OP AND MISMANAGEMENT IN FAMILY RUN COMPANY

INTRODUCTION

The provisions to deal with oppression and mismanagement in a company are outlined in Sections 241-246 of the Companies Act, 2013.

A majority is the foundation of corporate democracy. The decision of Foss v. Harbottle[1], which established the majority rule, said that shareholders have no legal recourse for corporate malfeasance and that any action launched to recoup losses must be brought by the corporation or through a derivative action.

The rights of minorities are often overlooked because majority rule is the norm. The goal is to find a happy medium between the needs of individual shareholders and the requirements of running an efficient business. Therefore, sections 241 to 246 of the Indian company act, 2013 were enacted to protect the interests of minorities.

 

OVERVIEW OF THE PROVISIONS

 While "oppression" is not defined in any detail in Company Law 2013, the courts have interpreted it to mean "clearly departing from the rules of fair dealing and violating conditions that necessitate fair,", especially in regard to the rights of shareholders.

Although the act also does not define "mismanagement," it can be thought of as the management of a corporation that is unfair, dishonest, or incompetent. In Re, Malayalam Plantations India Ltd.[2], it was held that selling of company’s assets at low prices without complying with requirements under Section 293 was a case of mismanagement.  

When members experience persecution or the company is poorly run, they have recourse under Sections 241-246. 

• WHEN CAN AN APPLICATION BE MADE

Members have access to the National Company Law Tribunal ("Tribunal") under two circumstances, as outlined in Section 241. In the first place, if the company's affairs have been or are being conducted in a way that is harmful to the general public, or them personally or any other member(s), or harmful to the company's interests.

Second, if there is a change in the board of directors, membership, share capital or any other factor that substantially affects the management and control of the company, and that change is likely to result in the conduct of the company's affairs in a manner detrimental to the company, its members, or any class of members. A change is not considered material if it is implemented for the benefit of the company's creditors, debenture-holders, or any class of shareholders.

• WHO IS ELIGIBLE TO MAKE AN APPLICATION

As per Section 244, the following individuals are eligible to file a Section 241 action:

1. any member or members holding not less than 10% of the issued share capital of the Company, provided that the applicant or applicants have paid all calls and other sums due on his or their shares;
2. In the case of a company without a share capital, not less than one hundred members of the company, or not less than one-tenth of the total number of its members, whichever is less.

However, if the Tribunal determines that doing so is necessary, it can opt out of the aforementioned quorum requirement. In Cyrus Investments Pvt. Ltd. & Anr. v. Tata Sons Ltd. & Ors.[3], the National Company Law Appellate Tribunal ("NCLAT") developed a four-part test to evaluate whether or not the quorum requirement of Section 244 should be suspended. NCLAT recommends the following four-stage process:

1. To what extent the candidates are already invested in the company in question as members? The application should be immediately denied if the answer is no; that is if the applicant(s) are not already members. If that doesn't apply, the Court will move on to the next consideration.
2. Should we expect "oppression and mismanagement" from this proposed Section 241 application? If the Tribunal finds that the proposed application for "waiver" under Section 241 is unrelated to "oppression and mismanagement" of the company or its members and/or is frivolous, the application will be denied. In the event that this is not the case, the Tribunal will proceed to weigh the remaining factors.
3. Is it the case that a similar charge of "oppression and mismanagement" was lodged by another member in the past and has been resolved?
4. In order to file an application under Section 241 etc., can members get a "waiver," or an exception, if special circumstances exist?

Consequently, NCLAT granted a waiver to the Appellant/Applicant despite the fact that it was below the 10% criteria due to the four-step approach applied to the facts of the case.

Section 241(2) adds that if the Central Government believes the company's business is being handled in a way that is harmful to the public interest, it may file an application with the Tribunal.

• POWERS AND RESPONSIBILITIES OF THE TRIBUNAL 

If the Tribunal finds that the company's affairs are being conducted in a manner that is prejudicial or oppressive to any member(s), or that is prejudicial to the public interest or interest of the company, and that the Tribunal would be justified in winding up the company on such grounds but that doing so will unfairly prejudice such members or members of the company, then the Tribunal may wind up the company on just and equitable grounds pursuant to Section 242. In addition, the Tribunal can adopt any of the measures outlined in Section 242(2) against firms whose conduct it deems oppressive. The list in Section 242(2) includes the ability to dismiss the managing director or directors, prohibit the allotment or transfer of shares, or govern the future conduct of the company's business. In addition, Section 242(4) empowers the Tribunal to issue both interim and final orders.

 

LANDMARK CASES                                                  

An important precedent was just handed down in the case of Tata Consultancy Services Limited v. Cyrus Investments Pvt. Ltd. & Ors.[4]. Here, the Board of Directors of both businesses voted to replace Cyrus Mistry with Ratan Tata as a non-executive director on the board of Tata Sons. In addition, shareholder resolutions ousted him from his positions as a director in other Tata Group firms. Subsequent to his dismissal, two firms called Cyrus Investments Private Limited and Sterling Investment Corporation Private Limited, both of which had stock in the Tata Group of Companies, filed a complaint under Sections 241, 242, and 243, alleging bias, oppression, and poor management. Mr. Mistry held a majority of the voting stock in both of these organisations.

