COMPANY LAW FOR A COMMON MAN THE CONCEPT OF CORPORATE DEMOCRACY

The Purpose
I have been in practice of company law for the last fifteen years and have gathered the working and practical knowledge of the same over this period. I want to share it in a series of articles. I want to explain it in a way that a common man can understand. I also hope that this will help the students and business people in a similar way.

Disclaimer
I would also like to make it clear that anything explained here should not be taken as a legal advise and anybody acting upon shall be solely responsible for his actions. Therefore, I caution the readers to take appropriate legal help in specific cases.

Before knowing anything about a subject it helps if we know the history of the subject matter.

Assumptions
Before embarking upon the subject matter I need to declare the assumptions which I would be following.
1. The company or corporate entity discussed is about the Companies as they are in India at present.
2. Whenever there is reference to Democracy or parliament it is about the Indian Democracy and the Parliament of India.

History
The industrial revolution in the England set the foundation for Companies (corporate legal entity separate from its constituents). Large sums of money were needed to finance long term capital requirements of industries and businesses. This money could be contributed by the members of public at large by way of buying shares in the company.

Concept of Limited Liability
That brought in the fundamental of limited liability i.e. once a shareholder has paid fully for the shares agreed to be taken by him then he would not be required to pay anything in the case of winding of the company if the venture failed altogether. This was an improvement over the partnership form of business where the partners were personally liable to discharge the liabilities of the firm if the venture failed. The partners had to honour the debts contracted by the firm from their own resources.

Is the Liability of Directors also Limited?
The position of a Director is of a trusteeship and so long as he acts in good faith he is not personally liable for the losses of the company. However, if he acts negligently and doesn’t exercise prudence he may be personally liable. Also a Directors is personally liable to the creditors of the company if he binds himself by giving personal guarantee for the debts of the company.

Perpetual Succession
A partnership firm is dissolved when one or more partners leave the firms or die. This brings the affairs of the firm to standstill.

A Company has perpetual succession i.e. it is not affected by the death of its directors and members.

The members can elect new directors in place of demised directors and the show continues.

What happens to shares of deceased member
The shares held by a deceased member are transmitted to his legal heirs as per his will. In absence of will, however the legal heirs have to get a succession certificate from the Court of law.

There are two exception to this. One is if the deceased member held the shares jointly with others then the living members shall approach the company with the share certificates and a copy of death certificate and get the name of the deceased member removed from the register of members and share certificates.

Secondly if the deceased member has made nomination for the shares in question the shares are transmited to the nominee on production of a request letter alongwith a copy of death certificate of the deceased member.

Why partly paid shares?
Now a question arises what was the need to have partly paid up shares to start with. If a company implementing a big industrial venture takes a long gestation period of say more than three years the whole of the money is not required at the beginning. However, it would be required in a phased manner over the period of gestation. Issuing partly paid up shares ensures that the company would get the funds as and when required. If a shareholder fails to pay the money when called his shares would be liable to be forfeited. This deterrent acts in favour of the company and makes a shareholder to honour his commitment.

Alternately if a company takes full amount in the beginning it will have surplus money which it would need to deploy fruitfully. If the money invested thus is lost due to one or other reason the venture would be in jeopardy.

Organisation of a company
A company is similar to a democracy. Here the pattern is slightly different from a true democracy so far as voting rights are concerned. In a democracy each citizen has one voting right. Whereas, in a company each share has one vote. Therefore, the majority or minority is decided by not the number of members (shareholders) but the quantum of shares held by him/them.

Decision making process
The decision of a company are taken in the same manner as in a democracy. The votes in favour should be more than the votes against. Even a single vote can turn the events. You may remember that the 13 days Vajpayee Government at the centre fell due to one vote.

Normally the concept of majority vs. minority can be explained as under:

Simple Majority : 51%
A person or a group of persons holding a simple majority can pass ordinary resolutions.
Absolute majority: 76%
A person or a group of persons holding an absolute majority can pass special resolutions. Example of special resolutions is the resolutions which can change the constitution of a company like altering Articles of Association of a company.

Minority 49%
A person or group of persons holding shares between 25% and 49% cannot block any ordinary resolution. However, it can block a special resolution.

Minority 24%
A person or group of persons holding 24% or less shares cannot block any decision of a company unless the resolution required to be passed is with 100% voting.

Policy Framing
In a parliamentary democracy the citizens elect the Members of Parliament or Legislature. The house (parliament or Legislature, as the case may be) when in session makes policy decisions by enacting laws. These enactments are passed with simple majority. Amendments to the Constitution requires passing of acts with specific majority of 2/3 in favour.

Likewise a Board of Directors assembled at a meeting is called Board and collectively make policy decisions by passing resolutions. Board resolutions are required to be passed with simple majority unless specifically required to pass unanimous resolution (all Directors voting in favour of the resolution and none against it).

Conduct of Meetings
The speaker of the House is responsible for conduct the proceedings/ business of the house in an orderly manner. Likewise a Chairman of a company is responsible for the conduct of meetings of the Board and Members.

Here there are some basic differences in Company vs. Parliamentary democracy. The Chairman can also be a Managing Director in a company. Whereas, in a parliamentary democracy there is divorce between the position of a speaker and the Prime Minister. A prime minister cannot be a speaker and vice versa. This is due the fact that both are constitutional positions and require divorce of power.

Management
A member of parliament has no say in the day to day working of the Government. The Prime Minister with his cabinet colleagues and the team of bureaucrats is responsible for the running of the affairs of the Government.

An ordinary director has no say in the day to day affairs of the company. The Managing Director with the team of executive and whole time directors and the senior staff of the company implement the decision of the Board.

