Reclaiming Corporate Legitimacy: Doctrinal Flaws and the Failure of Minority Shareholder Protection laws in Pakistan

Hajra Tiwana Commentary, Guest ColumnistsNo comments

Abstract

Minority shareholder protection is central for corporate legitimacy, specifically in jurisdictions like Pakistan, where concentrated ownership structures and regulatory delays risk minority shareholders being abused. Although the Companies Act 2017 introduced legal reforms to ensure investor protection, procedural barriers, judicial conservatism, and doctrinal ambiguities have rendered these remedies inaccessible. It is argued that Pakistan’s legal framework is founded on colonial-era doctrines, and therefore, it fails to address the systemic issues faced by the minority shareholders. Through an in-depth doctrinal and jurisprudential analysis of Section 268 and Section 286, this paper reveals functional failure in institutionalising the protection of vulnerable shareholders. After examining comparative frameworks in jurisdictions like India, Singapore, Japan, and Germany, it is recommended that Pakistan codifies derivative actions, lowers maintainability thresholds, establishes special tribunals, and adopts ADR mechanisms. These reforms are not only fundamental for upholding minority shareholder interests but also critical for enhancing investor confidence, aligning Pakistan’s corporate governance with global standards.

Introduction

Corporate governance frameworks regulate complex relationships between company stakeholders, including managers, shareholders, directors, and creditors. To understand the dynamics of corporate democracy, it is therefore imperative to examine the dynamics between the company’s dominant directors or majority shareholders and the minority shareholders. Minority shareholders make up less than half of the total shareholding and therefore lack the voting control over key corporate decisions, which may include takeovers, mergers, and third-party transactions.[1] This power imbalance between the majority and minority creates corporate decision-making disparity. Without a robust protection mechanism, minorities are systematically excluded from the company’s operations.

Modern corporate structures, particularly those grounded in majority rule, usually authorize controlling shareholders and directors, often called ‘insiders’, to take key decisions that shape the company’s future direction. While these structures are usually portrayed under the ambit of corporate democracy, it is critical to distinguish the majority rule from corporate legitimacy. Although the corporate majority rule can be legally permissible, corporate legitimacy requires minority shareholders to be granted enforceable participatory rights. A governance framework that excludes vulnerable shareholders can continue to be valid.  However, it lacks substantive legitimacy.[2] Therefore, to achieve corporate legitimacy, the state must protect minority shareholders through accessible, equitable, and viable legal remedies.

Minority shareholder protection is crucial not only for equitable considerations but also to improve investor confidence.[3] The economic implications of these frameworks are significant for Pakistan, where corporate ownership structures are often concentrated in families, state-owned enterprises, or politically affiliated groups.[4] In this context, minority shareholders may also include international investors or small stakeholders with low influence over company decision-making. In the absence of structural or legal protection, this inherent imbalance of power creates a greater risk of minority exploitation. The inevitable abuse of minority shareholders may undermine investor confidence, discourage foreign direct investment, and adversely impact Pakistan’s capital market development and economic growth.

Although the Companies Act 2017 aimed to modernise corporate governance, these reforms have not substantially improved the minority protection remedies in Pakistan. This is primarily because structural challenges, procedural barriers, and judicial conservatism have limited the accessibility of the statutory provisions. While in recent judgements, courts have taken a pro-investor approach in recognising minority shareholder rights, the enforcement is highly inconsistent and primarily dependent on judicial discretion instead of a uniform statutory framework. Therefore, there is an urgency for context-driven reforms that align with the socio-economic realities of Pakistan’s commercial realm.

This paper is divided into three sections. Section 1 explores the theoretical and philosophical grounds for minority protection and its evolution under the common law systems. Section 2 critically examines the theoretical and practical deficiencies in Pakistan’s current framework, including statutory provisions, judicial interpretation and regulatory limitations. Finally, drawing on comparative analysis of India, Singapore, Japan, and Germany, this paper recommends Pakistan-specific reforms. It concludes to suggest that to enhance investor confidence and achieve corporate legitimacy, Pakistan must adopt context-sensitive reforms.

Section 1: Theoretical and Historical Foundations of Minority Shareholder Protection

To understand the need for minority shareholder protection, it is first necessary to conceptualise the corporation as an economic entity and a legally structured institution reflecting value distributions and power dynamics. Contemporary corporate governance is conversely viewed through the economic efficiency or the political legitimacy lens.[5] While the traditional economic theorists view the corporation solely as a tool for wealth and efficiency maximisation, this essay argues that a company is not a neural economic actor. Instead, it is asserted that a corporation is a legal-political institution and its internal structures reflect and even reinforce existing power hierarchies. Therefore, corporate governance models should not merely focus on operational efficiency but also strive to ensure democratic legitimacy.

One key issue in corporate governance is concentrated power in the hands of directors and dominant shareholders. This is intertwined with the ownership structures within corporations, which shape these power imbalances. This is because each share simultaneously represents the pecuniary interests and the bundle of rights enshrined in the company’s articles of association. As a result, the majority shareholders, due to their greater financial contribution, hold a controlling interest in the company and consequently influence key decisions such as board composition, dividend policies, and the company’s future objectives. However, such power dynamics lead to exclusion, exploitation, and possible oppression of minority shareholders at the hands of majority shareholders. This abuse or misuse of powers exercised by the controlling shareholders or directors is called ‘agency costs’,[6] where the agents misuse their authority to prioritise personal interests over the corporation’s interests.

