ABSTRACT
The exponential surge in industrialization in India is attracting significant investments, both domestic and foreign. These increasing investments have led to ever-evolving complex corporate structures and meticulous shareholder rights and obligations. However, the dispute resolution mechanism in India and the unintentional cooling-off period which invariably goes hand-in-hand with litigating in India, is constraining parties to naturally prefer institutional arbitrations, to enforce their rights. To complicate things further, there is an increasing anxiety particularly in cross-jurisdictional transactions, while choosing the optimal dispute resolution mechanism for claims arising in India, given the dichotomy in differing standards for arbitrability across international jurisdictions. This Article navigates the enforcement of rights in shareholder disputes.
A trillion-dollar economy, now the 5th largest economy by nominal GDP and 3rd largest by purchasing power parity with the world's second largest labour force, India ranks 63rd on the Ease of Doing Business Index and 40th on the Global Competitiveness Index. Having been left impoverished after the colonial rule, its present rate of growth has slated India to be one of the fastest growing economies in the world.
Whether it was the economic liberalisation in 1991 following the end of the Cold War, under the leadership of Dr. Manmohan Singh, or the motto of 'Atmanirbhar' and 'Make in India' being advocated since the Bhartiya Janta Party's rise to power in 2014, each government has played a pivotal role in boosting economic growth. The mutual commercial concessions between the Trump and Modi Administration, allows Indian businesses to capitalise on new opportunities in the US market. Interestingly, India has reached a significant milestone in its economic growth, surpassing USD 1 trillion in gross foreign direct investment (FDI) inflows since April 2000. Interestingly, the push that the economy has received in the recent past, has facilitated the advent of the modern bourgeoisie in India, with the total number of billionaires in the country peaking at 185 (holding around 7% of the world's total wealth) in 2024. These contributing factors have led some researchers to opine that India is poised to surpass Japan and Germany to become the world's third largest economy by 2027.
The foregoing coupled with a relatively large and young workforce and the economy's resilience to geopolitical tensions, has endorsed India as a promising haven for accelerating financial growth thereby attracting investors – foreign and domestic alike.
These investments are largely formalised through meticulously drafted agreements, from which claims often emanate, thereby inviting a need to revisit whether the dispute resolution mechanism as available in India caters to the needs of commercial disputes, ensuring speedy and efficient justice avenues and effectively combats cross-jurisdictional disputes.
An incorporated entity is arguably one of the most favoured vehicles for investments and business ventures.
CORPORATE STRUCTURES IN INDIA
Management styles in corporate houses in India are largely divided between: (a) public companies with a controlling stake predominantly with the government or the promoter, as the case may be; (b) family-run or heritage companies; (c) private companies with a team of professionals responsible for management of the company's affairs; and (d) startups by one or more entrepreneurs.
Each structure is mired with its own set of complexities and requires a tailored approach. The dispute resolution mechanism for shareholders of publicly listed companies are relatively streamlined and governed at the first instance by the relevant complaint redressal body, failing which, the dispute may be resolved in terms of the standard operating procedure(s) updated from time to time, unless a private claim exists in which case the applicable dispute resolution mechanism would apply, or where a claim before the Securities Tribunal lies.
In so far as family-run companies and private companies are concerned, the shareholding of a company is typically closely held between distinct groups, wherein one identified group prevails as the majority. The most classic issues which arise in such companies are oppression of the minority shareholders and/or mismanagement of the affairs of the company, usually coupled with a complete derailment in corporate governance, thereby harbouring lack of trust and confidence in the management of the company. Such disputes are adjudicated by dedicated company tribunals under Indian law.
Other common disputes amongst shareholders include disagreements in business decisions, management control, breach of a business agreement, loss of revenue, lack of transparency, exercise of put or other contractual options, and disagreements over exits and valuation of shares.
It is crucial that the terms of a shareholder's agreement (including the dispute resolution clause) is incorporated in the articles of the company, to enable an aggrieved shareholder to enforce their rights under such an agreement against not only the other shareholders, but the company as well.
SHAREHOLDER RIGHTS UNDER THE COMPANIES ACT, 2013
Shareholders despite being owners of the company, do not participate in the day-to-day management of the company. Shareholders can be of two types, i.e. equity or preferred shareholders. Equity shareholding is a riskier form of investment, though capable of generating exponential profits in the event the company performs. Preference shareholders on the other hand, get priority in payment of dividends and usually receive a larger share than equity shareholders, albeit at the cost of having no voting rights. In the event of insolvency, preference shareholders would be preferred over equity shareholders (who rank the lowest amongst all creditors), in terms of the waterfall mechanism set out in the Insolvency and Bankruptcy Code, 2016 ("IBC").
