Majority Rule And Minority

Protection And Its Exceptions

Majority rule
Introduction
The functioning of a company is based on democratic
principles where the majority’s will usually prevails. This
concept, known as the “majority rule”, is foundational to
corporate governance.
However, unchecked majority power can potentially lead to
the oppression or unfair prejudice of minority shareholders.
The shareholders democracy means the rule of shareholders
by the shareholders and for the shareholders in the
corporate enterprise to which the shareholders belong.
The concept of shareholder’s democracy in the present day
corporate world denotes the shareholder supremacy in the
governance of the business and affairs of corporate sector
either directly or through their elected representatives.
It is a right to speak and communicate with co shareholders
and to learn about what is going on in the company
The Companies Act, 2013, attempts to balance these
competing interests by upholding majority decisions while
providing legal safeguards to protect minority shareholders
from abuse.
What is Majority Rule ?
• It is a cardinal rule of company law that primacy a
majority of members of a company are entitled to exercise
the powers of the company and generally to control its
affairs.
• The title ‘Majority Rule’ suggests that the power to
manage the affairs of the company lies with the majority
people i.e., majority shareholders.
• The members of the company who hold more than 50% of
the power of voting are called majority shareholders.
• This power puts the rights of the minority shareholder at
risk and render them vulnerable in front of the majority
shareholders.
• The resolution of the majority of shareholders passed at a
duly convened and held general meeting upon any
question with which the company’s legally competent to
deal is binding upon the minority and consequently upon
the company.
• It is important as it
• Ensures smooth decision-making in companies.
• Prevents unnecessary litigation by minority
shareholders.
• Recognizes that company decisions should reflect
collective shareholder will.
The Doctrine of Majority Rule

Origin and Rationale

The principle of majority rule was firmly established in the
landmark English case of Foss v. Harbottle (1843) 67
ER 189, which laid down two essential rules:
1. The company is a separate legal entity.
2. If a wrong is done to the company, the proper plaintiff
is the company itself (not an individual shareholder).
Under this doctrine:
• Internal matters of a company, if done with the
majority’s consent, are not justiciable by courts.
• Courts will not generally interfere in the internal
management of a company unless the acts are illegal or
ultra vires.

Application in Indian Company Law

In India, this doctrine is recognized and incorporated
through various provisions of the Companies Act, including:
• Section 179 – Board’s power to make decisions on
behalf of the company.
• Section 114 – Resolutions are passed by a simple or
special majority.
• Section 169 – Removal of directors by majority
shareholders.
Majority Rule under the Companies Act, 2013
1. Corporate Democracy and Shareholder Voting
Under the Companies Act, 2013, shareholder decisions are
usually taken through ordinary resolutions (simple
majority) or special resolutions (three-fourths
majority) in general meetings.
1. Ordinary Resolution [Section 114(1)]:

• Passed by a simple majority (more than 50%) of

members present and voting.
• Examples: Appointment of directors, declaration of
dividends, approval of financial statements.
2. Special Resolution [Section 114(2)]:

• Requires that the votes cast in favor are at least

three times the votes cast against.
• Examples: Alteration of memorandum or articles of
association, change in name of the company,
reduction of share capital.
These voting mechanisms manifest the majority rule in
corporate governance.

2. Articles of Association and Majority Rule

The Articles of Association (AoA) serve as the internal
rulebook for companies. Shareholders can alter the AoA by
passing a special resolution under Section 14,
exercising majority rule.
However, such alterations must not contravene the
Companies Act or oppress the minority. Courts can
intervene if the alteration is inequitable or prejudicial.
3. Board of Directors and Majority Decisions
The Board of Directors, elected by shareholders,
exercises majority rule in day-to-day management.
Decisions are usually taken by majority vote in board
meetings under Section 173, unless specified otherwise in
AoA.

The Principle Of Non-Interference (Rule

In Foss V. Harbottle)
• The court will not usually interfere and the instance of
shareholders in matters of internal administration
• And will not interfere with the management of the
company by its directors so long as they are acting within
the powers conferred on them under the Articles of the
company.
• The basic principle of noninterference with the internal
management of company by the court is laid down in the
case of Foss v. Harbottle.
• The justification for the rule laid down in this case is that
the will of the majority prevails.
• The rule really preserves the right of majority to decide
how the companies affairs shall be conducted.
• If any wrong is done to the company it is only the company
itself acting as it must always act through its majority that
can seek to redress and not an individual shareholder.
Exceptions To The Majority Rule

The principle of majority rule originates from the case of

Foss v. Harbottle (1843), which established that:
“The company itself is the proper plaintiff for wrongs done
to it, and individual shareholders cannot sue for wrongs that
affect the company as a whole.”
In essence:
• Internal affairs of a company are to be managed by
the majority of shareholders.
• Courts will not usually interfere in decisions made by
majority unless exceptions apply.

