Sanjib Banerjee, J.
1. The plaintiff holds more than seven per cent. of the undisputed paid-up capital of the first defendant-company and has instituted the suit, with leave under Order 1, Rule 8 of the Code of Civil Procedure, for himself and 'on behalf of and for the benefit of all shareholders' of the first defendant-company except the defendant shareholders.
2. Though in the plaint the plaintiff cites several other transactions in support of his contention that the persons in control of the company are wrongdoers and have been conducting the business of the company for their personal benefit and to the company's detriment, the only challenge in these interlocutory applications is as to an item of business transacted at the annual general meeting of the company held on September 25 and 26, 2006. G. A. No. 3253 of 2006 is the first application in point of time and the orders sought are in aid of the primary reliefs in the suit. G. A. No. 3509 of 2006 is the second application for substantially the same orders which have been sought upon discovery of a further act of alleged illegality in respect of the relevant resolution shown to have been passed at that general meeting. G. A. No. 2973 of 2007 is for the appointment of a special officer to chair the subsequent annual general meeting. The plaintiff says that the third application has worked itself out. An order was made on the third application appointing an independent person to chair the subsequent annual general meeting, but in appeal the order was modified and the independent person was directed to only act as an observer at such subsequent annual general meeting.
3. In the principal interlocutory application there is an order subsisting that the relevant resolution of the general meeting held in September, 2007, would abide by the result of the application. On the second application an ad interim order was made on November 6, 2006, to the effect that the allottees of the shares pursuant to the relevant resolution would not exercise any rights relating thereto. Such order was carried in appeal but the appeal has since been withdrawn.
4. The admitted position is that the promoters of the company held about 50.69 per cent. of the paid-up capital of the company prior to the allotment of shares following the impugned resolution. The allotment has resulted in the promoters' shareholding having swelled to 54.06 per cent. of the increased paid-up capital of the company.
5. Since the suit was instituted with leave under Order 1, Rule 8 of the Code of Civil Procedure, a number of applications were made by other shareholders of the company for being impleaded. All such applications have been disposed of earlier this week. A few of such applicants who still continue to retain their shares in the company have been added as defendants and those that have sold off their shares in the company have not been taken on board. One of the added defendants has appeared to support the plaintiff's case.
6. The plaintiff assails the resolution and the consequent allotment on five major counts. He says that the explanatory statement was misleading and tricky; that it did not comply with either Section 81 of the Companies Act, 1956, in disclosing the necessity for the issue of shares on preferential basis or Section 173 of the Act in maintaining the degree of candour that the statute demands of an explanatory statement. He alleges that the company has not benefited upon the issue of preferential shares and the only motive was to augment the promoters' control of the company. He claims that the general meeting was conducted illegally and there was no basis for adjourning the meeting for putting the resolution to vote on the next day except to inconvenience the small shareholders and take advantage of their understandable disinclination to waste a second day to attend the adjourned meeting. He asserts that even if the resolution is treated as otherwise being valid and duly carried, the allotment of shares was not made within the 15 days period that the Securities and Exchange Board of India (SEBI) guidelines mandate. Most importantly, the plaintiff suggests that the resolution was in fact defeated when voted upon on the adjourned date, but has been shown to be passed upon wrongful rejection of some of the valid votes cast against the resolution or by denying other known opponents the right to vote.
7. Since the plaintiff insisted that the resolution was not validly carried, it was such matter that required immediate attention as the other contentions would be irrelevant if it appeared that the resolution failed to garner the requisite support on the adjourned date. The company was required to deposit all ballot papers, proxy forms, letters of authority and other documents relating to the voting on the resolution. Such papers remain sealed with an officer of this Court. Copies of all the original documents submitted have been made available to the plaintiff.
8. The plaintiff complains of six corporate shareholders of the company that were represented at the adjourned meeting but whose votes were wrongfully rejected or such shareholders were not allowed to participate at the voting. The company had declared the results of the voting on the sixth resolution at its 102nd annual general meeting by publishing the same in the newspapers of September 27, 2006, The declared results reveal that 46 ballots were cast of which nine were found to be invalid. Out of the 37 valid ballots, 25 votes were cast in favour of the resolution on behalf of the shareholders holding 9,24,925 shares in the company representing 78.37 per cent. of the shareholding of the shareholders present and validly voting. The other 12 votes were cast against the resolution on behalf of shareholders holding 2,55,276 shares in the company representing 21.83 per cent. of the shareholding present and validly voting.
