Bill offers new protections for minority shareholders

While the Companies Act, 1956, includes certain provisions for protection of minority shareholders’ interests, the Companies Bill, 2012, which was passed by the Lok Sabha on 18 December 2012, has introduced further significant provisions in this regard.

Exit provisions

As per clause 232(3)(h) of the bill, in the event of merger of a listed company with and into an unlisted company, the listed company is now required to provide an exit opportunity to its shareholders. In this regard, it is noteworthy that the Securities and Exchange Board of India (SEBI) has also recently revised and bolstered the requirements for listed companies undertaking schemes of arrangement to safeguard minority interests.

As additional safeguards, the bill mandates notification of the scheme to multiple regulatory authorities including the central government, income tax authorities, Reserve Bank of India, SEBI, stock exchanges, Competition Commission of India and any other relevant regulator. Further, valuation reports are now required to be sent to all members along with the notice convening their meeting to consider the scheme.

While the bill does not seek to alter the shareholder approval requirements for a scheme, SEBI has recently mandated that for listed companies, shareholder approval through special resolution passed through postal ballot and e-voting, after disclosure of all material facts, can only be acted on if two-thirds of the public shareholders’ votes were in favour.

Further, while the bill provides that objections to schemes may only be made by persons holding at least 10% of the shareholding, SEBI now requires listed companies to maintain a complaints’ report of all comments/complaints on the scheme to be shared with stock exchanges, SEBI and shareholders while seeking their approval. Therefore schemes in general, and particularly for listed companies, will become more regulated.

If 90% or more of a company’s equity shares are acquired by a person or a group of persons for any reason, clause 236 of the bill provides the minority shareholders an exit option at a price determined through valuation by a registered valuer. While clause 236 is similar in scope to section 395(2) of the act, the added requirement of valuation by a registered valuer guarantees a fair price to the minority.

Under clause 27 of the bill, in the event of variation in terms of contract or objects referred to in the prospectus, dissenting shareholders are to be provided an exit option by promoters and/or controlling shareholders at a price and in the manner prescribed by SEBI. Since any change to objects would require shareholder approval, additionally providing an exit option may not have been warranted and may prove to be operationally cumbersome.

Class action suits

The bill has introduced the concept of class action suits under clause 245, which provides that a certain number of members or depositors can bring an action before the proposed National Company Law Tribunal (NCLT) if they think that the company’s management or affairs are being conducted in a manner prejudicial to the interests of the company or its members or depositors, restraining the company from various acts including those that are illegal, ultra vires or in breach of its charter documents or a shareholders’ resolution, or authorized by shareholders based on misstatements or material omissions.

Significantly, clause 245 also provides a shareholder the right to claim damages or other suitable relief for fraudulent, unlawful or wrongful acts or omissions from the company and its directors, and in certain cases, its auditors or any expert, adviser or consultant of the company. Orders passed by the NCLT will be binding on the company, its members, depositors and external advisers.

Clause 37 of the bill further provides that a suit may be filed against the company, its directors, promoters and certain experts by any person, group or association of persons affected by misleading statements or the inclusion or omission of any matter in the prospectus.

The provisions on class action suits appear to be a direct fall-out of the Satyam scandal so as to apportion responsibility not only among company insiders but also among various experts engaged by the company.

Conclusions

The bill proposes several changes to augment corporate governance standards, including provisions regarding appointment of independent directors, appointment of auditors and checks on related-party transactions, which will also help safeguard minority interests.

If the bill becomes law, it remains to be seen whether it has achieved the requisite balance between protecting minority rights and respecting the will of the majority that is necessary to ensure smooth functioning of companies.

Puja Sondhi is a partner and Medha Srivastava is a senior associate at Amarchand & Mangaldas & Suresh A Shroff and Co, New Delhi. The views expressed in this article are those of the authors and do not reflect the position of the firm.