Minority shareholders should ink pacts for board seat in investee co: Experts

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Minority shareholders should ink pacts for board seat in investee co: Experts


(This story originally appeared in on Mar 30, 2021)

Mumbai: Small shareholders can have a representation on the board of the investee company but not minority shareholders, ruled the Supreme Court in the Tata Sons versus Shapoorji Pallonji (SP) Group case. SP, with a 18.4% stake in Tata Sons, is the single-largest shareholder in the private limited company.

Company law experts said it’s important that minority shareholders have agreements for allocation of seats on the board of an investee company and amend its articles of association (AoA) accordingly. India doesn’t have a proper definition on minority shareholders, though it defines a small shareholder explicitly. “The right to claim proportionate representation is not available to a minority shareholder both under the 1956 Companies Act and under the 2013 Act. It is only to a ‘small shareholder’, which SP Group is certainly not,” the judgment said.

Minority shareholder is widely referred to as someone who owns less than 50% of the total voting rights of a company or someone who owns less than the majority shareholder. On the other hand, a small shareholder is someone who holds shares worth at least Rs 20,000.

“In the absence of proportional representation in the Companies Act, there are no special rights for a minority shareholder to appoint a director. Even a ‘small shareholder’ derives its reins to appoint a director through the provisions under the Act and rules. As seen from the Alembic case, this is easier said than done,” said Economic Laws Practice managing partner Suhail Nathani. In 2017, an asset manager Unifi Capital tried to get a seat on the board of Alembic through the small shareholder route but the company rejected its proposal.

To table a board seat proposal, at least 1,000 small shareholders or 10% of the total small shareholders of the company, whichever is lesser, should come together and submit a notice to the company.

“The right to claim proportionate representation is not available for SP even contractually, in terms of the AoA. Neither SP nor (its director) Cyrus Mistry can request the (lower court) to rewrite the contract, by seeking an amendment of the AoA,” the judgment said.

AnantLaw partner Rahul Goel said even though the Companies Act does not automatically grant a right of proportionate representation to a minority shareholder, establishment of a contract may grant such a right. “Going forward, it will be important for all minority shareholders to have an agreement to that effect as well as the articles of association amended to capture the allocation/division of board seats,” Goel said.



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