9. The plaintiff says that the votes of six corporate shareholders duly represented at the adjourned meeting and constituting 4.807 per cent. of the shareholding among those present and voting were illegally disregarded by the company and shown to have been invalid. The plaintiff argues that if the 4.8 per cent. is added to the value of the shareholding against the resolution, it would take the votes cast against to a share over 25 per cent. of the paid-up capital of the company represented and voting at the adjourned meeting and, thus, defeat the resolution. The plaintiff has handed over the following chart with a caveat as to the sixth entry in the chart:
---------------------------------------------------------------------Name of member Votes Percentage---------------------------------------------------------------------1. Hi-Tech Design P. Ltd. (Hi-Tech) 16,982 1.369---------------------------------------------------------------------2. Jinay Investment Co. P. Ltd. 0inay) 432 0.034---------------------------------------------------------------------3. Span Stock Broking P. Ltd. (Span) 8,036 0.648---------------------------------------------------------------------4. Kejriwal Finvest P. Ltd. (Kejriwal) 654 0.052---------------------------------------------------------------------5. Teji Mandi Securities P. Ltd. 23,500 1.895(Teji Mandi) ---------------------------------------------------------------------6. Jemco Vanijya P. Ltd. (Jemco) 10,000 0.806---------------------------------------------------------------------Total 59,604 4,804---------------------------------------------------------------------
10. There is no complicated arithmetic in the figures furnished in support of such contention by the plaintiff and it is plain to see that even if Jemco's votes are disregarded, the first five shareholders in the plaintiff's chart represented, between them, a shade fewer than four per cent. of the shareholding present and voting on the adjourned date. If such block is added to the 21.83 per cent. that the company says who voted against the resolution, the resolution would still fail despite the increase in the denominator than what the company has shown.
11. Hi-Tech, Jinay, Span and Kejriwal were all represented by their proxies. It is evident from the bunch of documents relating to the voting made over by the company that each of such shareholders voted against the resolution. Their ballots were rejected on the ground that no authority had been produced by such corporate shareholders under Section 176(5) of the Companies Act, 1956 ('the Act'), as would appear from the scribble at the foot of each of the relevant ballot papers. In Jinay's and Span's cases, an additional ground for rejection is shown for the proxies being undated or otherwise incomplete. Teji Mandi and Jemco appear to have been disregarded altogether for no valid authority being produced on behalf of such corporate shareholders by the persons who sought to represent them. It is the company's contention that one K. K. Bhartia had produced resolutions under Section 187 of the Act in respect of Teji Mandi and Jemco on September 25, 2006, but it was not Bhartia who sought to represent Teji Mandi or Jemco on the adjourned date. The company says that the two similarly-worded board resolutions of Teji Mandi and Jemco that were submitted authorised Bhartia to represent such shareholders and did not provide for an alternative representative, as such resolutions ordinarily do. The company submits that the relevant board resolutions of Teji Mandi and Jemco gave Bhartia the authority to represent either company and authorised another director of either company to execute papers in support of the authority. It is the plaintiff's assertion that the persons who had been authorised by Teji Mandi and Jemco to authenticate the letters of authority to represent such companies at the general meeting also had the authority to attend the meeting or the adjourned meeting upon Bhartia failing. Teji Mandi has cited another board resolution of September 26, 2006, by which one Raj Kumar More appears to have been authorised under Section 187 of the Act to represent Teji Mandi at the general meeting of the company, but the company insists that such subsequent resolution was not presented on the adjourned date. In Jemco's case there is no assertion of any subsequent authority having been granted to another, in addition to the one in favour of Bhartia.
12. Teji Mandi and Jemco would clinch the issue for the plaintiff if it appears that their representatives had been wrongfully restrained from participating at the voting. Both Teji Mandi and Jemco applied for being impleaded and paragraph 8 of either application is identical save in the names of the alternative representatives. Teji Mandi claims that it authorised Bhartia and More to act as its representatives to attend the general meeting. There is no mention, in paragraph 8 of Teji Mandi's application which is relevant in the context, that there were two board resolutions relating to the two representatives. The opening lines of the paragraph gives an impression of there being a solitary board resolution for the purpose, as companies want to do when granting general or specific authority as to representation at meetings on their behalf. On behalf of Teji Mandi an extract of the minutes of the board meeting of September 26, 2006, has been made over at the hearing. But neither does Teji Mandi's alleged second authorisation find place in the bunch of documents relating to the voting that has been made over by the company nor does its application speak of any second resolution. Jemco has not ventured to assert any second resolution in support of its contention at paragraph 8 of its application that, in addition to Bhartia, Ravi Agarwal was authorised under Section 187 of the Act to represent the company.