Since minority shareholders do not have adequate voting power to influence corporate decision-making, minority protection must not be limited to their financial interests but also ensure their participatory rights, such as the right to information, voting, and fair participation. This, therefore, necessitates the theoretical tension between rights and interests-based approaches to shareholder protection. In an interest-centred model, the governance model limits itself to wealth maximisation, and thus, protection merely means financial loss or harm. On the other hand, the rights-based approach treats minority shareholders as empowered members irrespective of their financial contribution. Minority protection, in particular, becomes essential when the majority shareholders misuse/abuse power in cases where they commit a wrong, and that wrong can be ratified by the majority itself as they represent the company. [7]

This historical power imbalance lays the foundation of the classical agency problem: the divergence between those controlling company affairs and those affected by such conduct. This is further exacerbated in companies where the majority shareholders elect and influence the directors. Thus, it results in the amalgamation of ownership and control in one place. This wrongdoer dilemma necessitates the re-examination of the legal and historical foundations that have allowed this dichotomy to persist, especially in post-colonial justice systems like Pakistan that have transplanted the corporate governance frameworks of the UK.

The UK’s corporate governance model is conceptually based on two foundational principles: the doctrine of separate corporate personality and the Foss v Harbottle principle. In 1843, Foss v Harbottle[8] laid down the proper plaintiff rule, which established that the company itself is the proper plaintiff in cases of corporate wrong – only the company can sue for the wrongs committed against it. This solidified the majority rule: if an action is ratified by the majority, the courts will not interfere. In 1897, the landmark decision in Salomon v Salomon,[9] entrenched the principle of corporate separate personality as the House of Lords ruled that a company is a separate legal person because upon incorporation, it becomes distinct from its members. While this legal fiction promotes commercial stability, ensures limited liability, and attracts investments in companies, it also creates theoretical ambiguities. Consequently, it results in the wrongdoer dilemma where the majority, hiding behind the corporate veil, acts with impunity and misuses its authority to sideline minority shareholders. Therefore, this interplay reinforces the neoliberal ideals of private ordering and minimal state control, perpetuating the corporate hierarchies.

However, critics like Lorraine Talbot compare this system with the capitalist power structures. According to Talbot, these doctrines legitimise the internal concentration of power within companies and therefore undermine the participatory rights of the minority shareholders. In her analysis, these theories incorrectly assume an egalitarian playing field within corporations, which does not exist in reality.[10] As a result, legal frameworks reinforce the economic hierarchies instead of democratising corporate governance. This also applies to Pakistan, as family-owned corporations dominate the commercial environment, and the lack of adequate protection remedies expose the minority shareholders to an increased risk of exclusion. Therefore, it is imperative to reimagine corporate law as a mechanism for contract enforcement and a shield for participatory democracy.

Similarly, to understand the theoretical justification of minority protection frameworks, it is pertinent to analyse the debates on rights vs. interests. This originated in 1930 when American scholars, Adolf Berle and Gardiner Means, studied the concentrated ownership structures within American companies. Berele further developed the implications of the difference between ownership and control and argued for a regulatory framework that protects shareholder rights, upholds fiduciary duties, and restricts concentrated managerial powers within corporations.[11] In contrast, scholars like Merrick Dodd critique the rights-centred framework and instead advocate for a governance model that reflects broader stakeholders, including employee and customer interests.[12] Therefore, this theoretical dichotomy between interests and rights developed into the modern stakeholder and shareholder primacy models. Hence, under this framework, minority protection can be viewed as an economic interest or a democratic right. The right approach mandates legal enforcement of participation rights and remedies to protect the vulnerable shareholders from exclusion, irrespective of their financial contribution to the company.

Historically, courts were reluctant to protect minority shareholders because of the proper plaintiff rule. If a director commits a wrong, only the company has the right to file a claim and not the minority shareholders. This is a paradox, as the wrongdoers control the company affairs and litigation. In this way, the directors enjoy both de jure and de facto control over business decisions, leaving minority shareholders with no alternate recourse. In a public limited company, the minority members may sell their shares and transfer their interest. However, this power imbalance is exacerbated in close corporations or private limited companies. This intensified the corporate governance vacuum and thus mandates the development of legal exceptions. The UK courts addressed this gap through limited common law exceptions to Foss v Harbottle. These included fraud, ultra vires acts, and illegal conduct. However, these exceptions were criticised for being narrow and lacking uniform application.

The true exception to the Foss v Harbottle rule came with the development of derivative actions under which the minority members ‘derive’ their authority from the company and represent its interests to file a claim against the errant directors or majority shareholders. Under Part 11 of the UK’s Company Act 2006,[13] the derivative claims were recognised as a statutory remedy. It allows minority members to bring a claim on behalf of the company without the court’s permission. Although it strives to balance shareholder protection with excessive litigation, the provisions present extremely narrow grounds for a successful claim. Similarly, Section 994 of the Companies Act 2006 codified the unfair prejudice remedy and allows minority shareholders access to resources where their rights have been undermined. It is crucial to consider that the English court also developed the doctrine of legitimate expectations, specifically in quasi partnership settings, where minority members are deemed to have a reasonable expectation to be involved in the company management. However, seminal cases of O’Neill v. Phillips[14] and Re Saul D Harrison & Sons limited[15]the scope of judicial interpretation, as it was held that expectations have to be based on enforceable agreements. The UK’s reforms reflect the legislative intent and judicial willingness to expand the minority protection remedies.

However, Talbot views these reforms as merely ‘performative.’ She argues that while the reforms improve the procedural access, they fail to challenge the ideological construction of the corporation. Despite these reforms, a company is viewed through the contractarian lens where minority shareholders are regarded as mere economic actors instead of empowered participants. In her analysis, corporate legitimacy can only be achieved through the reconceptualisation of a company as a participatory democratic institution instead of viewing it as an economic entity.[16]

In conclusion, the historical and theoretical evolution of the UK’s company law mirrors a gradual shift from a rigid majority principle towards (somewhat) expansive minority protection. While the statutory reforms such as derivative claims and Section 994 provide remedies for minority grievances, they still function within a fundamentally neoliberal and economic framework. This theoretical theme is essential in dissecting jurisdictions like Pakistan’s challenges as they inherit the legal framework from the UK, but have failed to reform in line with the UK. In the subsequent section, we will explore how Pakistan has transplanted these doctrines in its framework, yet failed to modernise the provisions on minority shareholders protection.

