The shareholders of a company have the power to appoint and remove directors, subject to compliance with the provisions of the Companies Act, 2013 (the Companies Act). If the articles of association of a company provide for the same, the board can also appoint any person as an additional director, alternate director or nominee director. An additional director holds office up to the date of the next annual general meeting or the last date on which the annual general meeting should have been held, whichever is earlier, and their reappointment is considered by the shareholders in the general meeting.
The shareholders have the power to remove a director by a simple majority vote, after giving the director concerned an opportunity of being heard. However, shareholders cannot remove a director appointed by the National Company Law Tribunal or the directors appointed by the minority shareholders under the proportional representation mechanism as per the provisions of the Companies Act.
Typically, shareholders do not interfere in the decision making of the board. However, under the Companies Act, the board is required to refer certain important matters to the shareholders for their approval. If the directors’ acts were done in bad faith, or their actions are not in the interest of the company, the shareholders have the power to remove them by following the procedure prescribed under the Companies Act.
What decisions must be reserved to the shareholders? What matters are required to be subject to a non-binding shareholder vote?
The Companies Act provides that certain important decisions must be approved by the shareholders of the company. Some of the decisions that are required to be approved by the shareholders include:
There are no provisions under the Companies Act for non-binding shareholder votes.
Disproportionate voting rights
To what extent are disproportionate voting rights or limits on the exercise of voting rights allowed?
The provisions of the Companies Act and regulations of the Securities and Exchange Board of India (SEBI) permit the issuance of equity shares with disproportionate rights as to voting, dividends etc, subject to an enabling provision for the same in the articles of association.
Private limited and unlisted public companies are permitted to issue equity shares with disproportionate rights as to voting, dividends or otherwise, subject to certain specified conditions, including the following:
The SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 prohibit a listed company from issuance of shares which may confer on any person superior rights as to voting or dividend vis-à-vis the rights of equity shares that are already listed. However, a listed entity with equity shares having superior voting rights issued to its promoters or founders is permitted to issue such further equity shares to its shareholders through a bonus, split or rights issue in accordance with the provisions of the SEBI (Issue of Capital and Disclosure Requirements) Regulations 2018 and the Companies Act.
Shareholders’ meetings and voting
Are there any special requirements for shareholders to participate in general meetings of shareholders or to vote? Can shareholders act by written consent without a meeting? Are virtual meetings of shareholders permitted?
No meeting of shareholders can be validly held unless the minimum quorum prescribed under the Companies Act, or any higher number prescribed under the articles of association of the company, is present. The minimum quorum requirement for private companies is for two members to be present, irrespective of the number of members in the company.
For public companies, the minimum quorum requirements are:
Individual shareholders can attend the general meetings themselves or through a proxy appointed by them (who should be a natural person) to attend and vote at the general meetings. The proxy is not allowed to speak at any such meetings and only has the right to vote by poll. Unless the articles of association of the company permit, a proxy does not have the right to vote if voting is done by a show of hands.
If the shareholder is a body corporate, it can appoint any natural person as its authorised representative to attend and vote at a meeting of the shareholders. Such an authorised representative shall have all the rights of the shareholder, including speaking at the meeting and casting his or her vote on all matters, irrespective of the manner of voting.
For listed companies and companies with more than 200 shareholders, approval of shareholders on certain matters requires the adoption of a postal ballot mechanism or voting through e-voting.
It is mandatory for a listed company or other companies with more than 1,000 shareholders to provide an electronic voting facility to their members for general meetings. A virtual meeting of the shareholders is not permitted under the Companies Act. However, due to the covid-19 pandemic situation, the Ministry of Corporate Affairs has permitted companies to hold their annual general meetings and extraordinary general meetings of the shareholders through video conferencing or other audio-visual means until 30 June 2022.
Shareholders and the board
Are shareholders able to require meetings of shareholders to be convened, resolutions and director nominations to be put to a shareholder vote against the wishes of the board, or the board to circulate statements by dissident shareholders?
Shareholders’ meetings are typically convened by the board. However, shareholders holding 10 per cent or more of the shares can make a requisition to the board to convene an extraordinary general meeting (EGM) and provide the details of the resolutions that they intend to move at such meeting. If, within 21 days of the receipt of such requisition, the board fails to proceed to call an EGM to be held within 45 days from the date of the requisition received from the shareholders, the shareholders may proceed themselves to convene the EGM within a period of three months from the date of the requisition by following the prescribed procedure.
There is no specific provision in the Companies Act that mandates a board to circulate the statements of dissident shareholders to all the shareholders. However, the statements of the dissident shareholders made during the meeting may be recorded in the minutes of that meeting, subject to the consent of the chairperson of that meeting.
Controlling shareholders’ duties
Do controlling shareholders owe duties to the company or to non-controlling shareholders? If so, can an enforcement action be brought against controlling shareholders for breach of these duties?
Decisions that require approval of the shareholders are taken with the consent of the majority shareholders. It is expected that all decisions must be taken in the interest of the company and its stakeholders, and not to benefit only a section of the shareholders at the expense of other shareholders. If the majority shareholders benefit themselves at the expense of the minority shareholders or take such actions that are oppressive to them, the minority shareholders have the right to act against the majority shareholders to protect their interest.
As per the Companies Act, action for oppression and mismanagement can be initiated against the controlling majority by at least 100 shareholders or one-tenth of the total number of shareholders of a company, whichever is less, or shareholders holding at least 10 per cent of the issued share capital of a company.
The Companies Act provides for class actions by the minority shareholders for seeking restraining orders against the company, its directors, auditors or any expert, adviser or consultant for any action taken by them that is ultra vires to the memorandum or articles of the company, or other actions that are prejudicial to the interest of the company and its stakeholders and claim damages or compensation from them.
Can shareholders ever be held responsible for the acts or omissions of the company?
The liability of the shareholders is limited to the extent of their shareholding in the company. Such shareholders will not be held responsible beyond the amount, if any, unpaid on the shares held by them. The shareholders cannot be held personally liable for the acts or omissions of the company. In the case of a company with unlimited liability, the shareholders can be made responsible to the extent of the amount agreed that they would contribute to the assets of the company in the event of its winding up.