13. The stand taken by Teji Mandi now is not corroborated by the statements in its application though such application was made in November, 2006. Teji Mandi ought ideally to have asserted the second board resolution in its application or have appended to it the extract of the minutes of the relevant board meeting that it now hands up, for any credence to be given to its charge of being unfairly or illegally excluded at the voting. Prima facie, it appears that Teji Mandi's reliance on the subsequent board resolution is an afterthought and unworthy of being relied upon, at least at this stage. Jemco has not gone as far as Teji Mandi in asserting any subsequent authorisation. Its assertion at paragraph 8 of its application is plainly contrary to the copy of its relevant board resolution that was submitted to the company in course of the general meeting and is included in the bunch of voting papers.
14. The attractive arithmetic that the plaintiff has presented has to be seen without Teji Mandi and Jemco being part of it. The figure of 4.8 per cent. that the plaintiff says should be added to the side of nays in the voting loses the 2.7 per cent. that Teji Mandi and Jemco made up. The other four make up 2.2 per cent. of the shareholders present and seeking to vote and even if it is accepted that the votes of Hi-Tech, Jinay, Span and Kejriwal should have been shown as having rejected the resolution, it would make little difference to the outcome as the votes in favour of the resolution would still cross the statutory threshold of three-fourths in value of the shareholding present and voting.
15. The company has made a valiant show of defending the scrutineer in asserting that Section 176(5) of the Act requires, in addition to the duly filled up proxy form, a letter of authority in favour of the proxy from a corporate shareholder. Section 187 of the Act is placed to draw inspiration that notwithstanding Section 176(5) not specifically requiring any additional authority, a mere proxy form apparently executed on behalf of the company would not suffice without an authentication thereof by way of a board resolution or the like of the corporate shareholder. The argument does not appear to be of much merit as the nature of representation and entitlement of participation at a general meeting of a representative under Section 187 is much higher than that of a proxy appointed by a corporate shareholder under Section 176 of the Act. In the first case the authorised representative embodies the corporate shareholder as if the shareholder was present in person. A proxy, on the other hand, has no right of audience at a general meeting but is only permitted to demand a poll and participate in the voting. It would, thus, stand to reason that the authorisation under Section 187 of the Act would be of higher measure than of a proxy appointed under Section 176. But there is no virtue in spending time or paper over an issue that has now been relegated to a footnote in the dispute upon Teji Mandi and Jemco having slipped out of the plaintiff's chart.
16. The four other grounds urged by the plaintiff remain to be seen. But before that, a word needs to be said about the form of the action. The applications for addition of parties were disposed of on the applicants' assertion and a prima facie perception that the suit was a derivative action. It would appear so from the plaint where sundry other wrongdoings by those in management of the company find reference. Yet at this interlocutory stage the plaintiff and his only supporting added defendant have assailed the one resolution at the 102nd annual general meeting of the company. Not a word has been said of the other alleged illegalities said to have been committed by the persons in control of the company.
17. A company and its functioning have been compared to the parliamentary system of democracy with the company's general body as the Legislature and the board of directors as the executive. A company functions under its constitution consisting of its memorandum and articles of association and the applicable provisions of the Companies Act. The individual rights of a member stem from the implied contract between the member and the company. A shareholder may bring an action against a company for a wrong done to him personally or he may invoke his corporate rights. If a shareholder alleges that a wrong has been done to the company by persons in control thereof, he may bring a derivative action where he derives the authority from his corporate right to sue on behalf of the company. The company is impleaded as a defendant in such action and the premise on which the court entertains this extraordinary form of action is upon the complaining shareholder's assertion that the company cannot sue as persons at its helm would not bring an action on its behalf or for its benefit for these are the wrongdoers.
18. Though at one point of time derivative and representative actions were used as interchangeable expressions, there is yet another form of action other than personal and derivative action that a shareholder may bring against the company. A shareholder (or even a debenture-holder) may sue the company (and its directors or persons in control) for a perceived wrong done to a particular class to which the plaintiff belongs. Such form of action is now regarded as a representative action in corporate jurisprudence.
