This article is written by SENIKA RAMESH GUPTA during her internship.
- Keywords:
● Majority Rule
● Minority Rights
● Company Law
● Ultra Vires
● Fraud on Minority
● Corporate Governance - Abstract:
The rule of majority is fundamental in company law, dictating that decisions in a corporation are typically made by the majority of shareholders. However, minority rights are protected under Company Law to prevent the abuse of power by the majority. This article explores the exceptions to majority rule, including acts considered ultra vires, fraud on minority, and wrongdoer in control. While the majority holds significant decision-making power, the law ensures that minority shareholders are protected against oppression and mismanagement. Landmark cases such as Foss v. Harbottle (1843) and recent judgments illustrate the balance between majority control and minority rights. The article critically examines the role of the Companies Act, 2013 in safeguarding minority interests and ensuring corporate governance remains just and equitable for all shareholders. - Introduction: Majority Rule in Company Law
● The foundation of company governance:
In company law, majority rule ensures that decisions made by shareholders or members are based on the collective will of the majority. This principle is central to corporate governance, as it enables a company to function efficiently, with the majority vote determining the direction of the company’s operations, management, and policies.
● Why majority rule matters in decision-making:
Majority rule is important as it promotes effective decision-making in shareholder meetings, where the group’s decisions shape the company’s future. Without a majority rule, decision-making could be delayed or obstructed by a small number of shareholders, leading to inefficiencies and conflicts. It provides stability in corporate governance by giving a clear, democratic structure for resolving disputes and reaching decisions. - Powers of the Board of Directors
● How powers are shared between directors and shareholders:
In a company, the board of directors holds executive powers, meaning they manage the day-to-day operations. However, they must act within the boundaries set by the shareholders. The shareholders, typically during general meetings, exercise powers to vote on key decisions, such as electing directors or approving major corporate actions (e.g., mergers, amendments to the articles). This division of powers ensures that the board manages operational issues while the shareholders maintain control over the company’s fundamental directions.
● Role of the Memorandum of Association (MoA) and Articles of Association (AoA):
The MoA and AoA act as the company’s constitution, setting the legal framework within which the company operates. The MoA outlines the company’s objectives and scope of activities, while the AoA defines how the company will be governed, including the rules for holding meetings, voting procedures, and the rights of shareholders. Both documents are essential in ensuring that the board of directors and shareholders act within the powers vested in them. - Majority Powers in Companies
● Majority rule and its importance in company operations:
Majority rule is fundamental in ensuring smooth decision-making. When shareholders or board members agree on issues like the issuance of new shares, dividend policies, or strategic directions, the majority vote dictates the outcome. This prevents stalemate situations and ensures the company remains dynamic and responsive to market and operational changes.
● Limitations to the majority’s power:
While the majority can typically determine company decisions, their powers are not unlimited. There are legal restrictions imposed by the Companies Act, 2013, as well as the company’s constitution (MoA and AoA). For example, a majority cannot pass resolutions that are beyond the company’s legal capacity (known as ultra vires acts) or violate the rights of minority shareholders. Courts can intervene when the majority abuses their power or violates the law or the company’s governing documents. - Exceptions to the Rule of Majority
● Ultra Vires Act:
An ultra vires act refers to a situation where the majority shareholders or directors make a decision that is beyond the legal powers granted to the company by its MoA. For example, if the company’s MoA prohibits certain business activities, the majority shareholders cannot vote to engage in those activities, even if they have the majority vote. A minority shareholder can challenge this decision in court to prevent the company from engaging in ultra vires acts.
● Fraud on Minority:
If the majority shareholders make decisions that involve fraudulent practices, or harm the minority shareholders unfairly (such as depriving them of their voting rights or profits), this is known as fraud on the minority. In such cases, the minority shareholders have the right to approach the court for protection. The court may invalidate such decisions if it finds them to be in violation of minority rights.
● Wrongdoer in Control:
When the majority shareholders or directors of the company are involved in wrongdoing, such as fraud or self-dealing, it can harm the company and its minority shareholders. If the minority shareholders are unable to bring an action due to the majority’s control over decision-making, they can seek representative actions or derivative suits to hold the wrongdoers accountable. Courts may intervene in cases of extreme abuse of power by the majority.
● Resolution Requiring Special Majority:
Some important company decisions require a special majority—often defined as at least a 75% majority—such as altering the company’s constitution, approving mergers, or issuing new classes of shares. If a resolution requiring a special majority passes with a simple majority (e.g., 51%), it is considered invalid, and the minority shareholders can take legal action to prevent the decision from being enforced.
● Personal Action:
Minority shareholders have personal rights that cannot be overridden by majority decisions. These include the right to receive dividends, the right to vote, and the right to inspect corporate records. If the majority shareholders interfere with these personal rights, the minority shareholders can take legal action to enforce compliance. This protects the rights of individual shareholders, ensuring that majority rule does not trample over their individual interests.
● Breach of Duty:
Directors and majority shareholders have fiduciary duties to the company and its shareholders. If the majority engages in activities that breach their duty (such as acting in their own interests rather than the company’s), the minority shareholders can take action. Breaches of duty may include conflict of interest, negligence, or failure to act in the company’s best interest. Minority shareholders have the right to seek remedies in such cases to ensure accountability.
● Prevention of Oppression and Mismanagement:
One of the most significant protections for minority shareholders is the ability to seek relief from oppression and mismanagement. If the majority uses their power to unfairly oppress the minority (for example, by denying them access to company information or excluding them from decision-making), minority shareholders can file a petition in court. Courts can issue orders to remedy oppression or mismanagement, even overriding majority decisions in cases of clear abuse. - Case Law Examples
● Foss v. Harbottle (1843):
This landmark case established the non-interference principle, which dictates that the court should generally not interfere with the internal affairs of a company where the majority shareholders have made a decision, as long as the decision is within the powers granted to the company. However, exceptions exist, such as when the majority is acting ultra vires or committing fraud on the minority.
● Shah v. Patel (2020):
A recent judgment where the court ruled in favor of the minority shareholders who were being unfairly treated by the majority. The case reinforced the need for minority protection in cases of mismanagement and fraud. The court granted the minority shareholders the right to challenge the majority’s actions in a situation involving oppression.
● Illustration of Fraud on Minority:
Suppose a company’s majority shareholders pass a resolution to dilute the minority shareholders’ voting power by issuing more shares to themselves. This would amount to fraud on the minority, and the affected minority shareholders could challenge the decision in court. - Conclusion:
● In conclusion, while the rule of majority is a cornerstone of corporate governance, it is balanced by exceptions designed to protect the rights of minority shareholders. These protections are essential to maintaining fairness in corporate decision-making and preventing the abuse of power by the majority. The Companies Act, 2013 provides a legal framework to ensure that the majority cannot override the rights of the minority, and courts are empowered to intervene when necessary to uphold justice in the corporate world. The balance between majority power and minority rights is crucial for fostering good governance and ensuring that all shareholders are treated equitably. - References:
- Foss v. Harbottle (1843)
- Shah v. Patel (2020)
- Companies Act, 2013
- Daimler Co Ltd v Continental Tyre & Rubber Co Ltd (1916)
- Rajah Muthiah Chettiar v. Official Liquidator (1959)