The National Company Law Tribunal (NCLT) found no evidence of oppression or poor management based on a number of factors, including the law and the facts. In its appeal, the NCLAT not only overturned the original ruling but also reinstated Mr. Mistry as a director of Tata Sons and a select few other Tata Group firms. The Supreme Court ("SC") heard consolidated appeals from multiple Tata Group firms. While concluding that Tata Group's business does not constitute oppression, the Supreme Court made some noteworthy observations.

• The NCLT can dismiss claims of tyranny and mismanagement if the removal of a director is not sufficient to build out a case. Even if the removal is legal, Section 242 relief may be given if it "formed part of a larger design to oppress or disadvantage the interest of specific members."
• Only when there is a reasonable loss of trust in the conduct and administration of the company's activities can the firm be dissolved due to a finding of oppression or mismanagement. For this to work there needs to be more than just a general lack of trust between the majority and minority shareholders.
• The Tribunal does not have reinstatement authority under Sections 241 and 242.
• When making a decision under Section 241, the court may only consider actions that have already occurred or are currently being taken. The Tribunal will not investigate a Section 241 complaint based on a fear of future misbehavior based on the company's articles. 

 

LAW ON MINORITIES SQUEEZING OUT

The minority squeeze-out law in India has a less-than-stellar reputation. The Parliament seems reluctant to pass a law that would require minority shareholders to sell their shares voluntarily because it goes against the body's stated legislative policy. The government sees this as "expropriation" in its eyes. Therefore, our Parliament has taken a conservative stance, allowing majority shareholders to 'buy out' the shares held by minority shareholders despite a specific recommendation from the Dr. JJ Irani Committee.

The majority shareholders have a clear right with appropriate protections under the company laws of most developed countries, such as those found in Sections 979 and 983 of the English Companies Act, 2006. The foundation of Indian Company Law is laid in the English system, but we have made this significant departure.

Section 395 of the Companies Act, 1956 ("1956 Act"), in line with the goals of the legislation, allows a transferee company to engage in a minority squeeze-out if the scheme or contract involving the transfer of shares between the two companies is approved by at least 90% of the shareholders, whose shares are being purchased.

There is a rough analogy between Section 395 of the 1956 Act and Section 235 of the Companies Act, 2013 ("Act"). If within four months of the making of an offer on that behalf by the transferee company, the holders of not less than nine-tenths (i.e. 90%) in value of the shares in the transferor company have approved a scheme or contract involving the transfer of shares or any class of shares in the transferor company to the transferee company, then the transferee company may acquire the shares held by the dissenting shareholders by compulsory acquisition under section 235(1). When a majority of shareholders agree to sell their stock, the acquiring company can notify the remaining shareholders that it wants to buy their shares. It is important to note that under Sections 235(2) and 235(3) of the Act, minority shareholders who disagree with the compulsory acquisition of their shares can file an objection with the NCLT.

Companies have used mechanisms such as selective capital reduction (in accordance with Section 66 of the Act) for a minority squeeze-out in addition to the limited mechanism provided under Section 235.

Delisting of equity shares is an additional option for listed companies under the SEBI (Delisting of Equity Shares) Regulation, 2021 ("Delisting Regulations").

It is important to note that Section 236 of the Act, which deals with the "purchase of minority shareholding," was added at the same time as Section 235.

When acquiring a minority stake, it's crucial to think about whether or not the purchase price is fair and equitable and whether or not doing so would violate the rights of the minority.

The case of Cadbury[5] provided an answer to this question by showing that "The Court must check that the scheme does not (1) go against the public interest, (2) be unfair or unreasonable, or (3) unfairly discriminate against or prejudice a class of shareholders before granting sanction.

Here, "prejudice" must imply more than merely not getting what a given shareholder wants. It refers to a coordinated effort to coerce a group of shareholders into selling their shares at a price well below what would be considered reasonable, fair, or just. Here, prejudice must be understood as a form of discrimination, a tactic used to coerce a group into accepting something that is unethical." 

 

CONCLUSION

In reviewing the minority squeeze-out provisions, it is evident that the importance of safeguarding the interests of the minority shareholders has been acknowledged. As it stands, the law does not provide sufficient protection for minority shareholders against "squeeze-outs," particularly when compared to laws in other jurisdictions.

Legislators must take into account:

• Giving the minority shareholders the chance to challenge the approval at a general meeting, 
• or requiring a "majority of the minority" vote to make the acquisition official.

Such steps would be necessary to guarantee that the goal of protecting the minority is not compromised in any way, regardless of the method of squeezing the minority out that is ultimately chosen.

 

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