CHAPTER (5) FIVE

RULE OF MAJORITY
Learning Objectives
• Principle of Majority Rule
• Exceptions to the Majority Rule
• Minority Protection

7.1 THE PRINCIPLE OF MAJORITY RULE

As we all know in democracy, decisions are taken by majority and the same are considered as valid
and fair. The same principle applies even in case of companies and decisions taken by requisite majority
are treated as decisions of the company. Courts are also reluctant to interfere in the internal affairs of
the company if requisite majority has taken such decisions. At number of places in the companies act, it
is mentioned that such and such powers can be exercised subject to approval of the company in general
meeting. Such approval is said to have been given if the resolution is passed with the requisite majority,.
The resolution can be either ordinary (simple majority) or special (3/4 th majority) but in no case such
resolution need to be unanimous that is all the members consenting that motion and not a single vote
cast against. Such right of single vote against the motion stopping the action is known as veto in
common parlance.

This principle that the ‘will of the majority should prevail and bind the minority’ is known as the
principle of majority rule.

This principle was settled in the famous case of Foss v/s. Harbottle as narrated below. F and T, the two
minority shareholders of a company alleged that the directors and solicitors of the company were guilty
of buying their own land for the company’s use and paying themselves a price higher than its value. It
was further alleged that in this manner, the directors had indulged into various fraudulent and illegal
activities/transactions and thereby the property of the company was misapplied and wasted and as a
result company suffered the losses.

The minority shareholders decided to take action against these directors to make good to the
company the losses. In the general meeting, majority of shareholders resold not to take any action
against the directors by saying that they were not responsible for the losses of the company.

Accordingly, minority shareholders filed the suit in the court of law against such directors for
appropriate action.

The suit of the minority shareholders was dismissed, it was held that the acts of the directors were
capable of confirmation by the majority members and therefore the proper person to file such suit was
nothing but the company itself (which can act through majority shareholders) and not the minority
shareholders.
 The court observed that the conduct with which the defendants (in this case the directors) are charged
is the injury not to the plaintiffs (in this case minority shareholders) exclusively, but it is an injury to the
whole corporation. In such cases, the rule is that the corporation should sue in its own name and in its
corporate character. It is not for any individual member/s to assume to themselves the right of suing in
the name of the corporation, in law the corporation and the aggregate of members of the corporation
are not the same thing for purposes like this.

Supreme Court of India in Rajahmudry Electric Supply Co. v/s. Nageshwar Rao observed similarly as
follows.

The courts will not, in general, intervene at the instance of the shareholders in matters of internal
administration, and will not interfere with the management of the company by its directors so long as
they are acting within the powers conferred on them under the articles of the company. Moreover, if
the majority shareholders support the directors in what they do, the minority shareholders can, in
general, do nothing about it.

Following points can be summarised from the above two cases.

1. A company shall be recognised as a separate legal entity. If the company suffers any injury, then
the company itself should seek remedy (through majority shareholders). Individual shareholders
(especially minority shareholders) will have no remedy for the injury caused to the company if
the company (acting through majority) is reluctant to take action.
2. Company shall act through its members and decisions taken by the majority shall prevail over
minority.
3. Such arrangement is necessary so as to avoid unnecessary litigations likely raised by individual
shareholders.

7.2 EXCEPTION TO THE RULE OF SUPREMACY OF

THE MAJORITY OF SHAREHOLDERS
It should not be misunderstood here that majority shareholders have abandoned powers to do
whatever they want to do. This rule cannot be applied blindly in all the cases. There are certain
exceptions to the rule of majority where it can be proved that principle of majority has been misused.

1. Illegal or ultra vires acts: If the company does anything which is ultra vires its memorandum or
if such acts are illegal the same cannot be permitted irrespective of adequate majority. Such acts
even cannot be ratified with unanimous vote. Minority shareholders can challenge such acts of
the company and can be set aside.
2. Fraud on minority: If certain decisions are taken by majority to defraud or oppress minority, the
court will interfere at the instance of minority. The majority shareholders of Company X were
also the members of Company Y. in the meeting of company X they passed a resolution to
compromise an action against Company Y in a manner alleged to be favourable to Company Y
but against the interests of Company X. minority shareholders of Company X could succeed in
the litigation and could set aside such compromise. Majority shareholders cannot be allowed to
 put something in their pocket at the cost of minority shareholders. Here though the loss t
Company X would have been shares by majority shareholders also, they were getting
compensated in Company Y, which was not the case with minority shareholders of Company X.
3. Acts inconsistent with the Articles of the company: Certain acts which are inconsistent with the
articles of association of the company can be set aside at the instance of the minority
shareholders. In certain cases, majority can also be restrained from such alterations in the
Articles of Association, which are not bona fide.
4. Resolution not passed by requisite majority: If a resolution required to be passed as special
resolution is passed as ordinary resolution, then any member or members can bring an action
and get injunction restraining the majority.
5. Infringement of personal rights of an individual shareholders: Every shareholder has, vested in
him , certain basic personal rights against the company. These basic rights are conferred on
shareholders by the Companies Act, or in the Articles of Association of the company or in the
ordinary course of business. If such rights are denied by majority such acts can be set aside at
the instance of such aggrieved shareholders. Not allowing shareholders to vote on a motion or
withholding dividend without any proper cause could be the examples of such infringement.
6. Breach of duty: There are certain powers and duties of the directors of the company. Minority
shareholders can bring an action against the company if there is a breach of duty vy the
directors and majority shareholders to the detriment of the company.
In accompany two directors (being husband and wife) also having majority shareholding, sold
company’s land to one of them (the wife) at a gross undervalue. The minority shareholders
could succeed in an action against the company and its directors to set aside such deal.
7. Oppression of minority and mismanagement of affairs of the company {secs. 397 and 398}:
These sections give certain exceptions to the rule of majority where there is oppression of
minority or mismanagement. Companies Act tries to keep a balance between the right of
majority to conduct the affairs of the business and at the same time allowing the minority with a
remedy if anything is done to oppress them or if there is mismanagement of company affairs by
the majority. Such balance is necessary for the smooth functioning of the company. For the
purposes of this section, the oppression must be of such a nature as will make it just and
equitable for the NCLT to wind up the company but to order a winding up would unfairly
prejudice the interest of the oppressed member or members.

