ISLAMABAD, June 4: The shareholders who intend to contest election for a company's board of directors cannot be deprived of their rights in this regard just on technical grounds, the Securities and Exchange Commission of Pakistan has ruled.

It was not in good taste to disqualify "brethren members" who have undisputed shareholding on such technical ground as that they had quoted wrong section of the Companies Ordinance, remarked SECP Commissioner Abdul Rehman Qureshi on a complaint filed by legal heirs of late General (Retd) Habib Ullah Khattak.

In their complaint, Lt. General (Retd) Ali Kuli Khan Khattak, Mr. Ahmed Kuli Khan Khattak, Mr. K.V. Rehman and Mr. Jamil Ahmed Shah, had alleged that M/s Gammon Pakistan Limited, a listed company, had denied voting rights to their group in the election of the board of directors held on Dec 31, 2001.

As a result, not a single director from their group was taken on the Board despite the fact that they owned approximately 14 per cent shares of the company. The reason given by the management for rejection of their notices was that these were filed under sub-section (1) of section 184 of the Ordinance instead of sub-section (3) of section 178.

A show cause notice under section 186 read with section 476 of the Ordinance was, therefore, issued to all the directors including the Secretary of the Company. The company, while justifying the rejection of notices, said that the complainants had filed their notices under section 184, which was relevant for nomination/appointment of directors, while elections are held under section 178.

This indicated that their interest was in nomination/appointment as a director but not to contest election of directors, the council contended. In order to provide an opportunity of hearing, the case initially fixed for hearing on February 24, 2004.

No hearing could be held because of inability of the company's counsel to appear on the appointed date. Several dates passed without hearing because of non-appearance by the respondents.

The first hearing took place on May 11, 2004, when the company's counsel was asked to provide any ruling in support of his contention that such notices were rejected on the basis of wrong reference.

In his Order, the SECP Commissioner said reference to a wrong section was totally immaterial as the candidates were not existing directors of the company and they had expressed their intention to contest election in response to the notice of general meeting wherein election of directors was to be held after three years.

The principle of majority rule, Qureshi observed, "is no doubt time-honoured and democratic," but a frustrated minority shareholder could take recourse to law for remedy. But if unfair and wrong acts and decisions were condoned the minority would be prejudiced and in a company "locked in".

Such a situation must be avoided particularly in a listed company, he said. Instead, the shareholders having a stake in a company should have been encouraged rather being deprived by rejection of their bid for election on technical grounds.

"It is true that the principle of majority rule is generally followed in corporate matters, yet it is of utmost importance that the rights of minority shareholders are protected so that they do not feel deprived of their legitimate rights," he added.

The SECP Commissioner, however, observed that the rejection of notices to contest election falls within the purview of High Court as provided under section 179 of the Companies Ordinance.

He further noted that the last election of the company's directors was held on Dec 31, 2001 for three years and, therefore, a considerable period of time had already elapsed. "At this point of view, it does not appear to be appropriate to interfere in the matter when the next election is due only after seven months.

This was the second complaint filed by the legal heirs of late Gen. Habibullah Khattak. In the earlier case, the SECP had got transferred 288,241 shares in their names.