MAJORITY POWERS AND MINORITY RIGHTS

By | June 19, 2018
MAJORITY POWERS AND MINORITY RIGHTS

INTRODUCTION

In the corporate world, all democratic decisions and management of a company are made with the majority rule which is deemed to be fair and justified. Majority power has great importance in the working of a company and the “Courts will not generally intervene at the instance of the shareholder in matters of internal administration. Courts will not interfere with the management of a company by its Board of Directors so long as they are acting within the powers conferred on them under the articles of the company.[1]

It follows that the majority of the members enjoy the supreme authority to exercise the powers of the company and generally to control its affairs and the minority shareholders have to concede to the majority decision. This, however, may lead to a possibility that the members having majority vote may tend to be oppressive towards the minority shareholders misusing their majority strength.[2] Because of this reason, it has been said that “the protection of the minority shareholders within the domain of corporate activity constitutes one of the most difficult problems facing modern company law. The aim must be to strike a balance between effective control of the company and the interests of the small individual shareholders. To overcome this problem faced by the minority, the Companies Act, 2013 came up with the solution to tackle the problems which are usually faced by the minority shareholders.

RIGHTS OF SHAREHOLDERS

  1. Recognition of basic shareholder rights
  2. Shareholders have the right to participate in decisions concerning fundamental corporate changes
  3. Voting rights of shareholders
  4. Disclosure of disproportionate voting rights of certain shareholders to obtain a degree of control
  5. Markets for corporate control should be allowed to function
  6. Shareholders should consider the costs and benefits of exercising their voting rights.

POWERS OF MAJORITY

According to section 47 of the companies act, 2013, holding any equity shares shall have a right to vote in respect of such capital on every resolution placed before the company. Member’s right to vote is recognized as the right of property and the shareholder may exercise it as he thinks fit according to his interest and choice.  This rule is modified in certain cases. A special resolution requires a majority of 3/4th of those votes at the meeting. Therefore, where the act or the articles require a special resolution for any purpose, a 3/4th majority is necessary and a simple majority is not enough.[3] The resolution of a majority of shareholders passed at a duly convened and held general meeting, upon any question with which the company is legally competent to deal, is binding upon the minority and consequently upon the company.[4]

THE PRINCIPLE OF NON-INTERFERENCE (RULE IN FOSS V. HARBOTTLE)

The principle that the will of the majority should prevail over the will of the minority in matters of internal administration of the company was founded in the case of Foss v. Harbottle which is today known as the rule in Foss v. Harbottle.[5] According to this principle, the courts will not, interfere at the instance of the shareholders, in the management of a company it’s direct so long as they are acting within the powers conferred on them by the articles of the company. The rule states that “the proper plaintiff in an action in respect of a wrong done to the company or association of persons is prima facie the company or association itself. The court will not interfere in the internal affairs of a company at the instance of the minority if the irregularities complained of could be legally done or rectified by the majority.

The restrictive character of the Rule in Foss v/s. Harbottle has led to the creation of statutory remedies for minority shareholders. The most impressive thing about this is the permission to go to the court for prevention of oppression or mismanagement. The minority shareholders are protected under:

  • The common law
  • The provision of the companies act, 2013
 are as follows:
  • Recognition of the separate legal personality of the company: If a company has suffered some injury and not the individual members, it is the company itself that should seek to redress.
  • Need to preserve right of the majority to decide: The principle in Foss v Harbottle preserves the right of majority to decide how the affairs of the company shall be conducted. It is fair that the wishes of the majority should prevail.
  • Multiplicity of futile suits avoided: If every individual member were permitted to sue anyone who had injured the company through a breach of duty, there could be as many suits as there are shareholders. Legal proceedings would never cease, and there would be enormous wastage of time and money.
  • Litigation at the suit of a minority futile if majority does not wish it: If the irregularity complained of is one which can be subsequently ratified by the majority it is futile to have litigation about it except with the consent of the majority in a general meeting.

