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Majority Rule In Company Law

In today's world it is observant that the place of a nation is being taken by a corporation, it is essential to find common ground between the company's members, both those in the minority and those in the majority, just as it is in any other democratic society. With practically all of the main developing legal systems following the same pattern, the rule of majority has been institutionalised as an embedded component of the firm under common law, which is a form of law that originated in England.

The rule of majority has put the company's majority equity shareholders in a dominant position as opposed to the vulnerable minority members. This has the effect of tipping the scales in favour of the majority equity shareholders. The modern company law faces a significant obstacle in the form of the protection of minority members in the area of company administration.

The goal of the legislations must be to strike an equilibrium between the rights of majority and minority shareholder's, which is essential for the better orientation of the company. The fundamental idea of providing the greatest benefit to the largest possible number of individuals is where the concept of striking a balance between competing interests originates.

It should be exercised to curb the misuse of power and domination by the majority members in accordance with the general policy to safeguard the interests of the minority members from the unjust behaviour of the majority members. This policy is intended to defend the interests of the minority members.

Because it does not have the approval of the majority of shareholders, the court has ruled in many instances that an action initiated by a single shareholder cannot be heard. This is due to the fact that the majority of shareholders have the ability to give up their right to sue the company.

Therefore, a corporation can only file a lawsuit:
  1. If the directors of the company adopt a resolution to do so, or
  2. If the company passes an ordinary resolution in general meeting saying that it wishes to file a lawsuit.

Both of these options require a majority vote of the company's shareholders. This is because shareholders have the same power as directors to drag the company into court as a claimant, and if shareholders want to drag the company into court but directors don't, shareholders have the right to do so. This is because shareholders have the same power as directors to drag the company into court as a claimant. In the eyes of the law, the corporation is a person.

Under the Section 910 of the Act, a company incorporated under law has the "power to acquire, hold and dispose of property, both movable and immovable, tangible and intangible, to contract and to sue and be sued, by its name" as it is a separate legal entity. The court time and again in plethora of cases held that since a company is a persona in the eyes of law, the action is vested in it altogether, and cannot be exercised by a single individual member.

To analyse and compare the application of the Foss rule in the Indian context to that its origin countries, we need to examine the principle, in the countries of its origins. The genesis of this rule was to establish a ground basis for the shareholder's power revolving around single individual enterprise and including a huge chunk of small shareholders.

The Hon'ble Court in the case of ICICI v. Parasrampuria Synthetic Ltd. SCL13 held that, in India the circumstances are different from the other countries. In India, the corporate enterprises are not the result of different investments of small and medium investors but majorly state-sponsored funding structure that procures funds from financial institutes.

If the rule laid in the Foss case is applied as it is in India, it may lead to submitting weightage to the majority of the shareholders holding more percent shares, over the financial institutions which might have a lesser percent of shares even though contribution majority in terms of the finances. Such financial institutions actually procure and bring in the finance for the functioning of the company and, thus, to render such institutional investors voiceless on a mechanical application of the rule laid in Foss could be unfair and unjust in India.14

The rule in Foss v. Harbottle19 is not absolute but is subject to certain exceptions. In other words, the rule of supremacy of the majority is subject to certain exceptions and thus, minority shareholders are not left helpless, but they are protected by:
  1. The common law; and
  2. The provisions of the Companies Act, 2013.
The cases in which the majority rule does not prevail are commonly known as exceptions to the rule in Foss v. Harbottle20 and are available to the minority. In all these cases an individual member may sue for declaration that the resolution complained of is void, or for an injunction to restrain the company from passing it. The said rule will not apply in the following case:

Ultra Vires & Illegal Acts
The Foss rule is not applicable where the act against which the suit is institutes is ultra vires the company, 21 because not even a majority vote of the shareholders can approve an act that is ultra-vires. In these cases, the plaintiff member of the company may institute either an individual suit, for the company's violation of its memorandum, or a collective derivative action, for the wrong committed against the company for the violators who have committed the ultra vires act.22

Breach of Fiduciary Duty
A derivative action may be brought up by the minority shareholder against the directors of the company who have been found guilty of a breach of their fiduciary duties to the company, if they are able to stall the company from litigating against them in the company's name as the director control a majority of the votes of shareholder at a general meeting, or if the directors are able to prevent a general meeting from passing a resolution that the company shall sue them.

Therefore, the derivative actions have been allowed against the directors who are in control of the company for misappropriating the property of the company23 or misapplying it in breach of the Companies Act,24 to hold such directors accountable to the company for profits made by misappropriating for themselves a business opportunity which the company and other shareholders would have enjoyed.25

In the case of, Satya Charan Lal v. Rameshwar Pd. Bajoria,26 it was held by the Hon'ble Court that when a director breaches the fiduciary duty, every shareholder of the company has as an authorised organ to bring the action.

Fraud or Operation against Minority
In the case of Edward v. Halliwell, 27 the Hon'ble Court held that,:
Where the majority of a company's members use their power to defraud or oppress the minority, their conduct is liable to be impeached even by a single shareholder.28

The oppression or fraud should involve an unconscionable use of the majority's power resulting, either in in unfair or discriminatory treatment of the minority or financial loss, and the same shall be grave than the mere failure of the majority members to do something for the interest of the company as a whole.29 Fraud includes all such cases where the perpetrators are endeavouring, directly or indirectly, to appropriate to themselves money, property or advantages which belong to the company or in which the other shareholders are entitled to participate.30

Inadequate notice for a Resolution passed at a meeting of members
It is held in plethora of judgments that if an insufficiently informative notice is given of a resolution to be proposed at a general meeting, a member who did not attend the meeting, or who has voted against the resolution, can bring a representative action to restrain the from carrying out the resolution.31

Qualified Majority
When the Act or the articles mandates a qualified (special) majority for passing of a resolution, the rule of majority cannot be invoked to override these requirements. If not for this, the provisions of qualified majorities would be of no value as a simple majority can always concur a special resolution passed irregularly.32

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