The Hindu Business Line : Some good, a few bad and the rest indifferent

WHILE the proposal to create a new cadre of `independent directors' — professionals not tied down indefinitely to any particular company and not owning any shares in any company which they are called upon to serve — is the piece de resistance of the Companies (Amendment) Bill, 2003, it must be remembered that the `Bill' has as many as 174 clauses some of them good, a few bad and the rest indifferent.

It is necessary to have a close look at a few of them, because they are stated to be either based on the recommendations of august committees or coming down from the still-born Companies Bill, 1997.

Share transfers in private companies

A `private company' has been defined in sub-clause (a) of clause (iii) of sub-section (1) of Section 3 as a company which, among other things, `restricts its right to transfer its shares by its articles'. Now, a new Section (1A) is sought to be inserted in Section 111, which deals with the company's "power to refuse registration and appeal against refusal". The new provision stands as follows:

"A private company shall not approve the transfer of any shares unless it is approved by all the shareholders at its meeting." (emphasis supplied)

The amendment suffers from ambiguity. The intention is evidently to leave the decision not to the company's board of directors but to the shareholders in general body. This implies that an extraordinary general meeting (EGM) is required to be called whenever any existing shareholder wishes to sell or transfer his shares.

The expression `all the shareholders at its meeting' should, in that case, be expanded to cover all the shareholders present at the annual general meeting (AGM) or an EGM to be specially called within 60 days from the receipt of notice of proposal to transfer his shares. The following points should also be clarified through appropriate amendments to the proposed sub-section (1A):

What will happen if some of the shareholders present at the meeting do not approve the proposed transfer to any of the existing shareholders or an outside party, despite such transfer being legitimate under the company's articles of association?

Will any shareholder be allowed to convey his dissent by a letter addressed to the company secretary or chairman or managing director of the company or representation by a proxy?

Should a shareholder be allowed to be `oppressed' or subjected to harassment by the non-approval of his proposal by a single member or even some of the members present at the meeting? Should not the dissenting members(s) be required to specify the reasons for his (their) withholding their approval? Should not such a case be appealable under Section 111?

It will be undemocratic and purposeless to insist on the concurrence of all the other members of a private company, whether or not all of them are present at the meeting at which the proposal of a member to transfer his shares is to be considered. Such a provision will result in a stalemate even if one of the members is whimsical or perverse or there are factions among the members.

The sale or transfer of shares by a member to anyone he likes among the existing members or outsider should be governed by the private company's articles of association since a private company functions broadly like a partnership concern in which the instrument of partnership is of decisive importance.

While it should be possible for a member to decline to purchase the shares proposed to be sold by any other member at the price offered by him or even at any lower price, he cannot totally frustrate a sale.

If none of the other shareholders is inclined to acquire the shares at the offered price or any lower price, the auditor of the company should be asked to work out the break-up value of the shares and it should be a statutory obligation for the company itself to buy back the shares at the break-up or inherent value of the shares or the price offered by the shareholders parting from it, whichever is higher.

The member seeking to offload the shares held by him should have the right of appeal if the break-up value or market value is not considered fair by him.

If there are only two shareholders in a company and one of them is walking out of the company, there may be no alternative to the dissolution of the company, unless the surviving member does not mind the transfer of his shares by the member leaving the company either to his own nominees (outsiders) or the nominees of the surviving shareholder at a price to which the surviving member has no objection or which he has himself suggested.

(By arrangement with Corporate Law Adviser, New Delhi.)

Article E-Mail :: Comment :: Syndication

Stories in this Section
Corporate complexities

Shares with the `enemy'

Auditing is no mega serial

Choice is off the records

Starved of personal time

Some good, a few bad and the rest indifferent

On bathrooms and balance sheets

Pakistan's privileged army — Quest for hegemony at home, abroad

With caution to Cancun

Cess vs toll

Track-II diplomacy