Protection of the minority shareholders in private limited companies: Comparative study of UK, USA and Pakistan

Abstract

Since Solomon v. Solomon, the concept of a company as a separate legal person has revolutionized business and commerce across the globe. Risks associated with every type of business have been transferred to the company itself and consequently, the shareholder’s liability has been limited to the extent of their investment in the company. However, shareholder’s investment conferred them voting weightage rights according to their share of investment in the company. Subsequently, a minority investor had always remained under the tyranny of majority investor(s) and had to abide by the decisions taken by a majority shareholder(s). This problem first arose in Foss v. Harbottle in which minority shareholder suffered financial losses due to unilateral decisions made by majority shareholders of the company and were legally restricted to bring any action against their own company since the Honourable Court decided that company is proper plaintiff to bring any matter in the court of law. Although this principle settled in this case has remained under heavy criticism in the later years by the Jurist and legal practitioners, therefore earlier in the UK and later in the USA, protection to the minority shareholder has been provided through statutory protection under their new enactments or laws. In Pakistan, an aggrieved minority shareholder under section 286 of the Companies Act, 2017 can bring a derivative action against their own company. However, it is limited to the extent of those who hold 10% of the total shares in the company. Currently, a number of reforms have been introduced for the documentation of the unregulated economy in Pakistan in a pursuit to discourage the untaxed and undocumented parallel economy. That can only be achieved through, registration of all types of business under the institution of the Security and Exchange Commission of Pakistan in the form of company (or any other undertaking). Under such circumstances small investors even having less than 9.99% shares of the total shares of a company will always be excluded from running of the administration of the company and will always remain under majority rule. If similar natures of reforms on the patterns of UK and USA are also incorporated through new amendments in the current enactments, then empower the minority shareholders may have a greater role to play in the decision making of the company. Consequently, it can be assumed that after such reforms in the company law jurisdiction, derivative actions will only be brought in severe cases. In this thesis, efforts viii have been made in this direction that the bar of share weightage for bringing derivative actions by aggrieved minority shareholders may be scrapped altogether as it is being practiced in major jurisdictions of the world. Such reforms will encourage all types of investors to participate in business and commerce along with minor investors if statutory protection against majority shareholders is provided under a transparent and smooth procedure.