INTRODUCTION
Minority shareholder activism in India has grown more essential as corporate transparency, accountability, and sustainable governance become increasingly relevant. In the past, Indian enterprises have been run by promoters, and controlling shareholders often made the decisions. It’s simple to overlook or hurt the interests of minority shareholders in this kind of situation.
So, it’s really vital for minority shareholders to be active so they can keep an eye on management, speak out against unfair decisions, and make sure that corporate resources aren’t used to benefit a few people at the expense of the rest. The legislation has also changed to help their argument.
The Companies Act of 2013 included a number of new provisions that were ahead of their time. For example, Section 245 allowed class action lawsuits, made it harder for connected parties to do business with each other, and required independent directors.
These improvements provide minority shareholders new methods to fight bad management and hold directors accountable, which levels the playing field. The slow acceptance of the Business Judgment Rule (BJR) represents an interesting change in this view. Even though these notions aren’t officially part of Indian law, Indian courts and tribunals have started to adopt them.
The BJR keeps directors from being personally responsible for decisions they make in good faith, with care, and in the best interest of the company, even if those actions turn out to be harmful for business later. These let management take risks and come up with innovative ideas without always being afraid of being sued by dissatisfied shareholders. But the tricky part is getting the right amount of everything.
LEGAL FRAMEWORKS GOVERNING MINORITY SHAREHOLDER RIGHTS IN INDIA
The term “Shareholder Activism” refers to the efforts of minority shareholders to take part in the governance of the company they are holding their shares with. Minority shareholders are those groups of shareholders who own lesser portion of shares of a company compared to other large share owners.
The general rule of shareholding under The Companies Act, 2013, provides membership rights that eventually leads them to take part in decision-making processes as due members of the company. Since shareholders who own a major part of the company’s shares are in dominance over the other small shareholders, their opinions, conceptions and such other rights of active participation are oppressed. Shareholder activism can take shape in an atmosphere where the regulators demand that minority shareholder interests are protected. The part of minority shareholder activism in Indian corporate law is evolving, with emphasis on legal safeguards and potential influence of the Business Judgment Rule.
Under the Companies Act, 2013, some decisions can only be made with the approval of shareholders. Section 108 of the Act mandates the facility of e-voting in certain companies for their members (i.e., shareholders) on resolutions proposed at general meetings, as they might be distributed in multiple locations. In addition, they can sue the company under class action suits (Section 245) or sue the company for oppression and mismanagement (Sections 241-244).
In addition to the Act, regulations framed by the Securities and Exchange Board of India (SEBI) also provide rights and remedies to the shareholders of listed companies. The continuous oppression of the rights of shareholders (especially minority shareholders) evolved the concept of Shareholders Activism in India. It stimulates minority shareholders to overcome collective action problems and shareholders apathy.
E-Voting
Section 108 of Company Act 2013 says that a Central Government may prescribe the class or classes of companies and manner in which a member may exercise his right to vote by the electronic means. Moreover, Companies may provide video conferencing connectivity during such meeting in at least five locations in India.
E-voting has eliminated many geographical problems of shareholders like travelling, time, cost, etc., and now shareholders can cast their vote electronically and participate in a decision-making policy of a Company. Shareholder approval in key decisions was highlighted in the case of J.P. Srivastava & Sons (P) Ltd. v. Gwalior Sugar Co. Ltd. (2005).
Shareholders Class Action Suit
Section 245 of the Companies Act 2015 empower the members, depositor or depositors or any class of them to file an application before the Tribunal on behalf of the members or depositors, if they are of the opinion that the management or conduct of the affairs of the company are being conducted in a manner prejudicial to the interests of the company or its members or depositors.
Where the members or depositors seek any damages or compensation or demand any other suitable action from or against an audit firm, the liability shall be of the firm as well as of each partner who was involved in making any improper or misleading statement of particulars in the audit report or who acted in a fraudulent, unlawful or wrongful manner.
Oppression and Mismanagement
Section 241 of Companies Act 2013 says that any member of a Company (including minority shareholders) can file an application before the Tribunal if the affairs of the Company are being conducted in oppressive and prejudicial manner. The Central Government, if it is of the opinion that the affairs of the company are being conducted in a manner prejudicial to public interest, it may itself apply to the Tribunal for an order.