SHAREHOLDER DISPUTES
Shareholder disputes refer to the fallout typically between 2 groups of shareholders in a company, owing to one or varied reasons including, intermeddling with shareholder rights, breach of fiduciary duties of the management, differing opinions on strategic / operational business decisions, profit distribution, valuation of shares, steps taken in breach of the shareholder agreement(s), exercise of contractual options, exit rights, accessibility to corporate information, oppression of minority shareholders, gagging minority shareholders at AGMs, mismanagement of company affairs, derailment of corporate governance and undertaking transactions which ex facie appear to not be in the interest of the company. In India, disputes are largely resolved by way of (a) litigation; or (b) alternate dispute resolution mechanism, typically, arbitration, which may be (i) domestic; or (ii) foreign seated.
The nature of the dispute, and the right that one is seeking to enforce, i.e. in personam rights (rights claimed against a particular person / set of persons; eg.: an injunction against a private party) or rights in rem (rights claimed against generally against the world at large; eg.: a prayer for 'declaration'), determine the manner of adjudication. Broadly, while in personam rights are arbitrable, enforcement of rights in rem can only be though the aegis of commercial courts or dedicated company tribunals.
RESOLUTION OF SHAREHOLDER DISPUTES
A well-drafted shareholders' agreement can aid in preventing disputes by clearly outlining rights, responsibilities, and procedures for conflict resolution. Although alternative dispute resolution methods like negotiation, mediation, and conciliation are generally quicker and less cumbersome, they may only be marginally effective in realising results. As a result, many shareholder disputes ultimately require adjudication. Some of the dispute resolution mechanisms are set out hereunder:
A. PETITION COMPLAINING OF OPPRESSION AND/OR MISMANAGEMENT UNDER SECTIONS 241 AND 242 OF THE ACT
As aforesaid, under Sections 241-246 of the Act, minority shareholders can seek redress against the majority regarding oppression (where the interests of minority shareholders are disregarded) and mismanagement of the company. In India, the designated company tribunal, i.e., the National Company Law Tribunal (NCLT) exercises exclusive jurisdiction over matters covered under Sections 241 to 246 of the Act.
In terms of Section 241 of the Act, if the affairs of the company have been or are being conducted in a manner prejudicial to public interest or interests of the company, or in a manner oppressive to any member or members such that the conduct is demonstrably 'burdensome', 'harsh' or 'wrongful', Section 241 of the Act gives right to the members to move an application before the NCLT. Section 241 entitles only the shareholder to seek redressal and any unfair treatment in a capacity other than a shareholder (such as a creditor or director), is outside the purview of Section 241 of the Act.
In order to file a petition alleging oppression and/or mismanagement under the Act, a shareholder is required to satisfy the following four tests, i.e., (i) the oppression complained of must affect a person in his capacity or character as a member of the company alone; (ii) there must be continuous acts constituting oppression up to the date of the petition; (iii) the events have to be considered in a continuous story and not in isolation; (iv) it must be shown that there is a just and equitable ground for winding up the company (though however, the NCLT may grant other reliefs to put an end to the acts complained of, instead of winding up the company if in the facts and circumstances of the case, the winding up would unfairly prejudice the aggrieved shareholder). Upon failure to meet the aforesaid tests, a petition alleging oppression and/or mismanagement would constitute as a 'dressed up' petition.
B. ARBITRATION
Arbitration is another popular mode of dispute resolution, which has supplemented the existing judicial instrumentalities. Depending on the terms of the shareholders agreement and the nationality of the parties, the arbitration may be domestic or foreign seated.
It is imperative that the 'seat' of arbitration is thoughtfully chosen keeping in mind the potential overarching issues (including execution of the award) that may arise, given that the same is the determining factor of the applicable law. This is particularly problematic in cross-jurisdictional disputes, which invariably take longer to adjudicate, in view of the dichotomy between the substantive law, the law of the seat and the law governing the arbitration proceedings i.e., the curial law. As aforesaid, in an arbitration, an aggrieved shareholder can only enforce in personam rights.
Since the law of the arbitration agreement determines the validity of the arbitration agreement, questions of what disputes may be arbitrated by a tribunal under such an agreement have to be determined in accordance with the law of the arbitration agreement. The Courts in India have time and again echoed a pro-arbitration approach and have referred parties to arbitration in issues which are not otherwise reserved for the exclusive adjudication of a specific court or tribunal. It has also been held that in matters where some disputes fall within the domain of arbitration and some don't, the Court would be fair in reserving the entirety of the dispute to be adjudicated by itself.
