INTRODUCTION
Shareholders and Directors are two faces of a company serving distinct but interconnected roles in the corporate structure. Under Indian company law, the Companies Act, 2013, in, particular, shareholders and directors occupy their different rights and duties that create balanced governance between them, ensuring accountability. Shareholders on one hand, play as owners, by investing capital and earning returns from the company. Their primary role is investment, through which their rights are being upheld as an owner of the company. On the other hand, directors are the face of management that are responsible in steering the company by aligning with set objectives and in the best interests of the stakeholders.
Disputes may arise when directors are perceived to act contrary to shareholder interests, leading to concerns of mismanagement or breach of duty. This distinction between them is crucial in maintaining a good corporate governance, transparency, and investor confidence.
SHAREHOLDERS UNDER THE COMPANIES ACT, 2013
A shareholder is a person, company, or organization that owns at least one share of a company’s stock. Shareholders own the company, which gives them the right to share in the profits. When the company is under profit, shareholders benefit from higher stock values or profits distributed as dividends. They also have the right to vote in corporate elections. However, they are subject to receive lesser dividends or losing their investment entirely, if the company struggles, share prices fall or the company is declared insolvent. If the company fails, shareholders can claim any leftover assets after the company’s debts are settled.
Their ownership interest in a company is in proportion to the number of shares they hold in relation to its total share value. An entity that controls more than 50% of a company’s shares is known as a majority shareholder and holds substantial power when it comes to making key decisions for the company’s operations. Conversely, entities with less than 50% ownership of a company’s shares are referred to as minority shareholders.
Legal Status of a Shareholder
Shareholder as Member
Section 2(55) clause (iii) of the Companies Act, 2013 defines “member”, in relation to a company. It provides that a person can gain membership status in a company by holding shares of the company and having their name entered as a beneficial owner in the records of a depository. Thus, it is evident that a shareholder is also a member of a company.
Ownership Interest
By owning shares of a company, shareholders hold portion of the company. This interest of ownership is proportionate to the number of shares held by them.
Limited Liability
Shareholders’ liability is limited in nature, meaning, they are liable only to the extent of the unpaid amount of their shares. They are not personally held liable for the company’s debts due to the established principle of separate legal entity in the landmark English case of Salomon v. Salomon & Co. Ltd. (1897)[i]. Under this, assets of the company are realised to pay off debts and not the personal assets of shareholders.
Contractual Relationship
By purchasing shares of a company, the shareholder enters into a contractual relationship with the company with the Memorandum of Association forming such a contract.
Participation in Internal Governance
Shareholders’ right to vote, resolutions and general meetings are acknowledged under the Companies Act, 2013. But their rights are limited in case of management, which lies on directors.
RIGHTS OF A SHAREHOLDER
Right to Vote in Meetings
Every member holding shares of a company is entrusted with voting rights on every resolution placed before the company. This right, stated under Section 47 of the Act, affirms the ownership characteristic of a shareholder by allowing them to influence major decisions in corporate governance.
Right to Dividend
Dividend is the portion of the profit earned by a company that is distributed back to the shareholders at a pre-determined rate or otherwise. Shareholders are entitled to receive dividends once declared by the company’s board and approved by the members, subject to the availability of profits. In Re Chelsea Water Works Co. & Metropolitan Water Board, the court observed that “dividend means the right of a shareholder to receive his adequate portion of the profits of the undertaking”.
Right to Inspect Books and Records of the Company
Shareholders can inspect corporate records such as the Register of Members, Minutes of General Meetings, other Statutory Registers, etc. They are also entitled to receive information regarding financial results, corporate governance, etc., under the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.
Right to Participate in General Meetings
Shareholders can attend, speak, and vote in Annual General Meetings (AGMs) and Extra-ordinary General Meetings (EGMs) under Sections 96 and 100. Also, they can vote electronically as available in listed and certain unlisted companies under Section 108.
Right to Receive Notices and Information
Right to receive notice, agenda, and explanatory statement for general meetings (Sections 101–102) and financial statements and auditor’s report (Section 136). Access to statutory registers and minutes (Sections 88, 119). For listed companies, continuous disclosures under SEBI (LODR) Regulations, 2015 also apply.
Right to Transfer Shares
Right to transfer of shares as a moveable property is available in Public companies as provided under Section 44. But this right might be restricted in Private companies in their Articles of Association.
