Squeezing out Minority: A critical analysis of provisions under Companies Act, 2013

 Neelvi Rai & Komal Bothra

Abstract

The act of squeeze-out, which involves forcibly acquiring the equity shares of a company from minority shareholders and compensating them in cash, is a visible demonstration of a controlling shareholder’s power over the corporate machinery. Despite potentially enhancing value through the acquisition of the entire company, the regulation of squeeze-outs varies across different jurisdictions. The debate over majority rule versus minority rights has long been a central point of discussion, with the rule of the majority previously prevailing under company law. However, recent amendments to company laws have limited this supremacy. This paper aims to analyse the rights of minority shareholders under the Companies Act of 1956 compared to the Companies Act of 2013 and relevant judicial pronouncements in India. Squeeze-out mechanisms in India are like those in the UK, and the most used structure is the reduction of capital, which offers the least protection for minority shareholders. The UK’s regulation of squeeze-outs will be examined, as well as that of other jurisdictions such as the USA, Germany, and Singapore, to suggest reforms that best suit India and protect minority shareholders. This is a doctrinal study that incorporates the views of various jurists, including commentaries, books, treatises, articles, notes, comments, and case law, to present a comprehensive perspective.

Introduction

Squeeze-out transactions are a way for majority shareholders to gain complete control over a company by forcibly acquiring shares from minority shareholders. Under Indian law, the Companies Act of 2013 allows any shareholder or group of shareholders holding 90% or more of the total issued equity share capital to acquire the remaining equity shares by offering to buy them from the minority shareholders. However, the acquisition must be made at a fair value or higher value as determined by a valuer following Rule 27 of the CAA Rules, 2016. The aim of such transactions is to allow the majority shareholders to exercise full control over the company while providing a fair exit to the minority shareholders.

The issue of minority squeeze-out raises concerns about the protection of minority shareholders’ interests and public interest in business combinations such as mergers and takeovers. Corporate laws across various countries aim to maintain a balance of interest between controlling and minority shareholders. However, in trying to maintain this balance, decisions may be taken that support the majority and overlook the concerns of the minority. Squeeze-out transactions can be carried out through various methods such as consolidation, acquisition, cash payment to minority shareholders, and reduction of share capital. The reduction of share capital method is the most used and provides the least protection to minority shareholders.

While India has had the concept of minority squeeze-out, it was never part of the laws regulating companies until the Companies Act of 2013. This article explores the concept of squeeze-out, the concerns surrounding it, and the regulation concerning it in India and other jurisdictions. The purpose of studying regulations in other jurisdictions is to identify possible reforms that can be applied in the Indian context to provide a seamless takeover of a company while safeguarding minority shareholders’ interests and public interest. The inherent protection under the law ensures that the acquisition takes place at a fair value, but there is a need to strike a balance between the interests of the majority and minority shareholders. The squeeze-out transactions must be carried out in a reasonable manner that does not result in the oppression of the minority shareholders. The purpose is to ensure a seamless takeover of a company since given the very smallholding of the minority shareholders; the minority shareholders neither will be able to participate in the management of the company nor will be able to seek redressal of their rights or have meaningful participation in the company’s working. Therefore, to provide a fair exit to the minority shareholders and to allow majority shareholders to exercise full control over the company, section 236 has been inserted under the Act, 2013.

Statement of Problem

Oppression of minority shareholders in India despite the protection given under the provisions of the company law.

Research Methodology

This study is based on secondary data collection, specifically a doctrinal approach. The researcher has gathered information from a variety of sources, including commentaries, books, treatises, articles, notes, comments, and other written works, in order to provide a comprehensive perspective. To better understand the topic, the researcher has also analysed a range of judicial decisions, aiming to identify any patterns or trends that may exist.

Literature Review

The facts and issues surrounding the Foss v. Harbottle case have been highlighted. An easy introduction into the Majority rule has been given. (Tyagi & Kumar 2003) The principle given from Foss v. Harbottle is that the will of the majority should prevail and bind the minority. This is known as the principle of majority rule which has been long since followed in Company law. (Sharma 2010) The author studies the rationale behind the rule in Foss v. Harbottle which provides that individual shareholders have no cause of action in law for any wrongs done to the corporation. If an action is to be brought, then it must be brought either by the corporation or by way of a derivative action. (Shakya 2014) The judgement in the Foss v. Harbottle did not offer protection to the minority shareholders but there are certain exceptions to the same.

