1064, 1066
5
K. W. Wedderburn, Shareholders' Rights and the Rule in Foss v. Harbottle, The Cambridge Law Journal,
1957, 15(2), pp. 194-215.
Harbottle as follows6: (a) where there is an ultra vires act; (b) where a special majority is
needed; (c) where personal rights are infringed; (d) where fraud has been committed by those
in control.

Grounds For Filing Of Complaint Against Mismanagement And

Oppression
Any act of the management which has been exercised wrongfully, which is harsh, burdensome,
unwarranted, etc. and does not safeguards the interest of shareholders amounts to oppression.
Considering various judicial pronouncements, the acts which amounts to oppression is
summarized as:

a. Not keeping a general meeting and keeping shareholders in dark

b. Not maintaining the statutory records, books of accounts and not abiding by the Companies
Act

c. Depriving the right to dividend of a member

d. Issuing of shares only benefiting a few shareholders, etc.

“Section 241(1) (b) of the 2013 Act provides for relief in cases if mismanagement. If the acts
of the company are conducted in a manner which is prejudicial to the interest of the company
or public interest, or any alteration or addition in the board of directors could amount to
mismanagement, depending the facts and evidence of the case.2 Where directors preferred
objects of their liking and made a huge allotment of shares for a consideration other than cash,
this was held to be a mismanagement of affairs. 7 The following acts have been held as
amounting to mismanagement:”

a. Serious infighting between directors

b. Violations of the MOA & AOA of the company

c. Sale of assets at low price without complying with the Act

d. Directors continuing in office after expiry of the term

The first remedy available to oppressed minority is to move to the Tribunal. Whenever the
affairs of a company are being conducted in a manner pre-judicial to public interest or in a

6
Geoffrey Morse, Palmer’s Company Law, Sweet and Maxwell, UK, 2007
7
Akbarali A Kaveri v. Konkan Chemicals (P) Ltd, (1997) 88 CLB 245.
manner oppressive to any member or members, an application can be made to the Tribunal u/s
241 of the Act. The requisite number of members who must sign the application is given in
Section 399. The requirement varies with the fact as to whether the company has a share capital
or not and is as follows:

a. In the case of a company having a share capital, not less than one hundred members of
the company or not less than one tenth of the total number of its members, whichever
is less, or any member or members holding not less than one-tenth of the issued share
capital of the company, provided that the applicant or applicants have paid all calls and
other sums due on their share.
b. b. In the case of a company not having a share capital, not less than one-fifth of the
total number of its members.
c. c. The Tribunal may, if in its opinion circumstances exist which make it just and
reasonable so to do, authorise any member or members of the company to apply to the
court under section 241, notwithstanding that the two abovementioned requirements are
not fulfilled depending on the merits of the case.

After the coming up of the Companies Act, 2013, CLB was abolished and Tribunals were
created, National Company Law Tribunal (NCLT) and National Company Law Appellate
Tribunal (NCLAT). If the party is not satisfied with the decision of the tribunal then an
appeal can be filed at NCLAT following which the tribunal will scrutinize the case and
check for any quintessential question of law, if ignored by the tribunal.

Comparative Study And Changes In The Companies Act, 2013

The democratic decisions are taken mostly with respect to the majority keeping in mind the
utilitarian principle which is deemed to be justified and somehow, overshadows the rights of
the minority. Despite the fact, provisions have been in place under the CA, 1956 to protect the
interest of the minority shareholders, the minority has been incapable or unwilling due to lack
of time, recourse or capability- financial or otherwise. This has resulted in the minority to either
let the majority dominate and suppress them or squeeze them out of the decision-making
process of the company and eventually the company. CA, 2013 has sought to invariably
provide for protection of minority shareholders rights and can be regarded as a game changer
in the tussle between the majority and minority shareholders. Various provisions have been
introduced in CA, 2013 to essentially bridge the gap towards protection and welfare of the
minority shareholders under CA, 19568. The primary provision in the CA, 1956 was S. 397.
The section prescribes certain criteria for maintainability of application for relief in cases of
oppression. The impugned act should be prejudicial to the interest of the company or oppressive
upon a member or group of members; or the act may be prejudicial to general “public interest”.
It is also the burden of the applicant to satisfy before the Board that winding up the company
would “unfairly prejudice” him or the class he is representing; but otherwise the facts prima
facie would justify that the company be wound up on just and equitable grounds. The right to
apply is given to members as specified in the definition of “minority”. Both conditions under
this section should subsist in order to entail relief from the Board. Where there are no
allegations to support a winding up, a petition u/s 397 cannot be entertained.9

