Companies Law – Majority Rule and Minority Rights
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.
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:
- The powers of the majority of the members are subject to the MoA and AoA 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.
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.