 These are discussed in depth by the author in this book. Minority shareholders’ remedies are significantly analysed while focussing on derivative claim. (Boyle 2002) The exceptions given to the majority rule in a bid to protect the rights of the minorities are the only ways by which the minority’s interests can be safeguarded. Palmer‟s Company Law recognises the exceptions to the rule in Foss v. Harbottle. (Morse 2007) The challenges in providing marrow exceptions to the Majority rule has been analysed and that it limits the scope for minority shareholders‟ redressal. (Gregory 1982) The question raised here is if any irregularity occurs in the course of a company’s affairs, or some wrong has been done to the company, can an individual shareholder file a suit in the Court? The answer to this question has been dealt by taking into account the judgement given in Foss v. Harbottle which gives a negative answer to this question. The court has always been hesitant to interfere in the affairs of the company. The interest of the majority has been given paramount importance. The author has tried to answer these questions by examining the Majority rule in detail. (Wedderburn 1957).

The book deals with all issue confronting the Companies Act and Secretarial Practice in India. It throws light on the Old Act and offers an insight into the state of law in the late 1990s and the problems that emerged at that time. (Kumar & Sharma 1998) The author has dealt with state of the Company law before the 2013 Amendment and has highlighted any existing discrepancies in the 1956 Act. She has presented an overview of the Company law in India including the reforms which is a step towards good governance. (Dr. L. Usha et al. 2012) The author focuses on the rights offered to the minority shareholders in the Companies Act of 1956 and the various areas where the laws must be amended. (Sahu 2013) In this book, the author introduces the concept of majority rule and minority protection under the Chapter –“Shareholder of company”. He deals in detail regarding the changes brought in by the amendment act in 2013. (Kapoor 1998) The author gives a detailed explanation on the changes brought in by Companies Act of 2013 in India. He specifically covers all the new rights brought in for minority shareholders to ensure that they are given protection. (Bhalla 2016) The Companies Act, 2013 is fully covered with concepts such as class action suits, etc.

The author has presented a detailed idea of the Majority rule in India with case laws to understand the judicial trend on the same. (Singh 2015) Section 151 of the Companies Act, 2013, is analysed in detail where small shareholders have the right to appoint a director in listed companies. The Draft Companies Rules which elaborate this provision further are also discussed. (Sulalit) A new approach to the treatment of minority shareholders protection is given in this book which can be implemented in England. A detailed study of the effectiveness of Section 459 has been given. (Goo 2012) The protection offered to the minority shareholders under British company law are examined. It shows that the law gives shareholders considerable latitude if they had anticipated conflicts between majority and minority to rearrange the internal decision-making procedures of the company through formal contracting. (Davies 2010) The proper plaintiff rule is analysed and the author feels that it is the basis for the elemental legal principle that only the right-holder is entitled to enforce the right. The Companies Act 2006 introduced what is a “new” derivative action mechanism.

Though the Act is silent about the wrongdoer control requirement, it is widely understood to have abolished it. (Kershaw 2013) The paradigm shifts from the strict protection offered to the majority shareholders by the rule in Foss v. Harbottle to the recognition of individual shareholders rights are studied here. The derivative claim is focussed upon and the author feels that it is a step towards the enforcement of shareholders rights. (Bamigboye 2016) The Companies Act 2006 prevalent in England is covered here in comparison with the practise followed in US. (Sealy & Worthington 2007) The methods used in different countries to protect the minority shareholders are analysed. The effective means of enforcing shareholders‟ rights and against whom they may be enforced are discussed in detail. (Campbell & Buckley 1996).

Majority Rule In India

Origin – Foss v. Harbottle[1]

The majority rule has its origins in a legal case involving Victoria Park Co[2]., where two shareholders sued five directors for allegedly misapplying and squandering the company’s property. The plaintiffs sought to hold the defendants responsible for the company’s actions and asked for the appointment of a receiver. However, the court ruled that only the company or its representatives had the right to bring such proceedings and that the plaintiffs were not competent to do so.

The court’s decision also established the principle that minority shareholders are bound by the decisions of the majority shareholders. This means that the supreme governing body of the company, the proprietors at a special general meeting, have the power to exercise the functions conferred upon them by the Act of Incorporation. Therefore, individual shareholders cannot sue in the same way as the plaintiffs in this case. To illustrate this point, the court referred to the clauses of the Act of Incorporation.

