Steps Taken To Ensure The Protection of Minority Shareholders

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WHAT ARE OPPRESSION AND MISMANAGEMENT?

Section 241-245 of the Companies Act 2013 gives out the provisions to ensure companies prevent any sort of oppression and mismanagement within their own company and sector. Before the amendment, the provision had been 397(1) but the amendment had expanded the provision. What constitutes oppression and mismanagement? If a certain member of a company accuses that the operations are run in such an unfair manner to the public interest or a certain member of the company’s interests.[1] The provision also includes changes that are material in nature or a material change in the management or control of the company has occurred, not in the interests of any creditors, including debenture holders or any class of shareholders 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 way, and that as a result of such change, the company’s operations are likely to be conducted in a way that is oppressive to the members of the company and their interests.

HOW ARE MINORITY SHAREHOLDERS AFFECTED?

To answer this question, we must know who can file a case for oppression and mismanagement before the NCLT (National Company Law Tribunal). A person owning around 100 shares or who owns 1/10th of the company’s shares or any lesser out of the two options can file a suit before the tribunal.[2] In the case of Foss v Harbottle, the rule of the majority had been established. This case had been filed by two minority shareholders and the reason was due to their allegations stating that the directors of the company had participated in an unauthorised transaction which had led to a loss affecting the company. However, when this issue had been taken up in the board meeting, the majority of the shareholders were of the opinion that the directors should not be punished. Due to such a decision taken by the majority shareholders, the minority shareholders decided to file a case. However, the court thought that the minority shareholders are bound to accept the decisions taken by the majority shareholders, which is the majority rule.[3] When a resolution is passed with a simple or special majority, the minority shareholders must abide. The proper plaintiff rule can also be applied as this had been a wrong done to the company and only the company can file a suit as a separate legal entity (SPE). However, in India, the rule is not absolute. There are exceptions to this rule. When the act is Ultra vires and it is beyond the powers of the company to act upon it, then the shareholder can file a case. When there is clear evidence of fraud imposed on the minority shareholders by the majority shareholders which also includes the accused are the majority and the shareholders in control of the organisation. Class action suits or matters involving individual membership rights or if the case involves oppression and mismanagement done by the majority shareholders of the organisation.

ARE MINORITY SHAREHOLDERS PROTECTED EXTENSIVELY POST AMENDMENT?

Yes. In section 397 of the CA 1956, there are proper requirements seen for the case to be considered as oppression or mismanagement. However, prior to the amendment, only the company law board had the power to deal with such cases but post amendment, these powers have been transferred to the tribunal, and introduction for the criteria of class action suits had been brought in such as the numbers required to constitute a minority.[4] Sections 241 of the CA, 2013 is a combination of sections 397 and 398 but such issues of oppression and mismanagement are to be filed before the tribunal. If a minority shareholder feels that majority of the shareholders are conducting affairs that are prejudiced to him, he has the power to move the case to the tribunal and cite section 241. Before the amendment, section 399 had set up a minimum number for shareholders to constitute as the minority which are 100 members or members holding 1/10th of the company’s shares to apply for cases relating to oppression and mismanagement but the government had the discretion to decide how many shareholders can constitute as the minority.[5] However, post amendment, it has been given in section 244(1) that the tribunal has the discretion to put up any number and set aside the requirements in the section based upon the circumstances of the case. This had been a very supportive move considering that there is no strict application of section 244 as in cases where management or majority shareholders acting in a prejudiced manner to shareholders with less than 1/10th of the shares, the tribunal need not consider the minimum requirement and hear such case. However, does a minority shareholder show circumstances to ensure the requirements are waived? No, they need not. Such a requirement has been completely removed during the amendment. The discretion lies on the tribunal on whether to waive such criteria. In cases where directors or managers of the company are oppressing such minority shareholders, the tribunal has the power to remove them from such posts and also take away any inappropriate gains that have been made by such members. Options are provided to the minority in taking actions that would keep such directors in check. The introduction of class action suits into the act is a very forward step in the protection of the minority shareholders. This provision allows a collective of minority shareholders or depositors to file a class action suit if the management or majority shareholders are acting oppressively. Even though the specific number of shareholders had not been provided earlier, it has been decided that 5% of the total number of members or 100 members is the minimum amount that is willing to file such a suit. It is a step supporting the minority shareholders and is a protective clause.[6]