Section 2: Pakistan’s current Minority Protection Framework and its socio-legal implications

In Pakistan, multiple frameworks govern the minority shareholder protection, including the Company Act 2017’s Sections 286 and 268, the regulatory oversight under the Securities and Exchange Commission of Pakistan (SECP), and the common-law derivative claims. This section will primarily analyse the Companies Act 2017, which, despite its progressive objectives, reflects statutory stagnation and judicial inconsistency. While Pakistan inherited a colonial framework, particularly the Indian Companies Act, which was based on the British Companies Act, the corporate framework remained unchanged post partition until the enactment of the Companies Ordinance 1984. To incorporate global corporate governance models and modernise the old law, the legislature introduced the Companies Act 2017.[17] The primary objectives of the Act were to protect investors, create a sustainable business environment, and protect the minority through various statutory changes under Section 286.[18]

Section 286 allows members with a minimum shareholding of 10% to file a petition to the court in three situations including: affairs of company conducted in an ‘oppressive manner’, conduct of the members is ‘prejudicial’ to ‘public interest’, or if the conduct is detrimental to the interests of the company.[19] While Pakistan has inherited the idiosyncrasies of English law, the minority protection remedies remain theoretically broad yet practically inaccessible. This reflects a structural dysfunction between formal rights and actual redress in Pakistan’s minority protection framework.

  1. The Creditor and Shareholder Dilemma

The scope of Section 286 is comparatively broader than that of the UK’s S.994. While remedies under Section 994 can only be availed by the shareholders, in Pakistan’s statutory framework, the oppression remedy is accessible to shareholders and creditors. [20] This creates a two-fold problem: creditors who should be dealt with under separate insolvency laws are dealt with under the company law, thus leading to legal complications and overlaps. Second, this approach has doctrinal flaws, reflecting a fundamental misunderstanding of the corporate law theory. Under the corporate governance models, shareholders and creditors have distinct legal and economic statuses as shareholders are treated as ‘residual claimants’ and, therefore, are given the role of political participation in the company’s running and as members of the corporation. In contrast, creditors are merely ‘outsiders’ with fixed claims and contractual or private law remedies.[21] This blurring of the difference between the two categories promotes the ‘stakeholder’ approach, which contradicts the jurisprudential position of Pakistani courts of following the ‘shareholder’ primacy theory. This approach fails to consider that while creditors have alternate contractual protection and collateral remedies, minority shareholders cannot pre-negotiate their terms, lack bargaining power, and are often exposed to greater risk of abuse, including tunnelling and third-party transactions. Therefore, by giving the same oppression remedy to creditors and minority shareholders, Section 286 contradicts the fundamental rationale for minority protection laws and thus weakens the investors’ trust in equity markets.

  1. Locus Standi- The 10% Requirement

Secondly, unlike UK’s Section 994, Pakistan’s Section 286 sets a locus-standi quantum of 10%. Although the Companies Act 2017 lowered it from the original 20%, it is still an unreasonably high maintainability standard for petitions. As evident in Section 286’s jurisprudence, the point of contention shifts from the facts of the case to meeting this quantum. In Waterproof Industries ltd v NP Spinning Mills Limited,[22] the Sindh High court justified the threshold on the grounds of operational stability of corporations.

While it is designed to mitigate frivolous or excessive litigation, it serves as an exclusionary restriction that contradicts the primary function of minority protection frameworks. Particularly, in Pakistan’s commercial landscape, where most ownership structures in corporations are highly concentrated and often dominated by family members, minority shareholders usually constitute a smaller numerical strength as they meet the individual required shareholding.[23] Therefore, instead of viewing shareholders as political participants entitled to protection irrespective of their economic interests, it undermines the theoretical foundations of corporate governance. This rule disfranchises minority shareholders who fail to meet this criteria. It thus treats the shareholder’s right as a privilege that can only be availed by those powerful enough to reach the numerical threshold in the company.

Secondly, it creates economic disincentives for the prospective investors. This is because the minimum quantum requirement discourages broad-based equity participation, including retail investors, small institutional investors, and minority shareholders, resulting in lower investor confidence. It promotes the illusion that rights are not enforceable in the capital market. This shifts the investor’s focus from equity markets to informal finance and short-term return options, resulting in underinvestment and thus adversely impacting Pakistan’s equity markets.

  1. Public Interest as a Ground for Intervention

In addition to the grounds listed in the UK’s S.994, under Pakistan’s S. 268, the petition can also be filed if the conduct is presumed to be prejudicial to the company’s public interest.. This divergence from Section 994 is unnecessary and ambiguous, as reflected in the jurisprudential analysis of the meaning of ‘public interest’. In Shahbazuddin Chaudhry v. Service Industries Textile Limited,[24] the court recognised undermining the public interest as a ground; however, the decision and the statute do not define what constitutes public interest. However, in this case, Justice Ramday indicated that public interest could be viewed from an Islamic lens under the Objectives Resolution or Article 2-A of Pakistan.

Constitution’s Article 2-A lays the framework for all laws to align with Islamic principles, which can be construed as Pakistan’s ‘public interest’. In contrast, Article 227 mandates that if any law violates Islamic principles, it will be declared ultra vires. Without any further clarity on its interpretation, it can be argued that since public interest is to be viewed from an Islamic perspective, the 10% minimum requirements violate the Islamic principles, as the Islamic law’s foundations are based on equality. The 10 % threshold creates discrimination between the powerful and vulnerable members within the corporation, and therefore, the provision ought to be struck down as per Article 227 of the Constitution. Consequently, instead of harmonising corporate law with constitutional values, this approach creates interpretive uncertainty.[25]

  1. The Doctrinal Limits of Oppression and Mismanagement

In interpreting the scope of the oppression remedy, the Pakistani courts heavily rely on archaic English common law principles. From the jurisprudential analysis of Section 286, three contentions are highlighted: the narrow scope of the word oppression, mismanagement is not treated as an independent ground for relief, and the courts tend to protect the stability of the company instead of fulfilling the core intention of upholding minority shareholder rights.

