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Learning For Minority Shareholder’s In Relation To Pipe Deals

In the corporate sector, the majority rule is used to make all democratic choices and to govern a corporation, which is thought to be equitable and fair. The majority rule, which governs decision-making, frequently ignores the opinions of minority stakeholders. A minority shareholder is a member of a corporation whose interests are neglected and who has little influence on how the firm is run.

Minority shareholders found themselves unable to exercise their rights owing to a lack of resources or time, notwithstanding measures made under the Companies Act of 1956 to protect their interests. Consequently, this led to the majority dominating the company's management and decision-making processes, and suppressing the rights of minority shareholders.

Private investments made by investment firms, mutual funds, and other qualifying investors are known as PIPE (Private Investments in Public Equity) deals. The corporation sells it for less than the current market worth. The investments may be made in the listed company's stock, shares, or convertible securities.

Companies at various phases of development need two sorts of financial support: venture capital and private equity. An investment which a start-up or small business seeks to launch a novel idea and a fresh entrepreneur is known to as venture capital. Through venture capital any new private businesses can raise money which is unable to raise from the public sector.

A capital investment made by companies or private in a company which is not public is known as Private Equity. These investors or companies either purchase stock in private held companies or gain approval from publicly traded companies to take them private and simply remove from stock markets.

Who are Minority shareholders?

The equal treatment of all shareholders must be protected through the corporate governance structure. Equity holders who hold ownership of less than 50% of the company's equity capital and do not have voting or management powers are minority shareholders. Due to this it gives a boost to the Rule of Majority by making it more challenging for such shareholders to participate in the decision-making process.

The Rule of Majority was first established in the Foss v. Harbottle[i] case and is founded on the core idea of corporate democracy, which holds that the majority will decide what is best for the company and there could not be any court intervention.

The MCA established an Expert Committee in 2004 to revise the Companies Act of 1956's current provisions.[ii] The Expert Committee's report, which was submitted in 2005 and included a number of topics, included safeguarding the rights of minority owners. J.J. Irani served as the chair of the committee, which stressed the necessity to strike a balance between the interests of controlled and minority shareholders.[iii]

Under Section 236[iv] of the Companies Act, 2013 'minority shareholding' implicit shareholders holding not more than 10% of the shares of the company. The Companies Act of 1956 has no specifically mention of "minority shareholders".[v]

Raising Voice Against Controlling Shareholders

In order to affect the desired change in a company's management or decisions, shareholders engage in a series of energetic actions. Shareholders invest strategically in businesses because they want to see a particular return on their money. However, occasionally, the company's choices might place the business in an unpleasant situation, making it inappropriate for shareholders to maintain their investment positions.

In such circumstances, shareholders may take specific active measures to safeguard and advance their interests, signalling their transition from dormant to active investors. In India, there have been numerous recent cases when minority shareholders have used their authority to affect management choices in ways they wished.[vi]

Few important Rights of Minority Shareholders:

  • Right of Requisition:
    Section 100[vii] of the Companies Act, 2013 provides that shareholders holding at least 10% of the company's voting rights[viii] can summon a requisition notice to the company Board of Directors for shareholder's meeting and if the Board fails to convene a shareholder's meeting after receiving a requisition, then the shareholders themselves can hold the meeting.
  • Protection against Mismanagement and Oppression:
    If the affairs of the company are being operated in a way that is detrimental to the interest of the public or company, or its affairs are tyrannical towards any member of the company then the shareholders of a company can proceed to the National Company Law Tribunal (NCLT) under Section 241[ix] and 244[x] of the Companies Act, 2013.
  • Right of instituting of the Class Action Suits:
    If the shareholders of a corporation believe that the management affairs of a company are being handled in a way that is harmful to the interests of the firm or its members, they may file a class action lawsuit under Section 245[xi] of the Companies Act, 2013 and request damages or compensation.
  • Cancellation of variation of the rights:
    If Shareholders holding 10% of the issued shares of a class did not consent to any variation of the right associated with their shares, then they can approach to the National Company Law Tribunal (NCLT) under Section 48[xii] of the Companies Act, 2013.
  • Shareholders holding shares in publicly listed companies have extra rights under the Companies Act, 2013 and the regulations enacted by the Securities and Exchange Board of India (SEBI), including the following:
    • In the Companies Act, 2013 independent directors' duties and appointment are outlined when taken together with the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR Regulations). Independent directors are expressly required to protect the interests of minority shareholders under Schedule IV of the Act, which lays out their code of conduct.
    • Any change to a company's articles of incorporation, any transfer of an undertaking by a public company, any borrowing in excess of the established limitations and on a preferential basis any issuing of shares all require special resolutions under the Act when read with the LODR Regulations.
    • A listed entity is required to uphold certain shareholder rights under Regulation 4(2)(a) and 4(2)(c) of LODR Regulations including:
      • Participation right and be adequately informed of corporate change decisions.
      • Fully participate and cast a vote at shareholder meetings
      • Minority shareholders to be shielded from unfair treatment by majority shareholders or acting on their behalf.
      • Ensures that all shareholders, including foreign and minority shareholders, are treated fairly
A certain number of small shareholders who own shares with a maximum face value of ₹20,000 of a company which is listed are allowed to appoint a Director to the board of the listed company under Section 151 of the Act.

