Role of MOA in protecting the interest of Minority Shareholders

Introduction

Memorandum of Association is an important document for the birth of the company. No registration of the company can be made if that company does not have their Memorandum filed with the registrar. Shareholders are the one who invest in the company and in return becomes the owner of the company, by way of the allotment of shares. It is important to protect their interest to attract more investors and also to maintain the goodwill of the company in the market. Protecting minority shareholders is important as the minority shareholders are more in number as compared to majority shareholder. Although their share is less, if they withdraw their amount from the company, it can affect the reputation of the company.

What step can a company take to protect the interest of minority shareholders

The concept of Piggy Backing has been adopted by the companies. So, in piggy backing if the majority shareholders are selling their shares, minority shareholders has to be considered by the majority shareholders while making this deal. Minority Shareholders faces the problem to exit from the company due to their smaller number of shares. This concept provides protection to the minority shareholders. This concept also attracts investors as it will reassure them that in the future, they will also be having the exit opportunity. Appointing the director from the minority shareholder will ensure that their rights are protected. Also, providing them with the voting rights will make them feel included.

Research Questions

How can MOA protect the interest of minority shareholders.

Role of MOA in Protecting the Interest of Minority Shareholders

MOA is the document which gives birth to the company. For the protection of the minority shareholders the clauses should be drafted in such a way which depicts that the object clause are clear enough and the majority shareholders will not be able to violate it and accordingly there will not be any kind of ultra vires act. They should be defined very clearly.

MOA cannot directly protect the interest of minority shareholders as only brief is provided about the company. But for the minority shareholders it gives an idea that they are safe in this company and their rights will not be infringed. To ensure that the rights of minority shareholders are protected, there should be a forum in the company to address the grievances of these shareholders and this redressal should ensure that the rights are protected and should give the report to the Board of Directors which should be attached with the minutes of the meeting. At least 95% of the problem should be resolved by redressing every month.

In this way, there is a high chance that the reputation of the company is protected, and  no case will be filed against the company in the tribunal. Most of the problems will be resolved if the redressal forum works in a proper manner.

Concept of Squeezing Out.

Squeezing Out is related to the majority shareholder exercising their power to squeeze out the minority from the company. This act is to acquire the shares of the minority shareholders forcefully.  This transaction helps the majority shareholder to gain complete power in the company. In India, under Companies Act, 2013 it is allowed to acquire the remaining share if the person or group of people is holding 90% of the shares from the minority shareholders, by acquisition of remaining shares, full power will be in the hands of the majority shareholder. However, the acquisition will be made in fair value of the higher value. The value will be determined according to Rule 27 of the CAA Rules, 2016. But the concept of squeeze-out infringes the rights of minority shareholders. There is a possibility that a squeeze out happens when the profitable opportunity is about to be received by the company and the majority shareholders decide not to share the profits, so they try to squeeze out the minority. The other way to carry out the squeeze out is when the stock market is crashing and the majority shareholder take advantage of the same, by buying the shares from the minority at a lower price to gain an advantage of price and in return control the company.

Conclusion

Memorandum of Association plays an important role to attract investors. It is important to protect minority shareholders even though their share is less in the company, but the number is huge. There are cases where the majority shareholders squeeze out the minority from the company by isolating them and infringing their rights. This is why many changes are made in the Companies Act, 2013 for the welfare of the minority shareholders compared to Companies Act, 1956.

This article is authored by Yashika Malik, who was among the Top 40 performers in the Civil Procedural Law Quiz Competition organized by Lets Learn Law. The views and opinions expressed in this piece are solely those of the author.