Section 241 of the Companies Act, 2013 is related to the application to tribunal for the relief
in cases of oppression, etc. Under the 1956 Act, the CLB was empowered to grant relief against
oppression and mismanagement. The 2013 Act transferred the power to the tribunal. Under the
2013 Act, “members can seek relief against the conduct affairs in a manner which is prejudicial
to him or any other member or members of the company even though it may not amount to
oppression which was not the case under the Act of 1956.10 Under Section 242 of the 2013 Act,
powers of the tribunal has been given. Earlier Company Law Board used to entertain the
petition but now the NCLT and NCLAT has been empowered to it. Earlier the Central
government was given the right to waive off the requisite number of shareholders for filing of
the petition but in the Act of 2013, it has been given to the Tribunal.

Further, under Section 245 of the 2013 Act, class action suit can be filed which is a totally new
concept in India as well has no precedents for it. It can be seen that the intent of the section is
not only to empower the minority shareholder and/or members of the company but also the
depositors whose right also gets violated if any act of mismanagement or oppression takes
place. The requisites for filing of class action suit is as follows: a company with share capital,
100 members of the company or 10 per cent of the total number of members of a company may
file a class action suit, only if the members filing a class action suit have paid all calls and dues
on their shares. On the other hand, for a company without share capital, this number increases

8
Akshat Sulalit, Companies Act, 2013: Rise of the Minority Shareholder, INDIA LAW JOURNAL (2013),
http://www.indialawjournal.org/archives/volume6/issue-2/article5.html/.
9
Sanchit Srivastava, Oppression & mismanagement- Corporate law, LAWCTOPUS (2015),
https://www.lawctopus.com/academike/oppression-mismanagement-corporate-law/.
10
TAXMANN, A COMPARATIVE STUDY OF COMPANIES ACT 2013 & COMPANIES ACT 1956 231 (1st
ed. 2015).
to one fifth of the total number of members of the company. In addition to shareholders, other
stakeholders like depositors have also been granted this right. The directors, auditors or the
advisers of a company can be sued if any practice of mismanagement, fraudulent acts,
suppression of material facts, etc. has been found out. Class action suits first made headlines
in India in the year 2009 when the Satyam scam came into limelight. The investors in India
were not in the legal position to file a suit or even get their money back whereas in the United
States of America, the investors through class action suits and demanded compensation from
Satyam. This class action suit was felt to be the need of the hour and the legislature incorporate
it under the 2013 Act as it reduces multiplicity of cases, benefits a larger sect which is related
to the problem. NCLT order is punishable with fine between INR 5,00,000 and 25,00,000. The
lawsuits might also result in officers or directors being imprisoned up to three years and/or
fined between INR 25,000 and 1,00,000. This section benefits the investors in terms of
compensation as for any fraudulent or any unlawful acts arising from any third party, the suit
will be entertained.

