- The general principle of Company law is that every member holds equal rights with other members of the Company in the same class in proportion to the paid up capital.
- The scale of rights of members of the same class must be held evenly for smooth functioning of the company. In case of difference(s) amongst the members the issue is decided by a vote of the majority.
- Since the majority of the members are in an advantageous position to run the Company according to their command, the minorities of shareholders are sometimes oppressed. The Company law provides for adequate protection for the minority shareholders when their rights are compresssed by the majority.
- But the protection of the minority is not generally available when the majority does anything in the exercise of the powers for internal administration of a company.
- The court will not usually intervene at the instance of shareholders in matters of internal administration, and will not interfere with the management of a Company by its directors so long they are acting within the powers conferred on them under the articles of the Company and the exercise of powers is not oppressive to minority.
- The basic principle of non-interference with the internal management of company by the court is laid down in a celebrated case of Foss v. Harbottle[1] that no action can be brought by a member against the directors in respect of a wrong alleged to be committed to a Company. The Company itself is the proper party of such an action.
- 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. The rule really preserves the right of the majority to decide how the Company’s affairs shall be conducted. If any wrong is done to the Company, it is only the Company itself, acting, as it must always act, through its majority, that can seek to redress and not an individual shareholder.
- Moreover, a Company is a person at law, the action is vested in it and cannot be brought by a single shareholder.
- The main advantages that flow from the Rule in Foss v. Harbottle are of a purely practical nature and are as follows:
Ø Recognition of
the separate legal personality of Company;
Ø Need to preserve
right of majority to decide;
Ø Litigation at
suit of a minority futile if majority does not wish it
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:
Ø the common law;
and
Ø the provisions
of the Companies Act, 1956.
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 v. 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;
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. The majority of shareholders have no right to confirm an illegal or
ultra vires transaction of the company. In such case a shareholder has the
right to restrain the company by an order or injunction of the court from
carrying out an ultra vires act.
It means that
the rule in Foss v. Harbottle will operate in full force only when the majority
of shareholders through their chosen directors act within the extent of the
powers of the company.
1.
Fraud on Minority
Where an act done by the majority
amounts to a fraud on the minority; an action can be brought by an individual
shareholder. This principle was laid down as an exception to the rule in Foss
v. Harbottle in a number of cases. Any action or act of majority shareholders
which is fraud on minority, shareholder has a right to take an action over the
same. In such case litigation shall be undertaken at suit of a minority even if
majority does not wish it.
Though there is no clear definition of
the expression “fraud on the minority”, but the court decides a particular case
according to the surrounding facts. The general test which is applied to decide
whether a case falls in the category of fraud on the minority or not is whether
a resolution passed by the majority is “bona fide for benefit of the company as
a whole” [Allen v. Gold Reefs of West Africa]. Any decision undertaken by the
majority shareholders which is bonafide in nature or for the benefit of the
company as a whole, it cannot be considered as fraud on minority.
“In
all matters of internal management, the company itself is the best judge of its
affairs and the Court should not interfere. But application of assets of a
company is not a matter of internal management. As directors are acting ultra
vires in the application of the funds of the company, a single member can
maintain a suit”.[2]
2.
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 [Cf. Birch v. Sullivan]. 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 [Par Jenkins L.J.
in Edwards v. Halliwell].
In Glass v. Atkin, a company was
controlled equally by the two defendants and the two plaintiffs. The plaintiff
brought an action against defendants alleging that they had fraudulently
converted the assets of the company for their own private use. The Court
allowed the action and observed: “While the general principle was for the
company itself to bring an action, where it had an interest, since the two
defendants controlled the company in the sense that they would prevent the
company from taking action.”[3]
3.
Resolution requiring Special Majority
but is passed by a simple majority
Any act which requires special majority,
if passed by the shareholders by simple majority, such an act can be sued by a
shareholder. Any compliance though simple or rigid has to be observed by
shareholders, if the majority shareholders are willing to make their act valid
which is likely to disrupt the interest of minority.
4.
Prevention of Oppression and
Mismanagement
The minority shareholders are empowered
to bring action with a view to preventing the majority from oppression and
mismanagement. These are the statutory rights of the minority shareholders.
In Bennet Coleman & Co. and Ors. v.
Union of India & Ors., (1977)),[4]
the Division Bench of the Bombay High Court held that Sections 397 and 398 of
the Companies Act, 1956 are intended to avoid winding up of the company if
possible and keep it going while at the same time relieving the minority
shareholders from acts of oppression and mismanagement or preventing its
affairs from being conducted in a manner prejudicial to public interest. Thus,
the Court has wide powers to supplant the entire corporate management by
resorting to non-corporate management which may take the form of appointing an
administrator or a special officer or a committee of advisers etc., who will be
in charge of the affairs of the company.
5.
Breach of Duty
The minority shareholder may bring an
action against the company, where although there is no fraud, there is a breach
of duty by directors and majority shareholders to the detriment of the company.
Statutory
Remedies (under the Companies Act)
Though the
shareholders’ democracy is supreme the Companies Act and the decided cases
suggest that the majority shall not be allowed to act in an unfair, fraudulent,
or oppressive way against the interests of the minority shareholders. Under Companies
Act various powers are given to the shareholders. The Companies Act, 1956,
extends protection to minority by granting various rights to minority
shareholders which are discussed as below:
- The variation of class rights: The rights attached to the shares of any class can be varied under Section 106 of the Act with the consent in writing of the holder of not less than three-fourths of the issued shares of that class or with the sanction of a special resolution passed at a separate meeting of the holders of the issued shares of that class. But the holders of not less than 10% of the shares of that class who had not assented to the variation may apply to the Court for the cancellation of the variation under Section 107 of the Act.
- Schemes of reconstruction and amalgamation: The minority is accorded protection in cases where they dissent to the scheme of reconstruction or amalgamation.
- Oppression and mismanagement: The principle of majority rule does not apply to cases where Sections 397 and 398 are applicable for prevention of oppression and mismanagement. A member, who complains that the affairs of the company are being conducted, in a manner oppressive to some of the members including himself, or against public interest, he may apply to the Company Law Board by petition under Section 397 of the Act In O.P. Gupta v. Shiv General Finance (P) Ltd. and others the Delhi High Court held that a member’s right to move the Court under Section 397 was a statutory right and cannot be affected by an arbitration clause in the articles of association of a company.[5]
- Alternative remedy to winding up: Any member or members, who complain that the affairs of the company are being conducted in a manner oppressive to some of the members including themselves, may apply to the Company Law Board for redressal (Section 397).
Despite the
powerful weapons handed over to the shareholders by the Companies Act, the
shareholders have not been able to use them and most of the provisions remain
dead provisions and have not been used by the shareholders as potential weapons
to correct any wrongful act on the part of the directors or to give them any
directions.
Source:
1)
Study Material of Executive Program of The Institute of Company Secretaries of
India
2)
D.K. Jain
3)
R. Suryanarayanan
4)
Palmer
5)
L.C.B. Gower
6)
Taxmann’s
[2] Allen v. Gold
Reefs of West Africa, (1900) 1 Ch. 656
[3] Cf. Birch v.
Sullivan, (1957) 1 W.L.R. 1274
Par Jenkins L.J. in Edwards v.
Halliwell, (1950) 2 All E.R. 1064, 1067
Glass v. Atkin (1967) 65 D.L.R.
(2d) 501
[4] Bennet Coleman
& Co. and Ors. v. Union of India & Ors., (1977) 47 Com Cases 92 (Bom)
[5]
O.P. Gupta
v. Shiv General Finance (P) Ltd
