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Shareholder Rights and the Power of the Board of Directors: Analyzing a Conflictual Domain

April 14, 2019

[Gibran Naushad graduated from National Law University, Delhi in 2017 and is currently based in New Delhi.]

 

The board of directors constitutes an extremely important element in the managerial hierarchy of a company, particularly in high stake matters that require the senior management of the company to play a participative role. The decision to put somebody on the board is, therefore, a cautious and a well thought-out decision. An example could be former PepsiCo Chief Indira Nooyi’s recent appointment to the board of Amazon, a move that has been in the media glare since the time the announcement was made. Shareholders, on the other hand, are essentially the owners of the company, whose rights cannot be neglected in view of their contribution in setting up the company, even if such ‘contribution’ is notional in terms of the miniscule effect it has on the overall capital and functioning of the company. This power struggle often translates into a dispute between the shareholders and the board of directors. Accordingly, a question arises as to who would have the upper hand in case there is a conflict of opinion between the shareholders and the board of directors of a company. 

 

Strangely, for a conflictual proposition that is bound to massively disrupt the functioning of the company, there are few Indian legal pronouncements that clarify the field. The Supreme Court decision in Life Insurance Corporation v. Escorts holds the fort on this subject. The Supreme Court, while comparing a company to an institution like the State, i.e. the Government, observed that the only way in which the shareholders of the company can exercise power over the decision of the board of directors is by ‘democratically’ altering the articles of association to restrict the powers of the directors for the future. Accordingly, without following such a process, the powers of the directors cannot be interfered with. The Allahabad High Court decision of Jagdish Prasad v. Paras Ram also becomes important in this context. The High Court clearly opined that the powers vested with the board of directors by the articles of association cannot be interfered with by the shareholders, and if the shareholders are dissatisfied, then the only remedy is to remove the directors as per the procedure provided in the articles. Accordingly, the shareholders cannot override the decision of the board of directors. The Calcutta High Court in Murarka Paint and Varnish Works v. Mohanlal Murarka also held a similar view. The Calcutta High Court held that the power of the shareholders is restricted to alteration of the articles of association. Accordingly, the power of voting in the hands of the shareholder cannot be used by them to usurp the powers of the management of the company, and therefore, they cannot change the decisions of the board in case they are not comfortable with the same. The Kerala High Court in Suburban Bank Private Limited v. Thariath and Others, while quoting Halsbury’s Laws of England, observed that if there is no specific power conferred on the shareholders to control the decision of the directors, then the actions of the directors cannot be controlled except by altering the articles through a special resolution passed by the shareholders. 

 

Accordingly, it becomes clear that the Indian law does not given shareholders the power to trump the decisions of the board of directors, and their rights are limited to election of a new board. The law in the United Kingdom, however, could be of some more help in terms of additional case laws on this subject. The case of Cannon v. Trask[1] elaborated on this aspect and held that the management of the company cannot be taken out of the hands of the board of directors by the shareholders unless it can be shown that the powers or discretion of the board of directors was being used in an arbitrary manner. The King’s Bench Divison decision in John Shaw and Sons (Salford) Limited v. Peter Shaw and John Shaw[2] is an extremely popular case dealing with shareholders’ rights and the powers of the board. It was clearly stated in the case that if powers of the management have been vested in the directors, then only such directors could make use of the powers, and the only way in which such power can be exercised by the shareholders is by altering the articles of association of the company. The Chancery Division decision in Grundt v. Great Boulder Proprietary Mines Limited[3] is yet another important one on this subject. The court held that directors were not servants or agents that had to obey the commands of the shareholders. If such directors are entrusted with the task of management of the company, then such powers could only be taken away from them by an alteration of the articles.  

 

[1] Cannon v. Trask, [L.R.] 20 Eq. 669.

[2] John Shaw and Sons (Salford) Limited v. Peter Shaw and John Shaw, [1935] 2 KB 113.

[3] Grundt v. Great Boulder Proprietary Mines Limited, [1937] HCA 58.

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