As per the Companies Act, 2017 (‘the Act’), Minority shareholders are those shareholders whose shareholding is not less than ten percent of the equity share capital. Minority shareholders enjoy the same right and equal treatment as the other shareholders. The primary rights of every shareholder include, inter alia, right to hold respective share, receive share certificate on allotment, receive duplicate share certificate, right to transfer of shares, right in capital increase, to be informed of, and approve variation of shareholder rights, right to share in profits dividends, attend and participate in general meeting, elect and remove directors, have access to certain information of the company and some other rights. On the basis of equal shares all shareholders get effective remedies for violations of their rights.
Previously, the rights of shareholders were regulated by the Companies Ordinance, 1984 which has now been repealed by the Act. The objective of the Act is to increase progress in the corporate sector, promoting technology to enhance the protection of shareholders, creditors and public interest and increasing protection of minority interest.
Right to claim declaration of general meetings invalid:
It is important to note that Section 136 of the Act deals with the Power of the Court to declare the proceedings of a General Meeting invalid. This section gives the minority shareholders i.e., members of the company having not less than ten percent of the voting power in the company, to file a petition before the court, within thirty days of the meeting, for seeking declaration of a general meeting to be invalid, if they are able to substantiate that there was a ‘material defect or omission’ in the notice or irregularity in the proceedings of the General Meeting called in question which prevented them from exercising their rights as shareholders. The High Court have the requisite jurisdiction to declare such General Meeting as invalid and to issue directions for calling of fresh general meeting.
In addition, the courts do not allow petitions for invalidation of general meeting of a company, if it is observed that the petition is filed for revengeful purposes and for obstructing smooth running of the company. The approach in this area could be viewed from the case of Muhammad Yousuf Ahmed & Others v Artistic Denim Mills Limited (2021 CLD 134), where a petition under Section 136 of the Act was dismissed by the Sindh High Court.
Protection from oppression and mismanagement:
Similarly, where a minority shareholder is aggrieved from the affairs of the company being conducted, or likely to be conducted, in an unlawful or fraudulent manner, or in a manner not provided for in its memorandum, or in a manner oppressive to the shareholder(s) or the creditor(s) or are being conducted in a manner that is unfairly prejudicial to the public interest, the matter may then be petitioned before the High Court under Section 286 of the Act.
The Court after adjudicating the dispute may then, with a view to ending the matters complained of, make such order as it thinks fit, whether for regulating the conduct of the company’s affairs in future, or for the purchase of the shares of any members of the company by other members of the company or by the company and, in the case of purchase by the company, for, the reduction accordingly of the company’s capital, or otherwise.
The approach in this area could be viewed from the case of Lahore High Court where in the case of Nadeem Kiani v American Lycetuff (Pvt.) Limited (2021 CLD 7), where the High Court held that the Section 286 of the Act is an alternate provision of winding up, and its true intent and spirit is to protect the minority shareholders from the oppression and mismanagement of the majority shareholders and to promote the lawful conduct of the company in accordance with its Memorandum and the Articles. In addition, the word “oppression” was also interpreted in the case of Najamuddin Zia and others v Asma Qamar and others (2013 CLD 1263), where the High Court defined it as acting against the standard of fair dealing and in the violation of conditions of fair play.
In the English law, the protection of shareholders from oppression and mismanagement is provided in Section 994 of the Companies Act 2006 and the interpretation of the word “oppression” is taken from Black’s Law Dictionary (10th Edition) (P-1267) as “The act or an instance of unjustly exercising authority or power so that one or more people are unfairly or cruelly prevented from enjoying the same rights that other people have”. In terms of company or corporation its meaning is taken as unjust treatment to minority shareholders by those in control. One must take note of the English case, O’Neill v Phillips (1999) UKHC 24, where Lord Hoffmann explained the grounds to prove the unfair treatment as: “the mere fact that trust and confidence between parties had broken down was not sufficient… since the judge had found that P had made no promises, there was no basis, consistent with the principle of equity, for the court to hold that P had behaved unfairly. It followed that there was no basis for the Court of Appeal’s finding that O had been driven out of the company.”
In the Indian law, the protection of shareholders from oppression and mismanagement is provided Section 241 of the Companies Act, 2013. In this regard the Supreme Court of India in the case reported as 1981 Supreme Court 333 held that the term “oppression” does not include every instance of illegality.
As referenced from the case of Nadeem Kiani, to invoke Section 286 of the Act, it must be proved that the conducts are such that requires court to exercise its jurisdiction and that winding up would unfairly prejudice the members or creditors. The conduct must fall under one of the following situations:
- Unlawful manner;
- Fraudulent manner;
- Manner outside the scope of memorandum;
- Manner oppressive to any of members or creditors;
- Manner unfairly prejudicial to public interest.
It is to be noted that mere complains regarding irregularities by the company are dealt by the Commission, for the purposes of Pakistan it is the Securities & Exchange Commission of Pakistan (‘SECP’), rather than the Court.
Circumstances in which a company may be wound up by Court:
Section 301(g)(iii) of the Act provides that if the business is being conducted in manner oppressive to the minority members or persons concerned with the formation or promotion of the company then the court may order to wind up the company and the Directors would be deemed to be personally liable for costs (Re Alliance Motors (Pvt.) Ltd (1997 MLD 1966). Generally, the court desire to file statutory report or hold annual general meeting rather than winding up but in the case of Ali Woollen Mills Ltd. V Industrial Development Bank of Pakistan (PLD 1990 SC 763) the Hon’ble Supreme Court held that where the “substratum of the company” has gone then the most convenient and just decision would be to wind up. This provision is enforced when winding up of the company would not cause any unfair prejudice to the members or creditors.
Right to appoint auditor:
Section 246(3) of the Act also gives the minority shareholders members of the company a right to propose any auditor or auditors for appointment whose consent has been obtained by him and a notice in this regard has been given to the company within seven days before the date of the annual general meeting.
Can the minority shareholders bring action on behalf of the company?
According to the leading case law of Foss v Harbottle (1843) 67 ER 189 which lays down a general rule that an individual shareholder or any outsider of the company cannot take any legal action against the wrong done to the corporation as both company and its shareholders are considered as the separate legal entities and in cases of alleged wrong to the company, the proper plaintiff is the company itself. However there are few exceptions where the minority shareholders can bring action for wrong to the company which are as follows:-
- the action of the company is outside the scope of memorandum of the company;
- the relief is sought against the person in control (majority) in which case the rule of majority is not applicable.
- when the act is not for the benefit of the company and discriminates between the minority and majority shareholders;
- when the minority shareholder is not involved in the meeting in which the decision is taken;
- where a resolution requiring special majority is passed by simple majority.
The persuasive effect of this authority in the Courts of Pakistan can be seen from the recent case of Asif Mannaan v Suleman Lallani (PLD 2020 Sindh 660) wherein the Sindh High Court applied the rule of exception laid down in the case of Foss, however the claim was dismissed because the shareholders only had 1% share in the company and before coming to the court the action was already resolved by the SECP.
Nevertheless, the case of Asif demonstrates that the courts of Pakistan courts do recognize the ratio laid down in the case of Foss, thereby entitling the minority shareholders of Pakistan to bring the case on behalf of the company by, provided they satisfy the criteria of Foss.
In view of the forgoing, in the matters of corporate governance generally the majority rule applied. However, if it can be established that the majority shareholders are exploiting and/or abusing their power which is detrimental to the rights/interests of the minority shareholder(s) of the company, the company law provides various legal remedies, and the same can be initiated before SECP and/or High Courts of Pakistan.