Shareholders are the owners of the Company and they have been given various rights under Companies Act, 1956, like to right to receive notices for the General Meetings, right to receive Annual Report of the Company, right to receive dividend, bonus shares etc., right to vote at the general meetings, right to be given an opportunity to subscribe for shares in case of further issue of shares (Rights Issue), right to inspect the statutory register and records as permitted by the Law etc. But in case the management encroaches upon the rights of the Shareholders they have different remedies available under Law, one of them is to approach the Company Law Board (CLB).

CLB is quasi judicial body formed under the Companies Act, 1956 to exercise and discharge powers and functions under the Companies Act, 1956 and to exercise and discharge such other powers and functions as notified by the Central Government from time to time. CLB may also be approached by Companies for seeking approvals for the corporate actions like issue of shares at a discount, issue further redeemable preference shares equal to the amounts due in respect of the unredeemed preference shares, aggrieved Debenture holders and sometimes by Directors for their individual rights etc.

In many cases a single Shareholder can approach CLB for redressal of his grievances but in some cases a certain number of shareholders or shareholders holding a specified percentage of voting power only can approach the CLB. This can be noted from the below mentioned sections of the Companies Act, 1956:

Section 235 INVESTIGATION OF THE AFFAIRS OF A COMPANY.

  1. Where -
    1. in the case of a company having a share capital, an application has been received from not less than two hundred members or from members holding not less than one-tenth of the total voting power therein, and
    2. in case of a company having no share capital, an application has been received from not less than one-fifth of the persons on the company's register of members, the Company Law Board may, after giving the parties an opportunity of being heard, by order, declare that the affairs of the company ought to be investigated by an inspector or inspectors, and on such a declaration being made, the Central Government shall appoint one or more competent persons as inspectors to investigate the affairs of the company and to report thereon in such manner as the Central Government may direct.

Section 399 - RIGHT TO APPLY UNDER SECTIONS 397 AND 398

  1. The following members of a company shall have the right to apply under section 397 or 398 :
    1. in the case of a company having a share capital, not less than one hundred members of the company or, not less than one-tenth of the total number of its members, whichever is less, or any member or members holding not less than one-tenth of the issued share capital of the company, provided that the applicant or applicants have paid all calls and other sums due on their shares ;

Section 408. POWERS OF GOVERNMENT TO PREVENT OPPRESSION OR MIS-MANAGEMENT

  1. Notwithstanding anything contained in this Act, the Central Government may appoint such number of persons as the Company Law Board may, by order in writing, specify as being necessary to effectively safeguard the interests of the company, or its shareholders or the public interests to hold office as directors thereof for such period, not exceeding three years on any one occasion, as it may think fit, if the Company Law Board, on a reference made to it by the Central Government or on an application of not less than one hundred members of the company or of the members of the company holding not less than onetenth of the total voting power therein, is satisfied, after such inquiry as it deems fit to make, that it is necessary to make the appointment or appointments in order to prevent the affairs of the company being conducted either in a manner which is oppressive to any members of the company or in a manner which is prejudicial to the interests of the company or to public interest :

In order to prevent the minority shareholders from approaching the CLB to complaint against the oppression and mismanagement acts of the majority shareholders, the majority shareholders with their Directors try to change the shareholding pattern of the Company in such a manner, by further issuance of shares or fraudulent transfer of shares, that the shareholding of the minority goes below 10% and/or their number is goes below 200 or 100 or 1/10th as the case may be and thus make an attempt to make the minority shareholders ineligible from approaching the Company Law Board. Such instances not only takes place in companies where there is unequal shareholding between the majority and minority but also in cases where the Shareholding between two groups is equal or near to equal and one group tries to oust the other group by allotment of further shares to its own group. But the CLB has taken note of such cases and in its numerous Judgments enunciated that the rights of the minority shareholders be protected even if the shareholders does not qualify for the minimum percentage as prescribed under the provisions of the Companies Act, 1956.

