MAJORITY POWERS AND MINORITY RIGHTS Click to edit Master subtitle style

SANDHYA JAGTAP

LL.M-I YEAR
4/10/12

BUSINESS LAW

INTRODUCTION

As everybody knows, section 397/398 of the Companies Act, 1956 provides a relief to the shareholders of a Company if they are qualified to approach the Company Law Board under section 399. The object of sections 397/398 is to provide protection to the minority shareholders in a Company against the oppressive and the acts of mismanagement by the majority. I personally feel that an application under section 397/398 of the Companies Act, 1956 is a serious thing exposing serious misunderstandings between majority and minority group in the Company. This groupism in private limited companies and closely held public companies too at times. 4/10/12

Rule of Majority
Applicability of Principle Decision making power by resolution No court intervention for protecting Minority interest
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Rule in FOSS Vs. HARBOTTEL

Facts of case :

In this case the action was by two shareholders in company against the directors charging them with concerting and effecting various fraudulent illegal transactions whereby the property of the company was misapplied and wasted and praying that the defendants might be decreed to make good to the company the losses.

Held :

The action was rejected in respect of those transaction which a majority of the shareholder had the power to confirm. The conduct with which the defendant are charged is an injury not to the plaintiffs exclusively it is an injury to the whole corporation.
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Exception to Rule

The protection of minority rights as mentioned in the previous part is realized by making out some exceptions to the Foss v. Harbottle rule. These exceptions are :

Ultra vires and Illegal acts :

Ultra vires means those things which are outside the scope. In case of a company any act which is not allowed under the memorandum of association is ultra vires. However where the acts are only contrary to the articles of association but allowed by the memorandum those acts are not ultra vires and in such cases the rule in Foss v. Harbottle is applicable. These are any act which is beyond the object clause.
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Exception contd..

Fraud on Minority

Where the act is not for the benefit of the company and discriminates between majority and minority shareholders, action can be brought by the minority. Case : Greenhalgh Vs. Arderone Cinemas
Ltd (1950)2 All E R 1120 [1951] Ch
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286

Contd..
Acts

requiring special majority

Case : Dhakeshwari Cotton Mils Vs. Nil kamal Chakraborty (AIR 1937 Cal 645)
Wrongdoers

in control

If the person against whom the relief is sought is himself in control, the rule of majority supremacy cannot be applied. 4/10/12

Exception contd..

Individual

Membership right

Case : Naggapa Chehtar Vs. Madras club (1949)1 MLJ 662

Oppression

and Mismanagement
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Sec. 397 & 398.

Conclusion
There can be no single answer to how minority-group differences in views and values are resolved only the sure knowledge that only through the democratic process of tolerance, debate, and willingness to compromise can free societies reach agreements that embrace the twin pillars of majority rule and minority rights.
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