Firstly, the word ‘oppression’ does not have a consistent or precise meaning. Courts, in the Nadeem Kiani v Messrs American Lycetuff(PVT)[26]and Najamuddin Zia v Mst. Asma Qamar,[27] interpret it in the following manner:

“visible departure from the standard of fair dealing” and “unfair treatment to minority shareholders by those who control the corporation or the company”.

However, in many instances, the courts have clarified the conduct that does not amount to oppression. This includes mere allegations, breakdown of trust between parties, or mismanagement. It reflects a restrictive approach in interpretation of oppressive conduct. In contrast, the English common law interprets the terms ‘unfairness’ and ‘prejudicial’ through common sense and an objective meaning; however, they have also established the doctrine of ‘legitimate expectations’, which serves as a broader ground for minority shareholder claims. This principle, developed in the O’Neil v Phillips, can be categorised as a legal innovation. Still, it allows courts to intervene in cases where a minority member is unfairly excluded from decision-making or denied participation implied by the parties’ dealings. Although the Pakistani judges consistently use O’Neil v Phillips as persuasive precedent, they fail to strike a similar balance between fairness and frivolous litigation.

The jurisprudential examination of Section 286 reflects that instead of upholding minority protection rights, the Pakistani courts seek to promote corporate stability. For example, in Dr. Muhammad Imran Qureshi v Muhammad Asif,[28] the Sindh High Court held that the intention of S. 286 is not to be applied as an alternative to a winding up order, but rather as a substitute for the court to avoid the winding up of the corporation. Similarly, Asif Manan v Suleiman Lelani[29] the court held:

“it would not be appropriate to keep the company hostage on the whims and desires of the Plaintiffs.” (emphasis added)

This excerpt from the judgment indicates that the courts are strictly reluctant to accept claims under Section 286 and are inclined to favour majority shareholders and errant directors, undermining the core conception of corporate governance, enabling the majority wrong doers to evade accountability. This line of reasoning highlights judicial bias towards preserving managerial autonomy over minority protection. It, thus, underscores the broader apparent tension between legal remedies and judicial conservatism.

  1. Common Law Derivative Claims

Other than personal action remedies under S.286 and S.268, there exists a theoretical possibility of common law derivative claims. However, there has been no successful precedent to date.

In Asif Manan v Suleiman Lilani,[30] the Sindh High Court acknowledged that the application of the famous Foss v Harbottle exception remains unclear in Pakistan:

“So in all fairness, whether this rule is to be followed strictly by this court is unclear and remains debatable.”

However, in Sakina Khatun v Ahsan Nazir Ahsan[31], the court recognised and highlighted four principles for a successful derivative claim. These circumstances included that the company must be controlled by the majority shareholders who are abusing their authority; (2) this abuse of power must be exercised to defraud the company; (3) the company must be unable to file a claim because of the majority shareholder’s control; (4) the company must be impleaded in the derivative action. However, the court did not elaborate on these circumstances since the suit filed was not a derivative action.

Similarly, in Golden Arrow Selected Stock Funds LTD v Clariant Pakistan LTD,[32]Justice Munib Akhtar held that the derivative claim in Pakistan is a ‘judicially evolved rule’. He further maintained that for a successful claim, the three requirements must be met, including (1) a prima facie case, (2) a balance of convenience, and (3) an irreplaceable loss or injury must be proved. In the aforementioned case, the claimant could not prove loss, so the petition was dismissed.

It is imperative to note that various judgements consistently cite the Prudential Assurance Co Ltd v Newman Industries[33] to establish that in derivative actions, the loss is incurred by the company. Therefore, it is not the personal loss of the shareholder. Shares purchased by members merely entitle them to the right of participation as entailed in the corporation’s articles of association. Therefore, while ruling against the principle of double recovery, courts still uphold the equitable principles of justice, i.e., the members have the authority to file a claim as they prosecute on behalf of the company “in the interest of justice.” Therefore, despite the theoretical recognition of derivative claims through the fraud exception to the rule in Foss v. Harbottle, the absence of statutory codification in Pakistan renders them illusory.

While the theoretical foundation of corporate governance theories mandates the protection of minority shareholders as they are to be viewed as empowered participants, Pakistan’s framework fails to address the grievances of minority shareholders. Drawing on comparative analysis, the subsequent section will examine how context-driven reforms can be enforced in Pakistan.

Section 3: Recommendations

This section is primarily based on Martin Gelter’s application of the Anna Karenina principle to shareholder litigation. Henceforth, the legislature must address interdependent systematic issues that make enforcing the shareholder protection framework difficult. Gelter introduced a model for shareholder litigation with four key prerequisites: permissive standing rules, balanced litigation cost allocation, adequate access to information, and a functional enforcement mechanism.[34] Failure or absence of each salient feature would render the entire framework ineffective. Therefore, the regulatory reforms should not be viewed as separate measures but as part of a coherent and collective framework, addressing the socio-economic needs of Pakistan’s corporate environment. [35]

It is essential to highlight that although the recommendations proposed are based on cross-jurisdictional analysis of Pakistan with the UK, Singapore, India, and Japan, they must be viewed in the context of the convergence and path dependency theories in corporate governance. While convergence theorists like Hansmann and Kraakman support the global acceptance of the shareholder-oriented approach,[36] path dependency theorists, including Roe, argue against it on grounds that each region’s history, legal culture, political structures, and ownership dynamics shape corporate governance frameworks.[37] As examined in this paper, path dependency features, including family-owned companies, weak regulatory framework, and limited judicial capacity, make direct transplantation of global models highly unsuitable and ineffective. Therefore, reforms should not solely be grounded in the Anglo-American model. However, they should be institutionalised and contextually adapted to address Pakistan’s socio-economic realities.