Rationale behind the rule

The fundamental principle is that when a company or association of individuals suffers a wrongdoing, the company or association itself is typically the appropriate plaintiff in any legal action. This principle arises from the legal treatment of a corporation as a distinct “person” from its members. It has long been established that the members of a corporation are separate from the “metaphysical body” of the corporation. Thus, injuries to the corporation itself, rather than to its individual members, must be remedied through corporate action[3] , rather than through the action of individual members.

This specific rule exists to safeguard the interests of the majority shareholders, as it is generally understood that when a person becomes a member of a company, they implicitly consent to abide by the decisions of the majority in the general meeting of the company.
Rationale Behind the Rule.

Exceptions

While the majority rule is generally upheld, certain exceptions have been established to protect the rights of minorities, which serve as a means of safeguarding their interests. These exceptions are crucial because they allow for minority shareholders to challenge the majority’s decisions when necessary.

According to Palmer’s Company Law, the exceptions to the rule in Foss v. Harbottle are as follows:[4] (a) when an act is deemed to be beyond the powers of the company; (b) when a special majority is required for a decision; (c) when personal rights are violated; and (d) when those in control of the company have committed fraud.

What Is A Squeeze-Out And What Are Issues Surrounding It?

Squeeze-out is a transaction in which the acquiring party, who is also the controlling shareholder[5], acquires 100% shares of the firm to be acquired, thereby leaving the minority shareholders with no say in the matter. For instance, VU Ltd., the controlling shareholder of XYZ Ltd. with a 55% share, decides to acquire the remaining 45% shares of XYZ Ltd., resulting in a squeeze-out where the minority shareholders receive compensation for their shares. However, such transactions raise concerns for minority shareholders as the controlling shareholders can easily manipulate the transaction to their advantage due to their majority shareholding.

There are various ways through which squeeze-out transactions can be carried out, with controlling shareholders using different phases and circumstances in a company’s life to their advantage. For instance, they may time the squeeze-out around the point where the company is about to receive a profitable opportunity, so that they do not have to share the profits with the minority shareholders. Similarly, they may take advantage of temporary declines in the stock market to carry out a squeeze-out. Additionally, controlling shareholders may take decisions that reduce the value of the company for a certain time period so that they do not have to pay more compensation to minority shareholders.

Such opportunistic behaviour by controlling shareholders highlights the need for minority shareholder protection, as it can also impact capital formation. However, total prohibition on squeeze-outs is not feasible as they do have some benefits. Therefore, a well-balanced approach is required to address minority squeeze-outs.

Regulation In India Regarding Squeeze-Out

In India, the regulation of squeeze-out is governed by the delisting regulation of Securities and Exchange Board of India (SEBI) and the statutory provisions of the Companies Act. Under the previous Companies Act of 1956, there were no explicit provisions related to minority squeeze-out. The only section that could be related to it was Section 395, which explained the acquisition transaction as one of the forms of minority squeeze-out. This section stated that the transfer of shares from one company to another must be approved by holders of at least nine-tenths in value of shares whose transfer is involved within four months after the offer has been made by the transferee company. After the lapse of two months, the transferee company must give notice to the dissenting shareholders (left 10% of the shareholders) to acquire their shares, thereby eliminating the minority from the company.

However, instead of Section 395[6], recourse was often made to Section 100[7] of the Act to eliminate the minority, which allows the capital of the company to be reduced in any manner by passing a special resolution that requires the assent of 75% of the shareholders present and voting, subject to court approval. This section completely disregards the intention of minority shareholders. It should be noted that the reduction of capital is another form of enforcing minority squeeze-out.

With the Companies Act of 2013, the concept of squeeze-out was specifically introduced under Section 236, which elaborates on various situations under which minority shareholders can be bought out by the majority shareholders. Although the term “minority shareholding” is not specifically defined under the act, Section 236 uses the term to refer to equity shareholders not exceeding 10% of shares in the company.

Indian Scenario

In India, the Company Law is based on the common law principles of England, and as such, our Old Companies Act of 1956 provided some measures to address the concerns of minority shareholders between Sections 397[8] to 409. These provisions were put in place to safeguard the interests of minority shareholders against any oppressive actions taken by the majority shareholders.