The Zee Entertainment Enterprises Limited-Invesco Developing Markets Fund Conflict

In recent time in the matter of Invesco Developing Markets Fund v. Zee Entertainment Enterprises Limited [xiii] the Bombay High Court's Division bench on March 22, 2022 accepted the appeal filed by Invesco Developing Markets Fund against its judgement of Single Judge Bench dated 26 October.

In order to prevent Invesco Developing Markets Fund from convening an extraordinary general meeting (EGM) of Zee Entertainment Enterprises Limited, the Bombay High Court's Single Judge Bench decided on the side of Zee Entertainment Enterprises Limited (Zee). Investor shareholders in India are relieved by this ruling since it reinstates a shareholder's fundamental right to call an EGM to alter the make-up of a company's board of directors.

Invesco Developing Markets Fund, Zee's largest shareholders and owners of a 17.88% equity holding, submitted a request for the convening of an Extraordinary general meeting (EGM) on September 11, 2021, in complaint with Section 100(2)(a) of the Companies Act, 2013. The Requisition requested the removal of the CEO from the Zee Board and the appointment of six independent directors.

Zee argued that the planned Requisition breached the law of India and hence should not be used to justify convening the Extraordinary General Meeting (EGM). Regarding this claim, Zee Entertainment Enterprises Limited denied calling the scheduled Extraordinary General Meeting (EGM), and at the same time, the Zee Entertainment Enterprises Limited filed a suit before the Bombay High Court asking for the Requisition to be declared void, unlawful, and contrary to the law.

By ruling dated October 26, 2021[xiv], the Bombay High Court's Single Judge-Bench granted an injunction in Zee Entertainment Enterprises Limited favour and prohibited the Invesco Developing Markets Fund from acting in accordance with the Requisition, including calling or convening the Extraordinary General Meeting (EGM). Then annoyed by this choice, Invesco Developing Markets Fund appealed, and the Bombay High Court Division Bench ultimately decided to grant their request in a ruling dated March 22, 2022.[xv]

After digging in the Companies Act, 2013 it is clear that the legislation's main aim is to protect the interest of minority shareholders but it is necessary to have a greater awareness of the regulatory environment to interpret these instruments in a meaningful way and that their precious rights be given the respect they deserve. Law is plain and clear which asserts that a shareholder has a right to call for requisition meeting under Section 100 of the Companies Act, 2013

If it the fulfils the procedural and numerical regulation and if the board rejects the requests for reasons other than listed under Section 100 of the Act then the shareholder has the right, under Section 100(2)(a) of the Act to convene the meeting without the directors in twenty-one days. Zee Entertainment Enterprises Limited made an offer to amalgamate with Sony Pictures Networks Private Limited although the dispute continued to be in progress.

Despite the Bombay High Court's judgement, Invesco chose not to use its right to requisition a shareholders' meeting but rather sold some of its shareholding in Zee Entertainment Enterprises Limited. It seems that systemic deferrals can create concerns for minority shareholders trying to quickly and effectively assert their statutory rights. However, the Companies Act, 2013 has taken a number of important measures to safeguard the interests of minority shareholders' rights in the company, regardless of the existence of oppression and poor management that influence those rights.

  1. [1843] 67 ER 189
  3. Ministry of Corporate Affairs, "Report of the Expert Committee on Company Law" (May, 2005).
  4. Companies Act, 2013, Section 236
  7. Companies Act, 2013, Section 100
  9. Companies Act, 2013, Section 241
  10. Companies Act, 2013, Section 244
  11. Companies Act, 2013, Section 245
  12. Companies Act, 2013, Section 48
  13. Appeal (L) No. 25420 of 2021 in IA (L) No. 22525 of 2021 in Suit (L) No. 22522 of 2021 with IA (L) No. 25423 of 2021
  14. Zee Entertainment Enterprises Limited v. Invesco Developing Markets Fund [2021] 229 CompCas 540 (Bom)
Written By:
  1. Tushar Jain and
  2.  Jashn Sethi

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