 3.1: Establishment of Specialized Tribunals

To strengthen its minority shareholder protection framework and mitigate the increasing judicial backlog, Pakistan can establish specialised Company Law Tribunals. Pakistan’s judicial framework currently consists of generalist civil benches within the High Courts, responsible for addressing technical company law disputes, which has led to significant procedural delays and an inconsistent jurisprudential approach. It has also limited and slowed down the jurisprudential development of corporate law. In comparison, India’s company law amendments of 2013 illustrate that legal infrastructure leads to an effective corporate regime to ensure investor protection. In 2013, India established the National Company Law Tribunal (NCLT), which consolidates the functions of different corporate regulators and adjudicators into a single specialised tribunal. Its jurisdiction covers wide-ranging company law issues including winding up, oppression claims, delistings, and mergers.[38] Its institutional structure mirrors the recommendations of the Pakistan SECP company commission as it embodies a pluralist structure that includes a president and judicial members who are often experts with specialised knowledge in accounting, company law, and corporate finance. This pluralistic structure reduces the excessive judicial discretion exercised by Pakistan’s sole company judge. Similarly, the United States has established specialized corporate courts such as‘ Delaware’s Chancery court’ and its success reflects that such tribunals are better equipped to handle complex corporate issues. [39]

Pakistan can initiate institutional reforms in two phases to reform its judicial approach. In the first phase, it can pilot specialised corporate benches within each high court in Karachi, Islamabad, Peshawar, and Quetta. Unlike the existing institutional framework, the specialised benches recruit judges with specialised financial and corporate law skills. Gradually, depending on this model’s performance and case management system, statutory amendments can be introduced to establish specialised Company Law tribunals similar to India’s NCLT. The introduction of NCLT-like tribunals can address various corporate governance issues in Pakistan. Firstly, it could address the lack of specialist expertise in the current judicial framework. Secondly, it would remove the excessive burden, backlog, and unnecessary delays in shareholder litigation. As a result, it would promote the development of company law jurisprudence in the country and create an efficient corporate governance regime, attracting investors.[40] Lastly, this is also in line with Pakistan’s existing judicial mechanism, since the country already has specialised tribunals for banking, taxation, labour, environmental, and insurance laws.[41]

3.2: Codification of Derivative Action

The jurisprudential analysis reveals that Pakistani courts recognise common law derivative claims under the Foss v. Harbottle principles. However, the absence of a statutory remedy limits it to a mere theoretical possibility. To align its minority shareholder protection framework with the global standards, Pakistan should introduce statutory derivative claims. Justice Yousaf Ali Sayed of the Sindh High Court, reflecting the judiciary’s stance on the issue, suggested that Pakistan must follow the UK’s statutory framework for derivative action.[42] Pakistan inherited and transplanted the UK’s corporate governance framework; however, unlike the UK, it did not align its framework with the global trends. UK’s Sections 260-269 (part 11 of CA 2006) replaced the common law derivative actions and thus consolidated the fragmented common law principles into a statutory framework. The UK’s framework limits the possibility of frivolous claims through the two-stage judicial permission to ensure that only genuine, good-faith claims are accepted.

Similarly, comparative support for codifying derivative claims can also be drawn from Singapore’s Section 216-A of the Companies Act 1993. Unlike the UK’s, Singapore’s ownership structure is similar to Pakistan’s, as family members dominate the ownership. Subject to good faith and prima facie requirements, the framework allows shareholders, irrespective of their holding in a company, to apply for leave to file a derivative action. One of the significant criticisms of statutory derivative claims is the supposed floodgates argument. Despite being one of the first common law jurisdictions in Asia to introduce statutory derivative actions, empirical studies on Singapore illustrate against such claims and hold that it has improved investor protection and confidence. [43] This suggests that the presence of statutory remedy may encourage managers and directors to avoid litigation by resolving the disputes internally.

Furthermore, Pakistan can adopt some features of China’s Company Law amendments of 2005 to address the risks of frivolous litigation. While Articles 151 and 152 of the Act allow derivative actions, their access is limited to shareholders having at least 1% for a specific period. Professor Hui Huang’s research indicates that the majority of the derivative actions are filed by shareholders of private corporations in China.[44] This proves that derivative action acts as a shield for the most vulnerable group – minority members of closed corporations or private limited companies.

The Chinese experience has revealed that the codification process has positively addressed corporate misconduct, especially in the context of state and insider control. This is particularly relevant for Pakistan for two reasons. Firstly, Pakistan and China both have an IPO system, where state-owned companies like PIA and Steel Mills can offer shares to the general public, creating the risk of the state dominating the decision-making process, effectively excluding minority shareholders. Secondly, besides CPEC and joint economic projects, data shows that Chinese investors contribute approximately 40% to the Pakistan Stock Exchange.[45] Therefore, a consistent legal framework might be suitable and produce similar results.

However, for the statutory derivative reforms to succeed, codifying directors’ fiduciary duties is equally important. Currently, there is limited jurisprudence on SECP’s Section 204, which outlines  some broad duties. Thus, it is reasonable to assume that courts will only discuss directors duties once derivative actions are given a statutory status. Like the UK’s sections 171-177 of the CA 2006, Pakistan must also codify directors’ duties to provide the courts with a uniform benchmark against which they can evaluate the directors’ conduct in each case. [46]

