Oppression of minority shareholders by majority shareholders

1. Oppression of Minority Shareholdersby Majority
Shareholders
Submitted To Submitted by
Mr. Ajay Kant Chaturvedi Shobhit Tiwari

2. INDEX
 Introduction
 Who comes under the term Minority?
 What is Oppression?
 Remedy Against Oppression(Laws)
 Conclusion
 Bibliography

3.  Introduction :
Shareholders have ultimate control of a company. However the directors run
the company's business and are responsible for its management. In general
shareholders cannot interfere, although they can appoint and remove
directors. Some constitutional matters, such as changes of the company's
name, or to its Memorandum or Articles of Association, or to put it into
liquidation (when solvent), require approval by special resolution, i.e. a 75%
majority, which can therefore be blocked by shareholders with 25% or more.
The nascent debate on corporate governance in India has tended to draw
heavily on the large Anglo-American literature on the subject. However, the
governance issue in the US or the UK is essentially that of disciplining the
management who have ceased to be effectively accountable to the owners.
The primary problem in the Indian corporate sector is that of disciplining the
dominant shareholder and protecting the minority shareholders.
The corporate governance literature in the US/Canada and the UK focuses
on the role of the Board as a bridge between the owners and the
management. In an environment in which ownership and management have
become widely separated, the owners are unable to exercise effective control
over the management or the Board. The management becomes self
perpetuating and the composition of the Board itself is largely influenced by
the likes and dislikes of the Chief Executive Officer (CEO). Corporate
governance reforms in these countries have focused on making the Board
independent of the CEO. Many companies have set up a Nominations
Committee of the Board to enable the Board to recruit independent and
talented members.
Turning to the Indian scene, a bird’s eye view reveals increasing concern
about improving the performance of the Board. This is without a doubt a
very imperative issue, but a close analysis of the ground reality would force
one to conclude that the Board is not really central to the corporate
governance malaise in India. As aforesaid, the central problem in Indian
corporate governance is not a conflict between management and owners as
described in the foregoing paragraph, but a conflict between the dominant
shareholders and the minority shareholders. The Board cannot even in theory
resolve this conflict, as it is composed of those very dominant shareholders
upon whom this control needs to be exercised.
This paper will highlight the legal framework on the subject of oppression of
minority shareholders in India, by drawing a contrast with its compatriots in
the UK and USA. Case laws on the subject shall be delved into in order to
achieve a prognostic idea about the problem(s) that afflict the laws as they
exist.

4.  Who is Minority?
“Minority”: In case of a company having share capital, not less than
100 members or not less than 1/10th of the total members, whichever
is less or any member(s) holding not less than 1/10thof the issued share
capital constitute “minority” for the purpose of consideration in this
paper. In case of companies not having share capital, not less than
1/5th of the total members would have the right to apply.
Presently, 'minority shareholders' are not defined under any law,
however, by virtue of Section 395 (Power to acquire shares of
dissenting shareholders) and Section 399 (Right to apply for
Oppression and Mismanagement) of CA 1956, minority shareholders
have been set out as ten percent (10%) of shares or minimum hundred
(100) shareholders, whichever is less, in companies with share capital;
and one-fifth (1/5) of the total number of its members, in case of
companies without share capital. In general terms, minority
shareholding can be understood to mean holding such amount of
shares which does not confer control over the company or render the
shareholder with having a non-controlling interest in a company. CA
1956 provides for various provisions dealing with situations wherein
rights of minority shareholders are affected and the same can be
divided into two major heads, i.e.,
(a) oppressionand mismanagement of the company; and
(b) reconstruction and amalgamation of companies.
The Rule of Minority:
The principle of rule by majority has been applicable to the
management of the affairs of the companies. The members pass
resolutions on various subjects either by simple majority or by special
majority. Once a resolution is passed by the requisite majority then it
is binding on all the members of the company. On becoming a
member, each person impliedly gives consent to the will of the
majority. Thus, if the wrong is done to the company, it is the company
which is the legal entity having its own personality and that can only
institute a suit against the wrongdoer, and the shareholders
individually do not have a right to do so.