An arbitration agreement between parties is formed by consensus of the parties. The arbitration agreement should therefore be determinative of the issues that the parties have agreed to arbitrate inasmuch as party autonomy being the bedrock of arbitration would necessarily apply from the agreement to the rendering of the final arbitral award. While determining such issues, care must be taken to ensure that the issues that the parties anticipate arising are arbitrable under the applicable law, given that certain disputes which are not arbitrable under Indian law, may be arbitrable in other jurisdictions. For instance, claims in an oppression and mismanagement dispute fall within the exclusive domain of the NCLT under the Companies Act and are thus not arbitrable in India, whereas, there is no such preclusion under Singapore Law. Thus, where a shareholders agreement provides for Singapore as the Seat of arbitration, an oppression mismanagement claim arising from such a SHA would be arbitrable. However, there would be technical challenges while executing such an award given that the subject matter of the arbitration was non-arbitrable under Indian law.
Shaadi-Dot-Com Case
A similar issue was before the Singapore Court of Appeal (SGCA) in Anupam Mittal vs. Westbridge II Investment Holdings [(2022) SGCA 1]. In this case, a dispute arose between the shareholders of an Indian Company, viz., Mr. Anupal Mittal, the founder of the matrimonial website Shaadi.com and Westbridge Ventures, arising out of a SHA seated in Singapore and governed by the laws of India. This decision underscores the need to pay careful attention to the drafting of arbitration clauses and expressly specify a governing law for their arbitration agreement to avoid protracted disputes regarding the proper law of the arbitration agreement to avoid unintended consequences on the scope of the arbitration agreement and enforcement of the Award arising from such a dispute.
Dispute and Injunction
Anupam Mittal filed a petition before the NCLT, Mumbai, seeking remedies on account of shareholder oppression. Relying on the arbitration agreement which categorically provided for Singapore to be the seat, Westbridge Ventures obtained an urgent ex parte interim Anti-Suit Injunction (ASI) from the Singapore Courts to restrain Anupam Mittal from pursuing the NCLT petition.
The ASI was upheld by the SGCA, finding that the arbitration agreement was governed by Singapore law, not Indian law. Although the Shareholders' Agreement (SHA) was governed by Indian law, the SGCA determined that the parties intended for all disputes, including oppression claims, to be resolved through arbitration in view of the arbitration clause's broad scope which suggested a desire for a unified forum for dispute resolution. Given that Indian law prohibits arbitration of oppression claims, it would be inconsistent to apply Indian law to the arbitration agreement. Instead, the SGCA held that Singapore law applied, as it had the closest connection to the arbitration agreement. In reaching this decision, the SGCA distinguished its earlier ruling in BNA v BNB [(2020) 1 SLR 456], by observing that while that case involved an implied choice of PRC law for the arbitration agreement, despite its invalidity under PRC law, the Anupam Mittal dispute demonstrated a stronger desire for arbitration as the preferred dispute resolution mechanism. In view of the foregoing findings, the SGCA held that the proceedings adopted by Anupam Mittal before the NCLT were in breach of the arbitration agreement.
Cross jurisdictional impasse
Despite the SGCA's decision, Anupam Mittal pursued proceedings before the Bombay High Court, which granted an injunction restraining Westbridge from enforcing the ASI, on the ground that the non-arbitrability of oppression-mismanagement disputes under Indian law was a significant factor, and where the subject matter of the dispute was non-arbitrable, the Indian Courts could not enforce any such arbitration award. The Court held that if Anupam Mittal was forced to only seek redress for his grievances by way of arbitration, he would be effectively rendered remediless. The NCLT also issued an interim injunction restraining the final hearing of the arbitration in Singapore. The outcome of this saga remains to be seen, but it highlights the significance of considering subject-matter arbitrability in cross-border disputes.
Enforcement in foreign seated arbitrations
Thus, parties must carefully negotiate and craft their arbitration agreement, so as to mitigate any issues from arising to frustrate the parties' desire to settle some or all of their disputes by arbitration. It would be a gamble to leave it to the jurisdiction they choose to maintain the position of being arbitration friendly even though there is always a chance of challenge to the award and unenforceability in a foreign jurisdiction. This is particularly challenging in foreign seated arbitrations, where Parties exclude applicability of Part I of the Arbitration and Conciliation Act, 1996, thereby subjecting them to technical challenges while moving Indian Courts for interim reliefs, for protecting the subject matter of the dispute within the territorial limits of India.
PREVENTIVE MEASURES
Given the challenges in the international landscape and particularly the uncertainties which are inherent to cross jurisdictional disputes where differing standards of arbitrability are applied by different courts, there is a crucial need for harmonising arbitration laws across different jurisdictions and a unison of model laws and principles. Satellite litigation and additional legal costs on technical issues can be avoided by anticipating potential disputes and identifying a mechanism for timely enforceability of rights, through a meticulously drafted agreement, as this could potentially determine if disputes are heard by their choice of forum or not.
Watertight corporate governance models further aid in navigating shareholder disputes. Implementing clear policies on shareholder rights such as by way of an in-house handbook, ensuring regular and transparent communication, strengthening checks and balances within the corporate structure and other measures to boost investor confidence, all work in strengthening corporate governance practices, which aid in maintaining corporate health and reduce the likelihood of disputes.
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