REMEDIES FOR MINORITY SHAREHOLDERS AGAINST OPPRESSION

FUNCTIONING OF A COMPANY

• žA company functions through different decisions taken by the members and the board of directors.
• žVarious matters such as appointment of auditors, declaration of dividend, appointment of director in place of the retiring directors, fixing remuneration of statutory auditors, which could be determined through only members resolution.
• žAs against this the board of directors is empowered to take various decisions u/s.179(3) of Companies Act, 2013 including routine business decisions of the company, appointment/ removal of key managerial person, authorizing buy back of shares, investing funds of the company, granting loans, diversifying the business of the company, borrowing money etc.
• žAppointment of directors happens through passing of ordinary resolution of members, meaning thereby that constitution of board is determined by the majority members.

• POSSIBILITIES OF OPPRESSION OF MINORITY SHAREHOLDERS

• Looking at wide range of matters on the members can decide through passing of ordinary resolutions, members having more than 50% equity in the company can dictate such decisions.
• While the board of directors owes a fiduciary duty to the company only and not to majority shareholders, since they are the appointing authority for the board, in practice, board of directors is likely to be under some sort of influence of the appointing majority.
• In such scenario, it is quite possible that majority may dictate not only the decisions of members but also the decisions of the board of directors of the company in some way.  While functioning of a company as per the wishes of the majority is what corporate democracy is and normally there is no remedy for minority dissenting shareholders against such decisions, the same does not mean that minority (less than 50%) are totally without remedy in all situations.

• When can dissenting minority shareholders have remedy against the decisions concerning the affairs of the company

• As explained above, mere dissent is no reason to have remedy and accepting the decisions that minority doesn’t agree to is a part of corporate democracy and there is as such no remedy for dissent.
• However, in terms of s.241 of CA, 2013, if any member of a company complains that:-
• the affairs of the company have been or are being conducted in a manner prejudicial to public interest or in a manner prejudicial or oppressive to him or any other member or members or in a manner prejudicial to the interests of the company  ORA material change (not being a change brought about by or in the interests of any creditors), has taken place in the management and control of company, whether by alteration in the board of directors, or manager or in the ownership of the company’s shares and by reason of such change, it is likely that the affairs of the company will be conducted in a manner prejudicial to company’s interests or to the interests of  its members or any class of members;
• Such member can apply to the tribunal, subject to it having a right to apply under section 244.

• Which members have a right to apply u/s.244 of CA, 2013

• In terms of s. 244, in case of a company having a share capital, not less than 100 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, have a right to apply under section 241;
• Subject to the condition that applicant or applicants has/ haver paid all calls and other sums due on his or their shares.

• What reliefs could be granted by tribunal on an application u/s.241

• If eligible member/ members make out a case u/s.241 of CA, 2013 that the affairs of the company are being conducted in a manner prejudicial to their interests or they are oppressive to them and
• that to wind up the company would unfairly prejudice to such members but otherwise facts would justify making of the winding up order, the tribunal, has all the powers to make orders that it thinks fit with a view to bringing to an end the matters complained of.

• Different orders that could be passed by the tribunal

• žS.244(1) gives ample power to the tribunal to pass any orders thought fit by it with a view to bringing to an end the matters complained of.
• žS.244(2) specifies only by way of illustrations –the orders that could be passed which include:-
• In the case of shareholders, a tribunal may decide that shares of members be purchased by other members or by the corporation.
• A tribunal may also mandate a decrease in the share capital or even impose restrictions on the transfer of shares
• In the instance of corporate management, the tribunal may even remove the Managing Director, Manager, and Director, recover excessive gains gained by such official, and assign new personnel.
• In the case of the company’s management, which is an important component of the business, a tribunal may terminate or amend agreements established in between company & management or agreements made between the firm and any other individual.
• tribunal may designate a person to report to the tribunal on the actions of oppression and mismanagement by management in order to prevent additional oppression.
• ¡the tribunal has some further authorities, like regulating the conduct of the company’s operations, restraining the transfer of any business property, and imposing costs. The tribunal must submit a copy of its order to the registrar, and if the order has not been finalised, it may issue an interim order to the registrar. Changes to the MOA (Memorandum of Association) and AOA (Article of Association) must be documented and given to the registrar.

• What constitutes OPPRESSIVE action?

• žAs seen above, s.241/ 242/244 do not provide any remedy for when the manners of conduct of affairs of a company is not in line with or even in total neglect of the wishes of the dissenting minority; rather it provides remedy only when a member makes out a case of affairs of company being conducted in a manner prejudicial or oppressive to him or other members etc.
• ž The terms oppressive is not defined under CA, 2013, however, the judgment, In re [1959] 29 Comp Cas 305 makes following conclusions with regard to “oppression” and “oppressive”:-
• (i) Although the word “oppressive” is not defined, it is possible by way of illustration, to figure out a situation in which majority shareholders, by an abuse of their predominant voting power, are “treating the company and its affairs as if they were their own property” to the prejudice of the minority shareholders ;
• ¡(ii) the oppression of which a petitioner complains must relate to the manner in which the affairs of the company concerned are being conducted ; and the conduct complained of must be such as to oppress a minority of the members qua shareholders ;
• ¡(iii) an oppression complained of must be shown to be brought about by a majority of members exercising as shareholders a predominant voting power in the conduct of the company’s affairs;
• ¡the conduct of the majority shareholders may amount to oppression notwithstanding the fact that their own shares depreciate in value pro rata with those of the minority ;
• ¡the word “oppressive” means “burdensome, harsh and wrongful”. The circumstances must be such as to warrant the inference that “there has been, at least, an unfair abuse of powers and an impairment of confidence in the probity with which the company’s affairs are being conducted, as distinguished from mere resentment on the part of a minority at being outvoted on some issue of domestic policy ;
• ¡ the conduct complained of “should at the lowest involve a visible departure from the standards of fair dealing, and a violation of the conditions of fair play on which every shareholder who entrusts his money to a company is entitled to rely. Absence of mutual confidence per se between partners, or between two sets of shareholders, however relevant to a winding up, has no direct relevance to the remedy contemplated in Section 397. Mere loss of confidence or pure deadlock is not enough. Lack of confidence must spring from oppression of a minority by a majority in the management of the company’s affairs and oppression must show at least an element of lack of probity or fair dealing to a member in the matter of his proprietary right as a shareholder ;
• ¡(vii) events have to be considered not in isolation but as a part of consecutive story. There must be continuous acts on the part of the majority shareholders, continuing up to the date of petition, showing that the affairs of the company were being conducted in a manner oppressive to some part of the members

• One might further fruitfully refer to and read the recent decision in the case of Tata Consultancy Services Limited v. Cyrus Investments Pvt. Ltd. and others (2021 SCC OnLine SC 272.)

Examples of what is considered as oppressive by the courts

Oppression
Witholding dividends from stakeholders	Raising of share capital without proper explanation and improper allotment of shares (2008) 1 Comp LJ 501 (CLB)
Refusing to hold general meetings	Removal of member-director without providing special notice (2005) 123 Com Cases 198
Not being transparent with certain shareholders	Annual general meeting conducted in the absence of majority of directors (2010) 94 CLA 380 (CLB)
Failing to maintain a statutory book of records	Not sending notice to all directors for a meeting regarding appointment of managing director/s (2010) 153 Com Cases 222 (CLB)
Issuing shares to benefit the majority