At present, in case of a company having share capital, not less than 100 members or not less than 1/l0th of total number of members, whichever is less or any member or members holding not less than 1/10th of issued share capital have the right to apply to CLB/NCLT in case of oppression and mismanagement. In case of companies not having share capital, not less than 1/5th of total number of members have the right to apply.
Rise in Proxy Advisories in India
The rise of proxy advisory firms has also contributed to shareholder activism. Proxy advisors give recommendations for voting at corporate proposals and major corporate transactions. They help shareholders make an informed decision, according to what is best for the company and their investment. Their recommendation includes companies’ proposals relating to appointment of directors, the appointment of creditors, and major corporate transactions such as mergers, amalgamations and takeovers. No longer can management and controlling shareholders ignore the influence of minority shareholders.
The recommendation of a proxy advisor firms has the effect of shedding greater light on corporate proposals and of rousing minority shareholders to overcome collective action problems. In 2013, activist investor Carl Icahn launched a proxy fight with Apple to compel the corporation to increase its stock buyback program. Although the fight did not yield an outright board change, Apple increased its buyback program afterward, which is just one example of the activist shareholders’ influence even without gaining board seats.
Shareholders Activism under SEBI Regulations
Under SEBI Regulations, listed companies are mandatorily required to constitute a Stakeholder Relationship Committee to provide a mechanism for redressing shareholder grievances. The shareholders may also exit from the management in certain situations. Due to the ease of exercising, and enforcement of shareholders’ rights, shareholders are now more willing to voice their opinion, resulting in increased shareholder activism.
JUDICIAL APPROACH TO SHAREHOLDER ACTIVISM IN INDIA
The Companies Act includes provisions for the representation of minority interests. Section 163 stipulates that the appointment of directors must adhere to the “principle of proportional representation,” whether through the single transferable vote method, a system of cumulative voting, or any other appropriate means.
Such appointments may occur once every three years, and any casual vacancies of such directors shall be filled as outlined in subsection (4) of section 161. But the basic stance in the Indian Courts is that minority shareholders do not have the right to claim equal representation as such provided to the small shareholders which was stated in the case of Tata Consultancy Services Limited v. Cyrus Investments Pvt. Ltd &Ors.
A shareholder activism action involving Zee Entertainment Enterprises Private Limited (‘Zee’), a publicly traded company, and Invesco Developing Markets Fund (‘Invesco’), an institutional shareholder of Zee, was decided in 2021. Zee refused to schedule a shareholders’ meeting in response to a requisition notice from Invesco regarding the appointment of independent directors at Zee.
The Bombay High Court citing the Supreme Court decision in Life Insurance Corporation of India v. Escorts Ltd., held that departing from the precedent established in this case would undermine shareholder democracy by supporting the restrictive behaviour of the Board. As such, Zee was ordered to call the meeting.
The Supreme Court made it clear in Sri Ramdas Motor Transport Ltd. v. Tadi Adhinarayana Reddy and Ors that under Section 397 of the Companies Act 1956, any member of a company can file a complaint if they think that the company is acting in a way that is bad for the public or unfairly harmful to one or more members. It was, however, stressed that minority activity did not violate the democratic rights of majority shareholders.
In Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. (1981), the Supreme Court said that majority owners can’t treat minority shareholders unfairly or in a way that is unfair.
THE BUSINESS JUDGMENT RULE: ORIGIN AND EVOLUTION
The Business Judgment Rule finds its historical roots in the corporate law of United States of America, with its earliest mention in the Louisiana Supreme Court’s judgment in Percy v. Millaudon. This case emphasised that directors as longs as they fulfilled their duties diligently and in good faith, would not be personally liable for the consequences of their business actions. These early rulings also underscored the importance of directors exercising reasonable care and diligence while carrying out their duties.
The BJR was not formulated with the intent to be employed as an absolute defence to shield directors from judicial scrutiny of their decision-making processes. Instead, it served as a prima facie presumption that directors, in making business decisions, acted with the requisite information, good faith, and a genuine belief that their actions were in furtherance of the best interests of the company, as described in the contemporary position of law established by Delaware courts.