19. The distinction between personal and representative action on the one hand and derivative action on the other appears to be that for a derivative action to be brought or to succeed the wrongdoing complained of and ultimately to be established has to be a wrong done to the company. In the purest form of derivative action no personal benefit would accrue to the plaintiff shareholder upon a decree being passed save as a member of the company. It is the company, notwithstanding it being shown as a defendant, that gets a voice through the plaintiff shareholder and the action is solely for the company's benefit. A personal cause of action, or even a representative action, may be combined with a derivative action, with or without leave of court, but subject to the distinct causes of action pertaining to the same transaction or series of transactions.
20. A decree in a derivative action is binding on all members of the company. A decree in a representative action binds all whom the plaintiff seeks to represent, unless fraud or collusion is urged against the plaintiff. In both the derivative action and the representative action the plaintiff will invariably sue upon obtaining leave under Order 1, Rule 8 of the Code of Civil Procedure. But while in the classical form of derivative action the plaintiff will sue on behalf of all the shareholders of the company except the recalcitrant shareholders who are impleaded as defendants, in the representative action the plaintiff has to identify the class that he seeks to represent.
21. The manner in which the interlocutory proceedings have been conducted on behalf of the plaintiff in this suit would suggest that it is a representative action on behalf of all the shareholders of the company not belonging to the promoters' group. But that is not spelt out in the plaint. It can also not be ascertained in the absence of any submission in that regard, as to whether all the shareholders belonging to the promoters' group have been arrayed as defendants after the company, for an assessment to be made that the plaintiffs use of the expression 'on behalf of and for the benefit of all the shareholders' would imply that he was suing for the minority shareholders in the company or for the benefit of all the shareholders not belonging to the promoters' group. This would have a bearing in the matter, for in a representative action by a class of shareholders (or other groups of persons connected with the company, like debenture-holders) the action may succeed upon a wrong to the class being demonstrated without a wrong having been done to the company being attempted to be established. But in a derivative action, the wrong done to the company is the sine qua non for the action.
22. The substance of the first two grounds of challenge is that the proposed issue was only to benefit the promoters and of no use to the company. The plaintiff suggests that if the size of the preferential issue was bigger it could have helped the company in augmenting its finances, but any allotment of preference shares to the promoters to take the promoters' ultimate holding in the company beyond 55 per cent. of its paid-up capital would have required a simultaneous offer by the promoters to acquire further shares from the existing shareholders. The SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1997, that are applicable to listed companies require the promoters to make a public announcement of offer for acquiring further shares in the company from other shareholders simultaneously with any issue of shares which carry the promoters' holding beyond the 55 per cent. threshold. The plaintiff says that the promoters wanted to avoid a hefty payout and devised a scheme to consolidate their control and pay off the company's debts to some of the promoters, without the company effectively gaining anything in the process. The plaintiff submits that the net inflow consequent upon the preferential issue did not improve the 1 : 1 debt-equity ratio that the company maintained prior to the issue and there was no immediate need for funds. The directors' report for the relevant financial year is placed where the directors refer to a difficult phase that the industry passed through before the situation improved. The company declared 20 per cent. dividend for the financial year which, the plaintiff asserts, would not show that the company was in the doldrums or in dire need of the pittance that it received upon the preferential issue.
23. The explanatory statement is challenged on the ground that it was misleading and tricky and confused more than it explained. There was nothing in terms of justification, the plaintiff alleges, of the proposed issue that Section 81(1) of the Act demands. In short, the plaintiff suggests that the pages by way of explanation in aid of the sixth item of business at the general meeting are perfunctory and pay lip service to Section 173 rather than inform the shareholders. A point as to the pricing of the new shares is taken in the first petition but such matter is not pressed at the interlocutory stage.