This can be seen from the observations made by the Company Law Board in the below mentioned cases:

  1. “As regards the objection that the petitioners hold less than 10% of the total issued, subscribed and paid up capital of the company, the petitioners have claimed holding of 6,48,300 equity shares of Rs. 10/- each. This Board has always taken the view that if shareholding of the petitioners is reduced below 10% on account of further issue of shares and if the issue of further shares is also challenged in the petition, then, the petition will not be dismissed as not maintainable in terms of Section 399. Instead, the allegations relating to the issue of further shares would be examined first as to whether the same is an oppressive act and if it is found to be to then only other allegations in the petition would be examined.”1
  2. “The respondents' preliminary objection that if the shares of the petitioners totalling to 154025 in respect of whom the signatures have been allegedly forged are excluded from the shareholding of the petitioners totalling to 7,33,000 then the petitioners' shareholding totals upto only 5,78,975 which works to only 8.9% and hence this petition is not maintainable for not fulfilling the eligibility criterion as laid down in the provisions of Section 399 of the Act, is also not tenable. This Board has always taken the view that if shareholding of the petitioners is reduced below 10% on account of further issue of shares and if the issue of further shares is also challenged in the petition, then, the petition will not be dismissed as not maintainable in terms of Section 399.”2
  3. “The petitioner's right to apply under Section 399 squarely would depend upon the validity of the issue and conversion of RCPS into equity in the name of R.N. Shetty Family Trust, which involve a mixed question of law and fact and cannot be adjudicated at the preliminary stage. The main petition cannot, therefore, be dismissed at the threshold as not maintainable in terms of Section 399. In the circumstances, it is directed that the parties shall complete the pleadings in C.A. No. 220 of 2007 and other connected applications by filing counter on or before 09.04.2008 and rejoinder to be filed by 25.04.2008. The applicant will take notice to the proposed parties in the connected applications, since prima facie I am of the opinion that the proposed parties must be afforded an opportunity of hearing on account of the involvement of their interest in the subject matter of the proceedings. The decisions in Sangramsinh P. Gaekwad v. Shantadevi P. Gaekwad (Supra) and T.N.K. Govindaruju Chetty v. Kadri Mills (CBE) Limited (Supra) would be relevant only when the validity of the further issue of shares is examined in the main proceedings. The parties shall ensure compliance in completing the pleadings, in terms of this order.”3
  4. “It has been rightly contended by the petitioners that the Company Law Board in the case of T.N.K. Govindaraju Chetty and Co. v. Kadri Mills (CBE) Ltd. [1998] 3 Comp. LJ 329 : [1999] 96 Comp Cas 871, has held that the transfer and allotment of shares which has been done with mala fide motive cannot be impugned in a petition under Section 111 and they have to be agitated as an act of oppression in the petition under Sections 397 and 398. It was held in that case that if the holding of the petitioner is reduced below 10 per cent, due to further allotment of shares and the allotment itself is impugned and the petition under Sections 397 and 398 should be held maintainable on the strength of the holding before the transfer and allotment of the shares” 4
  5. “It is true that the Company Law Board can allow the petition to be maintained even if the shareholding as on the date of the filing of the petition is nil or less than 10 per cent. But the petition alleges and challenges the reduction of the Petitioners' shareholding to nil or less than 10 per cent. on account of alleged acts of oppression. The company petition in such a situation is held to be maintainable on the grounds that reduction of shareholding of the Petitioner is a continuous act of oppression.”5

 

Conclusion

Although there is an eligibility criteria for shareholders to approach the Company Law Board under some sections of the Companies Act, 1956, but if the management of the company fraudulently tries to change the shareholding pattern of the company thereby making the shareholders ineligible to approach the Company Law Board, the CLB will not straight away reject the petition for not meeting the eligibility criteria but will go into the validity of further allotment/transfer of shares to decide the admissibility of the petition.