Judiciary and Minority Shareholders’ Rights

In the early period, the Court followed the Majority rule completely and allowed even the
irregular acts of the majority shareholders to be made regular through resolution. This was seen
in the case Bhajekar v. Shinkar11 where the board of directors of a company passed a resolution
appointing certain persons as managing agents. The resolution was confirmed by the company
in the general meeting with the complete knowledge of all the material facts. Some minority
directors brought a suit claiming the resolution to be declared invalid since it was irregular.
The court held that it was the right of the company to ratify any type of agreement even if it
was irregular and the Court will not interfere in the internal affairs at any cost. Similarly, in
Rajahmundry Electric Supply Corpn Ltd. v. Nageshwara Rao12, it was observed that the Courts
will not interfere in the internal affairs of the Company or the management of the directors as
long as they act within the ambit of the powers conferred on them under the Articles of
Association of the company. Over the years, the Judiciary has deviated from the strict sense of
the majority rule, so as to safeguard the interest of minority over majority shareholders. It has
tried to maintain a balanced view.

11
(1934) 36 BOMLR 483.
12
1956 AIR 213.
The Court in Sri Ramdas Motor Transport Ltd. v. Tadi Adhinarayana Reddy and Ors. 13 has
stated that under section 397 of the Companies Act 1956 any member of the company who
complains that the affairs of the company are being conducted in a manner prejudicial to public
interest or in a manner oppressive to any member or members may apply to Company Law
Board for an order under that section. However, the majority shareholders are not deprived of
their democratic rights due to minority activism.14

This was also upheld in the case of Shanti Prasad Jain v. Kalinga Tubes Ltd15. A fight between
broke out two groups of business magnates for the control of a certain company. The appellant
chairman of the company alleged that the affairs of the company were conducted in a manner
that was oppressive to him and his group of members. The appellant also contended that the
allotment of new shares to outsiders was for defeating the rights of the existing shareholders
and that it amounts to oppression. The Apex Court held that the High Court was right in holding
no case for action under Section 397, as mere fact of allotment does not constitute oppression.
The court clarified that the facts should be there to justify any potent mismanagement or
oppression.

The Court in Miheer H. Mafatlal v. Mafatlal Industries Ltd. 16 held that the Court cannot
intervene if the scheme is sanctioned by the majority of shareholders and if it is lawful. Court
can only go through the scheme and examine if it has complied with all the requirements under
Section 391 (2) and if it is passed by the requisite majority. If the scheme passed by the
company with majority is just and fair, then the Court will not interfere. But it will interfere if
the the majority shareholders‟ action affects the class interest of such equity shareholders.

Tata- Mistry Case Analysis

In the Tata Consultancy Services Limited v. Cyrus Investments Pvt. Ltd. And Ors17the Apex
court while upholding the Tata Group’s decision to remove Cyrus Pallonji Mistry as the
Executive Chairman of Tata Sons, also held that minority shareholders do not automatically
get a right to a seat on the board. Private companies, which have minority shareholders, are
free to make an enabling provision to do so if they wish to but are under no statutory obligation
to do so.

13
AIR 1997 SC 2189.
14
Manjeet Sahu. Rights of Minority Shareholders in India Under the Companies Act, 1956. SSRN Electronic
Journal, 2013, p. 10, Available at https://ssrn.com/abstract=2564925.
15
AIR 1965 SC 1535
16
AIR 1997 SC 506.
17
LL 2021 SC 184
Why did the Supreme Court discuss minority shareholders right in the judgment?

The issue of minority shareholders and their rights came into the question on allegations raised
by the Mistry family and the Shapoorji Pallonji (SP) Group that removal of Cyrus Mistry meant
oppression of minority shareholders.

In its plea following the removal of Mistry as the Executive Chairman and subsequently the
director from the board of Tata Group companies, the Mistry family and the SP Group had
alleged that Tata Sons was being run and operated in a manner which was “oppressive” and
“prejudicial” to the rights of minority shareholders.

Another major bone of contention in the spat between Tatas and Mistry was the existence of
Article 75 of the Articles of Association of the Tata Group. Article 75 gives the company the
right to purchase shares from a minority or a small shareholder at a fair market value. Fearing
that the Tata Group may use it to try and buyout the SP Group, the latter urged the company
law tribunals and the Supreme Court to not allow the same to be used.