7.3 RIGHTS OF MINORITY SHAREHOLDERS

The Companies Act, 1956 protects the minority from being oppressed by majority. Admitting the
rule of majority the Act also tries to

(a) Variation of class rights

(b) Applying to NCLT for getting company’s affairs investigated
(c) Scheme of amalgamation and reconstruction
(d) Prevention of oppression and mismanagement
(a) Variation of class rights: A company can provide for different classes of shares in its
Memorandum and Articles of Association. Such classes of shares can also be provided with some
special rights. Such special rights can be altered with the consent of 3/4th majority of the
shareholders of that class.
If such rights are varied with a requisite majority (3/4 th), shareholders holding not less than 10
per cent of the issued shares of that class who have opposed that variation can apply to NCLT
for the cancellation of the variation. NCLT if satisfied having regard to all the circumstances of
the case, that the variation would unfairly prejudice the shareholders of that class represented
by the applicant, disallow such variation as such decision of the NCLT shall be final. (sec.107)
(b) Investigation by Central Government: Where;
i. In case of a company having share capital, an application has been received from not
less than 200 members holding not less than 1/10 th of the total voting power of the
company, and
ii. In case of a company not having share capital, an application has been received from
not less than 1/5th of the persons on the register of members of company; the NCLT may
order that the affairs of the company ought to be investigated. Before forming such
opinion, the tribunal shall give the concerned parties an opportunity of being heard.

On receiving such report from the tribunal the Central Government may appoint one or more
competent persons as inspectors to investigate the affairs of the company. (sec.235)

(c) Scheme of Amalgamation or reconstruction: A company for the purposes of improving its
operations may announce a scheme of amalgamation or reconstruction. The provisions of
amalgamation and reconstruction are discussed in detail under the Chapter Compromise,
Arrangement, and Amalgamation &Reconstruction.
Under the scheme of amalgamation at least 9/10 th of the shareholders have to approve such
scheme within a period of 4 months from the date of offer from the transferee company. The
transferee company can then give an offer to the dissenting shareholders for acquiring their
shares within a period of 2 months. Such dissenting shareholders can then within a period of 1
month from such offer from Transferee Company apply to NCLT against such offer. (sec.395)
(d) Prevention of oppression and mismanagement: Specified number of member of a company can
complain to NCLT if they feel that the affairs of the company are being conducted in a manner
prejudicial to public interest or oppressive to any member or members.
The tribunal if forms an opinion after making due enquiry in the matter that the affairs of the
said company are being conducted in a manner prejudicial to public interest or oppressive to
any member or members and is of opinion that to wind up such company would unfairly
prejudice such member or members but otherwise the facts justify the winding up of the
company on just and equitable grounds (discussed under the Chapter of Winding Up) may make
such order as it may deem fit. (sec.397)
Specified number of members of a company can complain to NCLT if they feel that the affairs of
the company are being conducted in a manner prejudicial to public interest or prejudicial to the
interest of the company. Similarly, if the members feel that a material change has taken place in
the management or control of the company and due to such change it is likely that the affairs of
 the company will be conducted in manner prejudicial to public interest or prejudicial to interests
of the company may also apply to NCLT.
The tribunal if forms an opinion after making due enquiry in the matter that the affairs of the
said company are being conducted in a manner prejudicial to public interest or due to such
change in the management or control of the control it is likely that the affairs will be conducted
as aforesaid, may with a view to bringing an end or preventing the matters complained of or
apprehended, make such order as it may deem fit. (sec.398)

For both (secs. 397 and 398) the requisite number of members who can apply as given under (sec.
399) is as follows.

(a) If the company is having share capital, not less than 100 members or 1.10 of the total number of
members of the company whichever is less, or any members holding not less than 1/10 th of the
issued capital of the company. It is necessary that the applicant/s must have all their calls due
on their shares.
(b) If the company does not have share capital, not less than 1/5 th of the total number of members
of the company.

While making application to NCLT any member entitled to apply can obtain consent of other
members in writing and can file a single application.

In addition to above specific provisions, interests of minority are protected indirectly under certain
other provisions such as:

i. For shifting the registered office of the company from one state to another permission of
Central Government is necessary.
ii. Consent of NCLT is required for reducing capital of the company.
iii. Even a single contributory of a company is entitled to present a petition for winding up of
the company to NCLT.
iv. Central Government can appoint such number of persons as the tribunal may by order in
writing specify as being necessary to safeguard the interests of the company, or its
shareholders or the public interest to hold office as directors of the company. Such order
may be passed by tribunal on a reference made by Central Government or on an application
made by not less than 100 members of the company or members holding not less than
1/10th of the total voting powers of the company.

So it can be summarised that though the affairs of the company will be mainly operated on the
principle of majority rule there are number of checks and remedies available to minority
shareholders whereby their interests are protected without allowing them to use such tools in their
own interest or detrimental to the operations or conduct of the business. (For Minority
protection under new Act refer to PPT )