SHAREHOLDERS DEMOCRACY
SHAREHOLDERS DEMOCRACY/FOSS V HARBOTTLE
Q1. A is a minority shareholder who brought an action for damages against the Company and its directors on the ground that they have been negligent in selling a plant owned by the Company for ` 25 Lakh. A alleged that the real value of plant was about ` 70 Lakh. Evaluate based on decided case law(s), whether action taken by A will be maintainable in the Court.
[June 2019 (5 Marks)]
Ans. I n Pavlides v. Jensen ( 1956) Ch. 565, a m i nori t y s har e hol der br o ug ht a n acti o n f or da mages agai nst t he di r ect ors a nd t he c o mpa ny o n t he gr o und t hat t he y have bee n ne gli ge nt i n s elli ng a m i ne o wne d by t he c o mpa ny f or £ 82, 000, wher e as i t s r e al val ue was a bo ut £ 10, 00, 000. It was o bs er ve d t hat i f t he di r ect ors wer e ne gli ge nt i n s elli ng t he m i ne t he n i t was ope n t o t he maj ori t y of t he c o mpa ny t o v ot e agai nst s uc h s al e. Ho we ver t he maj ori t y di d not oppos e t hi s t r a ns acti o n of s al e. And i t was hel d t hat t he acti o n was not mai nt ai na bl e agai nst t he di r ect ors.
The ma nage me nt of t he c o mpa ny i s bas e d o n maj ori t y r ul e as poi nt e d o ut i n Foss v. Harbottle . The matt ers r el ati ng aff ai rs of t he c o mpa ny ar e deci de d upo n by a n or di nar y or s peci al r es ol uti o n of s har e hol ders.
I n t he pr es e nt c as e A bei ng a m i nori t y s har e hol der, c a nnot bri ng acti o n agai nst t he c o mpa ny or di r ect ors o n t he a bove me nti o ne d gr o und. The acti o n t a ke n by A will not be mai nt ai na bl e i n t he c o urt.
Q2. “Shareholders democracy means the rule of shareholders, by the shareholders and for the shareholders in the corporate enterprise, to which the shareholders belong”. Comment on the above and enumerate any five provisions of the Companies Act, 2013 which demonstrate the same.
[December 2019 (5 Marks)] OR
What do you mean by Shareholders Democracy? [Self-Test Question ICSI]
TAXMANN ® 1.1
1.2
Ans. De mocr ac y i n ge ner al me a ns g over n me nt by t he pe opl e es peci all y t he r ul e of maj ori t y. It’ s t he r ul e of pe opl e, by pe opl e a nd f or pe opl e. I n t hat c o nt e xt t he s har e hol ders de mocr ac y me a ns t he r ul e of s har e hol ders, by t he s har e hol ders’, a nd f or t he s har e hol ders’ Pr eci s el y i t i s ri g ht s t o s pe a k, v ot e, c o ngr e gat es, a nd c o mmuni c at es w i t h c o- s har e hol ders a nd t o l e ar n a bo ut ho w t he aff ai rs of t he c o mpa ny ar e bei ng c arri e d o n.
As per t he Co mpa ni es Act, 2013 t he po wers t o g over n t he c o mpa ny have bee n di vi de d bet wee n t he Boar d of Di r ect ors a nd t he s har e hol ders. The s har e hol ders have t he a ut hori t y t o a ppoi nt di r ect ors at t he Ann ual Ge ner al Meeti ngs s o t hat aff ai rs of t he c o mpa ny c a n be ma nage d by t he Boar d of Di r ect ors.
The Di r ect ors e xer ci s e t hei r po wers t hr o ug h meeti ngs of Boar d of di r ect ors a nd s har e hol ders e xer ci s e t hei r po wers t hr o ug h Ann ual Ge ner al Meeti ngs / Ge ner al Meeti ngs.
Eve ni f s har e hol ders ar e c a pa bl e of t r a ns acti ng all b usi ness i n Ge ner al Meet - i ngs, most of t he po wers ar e del e gat e d t o t he Boar d of Di r ect ors t hr o ug h
Me mor a ndu ma nd Arti cl es of Ass oci ati o n of t he Co mpa ny Ho wever cert ai n b usi ness es c a nnot be del e gat e d t o t he Boar d of t he Di r ect ors. The Co mpa ni es Act, 2013 de mar c at es bet wee n t he po wer of t he di r ect ors as well as t hat of s har e hol ders. So me of t he b usi ness es whi c h c a n be t r a ns act e d o nl y at t he meeti ng of s har e hol ders by passi ng or di nar y/s peci al r es ol uti o n ar e as under:
1. Al t er ati o n of Me mor a nd u mof Ass oci ati o n a nd Arti cl es of Ass oci ati o n.
2. Furt her i ss ue of s har e c a pi t al.
3. To r e d uce t he s har e c a pi t al of t he c o mpa ny.
4. To s hi ft t he r e gi st er e d offi ce of t he c o mpa ny o ut si de t he st at e i n whi c h t he r e gi st er e d offi ce i s si t uat e d at pr es e nt.
