Resisting the Business Judgment Rule Mindset: A Call for Active Minority Shareholder Protection in India

[Ashish Rawat and Kinjal Ahuja are third-year students at Chanakya National Law University, Patna]

Introduction

The emerging trend of judicial deference towards decisions made by the boards of promoter-controlled companies in India is a worrying development in sync with the rationale of the Business Judgment Rule (BJR), despite the absence of any formal adoption of this doctrine in Indian jurisprudence. The BJR, developed in the United States to protect directors against judicial second-guessing of corporate strategy decisions, assumes a governance environment characterized by dispersed shareholding and real (rather than formal) board independence, strong fiduciary enforcement, and active institutional shareholders. The corporate culture in India is one of promoter dominance that has influenced board rooms as well as shareholder dynamics, thus importing this mindset will tend to undermine the statutory protections, which were crafted particularly to mitigate these structural realities. This blog critically examines the increasing tendency of Indian courts to endorse an attitude towards board resolutions that resembles BJR logic. It argues that these deferential legal standards are inappropriate in India, where the corporate culture is promoter-centric and in effect erodes minority shareholder rights protected under the Companies Act, 2013.

The Business Judgment Rule: A Contextual Doctrine

The BJR, originating from Delaware jurisprudence, serves to create a presumption in favour of directorial decisions to shield them from liability when the actions are taken in good faith, with due care and in the best interests of the corporation. The BJR assumes a fair playing field between shareholders and a separation of effective ownership and management. It thrives in an environment where independent directors have true oversight authority and where markets and institutions can discipline managerial deviance without resorting to judicial intervention. The BJR is therefore a complement to a strong infrastructure of governance.

India’s Corporate Landscape: A Poor Fit for BJR Logic

The Indian corporate structure is in sharp contrast with the assumptions on which the BJR is found. Over 51% of the NSE listed Indian companies are controlled by the promoters, with promoters owning majority or significant minority shareholdings and having ability to appoint majority of the board and exercise control over executive roles. Independent directors, while mandated, do not always have the freedom or institutional support to serve as effective curbs on the promoter-interests.

The institutional conditions justifying deference to board decisions (as exists in jurisdictions like the United States) are lacking in India. This divergence is augmented by a few structural factors. The class action and derivative action frameworks in India are still underdeveloped and rarely utilized. The safeguards offered to independent directors is only theoretical in nature, especially when powers to remove directors are vested in controlling shareholders. Disclosure standards, particularly those in mid-cap and small-cap companies, are patchy, with regulators such as SEBI showing little consistency in enforcement. Even in such an environment, the court applying a BJR-like deference may face the risk of reinforcing power imbalances under the guise of showing respect to commercial autonomy. of showing respect to commercial autonomy.

Judicial Deference in India: The Shadow of the Business Judgment Rule

Although Indian courts have not explicitly adopted the BJR, the recent jurisprudence exhibits the creeping inclination towards the rationale of BJR. In Tata Consultancy Services Limited vs Cyrus Investments Pvt Ltd, the Supreme Court stated that the courts cannot sit in judgment over the business decisions of companies made by their boards or shareholders. Even though the Court did not mention the BJR explicitly, its language reflected the same policy, that courts must not interfere with or replace the judgment of directors unless there is evidence of fraud, oppression or mala fide conduct.  This approach has been observed in earlier cases as well. In Miheer H. Mafatlal v. Mafatlal Industries Ltd., the Court supported a decision of merger based on the premise that it was done out of commercial wisdom, despite the fact that it was disadvantageous to minority shareholders. Similarly, in Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd., the Court recognized the power of the majority to make strategic decisions, while limiting intervention to cases of ‘oppression’.

This deferential stance has been reinforced in recent appellate decisions as well. In Marathon Nextgen Townships v. Regional Director and Oriental Carbon & Chemicals Ltd. v. OCCL Ltd., the tribunal emphasized that once statutory requirements are satisfied and shareholders have approved a scheme, the NCLT cannot “sit in appeal” over the commercial wisdom of the stakeholders. Likewise, the Delhi High Court in Indiabulls Real Estate Ltd. v. DoT reiterated that courts should not scrutinize the merits of reorganisations where informed shareholder approval exists.