Pre-emptive Rights
Pre-emptive rights ensure fairness in the issuance of new shares by allowing existing shareholders to acquire shares prior to those shares being offered to third parties. This means that existing shareholders have the opportunity to maintain their proportionate ownership in the company, even if new shares are issued[ii].
Right to Legal Remedies
Right to apply to the National Company Law Tribunal (NCLT) when there are cases of oppression and mismanagement is conferred under Section 241 – 242 of the Act. Further, minority shareholders can seek relief by class action suits against the company, auditors or the directors for fraudulent, biased or prejudicial acts.
DIRECTORS OF A COMPANY
Section 2(34) of the Companies Act, 2013, defines “director” as a director appointed by the Board of a company. Every company consist a director or board of directors to run or administer the company. Directors look after the affairs of the establishment. Director is a person appointed or elected according to law authorised to manage the company.
In Maynard v. Firemen’s Fund Inc. Co.,[iii]it was observed that “the Directors of a company are the persons having the direction control, management or superintendence. The directors of a company or corporation are its chosen representatives, and constitute the corporation to all purposes in dealing with others.” Similarly, in Re Forest of Dean Coal Mining Co.,[iv] it was stated that, “So long as a person is duly appointed by the company to control the company’s business and authorised by the Articles to contract in the company’s name on its behalf, he functions as a director. A company is indeed a person, but a juridical person and the directors as a body endow the juridical person with human face that can act and react.
Legal Position of a Director
As Agents or Trustees
In G.E Rly v. Turner[v] it was observed that “The directors are the mere trustees or agents of the company – trustees of the company’s money and property and agents in the transactions which they enter into on behalf of a company”
As a Managing Partner
Directors of a company act as representatives of the shareholders, carrying out their interests and opinions. They work on behalf of the shareholders and their interests, which grants them significant powers and the ability to perform functions that are essentially proprietary in nature.
As Organs of Corporate Body
Directors of a company are considered to be the only brain through which the company acts. This can be applied in the “Lifting of Corporate Veil” principle, where the directors are the functioning part behind a separately entitled company with a legal personality of itself.
Duties of Directors
Duties of directors are codified as in nature of fiduciaries who must act in the best interest of the company members and stakeholders. It may be divided under two heads—
Statutory duties, which are imposed by the statute i.e., the Companies Act under Section 166—
- Subject to the provisions of the Act, a director must act in accordance with the Articles of the company
- He must act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of environment
- He has duty to exercise his duties with due and reasonable care, skill and diligence and with independent judgment as a prudent person
- A director must not involve with direct or indirect interest that may conflict with the interests of the company
- He must not attain undue personal gains from the company, if any, it must be repaid to the company itself
- A director must not delegate his authority or assign his office to any other person, as in the maxim delegatus non potest delegare which translates to “A delegate or deputy cannot appoint another”. It is the rule that a person, to whom a power, trust, or authority is given to act on behalf, or for the benefit of, another, cannot delegate this obligation unless expressly authorized to do so.
Promoting the objectives of the company and defending the interests of its stakeholders are the two main obligations to act in good faith, according to a straight reading of the statute. The common law before codifications cast upon a duty of loyalty which included the duty to act in good faith in the best interest of the company. Directors in India are now required to actively prioritize the best interests of stakeholders and shareholders in the current scenario.[vi]
Furthermore, there are other general duties under general law, such as duty to maintain confidentiality, attend the board meetings regularly and ensure statutory compliance.
Executive and Non-Executive Director
Executive directors are responsible for the day-to-day management of the company working alongside the other board members. In smaller companies, the directors and shareholders may be the same people, but the roles are very distinct. Most executive directors are employees of the company.
Non-executive directors are not involved in the day-to-day running of the business. They are not employees of the company. Their role is to challenge and develop strategy, scrutinise the board’s performance, manage financial controls and risk, determine remuneration, and appoint or remove executive directors if and when there is a need to do so.
BOARD OF DIRECTORS
Board of directors are constituted under Section 149 of the Act. It consists of a minimum of three for public, two for private and one for one person company and a maximum of fifteen directors with at least one woman director, which can be increased by passing a special resolution. It also classifies Resident, Woman and Independent directors. Their duties can be summarised as follows—
- Duty to file Return of Allotments,
- To disclose interest,
- To disclose receipt from transfer of property,
- Duty to attend board meetings,
- To authenticate and approve annual financial statements.