VIKRAM BAKSHI’S CASE ON PROTECTION OF MINORITY SHAREHOLDERS

In this case, Vikram Bakshi had been the Managing director of the CPRL (Connaught Plaza Restaurants Private Ltd) and had entered into a JVA (Joint Venture Agreement) with McDonald`s about 25 years ago. The shares were split into an even 50:50 agreement between both sides. The reason why the JVA had been introduced was due to the MIPL’s desire to set up several outlets across the northern part of India. The CPRL had been the primary franchisee between the two for 25 years. They had the complete authority to control and manage all the outlets that have been established within the northern part of India. The agreement had ensured that each side must nominate two board members and a total of 4 members on the board of directors. The board must also nominate a managing director with a term of 2 years. Clause 7(e) contained the prerequisites that were to be followed during the nomination process.

1. He had to be a resident of the national capital region; and

2. He had to have at least 50% of the shares of the joint venture.

Clause 32 of the agreement clearly stated that if Mr. Bakshi was not the MD, McDonald`s would have the option to purchase his shares at fair market value using the methodology outlined in the Joint Venture Agreement. McDonald’s offered to buy his shares for $5 million. Mr. Bakshi, on the other hand, wanted $100 million based on fair market value. Mr. Bakshi was fired (his re-appointment as Managing Director of CPRPL was blocked) in 2013 due to suspicions of money laundering and mismanagement. Mr. Bakshi contested the facts as well as the foundation for the claims. He claimed that the actions taken by MIPL’s nominee directors to remove him from his position as Managing Director were oppressive. Hence, Mr. Bakshi had moved the case towards the company law tribunal, but the NCLT later heard this case as it was transferred. As a result, Mr. Bakshi filed a complaint with the corporate law tribunal, which was later referred to the NCLT. Mr. Bakshi’s principal claim was that the respondents had a history of bias and persecution against him. The respondent’s principal contention was that because the case involved a private transaction, the NCLT lacked jurisdiction. The respondents further asserted that MIPL (and its nominee directors) had the right to refuse Mr. Bakshi’s re-appointment because he had broken the Joint Venture Agreement by acting against CPRPL and MPIL’s interests. They also stated that arbitration is the primary mechanism of resolving disputes under the private contract between both entities. It was held that there had been no complaints regarding his behaviour in the company and had violated no provisions added in the JVA. The NCLT stated that the act of firing Mr. Bakshi had been an act of oppression as it has been given in article 32 that if he had been fired, the company has the power to buy his shares. Secluding him would fetch the company a single price to buy his shares. There is financial gain that can be seen. This shows clear oppressive conduction of its affairs to Vikram Bakshi which is violative of section 241 of the CA 2013. Now for their main argument as to the fact that NCLT does not have jurisdiction in dealing with such a case, the tribunal had responded by stating that the JVA has been included in the Articles of Association which directly gives power to the NCLT to hear such matters regardless of the arbitration clause.

Even though there had been an equal share owned by both parties, the case proves to be a useful precedent for the protection of minority shareholders. Vikram Bakshi who had been the MD of the franchise had been oppressed by McDonald’s entity itself. He had mala fide intentions on buying him out of the franchise with a lesser amount. Section 241-245 of the CA 2013 as discussed earlier had clubbed all the provisions of oppression and mismanagement and had included powers of the tribunal and specification of class action suits. Post amendment had clarified the usage of such provisions in cases where minority shareholders are oppressed. In this case, the NCLT has been approached and in cases where there is a clear violation of the terms given in the Articles of Association, the case can be considered as mismanagement. With the amendment giving certain powers to the tribunal, the NCLT has the power to hear such cases. The joint venture agreement that had been incorporated into the Articles of Association gives us an idea of what is being intended by both parties. The respondents argue that private contracts are not under the NCLT’s control, but the actions of the respondents had been oppressive and done with mala fide intention. Even though the JVA has included article 32 which allows the company to buy the MD’s shares, the unreasonable act of kicking out Mr. Bakshi had been oppressive and is done for financial gain. This shows that even though companies can cite the JVA and agreed upon terms, an act that proves to be oppressive or is done in a manner that is prejudicial to the minority shareholders, the NCLT has the power to hear such case and recover any amount that has been gained unfaithfully by the majority shareholders.[7]

CAN THE ARBITRATION CLAUSE PREVENT NCLT’S JURISDICTION?