5. Rule in Foss v. Harbottle
For over a century, the rule that was followed in England was that the
courts were not justified in interfering with the matters of a company.
This was first expounded by the court in Foss v Harbottle, in which
the cardinal rule which was laid down is reproduced as below:
“On the first point it is only necessary to refer to the clauses of the Act
to shew 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 corporators to sue in the manner proposed
by the Plaintiffs on the present record. This in effect purports to be a
suit by cestui que trusts complaining of a fraud committed or alleged
to have been committed by persons in a fiduciary character. The
complaint is that those trustees have sold lands to themselves,
ostensibly for the benefit of the cestui que trusts. The proposition I
have advanced is that, although the Act should prove to be voidable,
the cestui que trusts may elect to confirm it. Now, who are the cestui
que trusts in this case? The corporation, in a sense, is undoubtedly the
cestui que trust; but the majority of the proprietors at a special general
meeting assembled, independently of any general rules of law upon
the subject, by the very terms of the incorporation in the present case,
has power to bind the whole body, and every individual corporator
must be taken to have come into the corporation upon the terms of
being liable to be so bound. How then can this Court act in a suit
constituted as this is, if it is to be assumed, for the purposes of the
argument, that the powers of the body of the proprietors are still in
existence, and may lawfully be exercised for a purpose like that I have
suggested? Whilst the Court may be declaring the acts complained of
to be void at the suit of the present Plaintiffs, who in fact may be the
only proprietors who disapprove of them, the governing body of
proprietors may defeat the decree by lawfully resolving upon the
confirmation of the very acts which are the subject of the suit. The
very fact that the governing body of proprietors assembled at the
special general meeting may so bind even a reluctant minority is
decisive to shew that the frame of this suit cannot be sustained whilst
that bodyretains its functions…”
In substance, the “majority rule principle” states that if the alleged
wrong can be confirmed or ratified by a simple majority of members
in a general meeting then the court will not interfere, cadit quaestio.

6. This rule could be justified on two grounds – firstly that the
corporation in itself constitutes a legal personality and therefore any
injuries caused to the corporation by the majority shareholders should
be remedied by the corporation itself and not any individual
member. This is known as the ‘corporation principle’ – “the proper
plaintiff in an action in respect of a wrong alleged to have done to a
company or association of persons is prima facie the company or
association itself.” Secondly there is a “partnership doctrine” which
was held by the equity courts in the early 19thcentury that the affairs
between one partner and another were out of bounds for the courts
except in cases of dissolving the partnership.
The majority rule had certain exceptions to it, thus affording remedy
to individual members in common law:
1. Where the act complained is illegal or ultra vires the company;
2. Where the act done by the majority inflicts fraud on the minority;
3. Where a resolution is passed by a simple majority for any act which
specifically requires a resolution by special majority;
4. Infringement of individual rights of a member;
The rule in Foss is very notorious when it comes to the administration
of justice and fairness. It allows the majority to perpetuate anything
and everything on the minority shareholders in a company by virtue of
its deceptive simplicity. The majority cannot complain about any
wrong on the corporation itself or internal improprieties. Such a
bottleneck approach is in absolute dissonance with the basic notion of
shareholding i.e. every shareholder has an interest in the company by
virtue of his share in the capital and it is the duty of the management
to protect this interest.

7.  What is Oppression?
The definition of oppression in India has been adopted from the words
of Lord Keith in Scottish Co-operative Ltd v Meyer, in Needle
Industries (India) Ltd v Needle Industries Newey (India) Ltd and it
runs as below:
“Oppression under s 210 may take various forms. It suggests to my
mind…a lack of probity and fair dealing in the affairs of the company
to the prejudice of some portion of its members. The section confers a
wider power on the Court to deal with such a situation in an equitable
manner…”
However, inefficient management would not fall into the category of
oppression even if the impact thereof is oppressive upon some
members.
Shareholderoppression occurs when the majority shareholders in
a corporation take action that unfairly prejudices the minority. It most
commonly occurs in close corporations, because the lack of a public
market for shares leaves minority shareholders particularly vulnerable,
since minority shareholders cannot escapemistreatment by selling
their stockand exiting the corporation. The majority shareholders may
harm the economic interests of the minority by refusing to
declare dividends or attempting a squeeze out. The majority may
physically lock the minority out of the corporatepremises and even
deny the minority the right to inspect corporaterecords and books,
making it necessary for the minority to sue every time it wants to look
at them.Democratic decisions are made in accordancewith the
majority decision and are deemed to be fair and justified while
overshadowing the minority concerns. The corporateworld has
adopted this majority rule in decision making process and
management of the companies. Statutory provisions in this regard
have been provided under the Companies Act, 1956, which is being
replaced by the Companies Act, 2013.
The term of Oppression under Companies Act, 1956:
Oppression is the exercise of authority or power in a burdensome,
cruel, or unjust manner. It can also be defined as an act or instance of
oppressing, the state of being oppressed, and the feeling of being
heavily burdened, mentally or physically, by troubles, adverse
conditions, and anxiety. The term oppression explained in the case
Scottish case of Elder v/s. Elder & Watson Ltd. which was cited in the
case of Shanti Prasad Jain v/s. Kalinga Tubes by the Supreme Court-