3.3: Lower or waive the 10% threshold

Perhaps the most potent (and obvious) reform in Pakistan’s corporate governance regime should be lowering or removing the 10% threshold under S.268 of the Companies Act 2017. Although the Companies ordinance lowered this quantum from 20% to 10%, the socio-economic implications of this requirement prove that it still makes the minority shareholder framework exclusionary and performative. Pakistani courts in various judgements have justified this procedural barrier to avoid excessive shareholder litigation. However, comparative analysis from jurisdictions like Japan, Germany, and India highly supports this reform. Germany and Japan, in particular, are among the jurisdictions with the most progressive thresholds. In 2005, Germany’s UMAG reforms of the Aktiengesetz (corporate law) reduced the holding requirement from 5% to 1%. Section 147 allows members holding 1 % of the share capital or shares worth 100,000 Euros to file derivative claims.[47] Similarly, Japan does not have any minimum share threshold and allows any single shareholder to file derivative action, however in order to reduce the possibility of frivolous claims, it introduced a condition that the petitioners must hold the shares for a minimum of 6 months. This reflects that, through a systematic framework, lower thresholds do not lead to frivolous or excessive shareholder litigation. [48]

However, in Pakistan’s context, India’s framework might be the most suitable. Instead of waiving the threshold requirement completely, Section 244(1) of the Companies Act 2013 empowers the NCLT to waive the statutory 10% quantum.[49] This flexibility allows the tribunals to balance litigation with fairness. In Pakistan’s context, such an approach would enable the judges to hear proceedings on their merit, even if the petitioners do not meet the required criteria and therefore contribute to minority shareholder protection.

3.4: Institutionalize Alternative Dispute Resolution (ADRs) Mechanism

There is a global trend towards promoting alternative dispute resolution frameworks, specifically for shareholder disputes. Considering Pakistan’s judicial backlog of cases, it is imperative to consider such mechanisms to resolve conflicts through mediation.[50] It is proven that shareholder litigation, especially in Pakistan’s commercial environment, specially when family-run corporations are involved, is often lengthy, expensive, and damaging both commercial and familial relationships. Comparative jurisdictional approaches – specifically in the Asian context reflect the broader cultural preference for non-confrontational dispute resolution.[51] For example, the Singapore International Mediation Centre (SIMC) and the State Courts Centre for Dispute Resolution, with a 75% resolution rate, have successfully reduced the burden on the judiciary as they handle relationship-sensitive, personal and often complicated shareholder disputes. [52]

Similarly, Japanese shareholder disputes are usually resolved through “chotei” i.e court-led pre-litigation reconciliation proceedings. Additionally, the majority of derivative actions of the 1990s were resolved through mediation rather than litigation. However, it is essential to note that for a successful mechanism, ADRs should not be seen as a secondary option to litigation, but rather as a preferable first course of action.[53] The lessons from these jurisdictions show that introducing ADR did not require radical cultural restructuring, but merely institutionalised the existing non-confrontational resolution approaches in Asian communities.

Transitioning towards ADR is useful in Pakistan’s context as the corporate environment mainly consists of large family-owned companies where conflicts over share valuation, mismanagement and dividend rights have legal and personal implications for shareholders. In such circumstances, lengthy and costly court proceedings deprive the members of speedy remedies and accelerate tensions, which might lead to a successful corporation’s dissolution or winding up. Moreover, despite resolution and mediation, recent judicial preference for arbitration indicates the judiciary’s ‘pro-enforcement bias’ to promote ADRS as a preferred alternative to court proceedings. Justice Mansoor Ali Shah, in particular, has been a vocal supporter of the ADRs mechanism to reduce judicial backlog and improve small shareholders’ access to justice. In Commissioner Inland Revenue v RYK Mills Ltd,[54] the court encouraged the shareholders to resolve their dispute through mediation.

Practically, this can be achieved in a two-stage reform process. Currently, Section 89-A of the CPC provides parties with the option to resolve their disputes through mediation or ADR methods. Firstly, Civil Procedure Code 1908 and Companies Act 2017 can be amended to mandate parties to pre-litigation mediation. Secondly, the SECP should introduce model ADR clauses and encourage companies to incorporate these in shareholder agreements and articles of association. However, these clauses should be culturally sensitive and therefore not rigid, allowing parties to opt for mediation or arbitration. Thus, introducing a formal ADR mechanism can help reduce judicial burden and align Pakistan’s commercial regime with the global corporate governance codes.

 3.5: Broaden the scope of Oppression and Mismanagement under S. 286

As discussed in Section 2, Pakistan’s jurisprudence on S. 286 streamlines a narrow and limited scope for ‘oppression’, whereas mismanagement is not recognised as an independent ground for relief. Therefore, the legislature needs to reconsider the scope of S. 286 of the Companies Act 2017. The United Kingdom reformed its framework by introducing a broader unfair prejudicial criteria under S. 994 of the Companies Act 2006. In Re Guidezone Ltd,[55] the court allowed a claim where the petitioner was excluded from management in a wrongful manner, which reflects the judicial position of considering broader social implications in determining conduct as unfair. Similarly, under Sections 241 and 242 of the CA 2013, India has also adopted an expansive interpretation of oppression and mismanagement matters. In V.S. Krishnan v Westfort Hi-Tech Hospital Ltd,[56] a case often cited in Pakistan case law, the Indian Supreme Court held exclusion from management in a family-owned company to be treated as oppression.

In contrast, the Pakistani judiciary’s conservatism in dealing with oppression and mismanagement claims makes access to justice difficult for minority shareholders. Therefore, necessary legislative amendments must be introduced to address these issues. Firstly, a wider and inclusive principle should replace the term ‘oppression’. Secondly, exclusion from management mismanagement, which may include inefficient conduct, violation of fiduciary duties or misgovernance, must be recognised as an independent ground for action.

Conclusion

In conclusion, Pakistan needs to move beyond the narrow and traditional conception of a company as a purely economic entity owned and controlled by the dominant majority.  The corporation, instead, should be viewed as an institution where members, irrespective of their financial contribution, have enforceable participatory rights. Hence, recognising minority shareholders as empowered decision makers instead of economic actors is the first step towards a robust minority protection framework. Effective reform necessitates employing Gelter’s ‘get it right’ approach to holistically mitigate structural and procedural enforcement issues. Thus, to align with Pakistan’s socio-economic context, the proposed reforms must incorporate the country’s core path dependencies, such as weak regulatory control, judicial capacity, and concentrated ownership structure. Pakistan’s corporate governance framework can only transition from formality to function if it reconstructs the company as a democratic institution instead of a private dominion.