24. Item No. 6 of the agenda for the relevant general meeting which was set down as a special piece of business reads as follows:
6. To consider and, if thought fit, to pass, with or without modification(s), the following resolution as a special resolution:
Resolved that in accordance with the provisions of Section 81(1A) and all other applicable provisions, if any, of the Companies Act, 1956 (the Act) (including any statutory modification or re-enactment thereof for the time being in force) and enabling provisions of the memorandum and articles of association of the company and subject to the provisions of the listing agreements entered into by the company with the stock exchanges where the shares of the company are listed, the Securities and Exchange Board of India Act, 1992 (SEBI Act) including guidelines issued by the Securities and Exchange Board of India (SEBI), in particular guidelines for preferential issues as contained in Chapter XIII of the Securities and Exchange Board of India (Disclosure and Investor Protection) Guidelines, 2000 (the DIP Guidelines) as issued from time to time and all other applicable rules, regulations, guidelines, statute or laws for the time being in force, and/or any approval, consent, permission or sanction of any appropriate authority(ies) and subject to conditions or modifications as may be prescribed or imposed by any of the appropriate authority while granting any such approval, consent, permission and/or sanctions, which may be agreed to by the board of directors of the company (hereinafter referred to as the 'board' which term shall be deemed to include any duly authorised committee thereof for the time being exercising the powers conferred on the board by this resolution), the consent of the company be and is hereby accorded to the board to offer/issue/allot to the promoters, namely M/s. Hindustan Composites Ltd., and M/s. J. L. Morison (India) Ltd., on preferential basis equity shares of the company not exceeding 1,32,000 equity shares of Rs. 10 each at a price which shall not be less than the price to be calculated in accordance with the DIP Guidelines, out of the unissued authorised share capital, on such other terms and conditions as the board may in its absolute discretion think, fit and decide.
Resolved further that
(i) All the new equity shares as and when allotted in terms of this resolution, shall rank pari passu in all respects with the existing equity shares of the company.
(ii) The relevant date as per clause 13.1.2.2 of the DIP Guidelines as amended up to date, for the determination of minimum price, for the issue of equity shares is August 26, 2006.
(iii) Necessary measures be taken to seek the listing of such new equity shares on all the stock exchanges where the company's shares shall continue to be listed.
(iv) Necessary application be made with the National Securities Depository Ltd., Central Depository Services (India) Ltd., and other authorities, if any, for executing corporate action and such other actions, as may be required in this connection from time to time.
Resolved further that for the purpose of giving effect to this resolution, the board of directors of the company (including any committee thereof) be and is hereby authorised to do all such acts, deeds, matters and things as it may in its absolute discretion deemed necessary, proper or desirable and take all such steps, measures and decide upon all consequential measures (including settlement of any questions, difficulties, doubts, that may arise in this regard to the issue of share as may be required) to give effect to the above and that the board be and is hereby authorised to delegate all or any of the powers herein conferred to any committee of directors or chairman of the meeting at which the committee is or may be formed or to any of the principal officers of the company/authorised representative in order to give effect to the aforesaid resolution.
25. The explanatory statement in respect of such item of business spoke of the vanaspati industry, which is the company's area of business, going through a difficult phase ; of the debt-equity ratio of the company being unfavourable for the company to obtain further borrowings ; and, of the need to augment the company's capital to retire certain debts. The explanatory statement furnished the names of the proposed allottees, identified the allottees as being part of the promoters' group, declared that the proposed allotment would not result in any change in the control of the company, promised that the proposed allotment would adhere to the SEBI (Disclosure and Investor Protection) Guidelines and assured that the pricing of the issue would be in accordance with the norms set down by the SEBI.
26. The plaintiff refers to the judgments reported at : [1962] 32 Comp Cas 207; AIR 1962 Cal 127 (Maharani Lalita Rajya Lakshmi v. Indian Motor Co. (Hazaribagh) Ltd.) [1964] 34 Comp Cas 777 : AIR 1965 Guj 96 (Sheth Mohanlal Ganpatram v. Shri Sayaji Jubilee Cotton and Jute Mills Co. Ltd.), : [1971] 41 Comp Cas 377 (Bom) (Firestone Tyre and Rubber Co. v. Synthetics and Chemicals Ltd.) and : [1965] 35 Comp Cas 706 (Cal) : [1965] 1 Comp LJ 112 (Shalagram Jhajharia v. National Co. Ltd.), in support of his contention that an explanatory statement under Section 173 of the Act should contain a full and frank disclosure of the true nature and character of the business proposed to be transacted and the reason therefor. In the Shalagram Jhajharia case the explanatory note was found tricky when it gave an impression that the business to be transacted under the agreement being the subject-matter of the relevant resolution was on principal-to-principal basis though it clearly appeared from the agreement that it was otherwise. A Division Bench of this Court held that a mere offer of an inspection of the agreement would not cure the defect. The Sheth Mohanlal Ganpatram case speaks of the provisions of Section 173 being mandatory, its purpose being to secure that all facts which have a bearing on the question on which the shareholders have to form their judgment are brought to their notice for them to exercise an intelligent judgment. In the Firestone case it was held that any fact which would influence the shareholders in making up their minds, one way or the other, would be a material fact under Section 173(2) and would need to be set out in the explanatory statement.