8. The essence of the matter seems to be that the conduct complained of
should, at the lowest, involve a visible departure from the standards of
their dealing, and a violation of the conditions of fair play on which
every shareholder who entrusts his money to the company is entitled
to rely.The most important element of oppression is that it should be a
continuous act, which means that the act must be continued by the
majority shareholder till date the petition is filed with the Tribunal.
Section 397 of the Companies Act, 1956 says that when any affair of
the company is being conducted to any member or members by the
way of prejudice to public interest or oppressive then any one or more
than one member have right to apply to the Tribunal by the virtue of
Section 399 of the Companies Act, 1956.
The requisite number of members who must sign the application is
given under Section 399 of the Companies Act, 1956.
1. In case of a company, having a share capital an application signed
by at least one hundred members or by at least 1/10th of the total
number of its members, whichever is less
OR
A valid application may be made by any member/ members holding
not less than 1/10th of the issued share capital of the company
2. In case of a company, having not a share capital an application
signed by at least 1/5th of the total number of members of the
company.
If the calculation of requisite members as per (1) mentioned above,
joint holders of the shares shall be counted as one member only.
Acts held as Oppression
The following are the few acts which are said to be as oppression
through various judgments
1. Not calling a general meeting and keeping shareholders in dark.
2. Non-maintenance of statutory records and not conducting affairs of
the company in accordancewith the Companies Act.
3. Depriving a member of the right to dividend.
4. Refusal to register transmission under will.
5. Issue of further shares benefiting a section of shareholders.
6. Failure to distribute the amount of compensation received on
nationalisation of business of company among members, where
required to be so distributed.

9. Acts not held as Oppressive
The following are the few acts which are said not to be as oppression
through various judgments
1. An unwise, inefficient or careless conductof director.
2. Non-holding of the meeting of the directors.
3. Not declaring dividends when company is making losses
4. Denial of inspection of books to a shareholder.
5. Lack of details in notice of a meeting.
6. Non-maintenance/Non-filing of records.
7. Increasing the voting rights of the shares held by the management.

10.  Remedy Against Oppression
CA 1956 provides for protection of the minority shareholders from
oppressionand mismanagement by the majority under Section 397
(Application to CompanyLaw Board for relief in cases of oppression)
and 398 (Application to CompanyLaw Board for relief in cases of
mismanagement). Oppressionas per Section 397(1) of CA 1956 has
been defined as 'when affairs of the companyare being conducted in a
mannerprejudicialto publicinterest or in a manneroppressive to any
member or members' while the term mismanagement has been defined
under Section 398 (1) as 'conducting the affairs of the companyin a
mannerprejudicialto publicinterest or in a mannerprejudicialto the
interests of the companyor there has been a material changein the
managementand control of the company, and by reason of such
changeit is likely that affairs of the companywill be conducted in a
mannerprejudicialto publicinterest or interest of the company'.
Right to apply to the Company Law Board in case of oppression
and/or mismanagement is provided under Section 399 to the minority
shareholders meeting the ten percent shareholding or hundred
members or one-fifth members limit, as the case may be. However,
the Central Government is also provided with the discretionary power
to allow any number of shareholders and/or members to apply for
relief under Section 397 and 398 in case the limit provided under
Section 399 is not met.
On the other hand, CA 2013 provides for provisions relating to
oppressionand mismanagement under Sections 241-246. Section 241
provides that an application for relief can be made to the Tribunal in
case of oppressionand mismanagement. Section 244(1) provides for
the right to apply to Tribunal under Section 241, wherein the minority
limit is same as that mentioned in CA 1956. Under CA 2013, the
Tribunal may also waive any or all of the requirements of Section
244(1) and allow any number of shareholders and/or members to
apply for relief. This is a huge departure from the provisions of CA
1956 as the discretion which was provided to the Central Government
to allow any number of shareholders to be considered as minority is,
under the new CA 2013 been given to the Tribunal and therefore is
more likely to be exercised