Source of Power
A parliament derives it law making power from the Constitution and the Company derives it power from the Memorandum of Association.

A parliament cannot pass an enactment beyond its power (not delegated to it by the Constitution). A company’s Board cannot take a decision to start a business not included in its Memorandum of Association.

A parliament is bound and shall recognise the fundamental and other rights of the citizens while enacting a law so that it is not ultra vires the constitution. Similarly, a Company’s Board has to keep in mind the laws governing the businesses it wants to embark upon. If a particular business needs a specific licence it should acquire that first and then only it can start that business.

Redressal Mechanism
If a law enacted by the parliament is ultra vires the constitution any citizen can approach the High Court of the Supreme Court to get an order for declaring it ultra vires.

Similarly if a company acts ultra vires its Memorandum and Articles of Association and the Laws applicable to it any shareholder can approach a competent court of law to restrain the company and its directors.


Ramanuj Asawa
Company Secretary

In today's tech and knowledge era there is no dearth of capital, ideas and all. The real dificulty a tech guy faces is if he starts a company would he be able to control the company. Most of the time people with finance control the companies. In order to enable a technocrat start a business and control the affairs of a company the law permits certain unusual things. A summary is presented here:

Under The Companies Act , 1956 a company can have two types of share capita:

1. Equity share capital; and
2. Preference share capital.

Further the equity shares can be classified as:

1. equity shares with voting rights ; or
2. with differential rights as to dividend voting or otherwise in accordance with such rules and subject to such conditions as may be prescribed.

Exercising the power conferred under section 86(a)(ii) of the companies Act, 1956 The Ministry of Company Affairs has promulgated the COMPANIES (ISSUE OF SHARE CAPITAL WITH DEFERENTIAL VOTING RIGHTS) RULES, 2001 which govern the issue of equity shares with differential rights as to dividend, voting or otherwise.

These rules are applicable to all companies other than private limited companies. The rules contains certain conditions. A company which fulfills the conditions can issue equity shares with differential rights as to dividend voting or otherwise. These conditions safeguard the interest of the existing shareholders and other stakeholders. The conditions are given in appendix I.

The existing companies other than private limited companies can take advantage of these rules if they fulfill the conditions laid down in the said rules.

By operation of sub-section (2) of section 90 of the Companies Act, 1956, the provisions of sections 85 to 89 are not applicable to a private company, unless it is a subsidiary of a public company (private company simliciter).

Therefore, even a brand new private limited company can have equity shares with differential voting and or/ dividend rights. There is no limit laid down under the law as to the scale of voting or dividend. One type of equity shares say class 'A' equity shares can have 1 vote for each share while class 'B' equity shares can have 10/100/1000 votes for each share. Likewise the dividend can be paid in multiple times on class 'B' equity shares than what is paid to class 'A' equity shares.

This way a person investing lesser amount in equity can control the company and get more dividend as compared to others.

In practical life you would ask why the others would allow one to have equity shares with differential voting and dividend rights. Truly speaking this mechanism is used where a technocrat and a financer forms an alliance. In the today's knowledge economy you cannot put a specific value to the knowledge and experience of the technocrat. As soon as he reveals his plan and concept he becomes valueless. To keep his value and let him have his share in the fortune this provision immensely helps the technocrat. After getting controlling power he can use his knowledge and experience and can safeguarded his interest

This is not the only route to have control of the company. A provision can be made in the articles that Mr. x will be the MD of the company for say ten years or for life or till he voluntarily resigns from office. In private limited company all this is possible. Even in public companies 1/3 of the total directors can be non-retiring (permanent) directors. However, a public company can appoint a Managing Director only for five years at a time. He can be re-appointed for any number of times.

A provision in the articles can be amended by passing of a special resolution. So if your friend holds or controls less than 26% equity shares he would not be able to block such special resolution.

I can show you a situation where one person holding a meager shares even less than 1% can act in a decisive way. Suppose there are two groups each holding say 49.5% each and are not getting together well. If you hold the balance 1% then you can strategically rule the company. The party with whom you sit can rule the company and you can extract the pound of flesh or whatever suits you. This is the gameplan of the politics we see as horsetrading.


Disclaimer: This article is for genral understanding purpose only. Please take action only after ensuring the law of the land and under proper legal guidance.

The other day when I went for evening walk I saw the security guard at the VNIT carrying a 'danda'. I jokingly asked what is the need for 'danda'? He replied that although many people come for walk and peacefully go away there are some miscreants creating scenses and troubles inside the campus and he has to show them danda to scare them away. He looked unhappy with the new situation.

After I walked further I started pondering on the words of the SG and realised that the very existence of a SG depedns on the evil. If there is no fear of any kind why would there be a SG. My chain of thoughts took me further and I realised that many people will be out of their jobs if evil suddenly disappears. There wll be no need for armies, police, arms, ammunitions or even doors and locks. What people will need is just to keep safe from the natural calamities or vagaries of nature.

There are so many viruses and therefore the antiviruses in biological sense as well as the software stuff. But I cannot imagine life without evil. First thing is the virtuous people will suddenly lose their importance. Honesty will no longer will be a virtue as everyone will be honest and truthfull. No one will be greedy and people will not bother to amass wealth. And there would be little cause left in the life except realization of self.

The world will no longer be place of amusement. The life drama needs very much evil as it needs good. A hero is of no use if there is no strong villain in a movie. So to keep the drama of life interesting the god has created good and evil together and gave the man choice. This way the show goes on.

These are just random thoughts. Most of you know it but I thought just to write anyway.