While this principle ensures efficiency and autonomy in

corporate management, it can leave minority
shareholders vulnerable. Hence, Indian company law
carves out specific exceptions where minority
shareholders can take legal action.
The Protection Of Minority Rights And Shareholders
Remedies Are Given As Exceptions To The Rule In Foss Vs
Harbottle
The principle forming the foundation on which the rights of
minority shareholders happen to be framed is derived from
the famous case of Foss vs. Harbottle (1843).

The case was decided by the House of Lords in 1843. The

board of directors is elected by the majority of shareholders
in the general body meeting to run the affairs of the
company; in fact, the majority had the upper hand in every
decision and the minority got no voice in any of the
company’s decisions and received stepmotherly treatment.

Upon an appeal by the minority stakeholders against this

oppression, it was held that the court should not interfere in
the internal matters of the company unless there is a grave
violation of the principle of natural justice with concern to
the minority shareholders.

In this way, the case had become a landmark judgement in

protecting the rights of the majority in company affairs.
However, the exceptions to the rule let down in Foss vs.
Harbottle have emerged as a lifesaver for the rights of
minorities.

The case in which the majority rule does not prevail are
commonly known as exceptions to the role in Foss v.
Harbottle and are available to the minority. In all these
cases an individual member may sue for declaration that the
resolution complained of is word or for an injunction to
restrain the company from passing it. They said rule will not
apply in the following cases:

1. Ultra-Vires Acts
• Where the directors representing the majority of
shareholders perform an illegal or ultra wires act for the
company.
• The majority of shareholders have no right to confirm
an illegal or ultra wires transaction of the company.
 • The rule lay down in the case of Foss vs. Harbottle
applies only as long as the company is acting within its
powers.
• If any act done by the company management is beyond
its powers, that is, ultra vires, the minority has a right
to take action against such an act.
• In Sh. Kanhaiya Lal vs. Bharat Insurance Co.
(1933)
• Facts of the case: As per the provisions in the
Memorandum of the Company, the loan must be given
upon adequate security being available. However, as per
the resolution passed by the majority, the loan was
passed, violating provisions in the Memorandum of the
Company.
• Judgement of the Court: The Court held that the act
was ultra vires and thus protected the rights of
minority shareholders.

2. Fraud on Minority
• Where an act done by the majority amounts to a fraud
on the minority an action can be brought by an
individual shareholder.
• It means a kind of discriminatory action.
• This should have resulted in gross unfairness to the
minority. Further, it also includes scenarios where the
majority shareholders appropriated the money,
property and so on belonging to the company.
 • If the majority suppresses the rights of minorities by
passing a resolution to commit any fraud in company
affairs, then the rights of minorities must be protected.
• In Menier vs. Hooper’s Telegraph Co. (1874)\
• Facts of the case: There were two companies with the
same person in majority on both sides. When there was
a conflict of interest between the companies, the
majority decided to go for a compromise that violated
the interests of minority shareholders; hence, they
protested on the grounds of fraud committed by the
majority shareholders and appealed in court.
• However, the majority raised the defence, claiming that
the court cannot interfere in internal matters of the
company, referring to the judgement in the Foss vs.
Harbottle case.
• Judgement of the Court: The Court held that the
case is not applicable here as the decision of the
majority amounts to fraud.

3. Individual Membership Rights

• A shareholder concealed if an act requires a special
majority but it is passed by a simple majority.
• There are certain acts which can only be done by
passing a special resolution at a general meeting of
shareholders.
• Accordingly if the majority purports to do any such act
by passing only an ordinary resolution or without
passing special resolution in the manner required by
 law any member can bring an action to restrain the
majority.
• Every shareholder can enforce his individual rights
against the company, for example, the right to vote and
the right to contest the election of directors.
• In C.L. Joseph vs. Jos (1963)
• Facts of the case: The plaintiff, being a shareholder,
was a candidate for the election of directors but lost the
election. However, he was again proposed as a
candidate to fill the second vacancy but the chairman
raised objections considering his previous defeat.
• Judgement of the Court: The Court held that the
chairman acted beyond his powers by disallowing the
nomination of the plaintiff and thus protecting the
individual rights of the plaintiff.

4. Wrongdoers in Control
• Sometimes an obvious wrong may have been done to
the company but the controlling shareholders would not
permit an action to be brought against the wrongdoer.
• In such cases to safeguard the interest of the company
any member or members may bring an action in the
name of the company.
• When the majority of shareholders have taken over the
control of management by violating the provisions of
the Memorandum of Association and Articles of
Association to fulfil their malicious intention, which is
likely to harm the growth of the company and the
overall interests of the stakeholders.
 • In Glass vs. Atkin (1967)
• Facts of the case: In this case, the defendant
fraudulently converted the company’s assets for
personal benefit.
• Judgement of the Court: The Court held that this is
an exception to the Foss vs. Horbottle case, as the
directors violated their duties by manipulating their
positions and compromising their morals for personal
gains.