5. To a ppoi nt a udi t ors.
6 To a ppr oac h Ce nt r al Gover n me nt f or i nvesti gati o n i nt o t he aff ai rs of t he c o mpa ny.
7. To a ppoi nt di r ect ors.
8. To r e move di r ect ors.
9. To i ncr e as e or r e d uce t he n u mber of di r ect ors w i t hi n t he li m i t s l ai d do wn i n.
10. Arti cl es of Ass oci ati o n.
11. To c a ncel, r e dee m de be nt ur es et c.
(Any five of the above mentioned bullet points can be written in the examination)
TAXMANN ®
S HA RE HOL DE RS DE MOC RACY
Ans. The ge ner al pri nci pl e of c o mpa nyl a wi s t hat e ver y me mber hol ds e q ual ri g ht s w i t h ot her me mbers of t he c o mpa ny i n t he s a me cl ass. For s moot h f uncti o ni ng a nd g over na nce of t he c o mpa ny t he ri g ht s of t he me mbers of t he s a me cl ass must be hel d e ve nl y
I n c as e of di ff er e nce( s) of opi ni o ns a mo ngst t he me mbers t he i ss ue i s deci de d by a v ot e of t he maj ori t y. Th us a c o mpa ny i s g over ne d by t he maj ori t y s har e hol ders. Due t o t hi s t he m i nori ti es of s har e hol ders ar e oft e n oppr ess e d.
The c o mpa ny l a w pr ovi des f or a de q uat e pr ot ecti o n f or t he m i nori t y s har e - hol ders whe n t hei r ri g ht s ar e t r a mpl e d by t he maj ori t y s uc h Cl ass Acti o n Sui t under s ecti o n 245 or a n a ppli c ati o n under s ecti o n 241 f or oppr essi o n a nd m i s ma nage me nt Ho we ver s uc h pr ot ecti o n i s avail a bl e o nl y i n s peci al ci r c u mst a nces. Suc h pr ot ecti o n of t he m i nori t y i s not ge ner all y avail a bl e whe n t he maj ori t y does a nyt hi ng i n t he e xer ci s e of t he po wers f or i nt er nal a d m i ni st r ati o n of a c o mpa ny. The c o urt will not us uall yi nt er ve ne i n matt ers of i nt er nal a d m i ni st r ati o n s o l o ng as t he maj ori t y s har e hol ders a nd di r ec - t ors ar e acti ng w i t hi n t he po wers c o nf err e d o n t he m under t he arti cl es of t he c o mpa ny. I n ot her wor ds, t he arti cl es ar e t he pr ot ecti ve s hi el d f or t he maj ori t y of s har e hol ders who c o mpos e t he boar d of di r ect ors f or c arr yi ng o ut t hei r o bj ect at t he c ost of m i nori t y of s har e hol ders.
Thi s basi c pri nci pl e of no n-i nt erf er e nce w i t h t he i nt er nal ma nage me nt of c o mpa ny by t he c o urt i s l ai d do wn i n a l a nd mar k c as e of Foss v. Harbottle
67 E . R . 189; ( 1843). Th us no m i nori t y s har e hol der c a n bri ng acti o n agai nst di r ect ors of t he c o mpa ny i f t he y ar e acti ng w i t hi n t he po wers gi ve n t o t he m by t he Arti cl es of Ass oci ati o n. Onl y c o mpa ny c a n bri ng acti o n agai nst t he m . Th us arti cl es ar e t he pr ot ecti ve s hi el d of maj ori t y s har e hol ders.
Q4. What are the exceptions to the Rule in Foss v. Harbottle [Self-Test Questions ICSI]
Ans. The maj ori t y r ul e e ndors e d i n FOSS v. HARBOTTLE e xt e nds t o c as es i n whi c h c o mpa ni es ar e c o mpet e nt t o r ati f y ma nageri al m i s dee ds. Ther e ar e cert ai n act s a nd i nci de nt s whi c h no maj ori t y c a n r ati f y. The f oll o w i ng ar e e xce pti o ns t o t he Foss v Harbottle :
1. Ultra Vires Acts: Wher e t he di r ect ors r e pr es e nti ng t he maj ori t y of s har e hol ders perf or m a n ill e gal or ultra vires act f or t he c o mpa ny, a n i ndi vi d ual s har e hol der has ri g ht t o bri ng a n acti o n.