LEGAL REMEDIES FOR SHAREHOLDERS AGAINST DIRECTORS
Under Indian Company Law, shareholders can get redressed against directors, if they believe that they have acted beyond their statutory powers or oppressed them. These disputes primarily arise with minority shareholders who often do not get their interests and opinions reflected in major decisions of the company.
Oppression and Mismanagement
Chapter 16 of the Companies Act, 2013 deals with oppression and mismanagement in a company. The term oppression and mismanagement are not clearly defined under the Act, but in general legal sense, it refers to the visible departure from the standards of fair and unbiased dealings in company matters, especially those that affects rights of shareholders. Mismanagement, as explained in Section 241(1)(b) of the Act, refers to the improper, negligent and dishonest management of company’s affairs.
Aggrieved shareholders can approach the National Company Law Tribunal (NCLT) for the grounds provided thereunder. The tribunal has powers regarding these issues such as removal of directors, recovery of undue gains by directors, termination or modification of agreements, etc.
Derivative Actions
This refers to the suit initiated by shareholders on behalf of the company against wrongdoers, if the directors or the company itself fails to act so. Here, the shareholder’s right to sue is derived from the company’s cause of action and not from their personal rights as a shareholder. Derivative actions have been recognised under the case of Rajahmundry Electric Supply Corp. v. Nageshwara Rao & Ors[vii].
Class Action Suit
Class Action Suits under Section 245 of the Companies Act provides such rights to the shareholders to collectively file suit against directors who have acted in fraudulent manner, breached fiduciary duties or other such grounds that affects both interests of the company and shareholders.
These suits are also filed under the NCLT which can restrain such prejudicial acts by imposing injunctions, or provide damages. Decisions made under a class action suit bind all the shareholders collectively under such suit.
Removal of Directors
Section 169 states about removal of directors for such grounds that are opposed to the best interests of the company and its shareholders. Shareholders can call an Extraordinary General Meeting (EGM) when significant business matters arise between two Annual General Meetings (AGM) that necessitate shareholder approval. Calling of EGMs is also recognised under Rules 18 and 20 of the Companies (Management and Administration) Rules, 2014. In such EGM, shareholders can pass an ordinary resolution after providing reasonable opportunity to be heard, to remove the director.
DIRECTOR LIABILITY TOWARDS SHREHOLDERS
Directors hold a fiduciary position towards the company and its shareholders. Their liabilities towards shareholders arise from the Companies Act, 2013, SEBI regulations, etc.
Civil Liability
Directors can be sued for damages for failure to exercise due diligence and skills, when it leads to loss to the company or shareholders. In other words, this liability arises when directors act negligently. Similarly, providing misleading statements in the company’s prospectus also imposes civil liability to compensate shareholders for losses incurred by them due to such misstatement, under Section 35. Civil liability can also arise due to breach of any statutory duties provided under the Act.
Criminal Liability
Under SEBI (LODR) Regulations, 2015, and the SEBI Act, 1992, directors can be held liable under criminal prosecution for insider trading, fraudulent disclosures, or market manipulation. The Companies Act provides for criminal liability of directors for misleading or untrue statements in prospectus. This is considered as fraudulent conduct if it was issued or authorised by the director, under Section 34 and 447. This includes punishment of fine or imprisonment. Directors can also face criminal liability under the Serious Fraud Investigation Office (SFIO), under Section 212, after due investigations into large-scale corporate fraud and wrongdoing. The SFIO is headed by a director and consist of experts from different fields viz banking, corporate affairs, taxation, forensic audit, capital market, information technology, law etc. The investigation into the affairs of a company is conducted in the manner and by following the procedure specified in Chapter XIV of Companies Act, 2013.
BALANCING BOARD AUTONOMY AND SHAREHOLDER PROTECTION (THE BJR and Minority Shareholder Activism)
The relationship between shareholders and directors in a company is often marked by tension over control, decision-making, and accountability. While the laws regarding corporate affairs provide accountability and liability of directors, they are protected for decisions made by them in good faith. This is known as the Business Judgment Rule (BJR). India is yet to adopt the rule statutorily, but its origin can be traced in the case of Percy v. Millaudon[viii], in United States of America. The court ruled that, as long as directors act in good faith and exercise their powers with case and diligence, they are not liable for the consequences of the decisions made by them. The rule was first applied in India in the case of Miheer H Mafatlal v. Mafatlal Industries[ix]. The court held that judicial intervention would be unwarranted when a director’s conduct aligns with the principles of fairness and reasonableness, making a commercially advantageous decision for the company.
