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  • Bhaskar Vishwajeet

Mind Your Business: Minority Shareholder Protection in Private M&A

[Bhaskar is a student at Jindal Global Law School.]

Modern-day corporations are notorious for merging to optimize resource allocation and cashing in on unexplored/technically efficient areas of specialization. That said, the new-age company is not impervious to corporate improprieties. A slew of disputes that involve accounting fraud, share manipulation etc., have resulted in a strict regime of company regulation. This has motivated several developments in, among all, the securities law that governs M&A.

One of the chief objectives of securities law is shareholder protection, especially minority shareholder protection, to ensure that publicly listed companies do not sidestep a strand of contributors to their corporate finance, i.e., the minority shareholders. Shareholders might vary in number, but, more importantly, in terms of class too. Tata Motors, for instance, is known for having multiple classes of shareholders with varying voting rights.

A shareholder’s class is decided by their voting rights within the corporate structure. Section 47 of the Companies Act 2013 defines a voting right as the right to vote on company resolutions commensurate with one’s proportion of shares in the paid-up equity share capital of the company. It can be inferred that Sections 235 and 395 of the Companies Act 2013 prescribe that all members who hold up to 10% of the paid-up shares of a company constitute the minority (however, in essence, these are the 1/10th shareholders who dissent to a scheme). This limit is critical when making a representation of oppression or mismanagement to the courts or appropriate authority.

How minority shareholders are treated is an important aspect of how companies operate and transact. Multiple jurisdictions have kept evolving the standards of minority shareholder protection. Singapore, for instance, has a four-limb test of minority oppression under Section 216 of the Singapore Companies Act 1967 that focuses on inter alia unfair discrimination and prejudice. These factors are broadly derived from the judgement in Over & Over, wherein the court held that minority shareholder protection must be based on fairness and the cumulative effect of the impugned conduct. A similar process was laid down for Indian companies in Needle Industries, according to which Indian courts check for a cumulative effect of mala fide intentions, i.e., mere illegality will not qualify as oppression unless motivated by wrongful intent. For example – in rights issues that are compliant with norms, diluting a shareholder’s holdings may be legal but may still be scrutinized on the grounds of being oppressive.

Therefore, it is evident that securities law is in a constant state of flux in so far as rigorous standards of protecting minority shareholders are concerned. Allied legislation is frequently updated and derives from contemporary practices in foreign jurisdictions. The chief legislations that concern securities regulation in M&A are the SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015 (LODR) and the SEBI (Issue of Capital and Disclosure Requirements) Regulations 2018. The SEBI recently amended the LODR through a second amendment, which in turn was based on a consultation paper released earlier this year. The author participated in the consultation process by sending comments, which will be discussed here.

This piece concerns sub-notification XII of the amendment, i.e., the insertion of Regulation 37A in the LODR. It analyzes the utility of the amendment through a comparison, providing insight into the way forward.

Discussing the New Insertion

Regulation 37 of the LODR stipulates requirements for draft schemes of arrangement by listed companies. The regulation states that listed companies can file draft schemes of arrangement under the merger provisions in the Companies Act 2013, provided they have a no-objection letter from the stock exchange. The no-objection letter must be further placed before the National Company Law Tribunal (NCLT) to seek approval for the scheme of arrangement. This regulation has limited requirements as the restructuring mechanism, i.e., the scheme of arrangement, is tribunal driven. The presence of a quasi-judicial authority signifies comprehensive scrutiny of shareholder rights while probing approval of a scheme. As such, Regulation 37 does not require explicit mention of the manner of exercising shareholder rights when deciding approval for schemes.

Regulation 37A, the new insertion, must be considered an exception to Regulation 37. If Regulation 37 is for court-driven processes, Regulation 37A is for arrangements outside that process. It speaks of private transactions (without approaching the court/NCLT) involving undertakings. The most common private transaction of this sort is a ‘slump sale’, a particularly Indian phenomenon in company law wherein an undertaking is sold on an ‘as is’ or ‘going concern’ basis through business transfer agreements (BTA). The regulation further states that listed companies must obtain approval from the shareholders through special resolutions and disclose the commercial reasons behind the transaction when pursuing private transactions involving undertakings.

There are two interesting caveats to this. Regulation 37A is qualified by two provisos, i.e., it comes with riders to the preconditions discussed above. First, the special resolution seeking approval for the sale of the undertaking must be approved by a majority of the minority of shareholders. This means that public shareholders in the minority will decide whether such sales go through. The amendment is important as it reinforces the importance of having minimum public shareholding, but even more importantly, empowering the public shareholders with critical voting rights on issues that inevitably affect the value of their shareholding.

In the comments submitted in the consultation paper, the author argues that BTAs are preferred to court-mandated schemes of arrangement for slump sales due to the relatively beneficial taxation regime applicable to a slump sale outside schemes of arrangement. BTAs that involve transfers as a "going concern" are exempt from GST payments. Nevertheless, Section 188 of the Companies Act 2013 prescribes that BTAs between ‘related parties’ may cause conflicts of interest, and the minority shareholders may be sidelined in crucial decisions concerning the business (undertaking) being transferred. The amendment is a step in the right direction to avoid such instances.

That said, even though obtaining votes from the majority of the minority is important, it needs to be understood that the company's day-to-day functioning should not be affected due to cumbersome regulatory requirements. Maintaining a balance between transaction costs and the rights of the minority is essential. Section 180 of the Companies Act 2013 stipulates restrictions on the powers of the Board of Directors when selling or leasing undertakings. Undertakings are purposely defined as investments where the company has invested 20% or more of its net worth or investments that generate 20% of the company’s total income. The author submits that the investment thresholds in the explanations to Section 180 should be increased or reconsidered. This is because, with the new amendment, there is a universal requirement for all undertakings (investments beyond with at least 20% value) to seek minority shareholder approval. Such a blanket requirement might increase the transaction costs for compliance and lead to situations where almost no sale is approved by minority shareholders.

Thus, the new amendment for non-scheme transactions nullifies the inability of the minority shareholders to block special resolutions by requiring that said special resolutions be approved by a majority of the minority.

Comparisons with the United Kingdom

The United Kingdom is the closest legal regime to India as Indian deal structures, including the judicial schemes of arrangement, were derived from the UK’s company law. In the United Kingdom, shareholders with less than 50% of a company's holdings are technically classified as the minority. However, the requirement to block special resolutions is the same as in India, i.e., at least 25%. Shareholders under 25% can only seek redressal of their claims through derivative actions or statutory claims of unfairness under Section 994 of the Companies Act 2006. There are no statutory prescriptions that specifically empower minority shareholders with rights in special situations like the execution of business purchase agreements (UK equivalent of the BTA).

The law in India is thus more certain and predictable in terms of protecting minority shareholders through special rights on certain transactions. This may also be attributed to the unique dominance of promoter-driven companies in India and the subsequent suspicion of their management style, hence the explicit requirement that minority shareholders be protected.


The amendment is a welcome step in aligning private M&A with identical checks by the NCLT through schemes, thereby protecting shareholders. The difference between Regulations 37 and 37A may be summed up as one of stages. That is to say, Regulation 37 mandates protections in court, whereas Regulation 37A protects shareholders by providing statutory guidance for post-facto claims, if any. Notwithstanding that, legislators must consider assessing the ramifications of allowing minority shareholders with such power, especially when the threshold for what constitutes an investment (undertaking) is this low. This could help balance the competing interests of regulation and commercial activity.


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