10% shareholding cap: Tata-Mistry battle put spotlight on rule

There are several instances where courts have dismissed petitions that do not meet the 10% threshold

As the high-profile legal battle at Tata Sons between the two promoter groups gathers pace, experts are divided as to whether there is need to take a fresh look at the provisions that protect the interests of minority shareholders. According to Section 244 of the Companies Act, 2013, shareholders who own at least 10 per cent of the issued share capital or represent at least one-tenth of the minority shareholders of the company could invoke action under “oppression and mismanagement of minority interest”. The National Company Law Tribunal (NCLT), however, has the powers to waive this requirement for shareholders who fall below the threshold.  

The Shapoorji Pallonji group held 18.3 per cent of the equity shares in Tata Sons. It filed a petition in the NCLT, citing “oppression and mismanagement” of minority interests in Tata Sons. The Tata group said that if one considered the preference capital, the other promoter group held 2.1 per cent of the issued share capital of Tata Sons. The NCLT, subsequently, turned down the plea for initiating action under the “oppression and mismanagement” clause on technical grounds. It did not waive the 10 per cent threshold requirement for the Shapoorji Pallonji group. The matter, upon appeal, is now slated for hearing at the National Company Law Appellate Tribunal. 

Most legal experts say while the concept of a numerical threshold may seem counter-intuitive — as any disconcerting shareholder has the right to raise a relevant issue — it does help to prevent frivolous complaints. “It also means that an issue has the backing of a more diverse set of members before it is subject to additional scrutiny by boards or regulatory authorities,” says Amit Tandon, founder and managing director, Institutional Investor Advisory Services.  

Experts point out that there are safeguards in the Companies Act, 2013, allowing shareholders with a lower stake to seek a waiver of this threshold from the NCLT. “This provision was also there under the Companies Act, 1956, whereby the powers to issue the waiver were held by the Ministry of Corporate Affairs,” points out Aakanksha Joshi, partner in law firm Economic Laws Practice.

This is not the only place in the Companies Act, 2013, where a threshold has been prescribed to be eligible to file a case or objection. Even in initiating a class-action suit, there is a threshold. According to the Companies Act, 2013, a group of shareholders, singly or jointly, holding not less than 10 per cent of the issued share capital of the company could initiate a class-action suit against the company or its directors, auditor, or expert advisor. Even in the case of schemes of arrangement, only a shareholder with at least 10 per cent shareholding is eligible to raise any objection to the scheme.

Since the threshold is based on the issued share capital by a company, it could lead to complications for minority shareholders, say legal experts. Sandeep Parekh, founder, Finsec Law Advisors, explains the situation with an example. “A person X having over 26 per cent of the equity share capital of a company may still have below 10 per cent of the total issued share capital of the company. So, X can defeat special resolutions by virtue of shareholding but fail to bring an action for oppression and mismanagement,” says Parekh.

The issued share capital includes both the equity share capital and preference share capital, and legal experts say that it is the correct reflection of the shareholding. “Shareholders have rights proportional to their shareholder percentage and that is the reason why the issued share capital is the basis for triggering shareholder action,” says Shriram Subramanian, founder and managing director, InGovern Research Services.

Legal experts say most common law jurisdictions do not have a shareholding threshold for bringing an oppression action suit. “The UK Companies Act, 2006, provides a remedy to any member to apply for relief on grounds of ‘unfair prejudice’ in an action which corresponds to the oppression remedy under Indian law,” says Joshi. Contractual protection, such as buyout provisions in a shareholder agreement, have been cited as a potential alternative to statutory protection of minority shareholders, points out Parekh.

The US has state-specific company laws but there is no specific statutory protection akin to an oppression remedy. “However, courts in California and Delaware have imposed a fiduciary duty on majority shareholders towards the minority shareholders, or corporations in order to provide protection to shareholders,” says Joshi.

Subramanian points out that in the US, the concept of proxy access allows shareholders to table proposals and garner votes against management. “In some countries, the voting powers also increase with the time frame that the shares are held,” he says.

One of the key reasons for the differences in the treatment of minority shareholders in some developed markets and in India is that most Indian companies have a large promoter shareholding. “It is difficult for minority and small shareholders to contest management decisions,” says Parekh. Also, shareholder activism is more evolved in developed markets, dominated by institutional investors.

Some legal experts say given the Indian situation, one way of addressing the issue of giving minority shareholders more powers to invoke the “oppression and mismanagement” clause could be to lower the threshold to 5 per cent or stipulate limits for each individual class of shareholders. “This ensures that any equity shareholder — with more than 5 or 10 per cent of equity capital — can file a suit the same way as that of a preference shareholder — with more than 5 or 10 percent of preference capital,” says Tandon. The approach is more inclusive, with all classes of shareholders having an equal opportunity to file such cases, he adds.

Subramanian is in favour of introducing another threshold — the holding period — so that only shareholders who have held shares for more than, say, one or two years can file minority oppression cases or initiate a class-action suit.

Experts say Section 244 of the Companies Act, which gives the NCLT the powers to waive the requirements of a minimum threshold to file for action against oppression and mismanagement, does not give any grounds or guidance on what basis the decision is to be arrived at.

“The concept is at a nascent stage in India and clarity will only emerge as the issue plays out over the next few years. But a basic framework is required for the NCLT to adjudicate on these matters,” says Tandon. One check could be whether the company leadership has exercised sufficient due diligence or professionalism in their decisions and has provided equitable treatment for all shareholders, he adds.

Minority report:

* ‘Minority shareholder’ is not defined under any law

* Under Section 235 of the Companies Act, 2013, (power to acquire shares of dissenting shareholders) and Section 244 (right to apply for oppression and mismanagement), minority shareholders have been set out as 10 per cent of shares or minimum 100 shareholders, whichever is less, in companies with share capital

Court’s take on the 10% threshold:

“The object of prescribing a qualifying percentage of shares in petitioners and their supporters to file petitions under Sections 397 and 398 is clearly to ensure that frivolous litigation is not indulged in by persons who have no real stake in the company”

                                               — JP Srivastava and Sons Pvt. Ltd. V Gwalior Sugar Co. Ltd. [2004]56SCL 1 (Supreme Court)

* There are several instances where courts have dismissed petitions those do not meet the 10 per cent shareholding threshold

For instance, in Northern Projects Ltd. V. Blue Coast Hotels and Resorts Limited [2009]148CompCas279 (Bom), an applications under Section 397-398 of the Companies Act, 1956, was rejected on the ground that although the petitioner held 10 per cent  of the equity, it did not hold 10 per cent of the issued capital, which included preference shares.