Under Sections 395 and Section 399, it is established that minority shareholders are defined as those holding either 10% of shares or 100 shareholders (whichever is less) in companies with share capital, and 1/5th of the total number of members in companies without share capital.

The Act includes provisions that address situations where the rights of minority shareholders may be affected, which can be broadly categorized into two main areas: Section 397 (Application to Company Law Board for relief in cases of oppression) and Section 398 (Application to Company Law Board for relief in cases of mismanagement).

Section 399 of the Companies Act of 1956 grants minority shareholders the right to apply to the Company Law Board for relief in cases of oppression and/or mismanagement, subject to the numerical threshold of ten percent shareholding or hundred members or one-fifth members limit, as applicable. However, the Central Government was given the authority to waive this threshold if deemed necessary.

Companies Act, 2013

The new Act provides relief for oppression and mismanagement under Sections 241-246, allowing affected parties to approach the National Company Law Tribunal (NCLT). Section 244(1) maintains the same numerical threshold as the parent Act, but the NCLT has been given the power to waive the threshold. The Act introduces class action suits, which can be brought against the company and its auditors. To address shortcomings, Section 235 grants the majority power to acquire the shares of dissenting shareholders at market price.

Minority shareholders have also been empowered, with Section 151 requiring small shareholders to appoint a director in listed companies. The Draft Companies Rules elaborate on this, allowing listed companies to elect a small shareholder as director for a three-year term without eligibility for reappointment. Overall, the Companies Act of 2013 aims to include minority shareholders in decision-making and company management.

Methods

The various methods for the implementation of the squeezing out of minority shareholding as introduced by the Companies act of 2013 are:[9]

Consolidation Of Share Capital –

This option allows a company to combine and restructure its share capital into shares with a higher face value than the current shares. However, this process can only be done with the approval of the articles of association and a general meeting of the company. After the consolidation, minority shareholders may have fractional shares according to the new face value, and these fractions are held in trust by the Board. The Board is authorized to consolidate these fractions and sell the resulting shares to anyone it deems appropriate at a reasonable price. The revenue from such a sale is then distributed to those members with fractional entitlements in proportion to their entitlements, effectively cashing them out.

The process of share consolidation or division is usually a quick one, requiring only approval from shareholders. However, there may be instances where this process faces opposition or resistance, taking the following forms:

1) If the consolidation or division results in a change in voting percentage for shareholders, it can only take effect with the approval of the Tribunal as prescribed (as per the act).

2) Companies listed in Table F of the act, as well as those with articles containing provisions similar to those given in regulation 4 of the act, have the right to refuse recognition of any interest in a fractional part of a share.

3) Minority shareholders may file for an action of Oppression (previously known as sec 397 of the Companies Act, 1956).

Reduction of Capital:

The Sandvik case dealt with the question of whether a special resolution, which proposed to eliminate a class of shareholders after providing them with adequate compensation, could be considered as unjust and inequitable. The court ruled that if it is established that non-promoters are being compensated fairly for their shares, and if an overwhelming majority of non-promoter shareholders have voted in favor of the resolution, the court would not be justified in withholding its approval. As a result, minority shareholders may be forced out without their consent. The Bombay High Court outlined two tests that appear to be the guiding principles under this option: (i) whether non-promoter shareholders are being compensated fairly, and (ii) whether an overwhelming majority of the non-promoter shareholders have approved the resolution.

A public limited company has several options to reduce its share capital. Firstly, it can eliminate or reduce its outstanding equity capital liabilities. Secondly, it can reduce or eliminate liabilities related to shares that are not represented by lost shares or existing assets. Thirdly, it can reduce or eliminate liability for shares that exceed the requirements. However, any reduction of capital by the company requires the consent of the court under Section 66 of the Act, provided that the company has not defaulted on any deposits received or the interest on them.

Article 235 allows for the acquisition of minority shareholdings, provided that the acquirer obtains approval from at least 90% of the shareholders who are not already held by them or their nominee or subsidiary. The acquirer must notify any dissenting shareholders within two months of receiving this approval, and those who oppose the acquisition can approach the NCLT for relief within one month of receiving the notice. This process can be lengthy and time-consuming for the acquirer, causing delays in expelling dissenting shareholders.

