Under the Companies Act, 2017, (‘Act’) minority shareholders are defined as shareholders holding at least ten percent (10%) of the equity share capital. They have the same rights and receive equal treatment as other shareholders. These rights include holding shares, receiving share certificates, transferring shares, participating in capital increases, being informed about and approving changes to shareholder rights, receiving dividends, attending general meetings, electing and removing directors, accessing company information, and having remedies for violations of their rights based on equal shareholding.
The Companies Ordinance, 1984, which regulated shareholder rights, has been repealed by the Act. The Act aims to promote progress in the corporate sector, enhance shareholder protection, protect creditors and public interest, and increase the protection of minority interests
Right to claim declaration of general meetings invalid:
Under Section 136 of the Act, minority shareholders, who hold at least ten percent of the voting power in the company, can petition before the High Court within thirty (30) days of a general meeting to declare it invalid if they can prove a “material defect or omission” in the notice or irregularity in the proceedings that hindered their shareholder rights. The High Court has the jurisdiction to invalidate such a meeting and order a fresh one. However, courts reject petitions aimed at obstructing the company’s operations or seeking revenge. The approach can be viewed from the case of Muhammad Yousuf Ahmed & Others v Artistic Denim Mills Limited (2021 CLD 134), the Sindh High Court dismissed a petition filed under Section 136 of the Act.
Protection from oppression and mismanagement:
Under Section 286 of the Act, if a minority shareholder believes that the company’s affairs are being conducted unlawfully, fraudulently, in violation of its memorandum, oppressively, or in a manner prejudicial to the public interest, they can petition the High Court. The Court, after hearing the case, can issue orders to regulate future conduct, purchase shares from members, reduce the company’s capital, or take other appropriate actions. However, if the shareholder is holding less than ten-percent shareholding then he cannot approach the High Court directly instead he first needs to file a Petition before the Security Exchange of Pakistan (SECP).
The intent of Section 286 of the Companies Act, 2017 is primarily to protect minority shareholders from oppression and mismanagement by majority shareholders. The term “oppression” has been defined as acting against fair dealing and violating conditions of fair play in previous cases such as Najamuddin Zia and others v Asma Qamar and others (2013 CLD 1263). Recently, in the case of Nadeem Kiani v American Lycetuff (Pvt.) Limited (2021 CLD 7), the Lahore High Court affirmed that Section 286 actually serves as an alternative to winding up, and aims to ensure lawful company conduct according to its Memorandum and Articles.
Under English law, shareholders are protected from oppression and mismanagement by Section 994 of the Companies Act 2006. The definition of “oppression” is derived from Black’s Law Dictionary (10th Edition) as the unjust exercise of authority or power that unfairly prevents individuals from enjoying the same rights as others. In the context of a company or corporation, it refers to the unfair treatment of minority shareholders by those in control. In the case of O’Neill v Phillips (1999) UKHC 24, Lord Hoffmann clarified that the breakdown of trust and confidence alone is insufficient to prove unfair treatment. The absence of promises or equitable grounds for unfair behavior led to the conclusion that there was no basis to find that the shareholder had been treated unfairly or driven out of the company, as determined by the Court of Appeal.
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 v American Lycetuff (Pvt.) Limited (2021 CLD 7) 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:
According to Section 301(g)(iii) of the Act, if the business is being conducted in a manner that oppresses minority members or those involved in the formation or promotion of the company, the High Court may order the winding up of the company, with the Directors being personally liable for costs (as seen in the case of Re Alliance Motors (Pvt.) Ltd (1997 MLD 1966)). Generally, the court prefers alternative measures such as filing a statutory report or holding an annual general meeting rather than resorting to winding up. However, the Supreme Court, in the case of Ali Woollen Mills Ltd. v Industrial Development Bank of Pakistan (PLD 1990 SC 763), held that if the “substratum of the company” ceases to exist, the most appropriate and just decision would be to wind up the company. This provision is invoked when winding up the company would not result in unfair prejudice to its 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?
The leading case law of Foss v Harbottle (1843) 67 ER 189 establishes the general rule that individual shareholders or outsiders cannot take legal action against harm done to the corporation. This is because the company and its shareholders are considered separate legal entities, and the company itself is the appropriate plaintiff in cases of alleged wrongdoing. However, there are exceptions where minority shareholders can bring an action on behalf of the company. These exceptions include but not limited to:-
- where the company’s actions are outside the scope of its memorandum;
- relief is sought against the controlling majority,
- the act discriminates between minority and majority shareholders,
- the minority shareholder is not involved in the decision-making meeting, or
- a resolution requiring a special majority is passed by a simple majority.
The persuasive effect of this authority can be observed in the courts of Pakistan, as seen in the recent case of Asif Mannaan v Suleman Lallani (PLD 2020 Sindh 660). The Sindh High Court applied the exception rule laid down in the Foss case, but the claim was dismissed due to the shareholders’ minimal 1% stake in the company and the resolution of the matter by the Securities and Exchange Commission of Pakistan (SECP) prior to the court’s involvement. Nevertheless, the Asif Mannaan v Suleman Lallani case demonstrates that the courts in Pakistan recognize the principles established in the Foss case, allowing minority shareholders to bring a case on behalf of the company if they meet the Foss criteria
In matters of corporate governance, the general principle is to follow the majority rule. However, if it can be proven that the majority shareholders are engaging in exploitation or abuse of power that harms the rights or interests of minority shareholders, company law offers several legal remedies. These remedies can be pursued both before the Securities and Exchange Commission of Pakistan (SECP) and/or the High Courts of Pakistan.