The problem with Vikram Bakshi’s case is the fact that there was no proper elaboration as to when the NCLT can hear cases even though an arbitration clause is in place. Yes, the tribunal does provide reasoning as the agreement in the debate is provided in the AOA which provides the NCLT power to hear cases if the claim presented is about oppression and mismanagement. However, are there other reasons provided? It was argued by the respondents in Vikram Bakshi`s case that there is an arbitration clause that leads to a contract that is private that ultimately ousts NCLT’s jurisdiction. However, that argument is invalid. The Bombay high court in the case of Rakesh Malhotra v. Rajinder Malhotra held that an arbitration clause will not be the sole basis for a court to move the case towards arbitration. It must be proven by the party that the petition filed is done with a mala fide intention.[8] However, if there are issues regarding violation of the agreement made by shareholders, then it can be arbitrable as it is provided by section 8 (arbitration and conciliation act 1996).[9] Only the issues regarding oppression and mismanagement (s.241 and s.242) cannot be directed to arbitration. In Vikram Bakshi`s case, the case involved oppressive actions which empowers the NCLT to hear the case. The case should have clearly highlighted that due to the offences coming under s.241 and s.242, the matters are not to be referred to arbitration.

APPOINTMENT OF ADMINISTRATORS IN SUCH CASES

A very interesting move made by the NCLT was to appoint Justice Singhvi as the administrator and ensure that there is mismanagement detected within the company. The addition of such a member is definitely supportive in the sense that they are responsible for providing reports which would give us an idea about the company’s operations. The appointment would prove to be useful as minority shareholders are protected in the sense that a third party who is not involved in the company’s operations is analysing the issue. If the accusations are true, the administrator is there to provide the courts with the information and can let the courts take action. Such appointments are requested by the minority to the tribunals to ensure a neutral viewpoint is taken and the oppression or mismanagement is detected.

CONCLUSION

It is safe to conclude that India is better equipped to deal with cases of oppression and mismanagement after the amendment had been made to the Companies Act. For instance, if Vikram Bakshi`s case had been dealt with earlier provisions with no additional powers provided to the tribunal, the settlement of such a dispute would have been more complex. Yes, the case did take a large amount of time for settlement, but the usage of post amendment provisions has been effective. The tribunals now can decide who can be considered as a minority shareholder and have been provided with the discretion to do so. The powers have been extensively provided and highlight what the tribunal can do in such cases. Earlier, the shareholders must show the reasons and circumstances for the requirements to be waived but it had been removed from the Companies Act 2013. The clubbing of previous oppression and mismanagement provisions together with additional powers given to tribunals and the introduction of class action suits have provided minority shareholders with a better chance in dealing with these cases. In Vikram Bakshi`s case, clear evidence has been provided to ensure such cases fall under s.241 and 242. The previous history had been taken into the importance and had concluded no such issue. He had been a proper asset to the franchise. Such an act had been done for financial gain and control. The steps taken by the tribunal including the appointment of an administrator can be set as a precedent for other cases to ensure the rights and interests of the minority shareholders are protected.

  1. S.241, Companies Act 2013

  2. S.244(1), Companies Act 2013

  3. Foss v. Harbottle, (1843) 67 ER 189

  4. S.397, Companies Act 1956

  5. S.399, Companies Act 1956

  6. S.245, Companies Act 2013

  7. Vikram Bakshi v. Connaught Plaza Restaurants Ltd, (2017) 140 CLA 142

  8. Rakesh Malhotra v. Rajinder Malhotra, (2015) 2 CompLJ 288 (Bom)

  9. S.8, Arbitration and Conciliation Act (1996)

This Article has been wtitten by Vaishnav Arun Kumar. He is a BBALLB student at OP Jindal University.

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