Minority Shareholder Activism is essential in India, where controlling shareholders may act in ways that harm the interests of minority stakeholders. 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.
Unnecessary intervention by the judiciary could deter capable governance, whereas excessive deference can enable oppression or abuse of power to operate. 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.
RECENT JUDICIAL TRENDS
Tata Consultancy Services Ltd. v. Cyrus Investments Pvt. Ltd. & Others[x]
Cyrus Mistry was appointed Executive Chairman of Tata Sons, who held a minority share under two family companies – Cyrus Investments and Sterling Investments. Later he was removed from his position due to loss of confidence. This was challenged as oppression and mismanagement under Sections 241-242 of the Companies Act, 2013 as its main issue of whether the affairs of the company are being conducted in a manner prejudicial and oppressive to certain members of the company. Upon petition to the NCLT, it dismissed the petition removing Cyrus Mistry form his position; the NCLAT, on the other hand, upheld his position declaring his removal was illegal and prejudicial. Tata sons approached the Supreme Court against the order of the NCLAT.
The Court ruled that under the Companies Act, 2013 it is not just sufficient for a shareholder to show that the company’s affairs are being conducted in a manner prejudicial or oppressive to her. The shareholder, to get relief, must establish that the oppression or prejudice is so grave that it is just and equitable to wind up the company. Since Mr. Mistry was not “representing” any shareholder in the Board, his dismissal would not amount to an act that is prejudicial or oppressive to minority shareholders. Further, chairman and director are posts that call for special personal qualification. Law does not permit to reinstate anybody who was removed from such a post requiring personal qualification. The Supreme Court stayed the order of NCLAT stating his removal was illegal and ruled in favour of Tata Sons.
Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd.[xi]
Needle Industries (India) Ltd. was a joint company. The company issues additional shares to Indian shareholders only at a price lesser than the market price. The foreigner shareholders alleged this as “oppression” under the Companies Act, 1956 (Section 397).
The Court, in this case, held that, to be included under the term “oppression”, the act must be “burdensome, harsh and wrongful”. Merely isolating certain group of shareholders did not constitute “burdensome, harsh and wrongful” act and hence, such special issuance was not oppressive under the Companies Act. The court also required the foreign shareholders to sell their shares to the Indian minority shareholders, effectively transferring ownership and control of the company to the Indian group.
LIC of India v. Escorts Ltd.[xii]
The Life Insurance Corporation of India (LIC), as a shareholder in Escorts Ltd., sought to call and Extraordinary General Meeting under Section 169 of the Companies Act, 1956, to remove 9 of the existing directors and appoint new directors. This was challenged by the company as contrary to Section 248 of the Act.
The Supreme Court held that a shareholder’s statutory right to requisition a meeting under Section 169 is absolute. The Court also held that it is necessary to annex a statement setting out all material facts concerning each item business to be transacted in the meeting under Section 173(2), but this does not require the shareholders to disclose the reasons for the resolutions which they propose to move at the meeting. So the LIC cannot be restrained from calling the meeting or moving the resolution as a due shareholder of the company. Therefore, the resolution was not ultra vires.
V.M. Rao v. Rajeswari Ramakrishnan & Ors.[xiii]
In this case the minority shareholders challenged the director’s actions as oppressive. The dispute was between members and directors who were members of same family. The Madras High Court clarified what constitutes an oppressive act and laid down the following 6-point test—
- The alleged oppressive conduct must have an effect on the person in their capacity as members of the company.
- “Continuous” acts must have constituted the oppression.
- The event must be considered as part of a “continuous story”.
- “Just and equitable” grounds for winding up the company must be shown as preliminary to the Section 397 application.
- Conduct has to be “burdensome, harsh and wrongful”.
- At the very least, there must be “an element of lack of probity or fair dealing to a member in matters of his proprietary right as shareholder and not any harsh or unfair treatment in any other capacity”
The Court therefore ruled that there was no material change in the management and control of the company that is done prejudicially, to constitute a ground under mismanagement, and dismissed the petitions with costs.
BOARD AUTONOMY IN USA
Corporate laws in USA follow the Business Judgment Rule (BJR) that protects directors from good-faithed decisions. It first originated in the Louisiana Supreme Court’s judgment in Percy v. Millaudon[xiv]. 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[xv]. This rule is yet to be codified under Indian law. The Indian judiciary has always shown concerns for emphasising shareholder rights, so the burden to prove that the decision was made in best interest of the company lies with the director.
