For profit Companies operate in ultra-competitive, lucrative and at times hostile commercial environments, and many such Companies would have similar factors at play from time to time within its power circles i.e. Board of Directors (the Board) and Management/Executive structure, as highlighted by on-going litigation between high profile individuals of a prominent business house.

Directors who do not hold any or significant equity capital in the concerned Company are particularly vulnerable to potential removal from the Board before the expiry of their period in the office, as section 169 of the Companies Act 2013 (the Act), which is the principal provision of Company law directly dealing with the subject, allows (subject to some conditions and exceptions) such removal via an ‘ordinary resolution’ (majority ‘yay’ over ‘nay’ for removal by Members voting, in layman terms; for legal/technical meaning see section 114 of the Act) passed by the Members of the Company at a General Meeting or other such Member meeting.

Startups and Risk of Dilution

Entrepreneurs and Founders may also be at such risk of removal from the Board and/or executive positions in their very own Startup Company through the above said provision, in situations where significant equity capital is given to investors/VCs in exchange for much needed or sought after investment and working capital. Such a transaction may result in the dilution of their equity share capital holdings in the Company, which may be enough for the ‘ordinary resolution’ to be passed for their removal. Along with potential abdication of other powers, such as control over the number, appointment and overall control over the Board and Executive/Management and control over ‘Special Resolutions’ through relevant amendments (where required or demanded in the exchange) to the Articles of Association (the Articles) of the Company, such Entrepreneurs and Founders may find ‘control’ of their Startup Company quickly slipping from their grip.

Such a vulnerable situation may potentially arise where much or all of the intellectual property (IP) of the said Entrepreneur/Founder has already been transferred to the Company or disclosed to others, who may then have alternatives for stewardship and the need to acquire an even greater control and holding in the concerned Startup Company, expecting growing valuations over time.

Procedural Safeguards and Representation to Members

Many such ‘removal’ actions or attempts to do so, may be unjustified or unwarranted as far as the larger interests of the Company, its Members and various stakeholders are concerned, and may even be motivated by financial gains, need for control or personal animosity. To protect against such circumstances, the section 169 of the Act itself provides certain conditional and procedural safeguards (‘Special Notice’ requirement for moving the ordinary resolution etc.) to ensure that the concerned Director facing such potential removal from the Board is given a ‘reasonable opportunity’ of being heard in his/her defence on the matter by the Members via ‘representations’, which may be in written form and required to be communicated to the Members or be orally read out (as the case may be and subject to some conditions) at the relevant Company meeting voting on the matter.

National Company Law Tribunal (NCLT)

To pre-empt or defend against unlawful removal from the Board, the concerned Director, the Company or any other ‘aggrieved’ person can potentially present a Company Application before the jurisdictional National Company Law Tribunal (NCLT) for various legal remedies on the matter.

Other Potential Strategies

The below mentioned strategies have been listed on a general basis, based on the author’s own understanding and experiences on the subject. Therefore, their relevance or application would vary or be determined by the actual facts or circumstances of a concerned person or situation and the same should not be applied or followed without first obtaining legal and professional advice.

General (diverse/fractioned shareholding)

  • Awareness of ‘legal and procedural safeguards’ for removal and act against non-compliance
  • Carefully draft ‘representation’ to Members and ensure communication of the same before/at the Meeting
  • Undertake transparent and open management practices and routinely e-communicate with Members/Stakeholders
  • Ensure accurate/prompt recording and maintenance of decision making and administrative processes
  • Carefully negotiate terms of appointment as Director (including in an executive role) with a ‘deterrent effect’ with respect to removal and lucrative ‘exit’ strategy
  • Assess nature, composition and powers of the Board and its members
  • Understand the legal scope/limits of Director ‘duties’ and responsibilities under the Act, the Company Articles and ‘appointment agreement’
  • Where appropriate and permissible, become a Company Member and hold/grow shareholding therein
  • Stay informed and assess Company shareholding and voting rights structure and changes thereto etc.

Startup Focus (concentrated shareholdings and Founder/Promoter Director/Executives)

  • Execute appropriate ‘Shareholders/Founders Agreement’ and ‘Voting Agreements’ to potentially pre-empt hostile removal from the Board and/or the Executive/Management positions
  • Understand and analyse the Articles of the Company and suitably modify where appropriate
  • Seek legal and professional help when negotiating ‘Share Transfer/Capital Issue’ agreements with potential investors/VCs etc.
  • Understand the legal ramifications on demanded changes to Capital structure/holdings, Voting Rights attached thereto and amendments to the Articles
  • Protect and control Intellectual Property of the Company via appropriate legal agreements etc.

There are also other significant legal and litigation strategies, which potentially may in different situations either pre-empt, deter or defend against removal from the Board of Directors (and/or an Executive position), these may however require a more confidential discussion on the matter and are therefore not detailed above.

Article by

Anand Chaudhuri
Advocate (Taxation & Criminal Law)
LL.B (CLC Faculty of Law, Delhi University), JD (UNSW)
e: contact@minustax.com
l: https://www.linkedin.com/in/anand-chaudhuri

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