protecting minority investors in india mumbai · reforms, with sub-saharan africa accounting for 80...

Protecting Minority Investors in India Mumbai www.doingbusiness.org

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We would like to thank you for your participation in the Doing Business project. Your expertise in the area of Protecting Minority Investors in India Mumbai is essential to the success of the Doing Business report, one of the flagship publications of the World Bank Group that benchmarks business regulations in 190 economies worldwide. The protecting minority investors indicator measures legal protections afforded to minority shareholders of domestic corporations, and is one of the 11 indicator sets published by the Doing Business report.

The report attracts much attention around the world. The latest edition, Doing Business 2017: Equal Opportunity for All, introduced improvements in the paying taxes and protecting minority investors indicators, and included a gender component in 3 of 11 Doing Business indicator sets. It received over 7,000 media citations within just a week of its publication on October 25, 2016 and the report was downloaded almost 40,000 times within that same period. A record 137 economies implemented a total of 283 reform. Low and middle income countries carried out more than 75% of these reforms, with Sub-Saharan Africa accounting for 80 of them.

Governments worldwide read the report with interest every year, and your contribution makes it possible for the Doing Business project to disseminate the regulatory best practices that continue to inspire their regulatory reform efforts. Since 2012, economies worldwide have implemented 89 reforms that have strengthened the protection of minority investors. In 2015/16, 19 economies implemented such reforms. Most increased disclosure requirements and expanded shareholders‘ role in company management.

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Did any reform (e.g. a new act, code, law, decree, order, supreme court decision, amendment, stock exchange listing rule) affecting the internal governance of corporations, the regulation of related-party transactions, disclosure obligations, liability of company executives or access to evidence in civil litigations enter into force between June 1, 2016 and June 1, 2017? If yes, please provide the information below.

Name of the legislation: 1. Notification [F. No. 1/32/2013-CL-V-Part] dated 30 March 2017 in relation to Companies

meeting of Board and its Power Amendment Rule 2017

2. Section 101 of the Companies Act 2013





7. Section 21 of the Securities Contract (Regulation Act), 1956; Clause 36 of the Listing Agreement Regulation 30 of

SEBI( LISTING OBLIGATIONS AND DISCLOSURE REQUIREMENTS) REGULATIONS, 2015.pdf

8. Clause 78 of Table F to the Schedule I of the Companies Act 2013- http://ebook.mca.gov.in/default.aspx

9. Notification [F No. 1/30/CLB/2013/CL-V]0 dated 1 June 2016 in relation to constituting NCLT and NCLAT under

Section 408 and 410 of the Companies Act 2013

10. The Companies (Management and Administration) Amendment Rules 2016

11. The Companies (Management and Administration) Amendment Rules 2016

12. The Companies (Compromises, Arrangements and Amalgamations) Rules, 2016

Date of adoption: 1. 30 March 2017

2. 1 April 2014

3. 1 April 2014

4. 1 June 2016

5. 1 June 2016

6. 1 June 2016

7. 2 September 2015

8. 1 April 2014

9. 1 June 2016

10. 23 September 2016


12. 15 December 2016

Date of entry into force: 1. 30 March 2017

2. 1 April 2014

3. 1 April 2014

4. 1 June 2016

5. 1 June 2016

6. 1 June 2016

7. 2 September 2015

8. 1 April 2014

9. 1 June 2016



12. 15 December 2016

Link to electronic copy: 1. Notification [F. No. 1/32/2013-CL-V-Part] dated 30 March 2017 in relation to Companies

meeting of Board and its Power Amendment Rule 2017 – on the given link select date and rules-

http://ebook.mca.gov.in/Default.aspx?page=notification

2. Section 101 of the Companies Act 2013 - http://ebook.mca.gov.in/default.aspx





7. http://www.sebi.gov.in/sebi_data/attachdocs/1441284401427.pdf

8. Point 78 of Table F to the Schedule I of the Companies Act 2013- http://ebook.mca.gov.in/default.aspx

9. Notification [F No. 1/30/CLB/2013/CL-V]0 dated 1 June 2016 – on the given link select date and notification in

relation to constituting NCLT and NCLAT under Section 408 and 410 of the Companies Act 2013


10. On the given link select date and notification in relation to the Companies (Management and Administration)

Amendment Rules 2016


11. On the given link select date and notification in relation to the Companies (Management and Administration)

Amendment Rules 2016


12. On the given link select date and notification in relation to the Companies (Compromises, Arrangements and

Amalgamations) Rules, 2016


Description: 1. Notification has been issued revising the limits for certain related party transactions under

Section 188 of the Companied Act, 2013 (‗the Act‘) read with Rule 15 of the Companies (Meetings of Board and its

Powers) Rules, 2014. Before the notification, the shareholder approval was required if the value of property to be

purchased exceeds 10% of the net worth of the company or INR 1000 Million, whichever is less. However, after the

amendment the limit has been amended and now, approval of shareholder would be required if the value of property is

10% or more of the net worth of the company or INR 1000 Million, whichever is less. This limit applies to transaction or

transactions to be entered into either individually or taken together with the previous transactions during a Financial Year.