Bibliography

       Books

  • Davies P, Introduction to Company Law (3rd edn, Oxford University Press 2020)
  • Koh AK, Shareholder Protection in Close Corporations: Theory, Operation, and Application of Shareholder Withdrawal (Cambridge University Press 2022)
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  • Talbot L, Critical Company Law (2nd edn, Routledge 2016)

Case-Law

UK

  • Foss v Harbottle [1843] 2 Hare 461, 67 ER 189
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  • Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1980] 2 All ER 841
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Pakistan

  • Asif Manan v Suleiman Lalani Sindh High Court, Suit No 579 of 2014, decided in 2020 (unreported)
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  • Dr Muhammad Imran Qureshi v Muhammad Asif [2020] CLD 1060
  • Golden Arrow Selected Stock Funds Ltd v Clariant Pakistan Ltd [2016] PLD Sindh 50
  • Nadeem Kiani v Messrs American Lycetuff (Pvt) Ltd [2021] CLD 7
  • Najamuddin Zia v Mst Asma Qamar [2013] CLD 1263
  • Sakina Khatun v Ahsan Nazir Ahsan [2010] CLD 963
  • Shahbazuddin Chaudhry v Service Industries Textile Ltd [1988] PLD Lahore 1
  • Waterproof Industries Ltd v NP Spinning Mills Ltd [2023] CLD 33 (Sindh High Court)

Journal Articles and Working Papers

Newspaper Articles

Reports

Unpublished Works

  • Hamid SS, ‘Judicial Attitudes Towards Shareholder Protection Laws in Pakistan and UK: A Critical Analysis of the Jurisprudence Developed by the Courts’ (unpublished)
  • Sayeed YA, ‘Reflective Loss and the Derivative Actions in Company Matters’ (SECP Symposium on Corporate Supervision and Regulatory Actions, 2025) https://www.facebook.com/watch/?v=268102819229229

Statutes and Legal Definitions

[1] Merriam-Webster, Minority Shareholder, Legal Dictionary https://www.merriam-webster.com/legal/minority%20shareholder.

[2] Lorraine Talbot and Andreas Kokkinis, Great Debates in Company Law (2nd edn, Hart Publishing 2024) ch 1.

[3] Rafael La Porta and others, ‘Investor Protection and Corporate Valuation’ (2002) 57 Journal of Finance 1147.

[4] Ali Cheema, Faisal Bari and Osama Siddique, ‘Corporate Governance in Pakistan: Ownership, Control and the Law’ in Farooq Sobhan and Wendy Werner (eds), A Comparative Analysis of Corporate Governance in South Asia: Charting a Roadmap for Bangladesh (2003) 177. http://www.lprn.org.pk/wp-content/uploads/2015/07/2003-bei-charting_a_roadmap_for_bangladesh.pdf.

[5] Talbot and Kokkinis (n 2).

[6] Fatima Wahla, ‘Theory and Practice of Corporate Governance: An Analysis of the Agency Problems in Pakistan’ (Shaikh Ahmad Hassan School of Law, LUMS, 2022) https://sahsol.lums.edu.pk/news/theory-and-practice-corporate-governance-analysis-agency-problems-pakistan; Shanthy Rachagan, ‘Agency Costs in Controlled Companies’ (December 2006) Singapore Journal of Legal Studies 264 https://www.jstor.org/stable/24869080.

[7] Talbot and Kokkinis (n 2), ch 2.

[8] [1843] 2 Hare 461, 67 ER 189.

[9] [1897] AC 22.

[10] Lorraine Talbot, Critical Company Law (2nd edn, Routledge 2016) ch 2.

[11] William W Bratton, ‘Berle and Means Reconsidered at the Century’s Turn’ (2001) 26 Journal of Corporation Law 737 https://scholarship.law.upenn.edu/faculty_scholarship/1025.

[12] E Merrick Dodd Jr, ‘For Whom Are Corporate Managers Trustees?’ (1932) 45 Harvard Law Review 1145 https://www.jstor.org/stable/1331697.

[13]UK Companies Act 2006.

[14] [1999] UKHL 24.

[15] 1 BCLC 14.

[16] Lorraine Talbot, Critical Company Law (2nd edn, Routledge 2016) ch 7.

[17] World Bank, Corporate Governance Country Assessment: Pakistan (March 2019) https://documents1.worldbank.org/curated/en/266041553594662038/pdf/Corporate-Governance-Country-Assessment-Pakistan.pdf.

[18] Sheharyar Sikander Hamid, ‘Judicial Attitudes Towards Shareholder Protection Laws in Pakistan and UK: A Critical Analysis of the Jurisprudence Developed by the Courts’ (unpublished).

[19] Companies Act 2017 (Pakistan), s 286.

[20] Khurram Parvez Raja, ‘The Statutory Unfair Prejudice Remedy for Minority Shareholder Protection in Pakistan: Difficulties of Section 290 of the Companies Ordinance 1984’ (2013) 20 Journal of Financial Crime 67. .67 https://heinonline.org.

[21] Jill E Fisch, ‘Measuring Efficiency in Corporate Law: The Role of Shareholder Primacy’ (2006) 31 Journal of Corporation Law 637 https://ssrn.com/abstract=878391.

[22] 2023 C L D 33.

[23]Beenish Ameer, ‘Corporate Governance – Issues and Challenges in Pakistan’ (2013) 3(4) International Journal of Academic Research in Business and Social Sciences.

[24] PLD 1988 Lahore 1.

[25] Raja (n 17).

[26]2021 CLD 7.

[27] 2013 CLD 1263.

[28] 2020 CLD 1060.

[29] Sindh High Court, Suit No 579 of 2014, 2020 (unreported) [6].

