Minority Shareholders: The Silent Sufferers of Big Corporate Deal

Author: Nandini Sharma, Amity University Noida, Uttar Pradesh

Introduction

Shareholders form one of the key pillars for the smooth functioning of a company, whether their contribution is small or large they play a significant role. When we talk about corporate enterprises it is widely acknowledged that shareholders are the true owners of the company. Shareholders are granted various rights, such as appointing directors , having a say in major corporate decisions , receiving dividends and can even hold board accountable for its action; however , in practice the truth frequently presents a different picture and diverges from this ideal particularly for minority shareholders. Active participation by the shareholders regardless of their contribution is a powerful indicator of sound corporate governance as it encourages transparency, accountability and fairness. It improves monitoring procedures and aligns the action of management with the interest of the stakeholders. Therefore understanding and protecting shareholders becomes essential for attaining balanced and fair corporate governance .

Who are minority shareholders?

Every voice makes a company but not every voice is heard. In the realm of corporate ownership, while some shareholders have a significant impact over critical decisions of the company, others , despite their smaller numbers, the weight of their role outweighs the number of shares they hold.

When we talk about minority shareholders, they are individuals who hold less than 50% of a company’s shares, this percentage may vary however, the most common threshold is 50% these are investors who own a smaller portion of a company’s outstanding shares and do not have much control over interest of the company even though they may not be able control its policies and choices but their voting rights give them a say in the company’s operations. Some examples of minority shareholders include employees with stock options, retail investors and smaller institutional players, despite having limited shares in the company they are essential to a company’s ability to maintain check and balances. They enjoy the right to vote on important company decisions and can influence the direction of the company. Their participation ensures that management or controlling shareholders cannot make choices that can jeopardize the interest of minority shareholders.

Why is their role undermined in corporate deals

Minority shareholders often find them in a vulnerable position during corporate deals and participation in decision making processes especially in high stakes matters like merger and acquisition and reconstructions due to several underlying factors:

In private enterprises the most common issue faced by minority shareholders are that the directors of the company are majority shareholders or appointed by them .In this scenario the minority shareholders has little to no in decision making processes as well as very little visibility on financial information which gives majority shareholder an upper hand in controlling the overall working of the company that makes it easy for them to manipulate things to their advantage.
Minority shareholders' votes are outnumbered by majority shareholders' votes as they hold a smaller percentage of shares making their objectives ineffective.
Minority shareholders also face the challenge of information asymmetry where one party typically the majority shareholders has more or better information access than the other .As a result , timely and accurate information about company’s financial status and other key developments are often withheld or kept away from minority shareholders . Putting majority shareholders in a position to influence decisions and push their own interest limiting the ability of minority shareholders to make informed decisions.
Minority shareholders are frequently excluded from key management roles or board positions, resulting in their underrepresentation in corporate boards which will influence their say in major decisions. As a consequence, they are often compelled to rely on decisions taken by majority shareholders.
Minority shareholders are often forced to sell their shares especially during freeze out merger also called squeeze out merger where controlling shareholders forms a new company and give their existing shares in the target company to the new company in exchange of 100 % ownership of the new company and this freeze out takes place by forcing minority shareholders to surrender their shares frequently in return of cash essentially freezing them out of the company.
The high cost of lawsuits places minority shareholders in an even more precarious position, making access to justice seem like a distant dream.

What are the legal frameworks to empower the minority shareholders in India?

The term minority shareholder is nowhere to be found when it comes to legal framework in India, but there is a term, ‘Small Shareholder’, under section 151 of the Companies Act, 2013 and to some extent the Rule 7 of Companies (Appointment and Qualifications of Directors) Rules, 2014; section 151 under its explanation explicitly outlines the term ‘small shareholder’ as “a shareholder holding shares of nominal value of not more than twenty thousand rupees or such other sum as may be prescribed.” Regardless of a solid definition that specifically defines who minority shareholders are, there exist safeguards that ensure and uphold the collusive nature of company law and corporate governance in maintaining fairness, transparency and equity within the establishment/Company. In India, the primary addressal to the aspect of legal framework for minority shareholders in India was the Companies Act, 1956 which was later repealed and replaced with Companies Act, 2013 which was comparatively more extensive while dealing with the aspect of minority shareholders. Additionally, the Securities and Exchange Board of India (SEBI) regulations of 1992 are also a part of the legal frameworks that deal with minority shareholders. These frameworks prescribe safeguards in the form of rights for the minority shareholder. These include:

The Companies Act, 2013

Right to Information – With regards to appropriate oversight over company’s activities and a well-informed decision making, the minority shareholders have the right to seek relevant company information such as annual reports (Section 92 – Annual Reports), financial statements (Section 136) and minutes of general meetings (Section 119).
Right to Vote – Herein, all shareholders, including minority shareholders, have voting rights pertaining to shareholder resolution, and furthermore to influence decisions relating to major matters such as mergers, appointments, etc. Sections such as 47 (Voting Rights), 108 (E-Voting) and 114 (Ordinary and Special Resolutions) highlight the aforementioned.
Right to Dividend – Sections 123 (Declaration of Dividend) and Section 127 (Punishment for failure to distribute dividend) implicitly grant the minority shareholders with the entitlement over dividends.
Right to Oppose Oppression and Mismanagement – The right to seek legal remedy in instances wherein company’s affairs are carried in an oppressive manner, the minority shareholders can with the use of section 241 (Application for relief in cases of oppression and mismanagement), if eligible as per section 244 (Eligibility criteria to apply), can apply to the National Company Law Tribunal (NCLT). Furthermore, the sections 242-246 prescribe for the powers of tribunal, consequences and other reliefs, which add on to the legal remedy.
Right to Class Action Suit – Section 245 enables the minority shareholders to collectively take action against directors, auditors, or experts for the acts that in essence are fraudulent, unlawful or harmful to the company or even its members.
Right to Transfer Shares – The minority shareholders, like all other shareholders, have been given the right to transfer their respective shares (securities), as per Section 56 (transfer and transmission of securities).

Under Securities and Exchange Board of India (SEBI) Regulations 1992

The SEBI Regulations, 1992 also prescribe for several similar rights as well such as protection from fraudulent practices, equal participation in corporate actions, and mandatory e-voting for wider access, they also have right to approve key decisions through majority-of-minority voting and receive an exit option during takeovers via open offers, promoting accountability and transparency.

Case studies

Tata sons case

In this case the judiciary did not shy away from entering into issues of minority shareholders.it highlighted the wider financial and strategic ramifications of their ownership by granting the group the ability to contest decisions that impacted their interest and utilize legal protections.

In Tata Consultancy Services Ltd. Vs Cyrus investments Case

In this case Mr Cyrus was removed from his position as executive chairman of Tata sons and subsequently from his position as director of many Tata group companies. Under section 241-242 of companies act, 2013, minority shareholders in Tata sons, Cyrus Investments Pvt Ltd., and Sterling Investment Corporation Pvt Ltd. under ministry’s control challenged this removal on the ground of oppression and poor management. But the Supreme Court held in 2021 that removal was neither oppressive nor illegal under company law hence, no relief was granted showcasing how articles of association can be used to limit the influence of minority shareholders.

Conclusion

Minority shareholders are essential to a balanced corporate structure, but they are frequently left out of important decision making processes. Despite the protection that is extended by laws such as companies act and SEBI regulations, power disparities and enforcement gaps still exist . Their lack of Sway highlights the necessity of stronger legal protection and inclusive governance procedures. Real empowerment must translate into real world efficacy from formal Rights.