2009 (1) TMI 480 - HC - Companies Law

Oppression and mismanagement - dilution of appellants shareholding percentage in the company - Held that - A civil court would not sit in judgment over the commercial wisdom of corporators. The appellants do not show that the decision to issue further shares was ultra vires the powers of the directors under the articles of association of the company. In the absence of any apparent illegality, the propriety of the issue hinges on the collective wisdom of the Board against the assertion of the appellants. The learned Single Judge exercised his discretion to make a limited order and the appellants have not been able to demonstrate that the exercise of discretion was perverse or contrary to accepted judicial principles. Appeal dismissed.

Issues Involved:
1. Validity of the rights issue of shares by the company.
2. Allegations of fiduciary duty breach by the directors.
3. Applicability of equitable considerations in corporate decisions.
4. Judicial review of commercial decisions by the Board of Directors.

Detailed Analysis:

1. Validity of the Rights Issue of Shares by the Company:
The appellants challenged the issuance of rights shares by the company, alleging it was engineered to consolidate the control of the majority shareholders and dilute the appellants' shareholding percentage. The appellants argued that the stated reason for the share issue was vague and irrational, and no substantial development had occurred with the funds raised. The respondents contended that the Board's decision to issue shares was legitimate, referencing Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. [1981] 3 SCC 333, which clarified that the power to issue shares is not solely for raising capital but can be used for other beneficial purposes for the company.

2. Allegations of Fiduciary Duty Breach by the Directors:
The appellants asserted that the directors breached their fiduciary duties by issuing shares with the improper motive of consolidating their control over the company. They relied on the Privy Council's judgment in Howard Smith Ltd. v. Ampol Petroleum Ltd. [1974] 1 All ER 1126, which established that an issue of shares based on improper motives constitutes a breach of fiduciary duty. The respondents countered by arguing that the appellants failed to establish mala fides on the part of the directors, referencing judgments in Shanti Prasad Jain v. Kalinga Tubes Ltd. [1965] 35 Comp. Cas. 351 (SC) and Jetu Jacques Taru Lalvani v. J.B.A. Printing Inks Ltd. [1997] 88 Comp. Cas. 759 (Bom.).

3. Applicability of Equitable Considerations in Corporate Decisions:
The appellants argued that the majority shareholders' decision to issue further shares should be subject to equitable considerations, as outlined in the classical exceptions to the rule in Foss v. Harbottle [1843] 2 Hase 461 (Ch.). The court acknowledged that while the majority cannot ride roughshod over the minority, the complaining minority must show a degree of unfairness and consequent prejudice. The court noted that the directors' incidental benefit from an issue of shares, if shown to be otherwise for the company's benefit, would be overlooked, as established in Needle Industries India Ltd.'s case.

4. Judicial Review of Commercial Decisions by the Board of Directors:
The court emphasized that a civil court would not sit in judgment over the commercial wisdom of corporators. The appellants failed to demonstrate that the decision to issue further shares was ultra vires the powers of the directors under the company's articles of association. The learned Single Judge's discretion to make a limited order was upheld, as the appellants could not show that the exercise of discretion was perverse or contrary to accepted judicial principles.

Conclusion:
The appeal was dismissed, and the interim order of 6-4-2006 was vacated. The appellants were given the option to exercise their rights to receive the shares within four weeks, failing which the company directors could deal with the shares as per their authority. The appellants would be entitled to receive the money deposited with the Registrar, Original Side, along with all accretions, if they chose not to invest in the rights shares. No order as to costs was made.

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