| Date | Version | May 30, 2022 | 1.0 |
| Keywords | Minority Shareholders, Minority Squeeze-out, Rule of Majority |
| List of Legislation Referred |
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| Jurisdiction | India |
Abstract
This write-up examines the concept of minority squeeze-out in India and explores the way forward by analysing the provisions of the Companies Act, 2013 and the Rules framed thereunder.
Introduction
Minority shareholders generally refer to shareholders who hold a relatively small percentage of shares in a company and are therefore unable to significantly influence decision-making processes. This gives rise to the Rule of Majority, a principle established in the landmark case of Foss v. Harbottle, which is based on the concept of corporate democracy and the belief that the majority should determine what is in the best interests of the company.
While majority rule facilitates efficient corporate decision-making, it also raises concerns regarding the protection of minority shareholders and the potential misuse of majority power.
Minority Shareholders and Squeeze-Out
Section 235 of the Companies Act, 2013 indirectly recognises minority shareholders by referring to dissenting shareholders holding not more than ten percent of the shares involved in an acquisition process.
The concept of a minority squeeze-out refers to the compulsory acquisition of minority shareholding by majority shareholders or acquirers in exchange for a fair value determined under the applicable legal framework.
Indian courts have recognised that a squeeze-out transaction may be permissible provided minority shareholders receive a fair and equitable price for their shares and the transaction does not unfairly prejudice their interests.
Need for Regulation
Although the Rule of Majority remains an important principle of company law, lawmakers have recognised the need to balance majority control with minority protection.
The J.J. Irani Committee highlighted the importance of safeguarding minority interests while maintaining efficient corporate governance and decision-making processes.
Present Legal Position
Acquisition of Shares of Dissenting Shareholders
Section 235 of the Companies Act, 2013 permits a transferee company to acquire shares from dissenting shareholders where a scheme or contract has been approved by holders of not less than ninety percent in value of the relevant shares.
Dissenting shareholders retain the right to approach the National Company Law Tribunal (NCLT) if they oppose such acquisition.
Purchase of Minority Shareholding
Section 236 of the Companies Act, 2013 provides that where an acquirer becomes the holder of ninety percent or more of the issued equity share capital, such acquirer may purchase the remaining minority shareholding at a price determined by a registered valuer.
The provision also grants minority shareholders a reciprocal right to require the majority shareholder to purchase their shares at a fair value.
Minority Takeover
Section 230(11) of the Companies Act, 2013 and Rule 3(5) and (6) of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 permit shareholders holding at least three-fourths of the shares to initiate a takeover of the remaining shares through the approval of the National Company Law Tribunal.
Valuation reports and judicial oversight seek to ensure that minority shareholders receive fair treatment during such transactions.
Protection in Other Jurisdictions
- European Union: Provides minority protection through takeover directives and mandatory bid requirements.
- Australia: Grants minority shareholders the ability to challenge majority-approved transactions and emphasises fairness principles.
- United Kingdom: Allows compulsory acquisition by a ninety percent shareholder while also granting minority shareholders corresponding sell-out rights.
Conclusion
The Indian legal framework recognises the importance of protecting minority shareholders during squeeze-out transactions. However, the remedies available to minority shareholders remain comparatively expensive and procedurally burdensome.
The article suggests that lawmakers may consider introducing additional safeguards, such as permitting minority shareholders to challenge approvals passed in general meetings or requiring a “majority of the minority” vote before implementing squeeze-out transactions.
Such measures would strengthen investor confidence and ensure that the objective of minority protection remains central to corporate restructuring and acquisition transactions.