Apart from this, the Mistry camp had also alleged that the Tata Group had taken several
commercial decisions which did not yield the desired result and thus resulted in more loss for
the minority shareholders than the majority shareholders.

What does the judgment say about the rights of minority shareholders?

Discussing the rights of minority and small shareholders and their importance in the board of
a company, the Supreme Court held that minority shareholders or their representatives are not
automatically entitled to a seat on the private company’s board like a small shareholder’s
representative.

In its judgment, the top court noted that the provisions contained in the 2013 Companies Act
only protects the rights of small shareholders of listed companies by asking such companies to
have on their board at least one director elected by such small shareholders.

Small shareholders, according to the Companies Act, is a shareholder or group of shareholders

who hold shares of nominal value of not more than Rs 20,000.

Since the Mistry family and the SP Group were not “small” shareholders, but “minority
shareholders”, there was no statutory provision which gave them the “right to claim
proportionate representation,” on the board of Tata Sons.
“The right to claim proportionate representation is not available for the SP Group even
contractually, in terms of the Articles of Association. Neither SP Group nor CPM (Cyrus
Pallonji Mistry) can request the Tribunal (NCLAT) to rewrite the contract, by seeking an
amendment of the Articles of Association. The Articles of Association, as they exist today, are
binding upon SP Group and CPM,” the top court said.

Conclusion & Suggestions

The rule in Foss v. Harbottle is actually rule of majority supremacy. It means that once a
resolution is passed by the majority, it is binding on all the members. This principle was earlier
considered as the symbol of democracy. But as far as India is concerned, this principle stands
diluted and is not followed in its strict sense.

The Companies Act of 1956 gave some provisions to protect the minority shareholders from
the majority shareholders. It was the first step taken by the legislature to recognize the rights
of the minority shareholders in India. In the Companies Act, 1956, the minority shareholders
were not considered as a major part of the company due to the suppression by the majority in
the company. But Companies Act of 2013 has taken various crucial steps to safeguard the
interest of the minority rights of the shareholders in the company irrespective of the existence
of oppression and mismanagement of the company affecting the rights of the minority
shareholders. It can also be ascertained that the core intention of the legislation is to safeguard
the interests of the minority shareholders.

But the challenge to this is the enforcement of these rights. The minority shareholders‟ rights
guarantees proper administration only when it is implemented successfully by giving
importance to the minority shareholders in the management of the company.

Another major flaw in the Companies Act of 2013 is that the numerical threshold that is
mentioned under Section 244 of the Companies Act of 2013. While it is understood that there
should be some filters to ensure that frivolous suits are not filed and the Court’s time is not
wasted, it is difficult to meet the requisite number mentioned. This came into light after the
recent Tata and Cyrus Mistry conflict where the Mistry group‟s plea was initially rejected as
they did not fulfill the numerical threshold. Though the power of waiver is given to the NCLT,
there is no clarity on when the NCLT can exercise that right and what is the criteria for the
same. Later, SC has held that minority shareholders do not automatically get a right to a seat
on the board. Private companies, which have minority shareholders, are free to make an
enabling provision to do so if they wish to but are under no statutory obligation to do so.
Generally, having filters for direct actions such as for oppression, which the shareholders bring
in their own names and to assert their rights (rather than that of the company), goes against the
spirit of corporate law and also ends up enfeebling the minorities. The introduction of class
action suit is one step in the right direction. Efforts must be taken to create awareness regarding
the same, so that the affected parties use this mechanism and get justice. This will also lead to
reduction in the number of lawsuits since it has allowed a group of people to file the case
against one defendant on common grounds.

Further, the companies have started taking steps to ensure that the rights of the minority
shareholders are not violated. The concept of “piggybacking‟ is being followed presently.
Accordingly, if the majority sells their shares then the minority shareholder right has to be
included in the deal. Moreover, it also requires the party to consider the purchase of the
business, in order to sell 100% of the outstanding shares.