27. The Maharani Lalita Rajya Lakshmi judgment was rendered in an appeal from a company petition complaining of oppression. The requirements of an explanatory statement were assessed in that case on the basis of Section 173(2) of the Act prior to its amendment in December, 1960, though nothing turns on that. The plaintiff relies on such judgment as it found that a failure to comply with the mandate of Section 173(2) of the Act. would render the meeting or, more appropriately, the relevant resolution invalid. The Division Bench, however, repelled the contention that a failure to comply with the requirements under Section 173(2) could be made the basis of a petition complaining of oppression within the meaning of Section 397 of the Act. Paragraph 18 of the report is relevant (page 214 of 32 Comp Cas):
18. Now the second answer is on the law on this branch of the appellant's argument. Section 173 of the Companies Act concerns what is indicated in the marginal note of that section as 'Explanatory statement to be annexed to notice'. Although it imposes by Section 173(2) an obligation that there shall be annexed to the notice of meeting a statement of the type and nature which I have discussed above, the question is, does failure to comply with the details of Section 173(2) of the Companies Act make it a case ipso facto of oppression in conducting the affairs of the company within the meaning of Section 397(1) of the Companies Act? I do not see how it can be the kind of oppression which Section 397 contemplates because breach of Section 173(2) can at best make the meeting called invalid and no more. If such a meeting is invalid then the Companies Act provides procedure for calling valid or regular meetings or for regularising irregular proceedings. That right is always open to every shareholder. But that does not mean that this failure to supply the fullest possible details in the explanatory note under Section 173(2) of the Companies Act will be visited with an application under Section 397 as typifying such failure to be an act of oppression within the meaning of Section 397.
28. The plaintiff says that the power given to the directors to issue shares in a company is a fiduciary power that has only to be exercised bona fide. The judgment reported at [1920] 1 Ch 77 (Ch. D) (Piercy v. S. Mills and Co. Ltd.) is cited for the purpose. The question in that case was whether the directors of the company were justified in issuing further shares or whether the directors' decision was in breach of their fiduciary powers. The court held that what the directors did in deciding to issue further shares in that case was to override the wishes of the majority shareholders of the company for the time being. The plaintiff urges that it is only upon the company being in need of funds that further shares may be issued and suggests that the same principle would apply whether the shares were being issued by the board of directors or by the company in general meeting.
29. The plaintiff relies on the judgment of the Privy Council reported at [1974] 1 All ER 1126 (Howard Smith Ltd. v. Ampol Petroleum Ltd.), for the principle that if an issue of shares in a company is founded on the improper motive of the directors consolidating their control in the company, it would amount to breach of their fiduciary duty. The proposition is captured in the following passage (p. 1134):
In their Lordships' opinion it is necessary to start with a consideration of the power whose exercise is in question, in this case a power to issue shares. Having ascertained, on a fair view, the nature of this power, and having defined as can best be done in the light of modern conditions the, or some, limits within which it may be exercised, it is then necessary for the court, if a particular exercise of it is challenged, to examine the substantial purpose for which it was exercised, and to reach a conclusion whether that purpose was proper or not. In doing so it will necessarily give credit to the bona fide opinion of the directors, if such is found to exist, and will respect their judgment as to matters of management; having done this, the ultimate conclusion has to be as to the side of a fairly broad line on which the case falls.
30. In that case the conflict was between two groups of shareholders with Howard Smith Ltd., on one side and Ampol Petroleum Ltd., and Bulkships Ltd., on the other. Ampol made an announcement to purchase shares from the existing shareholders in the company to which Howard Smith made a counter offer. Ampol thereafter joined hands with Bulkships ; the two together having 55 per cent. of the paid-up capital in the company R. W. Miller (Holdings) Ltd., Ampol and Bulkships then issued a statement that they would act jointly as to the future operation of the company and they had decided to reject any offer for their shares from any other. Despite such being the shareholding composition of the company, its board of directors accepted a proposal from Howard Smith to issue further shares to Howard Smith such that the combined might of Ampol and Bulkships was reduced to a minority. The directors split over the decision, returning a 4-2 verdict in favour of issuing shares to Howard Smith, with the seventh director present not being permitted to participate for his interest as a director of Bulkships.
