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Shareholder Activism

A Shareholder activist is a person who tries to bring change within the corporation using his rights as a shareholder of a public traded company. They can influence the decision of the company by using their rights as they are the partial owners of the corporations. The main source of law for shareholder activism in India lies in the Companies Act 2013. Besides company law, SEBI also provides certain rights to the shareholders in India against the company and its directors.

Shareholders put pressure on its management and directors by using an equity stake in the company. India is seeing a very high trend in Shareholder activism and the investors are viewed as a positive participative force. India has witnessed that in the past, the concept of shareholder activism is holding a good place in unlocking the true value of all the shareholders.

Need of the shareholders activism:

Shareholders use their right to increase their value by acting as a positive catalyst in the growth of the company. This helps to ensure that the management will also tries to maximize the long term returns on the investments made by the shareholders.

They help in maximizing the profit by safeguarding the company resources. They ensure that the company resources are utilized in a just and prudent manner.

Activist shareholder collectively raises their voice against the injustice more often. For example in a company, the raw material is purchased in a very high price from the ruling party. After strong opposition by these shareholders can force the company to stop this malpractice and change the terms of the contract.

Legal provisions for shareholders activists:

  1. Mismanagement & Oppression under Companies Act 2013
    • Section 241 of the companies act says that if the company affairs are being conducted in an oppressive and prejudice manner then the shareholder can file an application before the tribunal court.
    • However the government can itself file for an application, if he thinks that the affairs of the company are prejudicial to the public interest.
  2. Electronic voting under Companies Act 2013 and SEBI
    • Section 108 of Companies Act 2013 prescribes a manner in which a member of the company can cast his vote through electronic means. Additionally it is suggested to the company to conduct meeting by providing video conferencing connectivity in at least 5 different locations.
    • Usually general meetings are conducted at the registered office which makes it difficult for small shareholder to travel to these locations. So these shareholders should be allowed to cast their vote electronically i.e. E-voting.
    • In July 2012, SEBI mandate the listed companies to start the facility of E-voting. Currently the top 500 listed companies of BSE & NSE provides the facility of e-voting to their shareholders. However it is now extended to all the listed companies.
  3. Proxy advisory firms in India:
    • Proxy advisory firms are the research organizations which evaluate the pros and cons of the matters such as acquisitions, merger, CEO appointments, CEO pay, etc. These firms do a deep analysis and produce a detailed report to advice shareholders on how they should work to safeguard their interest.
    • Since 2010, India has a burst in the industry of proxy advisory firms. Within a short period of time, 3PFA have been published in India and they have published hundreds of recommendation to the shareholders like appointment of directors and auditors, major transactions and mergers.
    • Now with the recommendation of PFA, the companies can now no longer exploit the small shareholders and can take part in corporate decision making.
  4. Minority shareholder approval necessary for related party transaction:
    • Section 188 of Companies Act 2013 states that if a company want to enter into contract with related party then it has to take the consent of the directors and the report with the justification for entering into such a contract should be sent to the shareholders.
    • If the contract is entered without the approval of the board and if it has not been ratifies by the shareholders within 3 months then the contract will be voidable at the option of the board and the directors will be responsible for the loss, if any occurred.
  5. Appointment of director by the small shareholders:
    • According to Section 151 of the Companies Act 2013, at least one director must be elected by small shareholders in accordance with the Central government's terms and procedures.
    • A small shareholder is the one who hold the maximum share value of Rs. 20,000 or any other sum as may be prescribed.

Recent campaigns of shareholder activism:

  1. Shareholder activism with respect to blocking transactions
    There has been plethora of cases where shareholders block transactions which may bring adverse effects to the shareholder�s interest. As we know the law that the shareholder cannot vote to approve any decision if he/she has interest in the related party. In this scenario the interest of minority shareholders has taken a lot of importance. Some of the instances when shareholder activism leads to the block of transaction are:
    1. In 2016, HDFC Standard life insurance co. ltd. and Max life insurance co. ltd. announced a merger to create a new insurer. A non-compete fee of Rs 8.5 billion rupee has also been paid to one of the promoters.
    2. In July 2017, the deal between Raymond and its promoters faced a heavy opposition due to the related party transaction. I t was alleged that there has been sale of asset at a very low value.
  2. Shareholder activism with respect to forcing renegotiation of terms
    Sometimes the shareholders force the company involving in large transactions to renegotiate on the terms of the contract.
    1. For instance in 2014, Maruti Suzuki was highly criticized when he fails to get approval from the shareholders for the large transactions. Various shareholders including the infamous shareholder activist LIC come in between the deal challenging the transaction.
    2. In December 2019, RIL announced a swap scheme which many shareholders threatens to challenge this. However in January 2020 after shareholders opposition, RIL made the scheme optional.
  3. Shareholders activism with respect to changes in the board composition
    Some instances when shareholders/Investors forces the company to make changes in their board of directors are:
    1. Investors made a success by removing the chairman of CG Power and Industrial Solutions because of the certain irregularity allegations.
    2. In 2018, 22.20% shareholders voted against the voted against the reappointment of Deepak Parekh as a director HDFC ltd.