The BJR isn’t directly included in Indian laws, but Indian courts have implicitly accepted its ideas, especially when directors’ choices are questioned. The BJR typically protects directors from lawsuits if they act in good faith, with a solid reason, and in the best interests of the company. This can stop small groups from suing for no good reason, but it also means that companies need strong internal controls to stop misuse.
For example, Section 463(1) says that “an individual facing a proceeding for negligence, default, breach of duty, misfeasance or breach of trust may be relieved of liability wholly or partly if the court finds that the person acted honestly and reasonably with due regard to the circumstances.” This immunity, however, is dependent purely on the judgment of the courts and does not represent an inherent right or legal entitlement.
In addition, Section 166 goes into more detail about the directors’ responsibilities and includes the ideas of good faith, reasonable care, conflict of interest, and excessive advantage. Section 184 also goes into more detail on the directors’ duty to tell people about any “interest” they may have in a firm.
Indian courts have implicitly acknowledged the principle. In the case of Miheer H Mafatlal v Mafatlal Industries, the court ruled that judicial intervention was unnecessary when a director’s actions were consistent with the principles of fairness and reasonableness, similar to a judicious businessperson making a decision that benefits the company financially. It’s important to remember, though, that some parts of the theology have changed over time. The 1956 Act did not previously require the exclusion of interested directors from meetings, similar to the legal structure in the USA.
At the moment, if one of the directors is only interested in their own interests, that director can’t attend a meeting. In situations involving share valuations, Indian courts pay extra attention to whether the valuations mainly benefit the company’s promoters. The courts have shown a tendency to protect the rights and interests of minority shareholders, which gives them the right to closely examine the decisions made by the directors. As a result, the board of directors must prove that their actions were in the best interests of the company and did not unfairly favor any of its shareholders.
NEED FOR THE BUSINESS JUDGMENT RULE IN INDIAN JURISPRUDENCE
The rule pushes directors to take smart risks and make new choices, which are very important for the growth of businesses and the economy. If directors didn’t have the business judgment rule to safeguard them, they might be too careful and not want to take on hazardous but potentially profitable projects, which would slow down progress. There are parts of the norm in Indian law, but the courts have not always used the same standard of care for directors.
A formal business judgment rule would help courts and directors make better decisions, which would lead to more predictable and consistent results. The rule can cut down on the frequency of silly lawsuits against directors by protecting them from being sued for making honest business decisions and judgments in good faith and without malice or bad intent.
This would save both the courts and the companies time and money. The business judgment rule helps companies run better by making sure that directors do what’s best for the company and giving them some protection from being sued. It makes sure that courts don’t question directors’ every business move, as long as they behaved in good faith and with reason.
The rule helps balance the needs of shareholders, creditors, employees, and other stakeholders by letting directors make decisions that may aid some stakeholders in the short run, even if they aren’t popular with everyone right away. This is crucial because business decisions typically include trade-offs and compromises. The business judgment rule lets directors make those decisions without being punished too harshly.
CHALLENGES AND CONCERNS IN ADOPTING THE BJR IN INDIA
India is yet to rule on whether the Business Judgment Rule applies to poor business choices made by directors of a company. It is still unclear to what degree the courts may abstain from getting involved in business decisions made in good faith. Due to a number of reasons, such as the pervasive delays in the Indian legal system, the lack of a plaintiff’s bar, India may not have a tradition of bringing derivative class action lawsuits against directors for breach of their duties. This could contribute to the lack of jurisprudence on the topic in India.
Though there are some provisions under the Companies Act to protect the minorities, the director’s decisions made without malice and in good faith are barely protected under the statute and its applicability still remains meagre. The closest that the Supreme Court has opined is in the celebrated Miheer H Mafatlal v. Mafatlal Industries case, wherein it was held that the court would not interfere when the Director’s conduct was “just, fair and reasonable, according to a reasonable businessman, taking a commercial decision beneficial to the company”.