[30]Sindh High Court, Suit No 579 of 2014, 2020 (unreported) [6].

[31]2010 CLD 963.

[32] PLD 2016 Sindh 50.

[33] [1980] 2 All ER 841.

[34]Martin Gelter, ‘Why Do Shareholder Derivative Suits Remain Rare in Continental Europe?’ (2012) 37(3) Brooklyn Journal of International Law 844, 847 https://brooklynworks.brooklaw.edu/cgi/viewcontent.cgi?article=1097&context=bjil.

[35]Syed Muhammad Humaid Adil, ‘Applying the Anna Karenina Principle to Minority Shareholder Remedies: A Case Study of Pakistan’ (2023) 8 Durham Law Review https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4433121#:~:text=litigation%20by%20Professor%20Martin%20Gelter,Geller%E2%80%99s%20interpretation%20of%20the%20principle.

[36]Andy JY Yeh, Steven Lim and Ed Vos, ‘Path Dependence or Convergence? The Evolution of Corporate Ownership Around the World’ (Reserve Bank of New Zealand; University of Waikato) https://researchcommons.waikato.ac.nz/server/api/core/bitstreams/0d257146-8e04-4ddc-a5ba-44e0225cddad/content

[37]Ibid.

[38]Vikramaditya Khanna and Umakanth Varottil, ‘Regulating Squeeze-Outs in India: A Comparative Perspective’ (2015) 63 American Journal of Comparative Law 1009 https://academic.oup.com/ajcl/article-abstract/63/4/1009/2572132?redirectedFrom=fulltext.

[39] Zohar Goshen and Tomer Stein, ‘Leaving Delaware? The Essential Role of Specialized Corporate Courts’ (2024) Columbia Law and Economics Working Paper No 5200668, European Corporate Governance Institute Law Working Paper No 837/2025 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=5200668.

[40] Knowledge@Wharton, ‘The Value of Protecting Minority Shareholders in the Market’ (Wharton, 19 May 2008) https://knowledge.wharton.upenn.edu/article/the-value-of-protecting-minority-shareholders-in-the-market/.

[41]Pak: Muhammad Ajmal and Dil Muhammad Malik, ‘Compulsory Winding Up of Companies: A Comparative Study of Judicial Forums in India and Pakistan’ (2019) 37(3) Regional Studies https://www.irs.org.pk/journal/4RSAutumn19.pdf.

[42] Yousuf Ali Sayeed, ‘Reflective Loss and the Derivative Actions in Company Matters’ (SECP Symposium on Corporate Supervision and Regulatory Actions, 2025) https://www.facebook.com/watch/?v=268102819229229.

[43]Pearlie Koh Ming Choo, ‘The Statutory Derivative Action in Singapore – A Critical and Comparative Examination’ (2001) 13(1) Bond Law Review art 3 https://scispace.com/pdf/the-statutory-derivative-action-in-singapore-a-critical-and-1orfe19ylv.pdf; an M Ramsay and Benjamin B Saunders, Litigation by Shareholders and Directors: An Empirical Study of the Statutory Derivative Action (Research Report, Centre for Corporate Law and Securities Regulation, University of Melbourne, 2006) https://law.unimelb.edu.au/__data/assets/pdf_file/0006/1723218/9-Statutory_Derivative_Action_Research_Report__15_03_06_21.pdf.

[44]Hui Huang, ‘Shareholder Derivative Litigation in China: Empirical Findings and Comparative Analysis’ (2012) 27 Banking and Finance Law Review 619 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2140613.

[45] Dilawar Hussain, ‘PSX Sells 40pc Stake to Chinese Consortium’ Dawn (Karachi, 23 December 2016) https://www.dawn.com/news/1304006.

[46] Wasif Hassan, ‘Minority Shareholder Protection under the Corporate Governance Regime of Pakistan’ (SSRN, 2022) https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4138864.

[47]Alan K Koh, Shareholder Protection in Close Corporations: Theory, Operation, and Application of Shareholder Withdrawal (Cambridge University Press 2022) ch 4; Martin Gelter, Preliminary Procedures in Shareholder Derivative Litigation: A Beneficial Legal Transplant? (ECGI Working Paper Series in Law No 625/2022, February 2022) https://www.ecgi.global/sites/default/files/working_papers/documents/gelterfinal_4.pdf.

[48]Alan K Koh, Shareholder Protection in Close Corporations: Theory, Operation, and Application of Shareholder Withdrawal (Cambridge University Press 2022) ch 7.

[49]Garima Bothra, ‘Arbitrability of Derivative Action Claims’ (2022) 4 Indian Journal of Law and Legal Research 1.

[50]Basil Nabi Malik, ‘Clearing the Backlog’ Dawn (Karachi, 22 January 2022) https://www.dawn.com/news/1670860.

[51]The Rise of Arbitration in the Asia-Pacific Region’ The Asia-Pacific Arbitration Review 2026 (Global Arbitration Review, 2026)https://globalarbitrationreview.com/review/the-asia-pacific-arbitration-review/2026/article/the-rise-of-arbitration-in-the-asia-pacific-region.

[52]Singapore International Mediation Centre, ‘The Mediation Conundrum’ (SIMC, 23 August 2021) https://simc.com.sg/insights/mediation-conundrum; Singapore Judiciary, ‘Singapore International Commercial Court Launches Mediation-Friendly Protocol with Singapore International Mediation Centre to Advance Singapore as Asian Hub for Dispute Resolution’ (12 January 2023) https://www.judiciary.gov.sg/news-and-resources/news/news-details/joint-media-release-singapore-international-commercial-court-launches-mediation-friendly-protocol-with-singapore-international-mediation-centre-to-advance-singapore-as-asian-hub-for-dispute-resolution,

[53]Koh (n 39) ch 7.

[54] [2023] SCMR 1856.

[55] [2000]2 BCLC 321.

[56] (2008) 3 SCC 363.

Author: Hajra Tiwana

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