SUGGESTIONS AND RECOMMENDATIONS
Provisions relating to oppression and mismanagement can be simplified for shareholders to access them easily and ensure timely relief against such acts. Also, director’s independence can be more enhanced as in the United States. This would promote confidence, risk-taking and innovation in corporate field in India. Mediation can be used as a pre-litigation model for resolving corporate disputes between management and owners. This can highly reduce the number of litigations in tribunals and courts, leading to a more peaceful conclusion.
CONCLUSION
The Indian legal system provides separate, but interrelated, roles for shareholders and directors in Company Law, as a result of their respective rights and duties, and the implications for an appropriate balance of governance. Shareholders hold rights as owners — for instance, voting and dividends. Directors hold the rights as management and are legally required by fiduciary duties to act on behalf of the company and its stakeholders for their benefit, and to act in good faith and with diligence.
This separation of interests is necessary for accountability, but it raises the potential for conflicts of interest. Shareholders have legal recourse for the narrow range of shareholder oppression, and mismanagement actions, and class actions. Directors, on the other hand, may face both civil and criminal liabilities for breach of duty, and other fraudulent acts. In all cases, an additional factor is to balance board room discretion with the shareholder activism of minority shareholders. Courts, such as in Tata Consultancy Services (TCS) and others, maintain this balance, demonstrating respect for managerial discretion for good faith, operational decision-making, product design, pricing, choice of employment, and other day-to-day decisions that must be made. The Indian legal system, backdrop of legal duties, acts as a broad-based ability focusing on compliance, transparency on corporate governance, and good practice, to empower investments and investor confidence.
Author’s Info
Nitya Ramachandran is a law student at Government Law College, Coimbatore, affiliated to Tamil Nadu Dr. Ambedkar Law University. With a keen interest in Corporate Law, Contract Law, and Intellectual Property Rights (IPR), Nitya aspires to contribute to contemporary legal disclosure and practice by engaging with emerging issues in corporate governance, commercial transactions, and the protection of intellectual creations.
References
[i] Salomon v. A Salomon and Co Ltd [1897] AC 22, https://www.lawteacher.net/cases/salomon-v-salomon.php.
[ii] Merton Lawyers (2023) What are pre-emptive rights in shareholders agreements?, Merton Lawyers, https://www.mertonlawyers.com.au/blog/pre-emptive-rights#:~:text=Pre%2Demptive%20rights%20ensure%20fairness,if%20new%20shares%20are%20issued.
[iii] Maynard v. Firemen’s Fund Inc. Co., 37 Am St Rep 727.
[iv] [1878] 10 Ch. D 450.
[v] G.E Rly v. Turner [1872] LR 8 Ch. 149.
[vi] Kumar, V., Fiduciary Duty of Director(s) of a Company, manupatra academy. Available at: http://www.manupatracademy.com/legalpost/fiduciart-duty-of-director-of-company (Accessed: 29 July 2025).
[vii] Rajahmundry Electric Supply Corp. v. Nageshwara Rao & Ors. AIR 1956 SC 213, https://indiankanoon.org/doc/961006/.
[viii] Percy v. Millaudon, 8 Mart. (o.s.) 68 (La. 1829).
[ix] Miheer H. Mafatlal v. Mafatlal Indus. Ltd., (1997) 1 S.C.C. 579 (India)., https://indiankanoon.org/doc/1687638/.
- [x] Tata Consultancy Services Ltd. v. Cyrus Investments Pvt. Ltd. & Others AIR 2021 SC 179., https://indiankanoon.org/doc/5416696/.
[xi] Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. 1981 AIR SC 1298., https://indiankanoon.org/doc/292160/.
[xii] LIC of India v. Escorts Ltd. AIR 1986 SC 1370., https://indiankanoon.org/doc/730804/.
[xiii] V.M. Rao v. Rajeswari Ramakrishnan & Ors. [1987]61COMPCAS20(MAD)., https://indiankanoon.org/doc/333120/.
[xiv] Supra note 8.
[xv] Business Judgment Rule: Navigating Jurisprudential Diversity, Khurana & Khurana Insights (Nov. 22, 2023), Harsh Choubey, Business judgment rule:navigating jurisprudential diversity Khurana And Khurana (2023), https://www.khuranaandkhurana.com/2023/11/22/business-judgment-rulenavigating-jurisprudential-diversity/. (last visited Aug 10, 2025).