31. What is the common point of singular importance in both the Piercy and Howard Smith cases is that the decision to issue further shares in either case was taken by the board of directors of the relevant company and the result was that the controlling shareholders lost their majority status to the allottees. The breach of the fiduciary duty that the court recognised in either case was on the court's appreciation that the decision to issue further shares would not have been carried at any general meeting of either company where the majority shareholders could not be expected to commit hara-kiri and hand over control to the allottees. The principle would be applicable, though in diminished degree, to all cases where the status of a group of shareholders was being reduced or increased, consequent upon the impugned issue, below or beyond the immediate relevant threshold. If the issue of further shares could be shown to have brought a group of shareholders controlling 25 per cent. of the capital or more to below such level which would have allowed them to block a special resolution ; or such issue resulted in a group's shareholding being reduced from above 10 per cent. to a single digit control ; or, in the best case scenario, of a majority being reduced to a minority-the principle would apply if the decision were that of the board of directors of a company.
32. That is not to suggest that a majority can ride roughshod over the minority and use its numerical superiority to subdue the minority voice in a company. The decision of the majority shareholders, however legally made, is subject to equitable considerations. But the complaining minority has to show a degree of unfairness and the element of consequent prejudice. The plaintiff has cited the judgment reported at [1981] 51 Comp Cas 743 : AIR 1981 SC 1298 (Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd.), which recognises the principle that if the directors incidentally benefit from an issue of further shares which can be shown to be otherwise for the benefit of the company, such incidental benefit would be overlooked. The plaintiff has, however, relied on such judgment to urge that the benefit to the directors (or the majority shareholders in this case) cannot be the dominant purpose, but it is a question of fact as to whether the further issue was motivated by self interest or was incidental to augmenting further capital in the company.
33. In furtherance of his case of illegal conduct by the company and its directors, the plaintiff refers to the SEBI (Disclosure and Investor Protection) Guidelines, 2000 and relies on the following clause from Chapter XIII thereof:
13.4 Currency of shareholders resolutions-13.4.1. Allotment pursuant to any resolution passed at a meeting of shareholders of a company granting consent for preferential issues of any financial instrument, shall be completed within a period of fifteen days from the date of passing of the resolution:Provided that where the allotment on preferential basis is pending on account of pendency of any approval of such allotment by any regulatory authority or the Central Government, the allotment shall be completed within 15 days from the date of such approval.
34. This is the principal ground made out in the plaintiffs second application and on which the order of November 6, 2006, was made directing the allottees not to exercise any rights pending further orders. The plaintiff says that there is no escape from the provision and shows clause 13.4.3 to argue that if the allotment of instruments upon dispatch of certificates following a fresh issue is not completed within 15 days from the date of such resolution, a fresh consent of the shareholders shall have to be obtained.
35. The company relies on the history leading up to the incorporation of the proviso to clause 13.4.1 by an amendment of April 8, 2004. The company refers to SEBI letters of March 2, 2001 and September 29, 2003, to assert that SEBI suggested an amendment to the listing agreement (an agreement that every company whose shares are listed on any stock exchange is required to enter into with the relevant stock exchange) for it to reflect a clause that provides for an approval from the stock exchange before issuing further shares or securities. The amendment that SEBI suggested by the letter of March 8, 2001 and reiterated in the letter of September 29, 2003, is as follows:
The company agrees to obtain 'in-principle' approval for listing from the exchange before issuing any further shares or securities.
36. The company contends that the expression 'on account of pendency of any approval of such allotment by any regulatory authority' in the proviso to clause 13.4.1 reflects the SEBI mandate that prior to issuing further shares a listed company had to obtain the approval of the stock exchange(s) where its shares are listed. The company argues that a stock exchange would be a 'regulatory authority' within the meaning of the proviso and since it is apparent that the application for approval was made to the Bombay Stock Exchange within 15 days of the resolution being passed and the allotment was made within 15 days of the approval from the Bombay Stock Exchange, there is no merit in the plaintiff's argument on such score.