2. Fraud on Minority: Wher e a n act do ne by t he maj ori t y a mo unt s t o a f r a ud o n t he m i nori t y; a n acti o n c a n be br o ug ht by a n i ndi vi d ual s har e hol der. Ther e i s no cl e ar defi ni ti o n of t he e x pr essi o n “ f r a ud o n
TAXMANN ® S HA RE HOL DE RS DE MOC RACY 1.3
Q3. “Articles of the company are the protective shield for the majority of shareholders”. Comment. [Self-Test Questions ICSI]
t he m i nori t y ” , b ut t he c o urt deci des a parti c ul ar c as e acc or di ng t o t he s urr o undi ng f act s. The ge ner al t est a ppli e d by c o urt s i s: Whet her r es o - l uti o n pass e d by t he maj ori t y i s “bona fide f or be nefi t of t he c o mpa ny as a whol e”
3. Wrongdoers in Control: I f t he wr o ng doers ar e i n c o nt r ol of t he c o mpa ny, t he m i nori t y s har e hol ders’ r e pr es e nt ati ve acti o n f or f r a ud o n t he m i nori t y will be e nt ert ai ne d by t he c o urt [ Cf. Birch v. Sullivan ]. The r e as o n f or i t i s t hat i f t he m i nori t y s har e hol ders ar e de ni e d t he ri g ht of acti o n, t hei r gri e va nces i n s uc h c as e wo ul d ne ver r e ac h t he c o urt.
4. Resolution requiring Special Majority but is passed by a Simple Majority: A s har e hol der c a n s ue i f a n act r e q ui r es a s peci al maj ori t y b ut i s pass e d by a si mpl e maj ori t y. [Nagappa Chettiar v. Madras Race Club ( 1948)]
5. Personal Actions: I ndi vi d ual me mbers hi p ri g ht s c a nnot be i nva de d by t he maj ori t y of s har e hol ders. A me mber e nti tl e d t o all t he ri g ht s a nd pri vil e ges a ppert ai ni ng t o hi s st at us as a me mber. A s har e hol der c a n i nsi st o n t he st ri ct c o mpli a nce w i t h t he l e gal r ul es, st at ut or y pr ovi si o ns. Pr ovi si o ns i n t he MOA & A OA ar e ma ndat or y i n nat ur e a nd c a nnot be wai ve d by maj ori t y.
6. Breach of Duty: The m i nori t y s har e hol der may bri ng a n acti o n agai nst t he c o mpa ny, wher e al t ho ug h t her e i s no f r a ud, t her e i s a br e ac h of d ut y by di r ect ors a nd maj ori t y s har e hol ders t o t he det ri me nt of t he c o mpa ny. The di r ect ors have f oll o w i ng d uti es: u
To act bona fide ( not t o wor k f or pers o nal gai n) i n t he i nt er est of t he c o mpa ny u
To t a ke ut most c ar e a nd e mpl oy s kill i n ma nagi ng aff ai rs of t he c o mpa ny
7. Prevention of Oppression and Mismanagement: The m i nori t y s har e - hol ders ar e e mpo wer e d t o bri ng acti o n w i t h a vi e w t o pr e ve nti ng t he maj ori t y f r o m oppr essi o n a nd m i s ma nage me nt u/s 241 of t he Co mpa ni es Act, 2013.
Q5. Write a short note on Majority Powers and Minority Rights. [Self-Test Questions ICSI]
Ans. A c o mpa ny i s a n arti fi ci al pers o n w i t h no p hysi c al e xi st e nce. It f unc - ti o ns t hr o ug h t he Boar d of di r ect ors who ar e g ui de d by t he w i s hes of t he maj ori t y, s ubj ect t o t he wel f ar e of t he c o mpa ny as a whol e. It i s, t her ef or e, a c ar di nal r ul e of c o mpa ny l a wt hat prima facie a maj ori t y of me mbers of a c o mpa ny ar e e nti tl e d t o e xer ci s e t he po wers of t he c o mpa ny a nd ge ner all y t o c o nt r ol i t s aff ai rs.
TAXMANN ®
1.4 S HA RE HOL DE RS DE MOC RACY
The basi c pri nci pal r el ati ng t o t he a d m i ni st r ati o n of t he aff ai rs of a c o mpa ny i s t hat “t he will of t he maj ori t y pr e vail s or maj ori t y i s s upr e me”. The over all po wers of c o nt r olli ng t he c o mpa ny ar e w i t h t he s har e hol ders whi c h ar e e xer ci s e d i n t he ge ner al meeti ng of a c o mpa ny e xce pt f or t he po wers vest e d i n t he Boar d of Di r ect ors.