If the acquirer acquires 90% of the company’s share capital through a merger, stock exchange, or securities conversion, they can offer to acquire the remaining shares as well. The payment made to minority shareholders must be determined in accordance with theCompanies Regulations (Compromises, Arrangements and Amalgamation) Rule 2016.

Acquisition Of Shares –

Under a scheme or contract approved by shareholders holding 90% of shareholding within 4 months, a transferee company can make an offer to dissenting shareholders to acquire their shares within 2 months after the expiry of the said 4 months. Unless the dissenting shareholders make an application to the Tribunal and the Tribunal orders otherwise, the transferee company can acquire the shares of the dissenting shareholders. This option is similar to the ‘freezing-out’ concept, where the majority shareholders create a second corporation and initiate a merger with the original corporation, forcing the minority shareholders to sell their shares.

The Provision of Payment of Cash to Minority Shareholders in a Scheme of Amalgamation-

In the context of a scheme of amalgamation, it is possible to compensate minority shareholders with cash rather than offering them shares in the resulting company.

Purchase of Minority Shareholding –

If an acquirer has obtained 90% of a company’s equity share capital through means such as amalgamation, share exchange, or conversion of securities, they may offer to purchase the remaining shares from minority shareholders[10]. The price for these shares must be determined according to the Companies (Compromise, Arrangement, and Amalgamation) Rules of 2016.

SEBI’s (Delisting of Equity Shares) Regulation, 2009 can be seen as a precursor to squeeze-out. Promoters of a company can delist it from the stock exchange by making an offer to purchase shares from public shareholders. This can result in reduced liquidity for shareholders and limit their exit options, often resulting in them accepting the promoter’s offer. However, the delisting process can be cumbersome and has been used less frequently, with promoters opting for other mechanisms to perform a squeeze-out instead of delisting first.

Despite its potential benefits, the delisting procedure may not produce the same results as those produced by the squeeze-out provisions under the Companies Act. The delisting proposal requires approval from a 75% majority of all shareholder votes cast through postal ballot, with at least a two-thirds majority of public shareholders required for approval.

Regulation of Squeeze-Outs In Other Jurisdictions:

In India, like many other laws, the provisions concerning squeeze-outs have been largely inspired by laws in other jurisdictions. These provisions are a combination of laws in countries such as the U.K, USA, Germany, and Singapore. In the following section, we will provide an overview of the laws in these jurisdictions pertaining to squeeze-outs.

USA-

The squeeze-out process typically requires a majority vote in favor of a squeeze-out merger, which can take two forms: a long-form merger or a short-form merger[11]. If the acquirer has obtained 90% of shares of the target company, it can acquire the remaining shares through a short-form merger. However, if the acquirer has not obtained the required number of shares, it can acquire them through a long-form merger by paying consideration for the same and obtaining approval from the shareholders. The protection of shareholders is ensured through statutory appraisal rights, where dissenting shareholders can demand fair value of their shares as determined by the court, and fiduciary duty class actions, where dissenting shareholders can file a class action alleging fraud or breach of fiduciary duty by the controllers. In such cases, the burden is on the controller to prove that the process was fair.

UNITED KINGDOM–

The U.K. also employs various procedures or mechanisms for conducting squeeze-outs, such as Compulsory Acquisition, Scheme of Arrangement, and Reduction of Capital. Under the Compulsory Acquisition method, after making a takeover offer, the bidder can compulsorily acquire the minority shares if it has obtained at least 90% of the voting shares[12]. The Scheme of Arrangement in U.K. law follows an all-or-none approach, meaning that the acquirer must acquire everything or nothing at all. Minorities in such situations are provided with basic protection, such as being considered as a separate class, being provided with full disclosure before taking their approval, and the court supervising their interests. The Reduction of Capital method is also utilized for squeezing out the minorities, but it is not a preferred approach. In such a method, the courts have argued that the controllers and minorities should be considered as separate classes, as they have conflicting interests involved.Top of Form 

Issue with the Provisions

Section 236 of the Companies Act 2013, as amended, has raised questions about the rights of minority shareholders when an acquirer or a group of persons acquires 90% or more of the issued equity share capital of a company. It is unclear whether minority shareholders are obligated to accept an exit offer or offer to purchase their shares, or if they have the power to dissent. The Act defines mismanagement as the prevention of directors’ functioning, violation of statutory provisions and Memorandum and Articles of Association, misuse of company funds, etc.