Important case laws:
  1. In Cyrus Investments pvt ltd. Vs. Tata sons ltd.
    In this case, the petition was filed in NCLT against tata sons ltd. for getting relief against the oppression and mismanagement (O&M).

    Various allegations were alleged by the petitioner (a shareholder) which according to him was oppressive and against petitioner�s interest.

    These allegations include: continuing the loss making project of Nano, acquiring corpus group at a very inflated price, allowing Mr Ratan tata to interfere in the company, removing cyrus mistry from the post of director, and many more.

    The court held none of the actions of respondent was oppressive and mismanaged. Various decisions were taken with the bonafide intentions and not to cause harm or loss to the company. So it was concluded that the actions were not oppressive and mismanaged and not a violation of section 241 of the companies act 2013.
  2. In Brookefield Technologies Pvt. Ltd., it was held that:
    A company is an abstract entity in law. The right to complain about oppression and mismanagement lies within the members of a company. Fairness and probity rather than legality are the key factors to be taken into consideration by the Company Law Tribunal in case of oppression. The kind of oppression or prejudice or unfairness if any caused in a given case, depends on the injury caused to an affected person is to be determined according to Section 241 of the Companies Act, 2013.
    The burden to prove oppression and mismanagement is on the petitioner.

    A shareholder approaching the tribunal for oppression and mismanagement must come with clean hands and bona fide intentions.
  3. When examining oppression and mismanagement in Shanti Prasad Jain v. Kalinga Tubes, the court stated that one of the major conditions for a case of oppression under section 241 by a shareholder is that there must be conduct amounting to wrongdoing by the majority against the minority. Furthermore, this behaviour cannot occur in a single case, but rather must be repeated on a regular basis.
  4. The NCLT held in the case of Sidharth Gupta & Ors. Vs. M/s. Getit Infoservices Pvt. Ltd. & Ors. that simply violating the company's articles does not constitute a breach of section 241 of the Companies Act 2013. To prove the act of oppression and mismanagement, a continuous action with a motive is needed.
  5. In the famous case of Vikram Bakshi and McDonalds India Private Limited:
    FACTS: Mc Donalds India pvt ltd (MIPL) and mr Bakshi came into the join venture and both acquired 50% stake in CPRPL (a primary franchisee of MIPL. They had made 4 board of directors. Each party will got a chance chance to nominate 2 member of his choice. The agreement between Vikram bakshi and MIPL stated that if Vikram bakshi was not the MD, then MIPL has the right to acquire the share of vikram bakshi at the fair market price.

In 2007, MIPL offered bakshi to sell his share at 5 million dollar which was contradicted by Vikram bakshi demanding 100 million dollar. In 2013, Vikram bakshi was terminated as director by alleging him of diversion of funds and mismanagemt. Vikram bakshi approached NCLT alleging the action as �oppressive and mismanaged�

The NCLT ruled in Vikram Bakshi's favour, stating:
  1. There is no evidence of mismanagement or diversion of funds in the company's financial statements. Instead, the organisation seems to be in good financial shape.
  2. It's also worth noting that the company continues to give him emails commending his genuine efforts in developing the brand.
  3. The NCLT found that the respondent's prejudice and oppression of Mr. Bakshi has been ongoing. As a result, the court determined that this was a case of oppression and mismanagement.
  4. As a result, the court reversed his dismissal and reinstated him as Director of CPRPL..

The last decade have seen a major development in the shareholder activism. Numerous reforms have been made in the legal framework still many shareholder donot understand their role in the company. They should come forward and work for the betterment of the company. They form a very integral part of the company.

However the efforts by the various regulatory agencies cannot be said to be go in vain. Various study shows that there have been changing trends in the shareholder participation and positive result is being witnessed due to these reforms. If the shareholder activism is given boost then it not only helps the corporate sector but also improves the efficiency of the country as a whole.

Written by: Apoorv Bansal, Law student - BBA LL.B (5yrs. Integrated), BVIMR, Department of Law, New Delhi
Email id: [email protected]

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