Us uall y t he ge ner al r ul e i s t hat t he deci si o n of maj ori t y s har e hol ders i n a c o mpa ny bi nds t he m i nori t y. Ther ef or e, i t i s o nl y maj ori t y of me mbers who c a n c o nt r ol t he boar d of di r ect ors. The maj ori t y mai nt ai n t hei r ri g ht s w i t ho ut c o nsi deri ng t he i nt er est s of m i nori t y. Thi s may r es ul t i n m i s us e of t hei r po wer t o e x pl oi t t he ri g ht s of m i nori t y I n s uc h a c as e, Oppr essi o n of m i nori t y or m i s ma nage me nt by maj ori t y c a n occ ur.
Ho we ver, t he Co mpa ni es Act, 2013 has l ai d do wn cert ai n pr ovi si o ns whi c h r est ri ct s s upr e mac y of maj ori t y a nd c o nf er ri g ht s o n m i nori t y t o a ppl y t o t he Nati o nal Co mpa ny La w Tri b unal or Ce nt r al Gover n me nt i n c as e of Oppr essi o n or M i s ma nage me nt.
Acc or di ng t o Secti o n 47 of t he Co mpa ni es Act, 2013, e ver y me mber of a c o mpa ny, whi c h i s li m i t e d by s har es, hol di ng a ny e q ui t y s har es s hall have a ri g ht t o v ot e i n r es pect of s uc h c a pi t al o n e ver y r es ol uti o n pl ace d bef or e t he c o mpa ny. Me mber’ s ri g ht t o v ot e i s r ec og ni s e d as ri g ht of pr opert y a nd t he s har e hol der may e xer ci s e i t as he t hi nks fi t acc or di ng t o hi s c hoi ce a nd i nt er est. A s peci al r es ol uti o n, f or i nst a nce, r e q ui r es a maj ori t y of 3/4t h of t hos e v oti ng at t he meeti ng a nd t her ef or e, wher e t he Act or t he arti cl es r e q ui r e a s peci al r es ol uti o n f or a ny p ur pos e, a t hr ee- f o urt h maj ori t y i s necess ar y a nd a si mpl e maj ori t y i s not e no ug h.
The r es ol uti o n of a maj ori t y of s har e hol ders, pass e d at a d ul y c o nve ne d a nd hel d ge ner al meeti ng, upo n a ny q uesti o n w i t h whi c h t he c o mpa ny i s l e gall y c o mpet e nt t o de al, i s bi ndi ng upo n t he m i nori t y a nd c o ns e q ue ntl y upo n t he c o mpa ny.
Th us, t he maj ori t y of t he me mbers e nj oy t he s upr e me a ut hori t y t o e xer ci s e t he po wers of t he c o mpa ny a nd ge ner all y t o c o nt r ol i t s aff ai rs. But t hi s i s s ubj ect t o t wo ver yi mport a nt li m i t ati o ns. Fi rstl y, t he po wers of t he maj ori t y of me mbers i s s ubj ect t o t he pr ovi si o ns of t he Co mpa ny ’ s me mor a nd u m a nd arti cl es of ass oci ati o n. A c o mpa ny c a nnot l e gall y a ut hori s e or r ati f y a ny act whi c h bei ng o ut si de t he a mbi t of t he me mor a nd u m , i s ultra vires of t he c o mpa ny. Sec o ndl y, t he r es ol uti o n of a maj ori t y must not be i nc o n - si st e nt w i t h t he pr ovi si o ns of t he Act or a ny ot her st at ut e, or c o nsti t ut e a f r a ud o n m i nori t y de pri vi ng i t of i t s l e gi ti mat e ri g ht s.