11. Old Companies Act(1956)
The primary provision in the Companies Act 1956 was S. 397, which
was as mentioned earlier, modeled in the likeliness of S. 210 of the
English Companies Act 1948. The section is as produced below:
“397. Application to Company Law Board for relief in cases of
oppression.
(1) Any members of a company who complain 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
(including any one or more of themselves) may apply to the Company
Law Board for an order under this section, provided such members
have a right so to apply in virtue of section 399.
(2) If, on any application under sub- section (1), the Company Law
Board is of opinion-
(a) that the company’ s affairs are being conducted in a manner
prejudicial to public interest or in a manner oppressive to any
member or members; and
(b) that to wind up the company would unfairly prejudice such
member or members, but that otherwise the facts would justify the
making of a winding- up order on the ground that it was just and
equitable that the company should be wound up; the Company Law
Board may with a view to bringing to an end the matters complained
of, make such order as it thinks fit.”
The section prescribes 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
supporta winding up, a petition u/s 397 cannot be entertained.

12. In Killick Nixon Ltd v Bank of India, it was held that no personal
prejudice need be caused to the applicant. The cause of action is that
the affairs of the company were conducted in a manner which was
prejudicial and oppressive to the interests of the members or the
public interest. Thus, oppression of other members can also be a locus
standi for filing a petition under this section.
The expression “public interest” renders a wide ambit to this section.
An action for oppression, thus, could be justified even when a
member or group of members is not affected at all by the impugned
acts of the majority but the brunt thereof is suffered by some third
party. In cases of companies the concept of public interest takes it out
of the conventional sphere of merely being a going concern in which
only shareholders are interested. The stakeholder theory is endorsed
by emphasizing upon the idea that a company works for the public
good and welfare of the society at large, and anyone who is
reasonably connected to the company and impacted by its actions can
be said to have a “stake” in its actions.
In Shant Prasad Jain v Kalinga Tubes Ltd, the Supreme Court has
thus expressed the position on the requirements demanded by s 397:
“It is not enough to show that there must be a just and equitable cause
for winding up the company though that must be shown as a
preliminary to the application of section 397. It must further be shown
that the conduct of the majority shareholders was oppressive to the
minority as members and this requires that events have to be
considered not in isolation but as part of a consecutive story… There
must be continuous acts on the part of the majority shareholders,
continuing upto the date of petition, showing that the affairs of the
company were being conducted in a manner oppressive to some part
of the members. The conduct must be burdensome, harsh and
wrongful and mere lack of confidence between the majority and
minority shareholders would not be enough unless the lack of
confidence springs from oppression of a minority by a majority in the
management of the company’s affairs and such oppression must
involve atleast an element of lack of probity and fair dealing to a
member in the matter of his proprietary rights as a shareholder.”
Thus in substance, an application for oppression is not very easy to
maintain for the applicant before a court in India. This ratio of the
Supreme Court has enlarged the onus lying upon the applicant in such