37. The company has made murmurs of the plaintiff and all those who voted or attempted to vote against the resolution being part of a single group of persons who were acting in concert within the meaning of the expression found in the SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1997. The company informs that proceedings are pending before the Company Law Board on the company's complaint that the plaintiff and persons acting in concert with the plaintiff have crossed the threshold of shareholding specified in the said regulations without complying with the corresponding obligation thereunder. In short, the company submits that the present proceedings are guided by improper motive where the plaintiff seeks to keep the company and its management embroiled in litigation as he busied himself in cornering additional shares in the company.
38. Prima facie, there appears to be nothing misleading or tricky about the explanatory statement. It revealed that the preferential allotment was to be made only to certain members in the promoters' group, disclosed the extent of the promoters' added control in the increased capital structure of the company and does not appear to have concealed anything material. It was plain for the shareholders to see that only nominal part of the com-pan/s burden of debt was to be lightened upon the issue and they could have resisted it if they had chosen. There was no hidden agenda and if the plaintiff-shareholder could comprehend the intended benefit to be conferred on the promoters by the proposed issue, there is no reason to suspect that other minority shareholders were not as bright as the plaintiff is and would have missed the point. If the company had not identified the proposed allottees as part of the promoters' group or had not displayed the post issue promoters' shareholding strength, the matters canvassed by the plaintiff would have been of substantial merit. But as of now it does not appear that there was anything untoward or sinister that was attempted by the explanatory statement.
39. That brings the discussion to the core issue as to whether there was any illegality or unfairness on the promoters' part. On the tentative assessment now made, the resolution appears to have been carried. The 15 days period that the plaintiff cites under clause 13.4.1 of these relevant SEBI Guidelines also seems to have been met. Whether or not a stock exchange is an authority within the meaning of Article 12 of the Constitution of India (either side had attempted to refer to judgments on such point), it appeals to reason that the stock exchange is a regulatory authority within the meaning of the relevant clause. There is no illegality that the plaintiff has been able to show. Yet there is an element of unfairness in how the company went about adjourning the voting on the contentious resolution to the following day. The company's off-the-cuff response that it may not have been prepared with ballot papers is unconvincing. But such undesirable conduct of postponing the voting, albeit being within the bounds of the chairman's authority, cannot visit the company with a consequence of the resolution being annulled in the absence of positive material to show that the resolution would have failed if it had been voted upon on the earlier day.
40. Since the company was in debt there was a need for it to receive money and if three-fourths of the value of the shareholding present and voting felt so, the court will not sit in judgment over such business decision. It is not as if every company that declares a dividend has no loan exposure to banks. To the extent that money came into the till of the company following the issue, the company benefited from it. Viewed from another perspective, whatever little the benefit to the company the further issue of shares brought, it was certainly not to its detriment. The company would have no cause of action to complain of receipt of funds for any shareholder to espouse the company's cause in a derivative action. The acts complained of are all intra vires the company's authority, whether under its articles of association or under the applicable provisions of the Act or the mandates of the regulating authorities to which a listed company must answer.
41. If the action is seen as a representation on behalf of all the minority shareholders in the company and the plaintiff's contentions tested on the lesser touchstone of unfair conduct rather than illegality, it does not appear that a reduction of the minority's strength from 49.31 per cent. of the original paid-up capital to 45.94 per cent. of the increased capital has occasioned any prejudice or undue hardship to the minority or any unfair advantage to the existing majority.
42. Though the traditional view in the doctrine of indoor management may have been whittled down in course of time, courts are loathe to interfere with business or management decisions. A court will be wary of supplanting its own decision over the company's. The individual shareholder's, or a minority group's, right to challenge a company's decision is more the aberration than the rule. Even applying the modem test of where the best interests of the company lay, the court would assess the legal element of the decision rather than the commercial context. Prima facie, there is no discernable illegality that the plaintiff in this case has been able to establish.
43. Since the plaintiff's third application is now meaningless and there appears to be no merit in the first two, all interim orders subsisting stand vacated forthwith. G.A. No. 3253 of 2006 and G.A. No. 3509 of 2006 are dismissed but without any order as to costs. G.A. No. 2973 of 2007 has worked itself out and is disposed of as such. The voting papers submitted by the company and retained by an officer of this Court will be made over to the Registrar, Original Side, who will keep it in a sealed cover subject to further orders in the suit.
44. Urgent certified photostat copies of this judgment, if applied for, be issued to the parties upon compliance with all the requisite formalities.
Later:
45. The plaintiff seeks a stay of operation of the order so that the subsisting interim order can continue for some time. The order will remain stayed for a period of a fortnight from date.