• Investment and decision power issue in private firm

We 4 partners started private limited firm in August 2013.  Partner I hold 31% share, Partner 2 holds 23% share, Partner 3 hold 23%  and Partner 4 held 23% share. Partner 1 and partner 2 are real brothers and holds 54% of total share and are major shareholders. Partner 4 left the company within 3 month of the formation and sold his 23% share to partner 3 at agreed price. Immediately within few days partner 1 and partner 2, paid to partner 2’s personal bank account  2/3rd amount to be equal partner in the purchase of shares from 4 partner. 

Partner 1 and partner 2 paid around 2 lacs INR for 54% of their hold and partner 3 paid 1.5 lacs for his 23% part. Out of 23% purchased shares 14% was sold each 1% at 2.2 lacs and collected around 26lacs INR. 

Partner 1 & Partner (both brothers) and partner 3 are also part of board of director , mean 3 members of board of directors. Now since sometime as two brother are holding 54% are taking all decisions, because 3rd director always left alone. These 3 directors were also employee of the company; so same person shareholder, member of board of director and employee also. Since 3 month 3rd director is left alone and there is no attention being paid to his request on setting up balance decision power in the board. Since more than 3 month I am requesting them to call shareholder meeting or meet some experts to resolve it, but they both are not caring about it.

I have few question to clarify.

1.Can we arrange redistribution of the shares , because I feel we 3 paid just 2.5 lac all together for 54% + 23% = 77% and 3 other shareholders for 14% paid 26 lacs. Partner 1, 2 and 3 said they will build their share by contributing time, but now partner 1 and 2 also start taking salary for his time, so it is not aligned to what is said. 
2.	If Partner 1 and partner 2 refuse to redistribute the share to balance the power, can other shareholders ask them to contribute X INR for each share%, so they also invest?
3.	Can board of director be reorganized, but how, because 2 partner as a shareholder has power to decide the board and they will not accept someone from other partner?
4.	Can two partners take all decision in future alone, they might show the losses and close the company to cheat and other money will be used to enjoy.

I am really looking the professional advice, how all this can be sorted.    I am partner number 3.
Asked 11 months ago in Business Law from United Kingdom
1) you can  agree to purchase some shares of partner 1 and 2 

2) you cannot force partner 1 and 2 to contribute funds . 

3) since in a company decisions are taken by majority vote and they are holding over 70 per cent combined share they would call the shots in the organisation 

4) all accounts of company have to be audited . they cannot fudge accounts of company and show losses  and cheat you 

5) if you are oppressed as minority shareholder you can move company law board against the company if affairs of company are being conducted in manner prejuidical to public interest . CLB can order winding up of the company

6) you can seek appointment of independent person as chairman of the board of directors with casting vote 
Ajay Sethi
Advocate, Mumbai
23308 Answers
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1) under the 2013 Act, certain powers of the board of directors can now only be exercised subject to a favourable special resolution (requiring a three-fourth majority of shareholders) being passed. These include important subjects such as the right to sell a substantial part of the undertaking or borrow money above certain specified thresholds.

2) Under the 2013 Act, a shareholder of the company, who is a related party vis-à-vis a counter party in such a transaction, is not permitted to vote while approving the transaction.

3) selection of employee should be on basis of his qualifications and not shareholding 
Ajay Sethi
Advocate, Mumbai
23308 Answers
1220 Consultations
5.0 on 5.0
1.Can we arrange redistribution of the shares , because I feel we 3 paid just 2.5 lac all together for 54% + 23% = 77% and 3 other shareholders for 14% paid 26 lacs. Partner 1, 2 and 3 said they will build their share by contributing time, but now partner 1 and 2 also start taking salary for his time, so it is not aligned to what is said. 
It can be decided by passing a resolution in the board meeting.  If the artners 1 and 2 do not agree, then the partner 3 can approach this issue legally by first issuing a legal notice to those who do not agree or follow proper procedure as per the therms of partnership deed. 



2.	If Partner 1 and partner 2 refuse to redistribute the share to balance the power, can other shareholders ask them to contribute X INR for each share%, so they also invest?
This suggestion can be moved in the meeting of the board.



3.	Can board of director be reorganized, but how, because 2 partner as a shareholder has power to decide the board and they will not accept someone from other partner?
Partners differ from board of directors. 
Directors are paid with their salary though they are one among the partners.
Therefore in a board meeting, all directors and share holders can decide about such issues. 




4.	Can two partners take all decision in future alone, they might show the losses and close the company to cheat and other money will be used to enjoy.
They cannot do so.  The terms and conditions of the partnership deed will speak about it.
T Kalaiselvan
Advocate, Vellore
14090 Answers
127 Consultations
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1.	In board of directors decision are made by majority?  if there is board of 5 persons. 3 of them are shareholders, how the decision will be made proportion to their shareholding vote or 3 vs 2. Because if it is proportion to shareholding vote always partner 1 and 2 will take or reject all decisions, then other 3 on the board are useless. How can we select the fair board ?
Large or small, Boards always like to act unanimously. This is part peer pressure, part desire to send a strong message as a united front, part effort to avoid liability or legal proceedings (e.g., if you're the one director who voted differently from the rest, you're more likely to be subpoenaed or deposed). The rare exception is when a strategic decision is made that one or more directors simply don't agree with, and they want to cast a protest vote of sorts. Even then, they'll often abstain rather than voting "No."
Unanimous votes are made easier by the fact that the substance of Board deliberations is not recorded in the minutes, only actions.  Well-drafted minutes gloss over detail and simply state that certain subjects were discussed.  


2.	Who can we decide if shareholder can be employee of the company or not. According to me employee should be selected based on qualification, not based on shareholding, someone should not be employed only because he is major shareholder . How we can separate employee selection in the company from shareholder’s power?

Most companies have also developed charters to define the decisions for which board committees are responsible. Often, committee recommendations must be ratified by the full board, but the actual decisions are largely made within the committee rooms. The board of directors is a collective body, whose members have diverse expertise in various aspects of the company’s business. Therefore, communication between directors is critical to successful board functioning. Anecdotal and survey evidence suggests that conflicts of interest and pressure for conformity play an important role in directors’ decisions. Conflicts of interest arise due to private benefits directors receive from certain board decisions. The board can take action by adopting resolutions at a duly called meeting of the board (which may be held in person or by video- or telephone conference) or by a written consent signed by all members of the board of directors.  
However the employee selection from the share holder is a decision y the board of directors though some vested interest may be behind the screen.

T Kalaiselvan
Advocate, Vellore
14090 Answers
127 Consultations
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the largest shareholder has power to call general meeting. He has power to balance percentage of share in company. one share holder cannot sell his share without bring its notice to the company to other share holder. 

you have right to redistribute share among partners either in general meeting or by company registrar. 

largest shareholder has right of pre-emption and he can offers to buy share of outgoing partner by preventing others.  If provision regarding this is mentioned in AOA otherwise you should amend in AOA accordingly with view to redistribution of share.
Shivendra Pratap Singh
Advocate, Lucknow
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41 Consultations
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