According to the Act, when an acquirer or a group of persons acquires 90% or more of the issued equity share capital of a company, they must inform the company of their intention to purchase the remaining equity shares. The acquirer must then offer to buy the equity shares held by minority shareholders at a price determined by a registered valuer in accordance with prescribed rules. Minority shareholders may also offer to sell their shares to the majority shareholders at the same price determined under the Act.

The majority shareholders must deposit the value of the shares to be acquired under the Act into a separate bank account operated by the transferor company for at least one year. The transferor company will act as a transfer agent for receiving and paying the price to the minority shareholders and for taking delivery of the shares and delivering such shares to the majority. If minority shareholders do not deliver their shares within the specified time, the transferor company will issue new shares and complete the transfer in accordance with the law.

If the majority shareholders negotiate or reach an understanding on a higher price for any transfer of shares without disclosing this fact to the minority shareholders, they must share the additional compensation received on a pro rata basis. The Act defines “acquirer” and “person acting in concert” as per the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997.

The Act does not specify a time limit for minority shareholders to give away their shares to the majority shareholders. Additionally, there is no provision in the Act for conducting a separate meeting for minority shareholders to express their concerns about the sale of their shares to the majority shareholders. The Act only mentions that if the majority ofcreditors or shareholders assent to a merger, then the Tribunal may sanction the compromise or arrangement.

Judicial Response

During the early period, the Court fully adhered to the Majority rule, even permitting irregular acts of the majority shareholders to be validated through resolution. The case of Bhajekar v. Shinkar[13] exemplified this approach, as the board of directors passed a resolution appointing certain persons as managing agents. The company confirmed the resolution in the general meeting with full knowledge of all material facts. Minority directors filed a lawsuit claiming the resolution was invalid due to its irregularity. However, the Court ruled that the company had the right to ratify any agreement, even if it was irregular, and that the Court would not interfere in internal affairs under any circumstances.

In the case of Rajahmundry Electric Supply Corpn Ltd. v. Nageshwara Rao[14], a similar stance was taken where it was stated that the Court will not meddle in the internal affairs of the company or the actions of the directors, as long as they operate within the limits of the powers bestowed upon them under the Articles of Association. However, with time, the Judiciary has moved away from strictly adhering to the majority rule and instead has attempted to strike a balance between the interests of minority and majority shareholders, thereby safeguarding the former.

According to Sri Ramdas Motor Transport Ltd. v. Tadi Adhinarayana Reddy and Ors[15]., under section 397 of the Companies Act 1956, a member of the company may approach the Company Law Board and file a complaint if they believe that the company’s affairs are being conducted in a manner that is prejudicial to public interest or is oppressive to any member or members. Nevertheless, minority activism does not take away the democratic rights of the majority shareholders.

In the case of Shanti Prasad Jain v. Kalinga Tubes Ltd[16]., a dispute between two groups of business magnates arose over control of a company. The appellant, who was the chairman of the company, alleged that the affairs of the company were being conducted in a manner oppressive to him and his group of members. The appellant also contended that the allotment of new shares to outsiders was aimed at defeating the rights of existing shareholders and constituted oppression. The Supreme Court held that the High Court was correct in finding no case for action under Section 397, as the mere fact of allotment does not amount to oppression. The court clarified that there must be facts justifying any potent mismanagement or oppression.

In Miheer H. Mafatlal v. Mafatlal Industries Ltd[17]., the Court held that as long as a scheme is lawful and has been approved by the majority of shareholders, the Court cannot intervene. The Court’s role is limited to examining whether the scheme has complied with all the requirements under Section 391 (2) and has been passed by the requisite majority. If the scheme is just and fair and has been approved by the majority, the Court will not interfere. However, if the action of the majority shareholders affects the class interest of equity shareholders, then the Court may intervene.

Conclusion and Suggestion

The Foss v. Harbottle rule, which is based on the principle of majority supremacy, dictates that once a resolution is passed by the majority, it is binding on all members. While this principle was initially seen as a symbol of democracy, in India, it has been diluted and is not strictly followed.