PROPOSED FRAMEWORK FOR ADOPTING BJR IN INDIAN CONTEXT
Directors are protected from personal liability upon a lawful contract entered by them and which they have entered into in proper exercise of their authority. Directors purchased goods for their company and agreed with the supplier to allot him debentures for the price. Before the debentures could be issued, the company went into liquidation. The supplier was held not entitled to make the directors personally liable under the contract.
Where an accountant was appointed for the company by its director cum majority shareholder and he subsequently acting as a director removed the accountant, he was held not liable to compensate the accountant because he had acted only as an officer of the company but he was held liable for the accountant’s costs and expenses of litigation because the litigation was solely due to the director’s conduct in acting in a high handed manner.
The Burden of Proof in Law Suits Filed Against Directors:
The initial burden of proof will obviously be on the plaintiff to establish that:
- There was breach of duty by the Director,
- The loss caused to the plaintiff was foreseeable, and
- The Directors that caused such a loss had taken the decision mala fide and it was not in the best interest of the company, and there was a conflict of interest on the Directors’ part in the said business decision.
The Supreme Court has also clarified that where the duties are imposed by a statute, a mere breach of statutory duty could be proof enough of negligence and the wrongdoer Director cannot argue ‘unforeseeable harm’ since the very object of the legislation is to put that particular precaution beyond controversy. The Director who wants to seek immunity under Section 149(12) will need to demonstrate that he had discharged all his duties articulated under Section 166 of the Act. Once the Directors can demonstrate diligence, zero conflict of interest and prove that the business decision was taken for the larger corporate purpose, the courts may be willing to grant immunity to such Directors.
BALANCING BOARD AUTONOMY AND MINORITY PROTECTION
In India, Business Judgment Rule (BJR) and minority shareholder activism are two key but sometimes competing pillars of corporate governance. It is essential to achieve an optimal balance between them in order to ensure investor protection as well as managerial independence.
Minority Shareholder Activism is essential in India, where controlling shareholders may act in ways that harm the interests of minority stakeholders. Activism makes sure that things are clear, that people are held accountable, and that the power of the majority is not abused.
The Business Judgment Rule, on the other hand, shields directors from being sued for business choices they make in good faith, with care, and without a conflict of interest. It encourages people to take risks and come up with new ideas by protecting management from being held responsible for honest blunders.
Unnecessary interference by the courts could make it harder for good government to happen, while too much respect for the courts could let oppression or abuse of authority happen. At the same time, courts avoid becoming an overreaching authority, relying on the principles of BJR unless there is clear mala fide intentor procedural flaw.
Since Directors have the decision-making authority in a company regarding its functions, internal and external management, their decisions are considered significant and are to be made in an authoritative manner, without the apprehension of being penalised.
The Business Judgment Rule in this context ensures autonomic decision-making of the board and also protects the Directors from undue suits and liabilities inferred upon them by such Minority Shareholders with mala-fide intention, even though their rights were promptly protected and acknowledged.
CONCLUSION AND RECOMMENDATIONS
A healthy corporate governance regime in India must allow minority shareholders to question decisions that harm them while protecting honest directors from frivolous lawsuits. The balance lies in empowering shareholders without paralysing boards, ensuring that business judgmentand shareholder rights coexist in a complementary, not confrontational, framework.
To harmonize the two, India must, codify the BJR to provide clarity on the legal limits of managerial protection, educate shareholders about legitimate channels of activism, develop judicial standards for reviewing board decisions — focusing not on outcomes, but on process and intent and encourage institutional activism through proxy advisory firms and large investors who understand the nuances of business decisions.
ABOUT THE AUTHORS
Moveeka K and Nitya Ramachandran are law students at Government Law College, Coimbatore, affiliated to Tamil Nadu Dr. Ambedkar Law University, Chennai. Their combined academic interests encompass Company Law, Corporate Law, Banking and Finance Law, Constitutional Law, Contract Law, and Intellectual Property Rights, with a shared commitment to researching and writing on contemporary legal issues and emerging trends in corporate governance, commercial transactions, and the protection of intellectual creations. They aspire to further legal scholarship and professional development by engaging with new directions in law and legal writing.
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