EXCEPTIONS TO RULE

The hardship and injustice that arise from the strict application of the rule on minority shareholders, various exceptions were recognized under which the rule may be excluded in its application. The four established exceptions to the rule at common law[6] and the two exceptions in decided cases.[7]

Ultra vires

In the first place, the powers of the majority of members are subject to the provisions of the company’s memorandum or Articles. A company, therefore, cannot legally authorized or ratify any act which being outside the ambit of the memorandum, is ultra vires the company – such acts being illegal, there can be no question of the transaction being confirmed by any majority and a shareholder is entitled to bring an action against the company and its officers in respect of such matters.[8]

Acts Requiring Special Resolution

Generally, the decisions on internal affairs of the company are taken by passing an ordinary resolution at the general meeting. But there are certain acts which can be done only by passing special resolution. Therefore if the majority purports to do any such act by passing ordinary resolution as opposed to special resolution required by the law, any member or members can bring an action to restrain the majority[9]. Accordingly, the rule does not prevent an individual member from suing if the irregular act in respect of which he is suing is one which could validly be done or sanctioned not by a simple majority of the members of the association, but only by some special majority[10] This exception also covers a breach of any particular procedure laid down in articles or constitution or rules of the organization.[11]

Invasion of Personal Rights

the rule in Foss v. Harbottle is concerned with corporate rights-that is, the rule applies only to cases arising as a result of the invasion of the rights of a company in other words any matter relied upon by a defendant as constituting a cause of action to which the  rule applies must be one which properly belongs to the general body of members of the company in question as opposed to a cause of action which some individual member could assert in his own right.[12] The rule would not apply to individual members who can establish that their personal rights, as distinct from those of the union.[13]

Fraud on the Company or on the Minority

This appears to be the most important exception. At common law, fraud would include dishonesty and deceit.[14] “any act which may amount to an infraction of fair dealing; or abuse of confidence or unconsciously conduct, or abuse of power as between a trustee and his shareholders in the management of a company”.[15] To succeed, plaintiff must proof (a) fraud on the minority and (b) that the wrongdoers are in control of the company and this prevents the company itself from bringing action in its own name.[16]

Belated Meetings

Where a company meeting cannot be called in time to be of practical effect to redress a wrong to the company a shareholder can sue.[17]

– Samriddhi Pandey

Gujarat National Law University

Citation and References

[1]  O.Orojo Company Law and Practice in Nigeria 5ed (London: Lexis Nexis 2002) p. 203

[2] N. V. Paaranjabe Textbook on Company Law, 10th Edition ( India: Central Law Agency, 1995) at p. 389

[3] Edwards v. Halliwell, (1950) 2 All.E.R.1064

[4] North-West Transportation Co. v. Beatty (1887) L.R. 12 A.C. 589.

[5] Foss v. Harbottle, 67 E.R. 189.(1843) 2 Hare 461

[6] Gower: The Principles of Modern Company law 4th Edition (Sweet & Maxwell) p. 645, Heytin v. Dupont (1964)

1 WLR 843

[7]  Hodgson v. Nako (1972) 1 WLR 130, Daniels v. Daniels (1970) Ch. 406, Alexander v. Automatic Telephone co.

(1900) 2 Ch. 56

[8] N. V. Paaranjabe Textbook on Company Law, 10th Edition ( India: Central Law Agency, 1995) at p. 263

[9] N. V. Paaranjabe Textbook on Company Law, 10th Edition ( India: Central Law Agency, 1995) at p. 361

[10] G. A. Olawoyin Status and Duties of Company Directors( Ille-Ife: University of Ife Press 1977) p. 268

[11] Quin and Axtens Ltd v. Salmon (1950) 2 All ER 1064

[12] G. A. Olawoyin Status and Duties of Company Directors( Ille-Ife: University of Ife Press 1977) p. 266

[13] Abubakar v. Smith (1973) 6 S.C.R 31 p. 44.

[14] G. A. Olawoyin Status and Duties of Company Directors( Ille-Ife: University of Ife Press 1977) p. 11

[15] Associated Registered Engineering Contractors Ltd and others v. Yalaju-Amaye (1990) 4 NWLR (pt. 145) p. 422

[16] Associated Registered Engineering Contractors Ltd and others v. Yalaju-Amaye (1990) 4 NWLR (pt. 145) p. 422

[17] Hodson v. National and Local Government Officer Association (1972) WLR 130


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