The Companies Act of 1956 introduced provisions to protect minority shareholders from the majority. It was the first step taken by the legislature to recognize the rights of minority shareholders in India. However, the Act did not consider minority shareholders as a significant part of the company due to their suppression by the majority.

The Companies Act of 2013 has taken various crucial steps to safeguard the interests of minority shareholders, regardless of the existence of oppression and mismanagement of the company that affects their rights. The core intention of the legislation is to safeguard the interests of minority shareholders.

However, the challenge lies in enforcing these rights. The proper administration of minority shareholders’ rights is guaranteed only when their importance is recognized in the management of the company and successfully implemented.

The Companies Act of 2013 has a significant flaw related to the numerical threshold specified in Section 244. While it is important to have some filters to avoid frivolous suits, it is often difficult to meet the required number. This was highlighted in the recent conflict between Tata and Cyrus Mistry, where Mistry’s plea was initially rejected due to not fulfilling the numerical threshold. Although NCLT has the power of waiver, there is no clarity on when and what criteria are used for its exercise. Such filters undermine the spirit of corporate law and weaken the rights of minorities, especially in cases of oppression where shareholders assert their rights.

The introduction of class action suits is a positive step, but more efforts are needed to create awareness among affected parties so that they can seek justice using this mechanism. This will also reduce the number of lawsuits as a group can file a case against one defendant on common grounds.

Fortunately, companies are taking steps to ensure that the rights of minority shareholders are not violated. For instance, the concept of “piggybacking” is being followed, which mandates that if the majority sells their shares, the minority shareholders’ right must be included in the deal. It also requires parties to consider purchasing the business to sell 100% of the outstanding shares.

References

http://ijrar.com/upload_issue/ijrar_issue_20542723.pdf 

https://www.mondaq.com/india/shareholders/1199734/the-law-on-minority-squeeze-out-in-india.

https://corporate.cyrilamarchandblogs.com/2021/12/minority-squeeze-out-under-our-company-law-is-it-a-legislative-policy-dilemma/. 

https://www.ijlmh.com/wp-content/uploads/A-Comparative-Analysis-of-Minority-Squeeze-Outs.pdf 

https://acadpubl.eu/hub/2018-119-17/1/79.pdf 

https://thelawbrigade.com/wp-content/uploads/2020/05/Amartya-JLSR.pdf 

https://vinodkothari.com/2020/02/minority-squeeze-out/. 

http://www.lawstreetindia.com/experts/column?sid=514. 

https://cbcl.nliu.ac.in/company-law/ease-of-minority-squeeze-out-an-analysis-of-the-new-squeeze-out-provisions/.

[1]Foss v Harbottle (1843) 2 Hare 461, 67 ER 189

[2]Victoria park racing & recreation ground co ltd vs taylor 1937 HCA 45

[3]W. Wedderburn, Shareholders’ Rights and the Rule in Foss v. Harbottle, The Cambridge Law Journal, 1957, 15(2), pp. 194-215.

[4]Geoffrey Morse, Palmer’s Company Law, Sweet and Maxwell, UK, 2007

[5]Sealy, The Problems of Standing, Pleading and Proof in Corporate Litigation in B. G. Pettet (ed.), Company Law in Change (Stevens & Sons, 1987), p. 2.

[6]Power and duty to acquire shares of shareholder dissenting from scheme or contract approved by majority

[7]Calling of extraordinary general meeting

[8]Admissibility of certain documents as evidence

[9]https://www.ijlmh.com/wp-content/uploads/A-Comparative-Analysis-of-Minority-Squeeze-Outs.pdf

[10]The companies act 2013, sec 236(India)

[11]Ibid

[12]Luthra, supra note 5

[13]Bhajekar v. Shinkar [(1934) 4 Comp Cas 434]

[14]Rajahmundry Electric Supply Corpn Ltd. v. Nageshwara Rao19 1956 AIR 213, 1955 SCR (2)1066

[15]Sri Ramdas Motor Transport Ltd. v. Tadi Adhinarayana Reddy and Ors 3155 of 1997

[16]Shanti Prasad Jain v. Kalinga Tubes Ltd 1965 AIR 1535 1965 SCR (2) 720

[17]Miheer H. Mafatlal v. Mafatlal Industries Ltd JT 1996 (8) 205

*****

 UNIVERSITY OF PETROLEUM AND ENERGY STUDIES, SCHOOL OF LAW,SEMESTER VI