Rights of Minority Shareholders
Winding-up of a company by minority Shareholders under the Companies Act, 2013.
Shareholder democracy holds an important place in corporate governance.
Majority rule may hurt the Interests of shareholders OR Investors holding a minority stake, especially those who do not have protective covenants.
Indian companies traditionally have a high ‘promoter stake’.
Private Equity (“PE”) and/or Venture Capital (“VC”) investments in Indian companies have been minority investments with many protective covenants. While shareholder democracy holds an important place in corporate governance, majority rule sometimes hurt the interests of shareholders/investors holding a minority stake, especially those who do not have protective covenants. Shareholders with a controlling stake are in the position to make decisions for the company that may be unfavourable to the shareholders with a non-controlling stake. The past few years have seen a rapid increase in shareholder activism in order to safeguard their own interests as well as the interests of the company. Minority protection has also gained importance as a facet of corporate governance – with courts struggling to strike a balance between majority control and minority protection.
Certain PE covenants that safeguard their minority interest and control rights are :
(i) Well defined “Exit Strategies” in the Shareholders’ Agreement.
(ii) Affirmative voting rights
(iii) Anti-dilution protection rights
(iv) Pre-emptive rights
(v) Companies Act, 2013 : Right of approaching the National Company Law Tribunal (“NCLT” or “Tribunal”) for “Oppression and Mismanagement” u/s 241 of CA,13. In case majority shareholders are conducting business in a manner that is prejudicial to the interests of the minority. P
Leading Precendence is Cyrus Mistry approaching NCLT by instituting “Oppression & Mismanagement” against Tata Sons. NCLAT orders re-instatement of Mistry as a Executive Chairman and conversion of Tata Sons from a Private to a Public Entity.
While, it is important to have a significant threshold for such protective rights, minority shareholders who do not meet the aforesaid criteria are left without judicial recourse in case their interests are being adversely affected.
Act also provides for Contributory of a company to approach Tribunal for winding-up of the company. This may be relevant for minority shareholders who do not meet the threshold for “oppression and mismanagement” but believe that it is essential for the company to be wound-up. A contributory is a person liable to contribute towards the assets of the company in the event of it being wound up. A holder of fully paid-up shares is also considered to be a contributory, regardless of whether the company has assets or will have surplus assets left for distribution among the shareholders after the satisfaction of its liabilities. This, in turn, means that all shareholders (holding partly or fully paid up shares) would qualify as a contributories of the Company for the purpose of filing a winding-up petition. With shareholder activism gaining importance in corporate governance, it has become important for shareholders, albeit in minority, to seek winding-up where they believe that business closure is the only equitable solution for the company that is otherwise incurring heavy losses due to instances such as the ongoing COVID 19 pandemic. It is worth noting here that unlike the provision for “oppression and mismanagement”, the Act does not prescribe a numerical or control-based threshold for presenting a winding-up petition by a contributory.
Minority shareholders who have lost confidence in the management of the company may approach the Tribunal as contributories under Section 271(e) of CA,13; which provides for winding-up on “just and equitable” grounds. Any contributory (or contributories), so long as the shares in respect of which he/ she is a contributory or some of them were either originally allotted to him/ her or have been held by him /her, and registered in his/ her name, for atleast 6 months during 18 months immediately before the commencement of the winding-up proceeding or have devolved on him/ her through the death of a former holder, may present a “Winding-up petition”.
Such order for winding-up is not a matter of right of the contributory.
On “just and equitable” grounds, the primary intention is to avoid an order of winding-up. Tribunal may refuse to grant such a winding-up order when there is an alternative remedy available or if the demand for winding-up is unreasonable. Additionally, Tribunal has to take into consideration the interest of the company, its employees, other shareholders and the general public before ordering for winding-up of a company.
Ordinarily, a company may be wound-up in case there is a deadlock in the management or the company has lost its substratum, ie, when the object for which the company was established has substantially failed or it is impossible to carry on business except for losses and/or the existing and possible assets are insufficient to meet existing liabilities.
When the interest of minority shareholders is neglected by the majority, there is lack of confidence in the conduct and management of a company’s affairs, the Tribunal may wind-up the company on “just and equitable” grounds. However, the Tribunal will issue such an order only when it is impossible for the business of the company to be carried on for the benefit of the company.
Thus, it can be said that while a minority shareholder may approach the Tribunal in case he/ she lacks confidence in the management of the company or if he/ she has reason to believe that the nature of loss suffered is such that there is no prospect of the company making profit in the future and/or the company’s assets are insufficient to meet existing liabilities, the Tribunal may order winding-up of a company under Section 271(e) of the Act.
The Tribunal has to play a delicate role in balancing the needs of majority control as against those of protection for the minority and then order Winding-up.