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Three individuals - Madhu Kapur, widow of YES Bank co-founder Ashok Kapur, SKS Microfinance founder Vikram Akula, and Vikram Bakshi, former McDonald's India's former managing director (North and East India) - have, in some sense, one thing in common. They are fighting incumbent managements (Bakshi is also the joint venture partner) even though the circumstances of their legal battles are different.
In the YES Bank case, the board is fighting it out with the family of the bank's co-founder, the late Ashok Kapur, over granting a seat to Kapur's daughter. The Kapur family holds a 12 per cent stake in the private bank.
Microfinance entrepreneur Vikram Akula, the founder of SKS Microfinance, wants to make a comeback to the board, riding on the original promoter SKS Trust Advisors' 12.6 per cent stake in the venture.
Vikram Bakshi and McDonald's India - equal partners - are sparring it out at the Company Law Board where the former has contested his ouster from the managing director position in the joint venture, Connaught Plaza Restaurants.
So, under what conditions can the management of a company deny a board position to a shareholder?
Mehul Modi, senior director at Deloitte Touche Tohmatsu India Private Limited, says according to the companies law - both under previous 1956 Act and the current 2013 Act - the board of a company is under no obligation to give a board representation to a minority shareholder. Experts say the company law does not provide any specific privilege to any shareholder irrespective of their shareholding.
"It is well within the power of the management to refuse a position on the board of directors to a group of shareholders (who do not have sufficient voting rights to ensure a directorial position) and such rights have not been recognised in the old or the new Act," says Debanjan Mandal, partner, Fox & Mandal.
Articles of Association holds the key
Corporate lawyers point out that for management of company, the Articles of Association of the company is the reference point. "If the Articles of Association of a company does not specify giving such right to a shareholder, the management can deny the same," says Modi. In other words, in this case, no shareholder can claim a board representation where the majority shareholders in the company are opposed to the idea.
If the shareholders' agreement has a clause for board representation for a shareholder, it has to be included in the Articles of Association to be effective.
For instance, Madhu Kapur and her family have cited the Articles of Association of the bank while demanding the right to nominate a director on the board.
However, the management of a company can deny directorship to a minority shareholder citing the fit-and- proper guideline. YES Bank's board has exercised this clause while denying Kapur's daughter a position on the board.
Even when a minority shareholder is found fit-and-proper to hold a board position, the resolution has to be passed by the board. This decision, then, needs to be ratified through a general meeting. However, the company law does give a shareholder who holds a 10 per cent stake the right to call an extraordinary general meeting. By convention, such a shareholder also gets a board seat, point out legal experts.
According to Rajat Sethi, partner, S&R Associates, a Delhi-based corporate law firm, as a general matter, the shareholders would have the power to appoint directors at a general meeting by an ordinary resolution (that is, with greater than 50 per cent vote). However, inclusion of any such right - the power to nominate directors - to a particular shareholder in the Articles of Association will require a special resolution (that is, 75 per cent votes), he adds.
Legal experts point out that "fit and proper" criterion can vary from sector to sector. In sectors such as telecom, there would be additional requirements for a certain number of directors to be Indian.
Sethi points out that a significant minority shareholder - one who holds less than 50 per cent of the shares - and who does not have the power to nominate directors under the Articles of Association of the company may not be able to procure a board position unless such a shareholder is able to obtain a greater than 50 per cent vote at a shareholders' meeting in support of the shareholder's nominee director.
Departures between the 1956 Act and the 2013 Act
For enforcing legal rights as a shareholder, the minority shareholder has the right to approach the Company Law Board under the 1956 Act. However, under the new 2013 Act, this task has been taken over by the National Company Law Tribunal (NCLT), a single window clearance for liquidation, amalgamation, restructuring, strengthening the rights of minority shareholders and addressing shareholder grievances.
Another departure from the previous Act is the role of the nomination and remuneration committee in the board that decides on the qualifications of the director and provides inputs into that process. This has now been institutionalised in the new Act, says Sai Venkateshwaran, partner and head - accounting advisory services at KPMG India.
Also, the Companies Act 2013 permits a listed company to have a representative of small shareholders on the board, although this is not a mandatory appointment. The new Act empowers the NCLT to appoint such directors as it deems fit, on an application made by such shareholders' groups. These directors will be reporting to the tribunal directly.
Clearly, Kapur, Akula and Bakshi could have a long-drawn battle on their hands.