TAXMANN ® S HA RE HOL DE RS DE MOC RACY 1.5
Q6. Discuss the Rule in Foss v. Harbottle. [Self-Test Questions ICSI]
Ans. The ge ner al pri nci pl e of c o mpa ny l a w i s t hat e ver y me mber hol ds e q ual ri g ht s w i t h ot her me mbers of t he c o mpa ny i n t he s a me cl ass. The matt ers r el ati ng t o aff ai rs of t he c o mpa ny ar e deci de d by a v ot e of t he maj ori t y. Si nce t he maj ori t y of t he me mbers ar e i n a n a dva nt age o us po - si ti o n t o r un t he c o mpa ny acc or di ng t o t hei r c o mma nd, t he m i nori ti es of s har e hol ders ar e oft e n oppr ess e d. The c o mpa ny l a w pr ovi des f or a de q uat e pr ot ecti o n f or t he m i nori t y s har e hol ders whe n t hei r ri g ht s ar e t r a mpl e d by t he maj ori t y. But t he pr ot ecti o n of t he m i nori t y i s not ge ner all y avail a bl e whe n t he maj ori t y does a nyt hi ng i n t he e xer ci s e of t he po wers f or i nt er nal a d m i ni st r ati o n of a c o mpa ny The c o urt will not us uall y i nt er ve ne at t he i nst a nce of s har e hol ders i n matt ers of i nt er nal a d m i ni st r ati o n, a nd will not i nt erf er e w i t h t he ma nage me nt of a c o mpa ny by i t s di r ect ors s o l o ng t he y ar e acti ng w i t hi n t he po wers c o nf err e d o n t he m under t he arti cl es of t he c o mpa ny. I n ot her wor ds, t he arti cl es ar e t he pr ot ecti ve s hi el d f or t he maj ori t y of s har e hol ders who c o mpos e t he boar d of di r ect ors f or c arr yi ng o ut t hei r o bj ect at t he c ost of m i nori t y of s har e hol ders. The basi c pri nci pl e of no n-i nt erf er e nce w i t h t he i nt er nal ma nage me nt of c o mpa ny by t he c o urt i s l ai d do wn i n a cel e br at e d c as e of Foss v. Harbottle 67 E . R . 189; ( 1843) 2 Har e 461 t hat no acti o n c a n be br o ug ht by a me mber agai nst t he di r ect ors i n r es pect of a wr o ng all e ge d t o be c o mm i tt e d t o a c o mpa ny. The c o mpa ny i t s el f i s t he pr oper part y of s uc h a n acti o n. Th us Foss v Harbottle hi g hli g ht s t wo mai n r ul es g over ni ng c o mpa ny l a w :
u Majority Rule Principle : I f all e ge d wr o ng i s c o nfi r me d by maj ori t y t he n c o urt s wo n ’ t i nt erf er e.
u Proper Plaintiff Rule : Wr o ng do ne t o t he c o mpa ny c a n be vi ndi c at e d by t he Co mpa ny o nl y.
Q7. Write a short note on case law Foss v. Harbottle.
Ans. Facts of the Case: Foss v. Harbottle u Ri c har d Foss a nd Ed war d Turt o n wer e t he Pl ai nti ff s ( M i nori t y s har e - hol ders)
u
u
Tho mas Har bottl e a nd ot hers ( 4 Di r ect ors, Soli ci t ors, ar c hi t ect s et c. ) wer e t he def e nda nt s ( Maj ori t y s har e hol ders)
The c o mpa ny p ur c has e d 180 acr es of l a nd ne ar Ma nc hest er f or de vel opi ng pl a nt ati o ns, l a nds c a pi ng, gar de ns a nd c o nst r ucti ng ho us es.
u Thes e pr operti es wer e t o be s ol d or l e as e d by t he c o mpa ny.
TAXMANN ®
1.6 S HA RE HOL DE RS DE MOC RACY
Allegations made by Plaintiffs
1. Pr operti es of t he c o mpa ny wer e m i s a ppli e d a nd wast e d.
2. I mpr oper mort gages wer e gi ve n over t he pr opert y c o mm i tti ng non- c o m - pli a nce of l a w r el ati ng t o t r a nsf er of pr opert y.
Judgment
The all e gati o ns ma de by t he pl ai nti ff s wer e di s m i ss e d o n t he f oll o w i ng gr o unds:
1. Vi ct ori a Par k i s a c o mpa ny.
2. The i nj ur y i s not o nl y t o pl ai nti ff s e xcl usi vel y b ut t o t he Co mpa ny as a whol e.
3. The br e ac h of d ut y by di r ect ors i s a wr o ng do ne t o t he c o mpa ny a nd c o mpa ny al o ne c a n s ue. I ndi vi d ual me mbers c a nnot s ue i n t he na me of t he Co mpa ny. Pr oper Pl ai nti ff i s t he c o mpa ny a nd not t he s har e - hol ders.
4. I nj ur y was ca us e d by t hos ei ndi vi dual s who m maj ori t y t r ust e d/el ect e d . Wher e t he all e ge d wr o ng i s c o nfi r me d by maj ori t y t he n c o urt s wo n ’ t i nt erf er e i n t he i nt er nal f uncti o ni ng of t he c o mpa ny. Th us maj ori t y r ul es.
TAXMANN ® S HA RE HOL DE RS DE MOC RACY 1.7