Such judicial cases demonstrate an inclination in the judicial system to trust the exclusivity of the board and not to intervene in the cases where there are no clear violations of law. Although judicial restraint can be sometimes appropriate to prevent courts from micromanaging businesses, deference in promoter-dominated settings taken in blanket form poses a threat to establish opaque decision-making, marginalizing the voices of minorities, and undermining overall governance standards.

How the BJR Mindset Reinforces Promoter Dominance

It is a common feature in India that the promoters can exercise their influence on the board of directors and vital appointments of managers to influence a decision that favours them, be it the related party transaction, share buy-back, merger, or strategic disinvestment. Judicial deference under such situations amounts to the endorsement of decisions that are arrived at by interested parties, as opposed to those delivered by independent boards.

The Tata–Mistry case exemplifies how judicial deference to majority decisions can shape the contours of corporate governance in India. When the Supreme Court reinstated the ousting of Cyrus Mistry as executive chairman by a Tata-Trusts-influenced board, it affirmed a limited role of the Court, restricting judicial interference to visibly clear cases of illegality, fraud or statutory oppression. By giving the benefit of doubt and legal immunity to actions taken by persons in control, the Court has rendered a considerable level of immunity to promoters and majority shareholders in the context of boardroom ouster. As a result, the Court affirmed that decisions taken by the board or majority shareholders, provided they comply with company law and the Articles of Association and are free from illegality or fraud, are not ordinarily subject to intervention on grounds of oppression or breach of fiduciary duty, even if broader concerns about corporate democracy or process are raised.

The cautious approach taken by the Court in not meddling with boardroom decisions on the grounds of ‘commercial wisdom’ would serve to strengthen the position of majority shareholders who are often the promoters of company. Although such respect of ‘business judgement’ serves to support managerial discretion, it may in certain occasions leave the minority shareholders with little say concerning decisions that are material to their interests. Consequently, protections that are envisioned by Sections 241 and 242 of The Companies Act, 2013, to redress the issues of oppression and mismanagement may not be effective in practice due to the high bar of judicial intervention placed onto them.

Ultimately, deference to boards’ decisions under the guise of respecting ‘business judgment’ legitimizes and reinforces power imbalance. It effectively signals to promoters that so long as decisions appear commercially sound on paper regardless of their true motivation or fairness, they will escape scrutiny. This further weakens the position of minority shareholders, whose avenues for redress are already minimal. Promoters can leverage board decisions to dilute minority stakes, push through related-party transactions, or restructure assets in ways that consolidate their control, all while courts refrain from intervening, citing BJR-like deference.

Market Consequences: Chilling Minority Participation

Indifference of the judiciary towards promoter conduct has far-reaching implications for the market. The judicial recourse is uncertain, and the control of the promoters is unregulated, which discourages the institutional investors and minority investors. The efforts of SEBI to enhance governance by imposing greater requirements on independent directors and by enhancing disclosure regimes are a step in the right direction but will not work until they are supplemented by judicial involvement. 

Weak judicial scrutiny disfavours long-term, value-based investment that focuses on management stability. Investors will not invest or be associated with companies where the actions of the promoters fall outside the reasonable bounds of oversight, making safeguards only theoretical and redress illusory.

Conclusion

Not subscribing to the BJR approach is not tantamount to supporting judicial micromanagement of corporate affairs. Rather, it demands a refined, situation-sensitive approach that takes into account the promoter-centric realities of India. Courts must differentiate between legitimate business risks and decisions that, while facially commercial, serve to control or oppress minority interests. Directors’ fiduciary duties must be enforced not merely in form but in substance, examining whether decisions align with the collective interests of the company rather than the narrow interests of controlling shareholders.

Indian courts must resist the allure of BJR reasoning, reaffirming their role not as overseers of business wisdom but as guardians against its abuse. Active judicial engagement, aligned with laws and responsive to India’s unique corporate realities, is essential for evolving governance from formal compliance to substantive accountability. It is only with such vigilance that India will be able to build investor confidence, safeguard minority shareholders’ rights, and ensure that its corporate law serves the broader imperatives of fairness, transparency, and market integrity.