• Private limited company shareholder disputes

Dear Sir 
We have a private limited company in which shareholders are family members .( my father , his brother and few of their cousins)
My father and his brother are lifetime directors  (together they hold 42 % of shares ).
the board of directors is constituted my my father , uncle and his son .
we have come to know that two of the shareholders have bought shares from other family members without prior approval from the board of directors 
After buying these shares their shareholding is about 52 % 
They are now wishing to dislodge my father and uncle from the company and take it under their control 

my questions are
1. can the directors refuse to transfer the shares the two shareholders bought from other shareholders as the board was not informed and other members were not given an option to buy the shares
 
2. can they remove the permanent /lifetime directors (father and uncle) from the board .

3. the authorized capital is 30 lac while paid up is 20 lac . 
can the directors buy the remaining shares in authorized capital and thereby increase their shareholding and thereby increase their  voting rights.  if it is possible then what is the procedure 

4. is it possible to split the company into two companies one controlled by my father and his brother and the other by the other shareholders. 

i shall be very grateful if you could answer my queries as soon as possible

regards
samir
Asked 1 year ago in Business Law from United Arab Emirates
1) Section 2(58)(i) of the Companies Act, 2013 provides that the Articles of Association  of private company can  restrict the right to transfer the company's shares.  

2) Generally articles contain the detailed provisions as regards the procedure for transfer of shares. Usually following steps shall be followed by a private company to give effect to the transfer of shares:—   Transferor should give a notice in writing for his intention to transfer his share to the company. The company in turn should notify to other members as regards the availability of shares and the price at which such share would be available to them. Such price is generally determined by the directors or the auditors of the company. The company should also intimate to the members, the time limit within which they should communicate their option to purchase shares on transfer. If none of the members comes forward to purchase shares then the shares can be transferred to an outsider and the company will have no option, other than to accept the transfer.

3) there can be specific regulation in the articles about the appointment of directors and certain persons are even named in the Articles as the Permanent Directors at times. In all these cases, unless the Competent Court feel it appropriate to keep some one in the Board in the interests of the shareholders or the Company, the shareholders in fact controls the directors and decide the issues of appointment and removals. 




Ajay Sethi
Advocate, Mumbai
23365 Answers
1223 Consultations
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If there is dispute regarding shareholding and mismanagement of the company then the ideal solution is to file a petition of mismanagement and oppression in the company law board. 

Mere acquisition of share certificates is however not enough grounds. You must consult a lawyer specialised in commercial laws especially the companies act with all the relevant papers. 

Under a mismanagement /oppreasion petition the court has the power to grant status quo till disputes are heard barring any shareholder from changing the shareholding pattern.
Saptarshi Banerjee
Advocate, Kolkata
183 Answers
4 Consultations
4.9 on 5.0
A.The articles of association of a private company, or a shareholders' agreement, can include restrictions on the transfer of shares. The usual restriction is that the directors can refuse to register a proposed transfer - although they must only do so if it is for the long-term good of the company - in its legal jargon it promotes the long-term success of the company

B. A majority vote of the shareholders is always effective to remove a director from office, (though, if they have a service agreement, the director may be entitled to damages for wrongful or unfair dismissal). Shareholders must follow a special procedure to remove a director or their decision is not legally valid, so legal advice is strongly advised.

C.The capital clause in Memorandum of Association must state the amount of capital with which company is registered giving details of number of shares and the type of shares of the company. A company cannot issue share capital in excess of the limit specified in the Capital clause without altering the capital clause of the MA. Section 47 of CA 2013 prescribes restrictions on voting rights of preference shareholders.CA 2013 has removed this distinction between cumulative and non-cumulative preference shares and entitles a preference shareholder to vote on every resolution placed before the company at any meeting if the company has not paid the dividend in respect of a class of preference shareholders for a period of consecutive 2 (two) or more years.

D.It is necessary that the Articles of Association of the company should have a provision of reduction of its share capital in any way and its Memorandum should provide for demerger, division or split of the company in any way. Demerger, thus, resulting into reduction of company’s share capital would also require the company to amend its Memorandum of Association.Companies Act, 1956 does not define ‘demerger’ but covers ‘reconstruction’. The difference between these two terms lies only when a scheme of arrangement is framed for obtaining sanction of the court.The company is required to pass special resolution which is subject to confirmation by the court by making an application under section 101 of the Companies Act, 1956. 
B.T. Ravi
Advocate, Bangalore
736 Answers
31 Consultations
5.0 on 5.0
Shareholders and directors have two completely different roles in a company. The shareholders (also called members) own the company by owning its shares and the directors manage it. Unless the articles say so (and most do not) a director does not need to be a shareholder and a shareholder has no right to be a director.  The separation in law between directors and shareholders can cause confusion in private companies.The problem with this is that company law requires some decisions to be made by the directors in board meetings and others to be made by the shareholders by written resolutions or by resolutions passed at general meetings. To complicate matters further, some decisions have to be made by the directors, but only with the shareholders' consent. Whether a particular decision has to be made by the board meeting or the general meeting, or both, depends on the provisions of the Companies Act and/or the company's articles of association.
Serious potential liabilities can arise if the directors do not obtain the approval of the general meeting when this is required. The relationship between directors and shareholders is a complex one. The directors are subject to the general fiduciary duty to act in the company's best interests.  While the directors are in control of the day to day running of the company, with access to information about its business and effective control over the calling and conduct of meetings, the shareholders have an ultimate source of power: any director can be removed from office by ordinary resolution.  If the directors are actually or potentially in breach of their fiduciary duties, a resolution in general meeting, properly passed, may be used to authorise a transaction or give the company's consent to a profit or interest of the director.Subject to the articles, the directors are responsible for the management of the company's business, for which purpose they may exercise all the powers of the company.