5. Oppression and Mismanagement [Sections

241-246 of Companies Act 2013]
• The Companies Act provides the provisions concerning
oppression and mismanagement in companies and the
prevention of the same.
• This is to ensure remedy in the cases of oppression and
mismanagement against the minority and combat the
same. This acts as an exception to the majority rule as
well.
• Oppression is defined in the case of Elder v. Elder &
Watson Ltd. Case, involves conduct that significantly
departs from fair dealing, violating the trust
shareholders place in the company. Mismanagement
refers to the detrimental changes in a company’s
management or control, prejudicing its members.
• This exception had been laid down in the case of
Kanika Mukherji v. Rameshwar Dayal Dubey.
 • Section 397(1) of the Companies Act provides that any
member of a company who complains that the affairs of
the company are being conducted in a manner
prejudicial to the public interest or it is oppressive to
any member or members may apply to the tribunal for
order thus to protect his or her statutory rights.
• Section 397(2) of the Companies Act states that the
tribunal may grant relief in Section 397 if it is of the
opinion that-
• If the company’s affairs are handled in a manner
prejudicial to the public interest or in a manner
oppressive to any member or members.
• To wind up the company that would be unfair to its
member or members, but that otherwise, the facts
would justify the making of a winding-up order on the
ground that it was just and equitable that the company
should be wound.

The tribunal with the view of all the matters that were
complained to them, may then afterwards give their final
decision as they may deem fit.
Minority Protection

Who are Minority Shareholders?

There is no specific definition of “minority shareholder”
in the Companies Act, 2013. However, it is generally
understood as:
Shareholders who do not control or influence the
decisions of the company due to their limited voting
power or lower percentage of shareholding.
This often means:
• Holding less than 50% of voting rights.
• Being unable to prevent or block resolutions in
shareholder meetings.

Need for Minority Protection

While majority rule ensures efficient decision-making, it can
lead to:
• Oppression or suppression by majority.
• Unfair related party transactions benefiting the
majority.
• Siphoning of assets or profits.
• Unfair removal from directorship or employment.
• Lack of access to information or records.
Hence, minority protection provisions exist to ensure
• Ensure corporate fairness and transparency.
• Prevent abuse of majority power.
• Promote investor confidence.
• Foster accountability in corporate governance.

Minority Protection under the Companies

Act, 2013
The Companies Act, 2013 introduces several provisions
aimed at minority shareholder protection. These
mechanisms can be classified into preventive, remedial,
and investigative safeguards.

A. Preventive Measures
1. Special Resolutions and Higher Thresholds

• Many decisions require a special resolution (75%),

preventing the simple majority from unilateral control.
• Examples include:
◦ Alteration of Articles or Memorandum (Sections 13
& 14),
◦ Buy-back of shares (Section 68),
◦ Issue of further share capital (Section 62(1)(c)).
2. Restrictions on Related Party Transactions
(Section 188)

• Requires Board and shareholder approval (in

some cases) for transactions with related parties.
• Interested shareholders cannot vote – protecting
minority from abusive self-dealing.
3. Independent Directors (Section 149)

• Role includes protecting minority interests,

especially in listed companies.
• Ensures independent judgment on critical matters.

B. Remedial Measures
1. Oppression and Mismanagement (Sections 241–
244)
Section 241:

• Any member(s) can apply to NCLT if company affairs

are being:
◦ Conducted oppressively,
◦ Prejudicial to any member or public interest,
◦ Prejudicial to the company’s interests.
Section 242:

• Tribunal may pass orders such as:

◦ Regulating the affairs of the company,
 ◦ Removal of directors,
◦ Purchase of shares by majority from minority or
vice versa.
Section 244 – Eligibility Criteria:

• Members holding ≥10% of issued share capital or

1/10th of total members (whichever is less).
• Tribunal may waive this requirement under proviso
to Section 244(1) in deserving cases.

2. Class Action Suits (Section 245)

A unique remedy in Indian company law allowing

collective action by minority shareholders or depositors:
• Against the company, directors, auditors, or
advisors.
• Relief may include:
◦ Injunction on ultra vires acts,
◦ Compensation for fraudulent practices,
◦ Declaration of contract as void if prejudicial.
Eligibility:
• 100 members or 1/10th of total members (or 10% of
shareholding).
3. Right to Apply for Investigation (Sections 210–
229)

• Shareholders holding 10% of voting power may

apply for investigation into company affairs.
• Conducted by Serious Fraud Investigation Office
(SFIO) or Central Government.