13. cases. The requirement of continuous acts is one which has been
inserted into the gamut of s 397 by virtue of this case law. Thus an
unwise, inefficient or careless conduct of a Director or the Board of
Directors cannot give rise to a claim for relief u/s 397. However, if
circumstances indicate that even though an oppressive act is not per se
continuous its effect is, the courts can interfere. The requirement that
the act must prejudice the member(s) in the capacity of members is
also strictly enforced, unlike the English counterpart in s 994 CA
2006.
New Companies Act(2013)
Ss. 241 and 242 are the relevant provisions that give the power to an
individual member or a group of members to apply for relief in case
of oppressive practices. The major portion of these sections is similar
to that of S. 397 and 402 of the Companies Act 1956.
The only difference is that of S. 241 (1) (b), which provides an
additional ground for filing application for oppression:
(b) the material change, not being a change brought about by, or in
the interests of, any creditors, including debenture holders or any
class of shareholders of the company, has taken place in the
management or control of the company, whether by an alteration in
the Board of Directors, or manager, or in the ownership of the
company’s shares, or if it has no share capital, in its membership, or
in any other manner whatsoever, and that by reason of such change, it
is likely that the affairs of the company will be conducted in a manner
prejudicial to its interests or its members or anyclass of members
Thus this clause allows the minority a pre-emptive remedy, i.e. they
can prevent any change in the original composition and structure of
the company if there is reason to believe that such change will lead to
an injury to their interests. Also, the term “fraud” has been
specifically defined to include any act, omission, concealment of any
fact or abuse of position committed with intent to deceive, to gain
undue advantage from, or to injure the interests of the company or its
shareholders or its creditors or any other person.

14.  Conclusion
Indian law provides for the empowerment of every shareholder of the
company, including the minority shareholders. The minority
shareholders were specifically granted powers under the Companies
Act 1956 to challenge the decisions of majority shareholders and also
to convey their opinion on the management and working of the
company.
Apart from the deadlock or risks of litigation created by the minority
block, there can be cases where the majority wants to do away with
the minority shareholders in entirety in order to obtain an
administrative stronghold. Thus the concept of minority “squeeze
outs”, which are well recognized in the legal frameworks of many
jurisdictions, becomes relevant.
A squeeze out refers to a device by which the controlling block
effectively acquires the shares held by the minority shareholders in a
company. S. 395 of the 1956 Act directly deals with this concept. It
provides for compulsory acquisition of shares by the majority
shareholders in certain circumstances. The shareholders who dissented
from this acquisition had the right to file their objections before the
Court. Unless the court orders otherwise, the acquirer will be entitled
to acquire the shares of the transferor company (including the
minority). However, no corresponding rules were framed and thus
wide discretionary powers fell into the lap of the Courts. Further, the
section did not contain any guidelines for valuation of shares for
purposes ofthe acquisition offer.
236 of the Companies Act 2013 is the concurrent provision for
purchase of minority shareholding. In the event of an acquirer, or a
person acting in concert with such acquirer, becoming registered
holder of 90% or more of the issued equity share capital of the
company, or in the event of any person or group of persons becoming
90% majority or holding 90% of the issued equity share capital of a
company, by virtue of an amalgamation, share exchange, conversion
of securities or for any other reason, such entity shall notify the
company of their intention to buy the remaining equity shares.
Sub-section (2) provides for the pricing mechanism of the shares so
acquired, at a price determined by a registered valuer. The transferor-
company shall act as a transfer agent for receiving and paying the

15. price to the minority shareholders. It is also pertinent to note that in
this case the wheels of transfer are set into motion only once the
shares have been acquired, whereas in the old Act the mere approval
of the scheme by 9/10th of the shareholders of the company allowed
the transferee company could serve notice to the dissenting
shareholders for compulsory acquisition of their shares.
In order to ensure fairness to the minority shareholders, the provision
of a ‘registered valuer’ is given for valuation of the shares. This
guarantees that the minority shareholders are not squeezed out of the
company without being given fair value of their shares.
Thus the new Companies Act 2013 in many ways ensures that the
rights of the minority shareholders are protected in every possible
manner. The stake held by them in a company is not in any manner
subservient to the majority and it is the duty of the law to protect their
interests from any odious activity of the latter.

16. Bibliography
Primary Sources
 Taxmann Publication Pvt Ltd
 The Institute of Company Secretaries of India
 Company Law
Secondary Sources
 http://www.legalservicesindia.com/article/article/minority-rights-on-oppression-
and-mismanagement-under-companies-act-1956-and-companies-bill-2011-1534-
1.html
 http://www.indialawjournal.org/archives/volume6/issue-2/article5.html
 http://www.lawctopus.com/academike/oppression-mismanagement-
corporate-law/