The shareholders may, by special resolution, direct the directors to take, or refrain from taking, specified action.
No such special resolution invalidates anything which the directors have done before the passing of the resolution.

The directors are in control of the day to day running of the company, but must obtain approval from the shareholders for some of the more important decisions. Most companies do not have special articles and most have not passed special resolutions to restrict the directors' powers, so the reality is that in most companies the directors can make any decision unless the Act says it needs a resolution in general meeting.

The above are the general and legal position to your query. 
You may have to go through the articles of association of the company from which you will get more clues to process the issues legally and the grievances may be redressed accordingly.
T Kalaiselvan
Advocate, Vellore
14151 Answers
127 Consultations
5.0 on 5.0
1. The shares of existing shareholders were by other share holders of the Company.Was there any stipulation in the AoA or MoA whereby it was mandatory on the part of one shereholder to buy shares from other shareholders to inform about such transaction to the Board? If not then other members can not agitate on this issue,

2. It depends what has been mentioned in the AoA. If they are not removeable as per the documents of formation of the Company, then they will stay there permanently,

3. If there is no embargo/bar in the AoA for such buying of shares from existing share holders, then they can buy them,

4. No. The Company has been formed as per the AoA. There is no provision of splitting it in to two.
Krishna Kishore Ganguly
Advocate, Kolkata
12138 Answers
233 Consultations
5.0 on 5.0
As already stated the articles of association will define all the procedures according to the contents therein. 
The answer to your first question has already been given in my reply which is reproduced below for your information once again :
The directors are in control of the day to day running of the company, but must obtain approval from the shareholders for some of the more important decisions. Most companies do not have special articles and most have not passed special resolutions to restrict the directors' powers, so the reality is that in most companies the directors can make any decision unless the Act says it needs a resolution in general meeting.
The shareholders may, by special resolution, direct the directors to take, or refrain from taking, specified action.
No such special resolution invalidates anything which the directors have done before the passing of the resolution.
 Hope the above answers your subsequent questions too. 
T Kalaiselvan
Advocate, Vellore
14151 Answers
127 Consultations
5.0 on 5.0
A company may, by ordinary resolution, remove a director (not being a director appointed by the Central Government in pursuance of section 408) before the expiry of his period of office. This provision shall not apply where the company has availed itself of the option given to it of proportional representation on the Board of Directors to appoint not less than two-thirds of the total number of directors according to the principle of proportional representation. 

Special notice shall be required of any resolution to remove a director, or to appoint somebody instead of a director so removed at the meeting at which he is removed. 

On receipt of notice of a resolution to remove a director under this section, the company shall forthwith send a copy thereof to the director concerned, and the director (whether or not he is a member of the company) shall be entitled to be heard on the resolution at the meeting. 

Where notice is given of a resolution to remove a director and the director concerned makes representations in writing to the company (not exceeding a reasonable length) and requests their notification to members of the company, the company shall, unless the representations are received by it too late for it to do so :-
in any notice of the resolution given to members of the company state the fact of the representations having been made; and
send a copy of the representations to every member of the company to whom notice of the meeting is sent
Ajay Sethi
Advocate, Mumbai
23365 Answers
1223 Consultations
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1. The shares have been purchased without seeking the prior approval of the Board of Directors. Consequently, the board can refuse to transfer the shares.

2. The refusal of the board to transfer the shares does not impair the right of the shareholders to remove the directors. A simple majority vote at a meeting of shareholders, having the necessary quorum, is required to remove the permanent directors.

3. To preempt their removal the directors should seek an injunction from the court.

4. The remaining shares can be purchased by the directors but this will not give them more voting rights. Voting rights are not proportionate to the shares held.

5. The company can be split into two only if a resolution to this effect is passed by the board of directors and the majority of shareholders consent to it.
Ashish Davessar
Advocate, Jaipur
18183 Answers
449 Consultations
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