Companies Law - Majority Rule and Minority Rights

Majority and minority define who has the power to rule. The structure of democracy is as such, where the majority has the supremacy. In the corporate world, also the rule and decisions of the majority seem to be fair and justifiable. The power of the majority has greater importance in the company, and the court tries to avoid interfering with the affairs of the internal administration of the shareholders. With the superiority of the majority, there is always inferiority among the minority, which shows an unbalance in the company.

The Companies Act, 2013 reduces the inferiority of the minority. This article details the rules of the majority and also the rights of the minority in a company.

Powers of Board of Directors

The Companies Act distributes the power between the board of directors and the shareholders. The board and the shareholders exercise their powers through meetings in a democratic way. The meetings include the meetings of the board of directors and the general meetings. The shareholders entrust certain powers on the board of directors, which is through the

Memorandum of Association (MoA) and Articles of Association (AoA). The board of directors have all the powers and can to do all the things and acts just the same as the company exercises its powers. But the Act restricts the board of directors from the powers that only the shareholders can do in the general meetings.

Majority Powers

A company stands as an artificial entity. The directors run it but they act according to the wish of the majority. The directors accept the resolution passed by the majority of the members. Unless it is not within the powers of the company. The majority members have the power to rule and also have the supremacy in the company. But there is a limitation in their powers. The following are two limitations:

Limitations

The powers of the majority of the members are subject to the MoA and 1 of the company. A company cannot authorise or ratify any act legally outside the memorandum. This will be regarded as the ultra vires of the company
The resolution made by the majority should not be inconsistent relating to The Companies Act or any statutes. It should also not commit fraud on the minority by removing their rights.

Principle of Non-Interference

The general rule states that during a difference among the members, the majority decides the issue. If the majority crushes the rights of the minority

shareholders, then the company law will protect it. However, if the majority exercises its powers in the matters of a company's internal administration, then the courts will not interfere to protect the rights of the majority.

Foss Versus Harbottle

Foss v. Harbottle lays down the basics of the non-interference principle. The reasons for the rule is that, if there is a complaint on a certain thing which the majority has to do if there is something done irregularly which the majority has to do regularly or if there is something done illegally which the majority has to do legally, then there is no use to have a litigation over such thing. As in the end, there will be a meeting where the majority will fulfil their wishes and make decisions.

Benefit and Justification

The benefit and the justification of the decision of the case are:

Recognises the country's legal personality
Emphasises the necessity of the majority making the decisions
Avoid the multiplicity of suits

Exceptions to the Rule

The rule is not absolute for the majority; the minority also have certain protections. The Non-interference principle does not apply to the following:

Ultra Virus Act

An individual shareholder can take action if they find that the majority has done an illegal act or ultra virus act. The individual shareholder has the power to restrain the company. This is possible by the injunction or the order of the court.

Fraud on Minority

If the majority commits fraud on the minority, then the minority can take necessary action. If the definition of fraud on the minority is unclear, then the court will decide on the case according to the facts.

Wrongdoer in Control

If the company is in the hands of the wrongdoer, then the minority of the shareholder can take representation act for fraud. If the minority does not have the right to sue, then their complaint will not reach the court as the majority will prevent them from suing the company.

Resolution Requiring Special Majority

If the act requires a special majority, but it passes by a simple majority, then an individual shareholder can take action.

Personal Action

The majority of shareholders always oblige to the rights of the individual membership. The individual member has the right to insist on the majority on compliance with the statutory provisions and legal rules.

Breach of Duty

If there is a breach of duty by the majority of shareholders and

directors, then the minority shareholder can take action.

Prevention of Oppression and Mismanagement

To prevent the majority of shareholders from oppression and mismanagement, the minority can take action against them.

Back to Learn

Frequently Asked Questions

Common questions about Companies Law: Majority Rule & Minority Rights Overview.

The principle of majority rule in a company means that the majority of shareholders have the power to make decisions and rule the company. The majority's decisions are considered fair and justifiable, and the courts generally avoid interfering in the internal administration of shareholders.

The powers of the majority shareholders are subject to two limitations: (a) their actions cannot be beyond the powers granted by the company's Memorandum of Association and Articles of Association, and (b) their resolutions cannot be inconsistent with the Companies Act or other statutes, nor can they commit fraud on the minority shareholders by removing their rights.

The principle of non-interference states that courts will not interfere to protect the rights of minority shareholders if the majority exercises its powers in matters of a company's internal administration. This principle is based on the case of Foss v. Harbottle.

The exceptions to the principle of non-interference are: (a) ultra vires acts by the majority, (b) fraud on the minority, (c) wrongdoers in control of the company, (d) resolutions requiring special majority passed by simple majority, (e) personal actions by individual shareholders, (f) breach of duty by majority shareholders and directors, and (g) prevention of oppression and mismanagement.

The Foss v. Harbottle case laid down the basics of the non-interference principle in company law. It recognized the company's legal personality, emphasized the necessity of the majority making decisions, and aimed to avoid the multiplicity of suits.

The benefits and justifications for the majority rule are: (a) it recognizes the company's legal personality, (b) it emphasizes the necessity of the majority making decisions, and (c) it avoids the multiplicity of suits.

The Board of Directors exercises certain powers entrusted to them by the shareholders through the Memorandum of Association and Articles of Association. The Board can do all the acts and exercise all the powers that the company can, except for those reserved for shareholders in general meetings.

The Companies Act, 2013 provides certain protections and rights for minority shareholders to reduce their inferiority compared to the majority. It outlines exceptions to the principle of non-interference, where minority shareholders can take action against the majority's decisions.

The Memorandum of Association (MoA) and Articles of Association (AoA) are crucial documents that define the powers and limitations of the company, its shareholders, and its Board of Directors. The majority's powers are subject to the provisions of these documents.

The court's role is to determine whether the majority's actions fall within the exceptions to the principle of non-interference, such as in cases of ultra vires acts, fraud on the minority, or oppression and mismanagement. The court can then provide remedies to protect the rights of minority shareholders.