4. Exit Offer to Dissenting Shareholders (Section

13(8), SEBI Regulations)

• Dissenting shareholders in cases of changes in objects

of the prospectus are given an exit option by
promoters.
• This protects those not agreeing with major decisions
altering original investment intent.

5. Protection in Mergers and Amalgamations

(Section 230(3), (5))

• Notices to creditors and shareholders, including

minority, before approval.
• NCLT can provide hearing and representation
opportunity.
C. Investigative and Regulatory Safeguards
1. Rights to Inspect Books (Section 171 & 172)

• Members can inspect statutory registers, minutes of

general meetings, etc.
2. Disclosure Obligations (Section 184–189)

• Board members must disclose interest in

transactions – transparency prevents abuse by
majority insiders.
3. Whistleblower Protection (Section 177(9))

• Especially in listed and public companies, employees

and directors can report wrongdoing.
 Exceptions to Minority Protection
While the Companies Act, 2013 protects minority shareholders,
there are certain situations where such protection does not apply:
1. Good Faith Majority Decisions – Courts won't interfere if
decisions are lawful and bona de.
2. Business/Commercial Decisions – Minority cannot
challenge valid strategic choices made by the board.
3. Internal Management Rule – Routine affairs governed by
majority are not subject to minority interference.
4. Threshold Not Met (Sections 241/245) – Minority must
meet minimum shareholding or member count to le
petitions.
5. Personal Disagreements – Mere dissatisfaction or opinion
differences do not constitute oppression.
6. Rati ed Acts – Irregular acts later approved by majority
cannot be challenged.
7. No Injury to Company (Derivative Actions) – If the
company is not harmed, minority claims are not
maintainable.
8. Bad Faith or Malicious Intent – Courts may dismiss
vexatious or ill-motivated petitions.
9. Business Judgment Rule – Valid business decisions are
protected from minority interference.
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 10. No Exit Rights in Some Restructuring Cases – Statutory
exit rights are limited to speci c scenarios like change in
object clause with public funds.

Landmark judgements
Tata Consultancy Services… vs. Cyrus
Investment Private Limited (2021)
The case provides for a landmark judgement on operations
and mismanagement in company affairs.

Facts of the case

Mr. Cyrus Mistry was removed from the directorship of
various Tata Group companies by passing resolutions in
shareholders` meetings. Mr. Mistry and his company, which
holds less than a 50% stake, become minority shareholders
in Tata Group companies. Therefore, he challenged his
removal in the National Company Law Tribunal (NCLT) on
the grounds of oppression and mismanagement.

The NCLT held that there was no oppression or

mismanagement in the management action. However, this
judgement was reversed when Mr. Mistry appealed in
NCLAT.

Judgement of the Court

On further appeal by Tata Group in the Supreme Court of
India, it was held that just removal from the position of
director is not sufficient ground to conclude that there was
oppression and mismanagement.
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Delhi Gymkhana Club Ltd. vs. Union
of India Ministry of Corporate Affairs
(2021)
Facts of the case
In this case, the government filed a petition with the
Tribunal under Section 241 of the Act – application to the
tribunal for relief in cases of oppression. It was also claimed
that the affairs of the club were conducted in a way that was
“prejudicial to the public interest”.

Judgement of the Court

NCLAT, while discussing the scope of Section 241(2) of the
Companies Act 2013, held that the concept of public interest
should not necessarily be stretched out to include every
citizen of India; even the interests of a section of society can
be sufficient to look into. The affairs of the club were
prejudicial to the interests of the public, which amounts to
oppression and mismanagement.

Needle Industries (India) Ltd. v. Needle

Industries Newey (India) Holding Ltd. (1981)
• Recognized and upheld the rights of a minority
shareholder alleging oppression.

Dale and Carrington Invt. (P) Ltd. v. P.K.

Prathapan (2004)
• Held that issuance of additional shares to dilute
minority interest is oppressive and can be set aside.
Cyrus Mistry v. Tata Sons Ltd. (2021)
• Supreme Court held that mere removal of a
director is not oppression unless it violates legal
rights.
• Clarified scope and limits of Section 241.

S.P. Jain v. Kalinga Tubes Ltd. (1965)

• Affirmed that oppression must be burdensome,
harsh, and wrongful conduct, not mere dissent.

Conclusion
The Companies Act, 2013 embodies a delicate
equilibrium between majority rule and minority
protection. While corporate democracy necessitates that
majority decisions guide corporate actions, the law ensures
that such powers are not wielded oppressively or unjustly.
The shift towards greater accountability, transparency, and
shareholder activism, as reflected in statutory innovations
like class action suits and enhanced Tribunal powers, mark a
progressive departure from the rigid application of the
majority rule. Continued legal reforms, robust judicial
interpretation, and a culture of responsible corporate
governance are essential for fostering this balance in
practice.