2. As per Section 101 of the Act, the company is required to give a notice of shareholder's meeting atleast 21 days

in advance to its members/shareholders. The notice of the meeting shall specify the place, date, day and the hour of the

meeting and shall contain a statement of the business to be transacted at such meeting.

3. As per Section 96(1) of the Act, every company shall in each year hold an annual general meeting where all the

members would meet and such annual general meeting is required to be held within 15 months from the date of last

annual general meeting.

4. As per Section 243 of the Act, where an order made under Section 242 terminates, sets aside or modifies an

agreement then no managing director or other director or manager whose agreement is so terminated or set aside shall,

for a period of five years from the date of the order terminating or setting aside the agreement, without the leave of the

Tribunal, be appointed, or act, as the managing director or other director or manager of the company.

5. As per Section 245 (1)(g) of the Act, the members can claim damages or compensation for any act done by the

director which is prejudicial to the company's interest.

6. As per Section 242 of the Act, the Tribunal has the power to terminate, to set aside or modify, any agreement,

entered between the company and the managing director, any other director or manager, upon such terms and conditions

as may, in the opinion of the Tribunal, be just and equitable in the circumstances of the case.

7. As per Section 21 of the Securities Contract (Regulation Act), 1956; Clause 36 of the Listing Agreement

Regulation 30 of SEBI( LISTING OBLIGATIONS AND DISCLOSURE REQUIREMENTS) REGULATIONS, 2015, the

listed entity is required to disclose the transaction details within 24 hours of occurrence of the event or information to the

stock exchange.

8. The clause 78 of the Table F to the Schedule I of the Companies Act 2013 provides that ―A provision of the Act or

these regulations requiring or authorising a thing to be done by or to a director and chief executive officer, manager,

company secretary or chief financial officer shall not be satisfied by its being done by or to the same person acting both

as director and as, or in place of, chief executive officer, manager, company secretary or chief financial officer.‖

Accordingly, both the CEO and managing director should be separate individuals as per the standard articles of

association.

9. National Company law Tribunal (NCLT) is operationalized from 1 June 2016. NCLT has been constituted under

the Companies Act, 2013 and has been operationalized to replace the Company Law Board (CLB). NCLT is initially

located at ten places across India. It will prove to be effective platform for adjudication of disputes on corporate law

matters through disposal of such cases in a time bound and speedy manner.

10. Increased transparency through the amendment in the Companies (Management and Administration) Rules,

2016. Any change in the shareholding position of promoters and top ten shareholders of the company representing

increase or decrease by 2% or more of the paid-up share capital needs to be reported within 15 days of such changes.

11. Provision introduced to facilitate members of Listed Company with 1000 or more members to exercise vote

through electronic means.

12. Rules dealing with amalgamation, compromise, arrangement, liquidation and winding up were introduced. These

rules have provided the procedures relevant for corporate restructuring and also clarified the issues relating to

implementation of the restructurings.

I. Private limited companies

In the following questions, please assume that Buyer Co. (―Buyer‖) is a manufacturing company. It is incorporated as a private limited company or its functional equivalent. Its shares cannot be listed on a stock exchange. Examples include the Private Limited Company (Ltd), the Limited Liability Company (LLC), the Sociedad de Responsabilidad Limitada (SRL), Gesellschaft mit beschränkter Haftung (GmbH) and the Société à responsabilité limitée (SARL).

Last year

This year

Last year law Applicable Law Comment

New question Do all members have the right to inspect and copy any record maintained by the company regarding the company’s activities, financial condition, and other circumstances that are relevant to their rights and duties?

Yes Section 94, Section 136, Section 171 and Section 399 of the Companies Act, 2013

1. As per Section 94 of the Act, any member of the Company shall have the right to inspect the registers and returns required

to be maintained by the Company without payment of any fees. Further, the member would have the right to take the extracts from any register or index or return without payment of any fees. 2. As per Section 171 of the Act, the register of directors and key managerial personnel shall be open for inspection for any member of the Company and the members can take extract and copies of the registers free of cost from the Company. 3. As per Section 136 of the Act, a copy of the financial statements, including consolidated financial statements, auditor‘s report and every other document annexed or attached to the financial statements shall be sent to every member of the company not less than twenty-one days before the date of the

general meeting. 4.In addition to above, any person other than member can also inspect by electronic means any documents kept by the Registrar on payment of prescribed fees for inspection. URL: http://ebook.mca.gov.in/Default.aspx?page=main

Does the sale of 51% or more of Buyer’s assets require the consent of the majority of its members? (whether such sale occurred in a single transaction or several transactions taking place within 1 year from the date of the first transaction)

Yes Yes Section 180 and 188 of the Companies Act, 2013 read with Rule 15(3) of the Companies (Meetings of Board and its Powers) Rules, 2014.

Section 180 of the Companies Act, 2013. Section 188 of the Act read with Rule 15(3) of the Companies (Meetings of Board and its Powers) Rules, 2014

1. As per Section 180 of the Act, the sale of whole or substantial whole of the undertaking of the company (i.e. which values 20% or more of the value of the undertaking) would requie to be approved by 3/4 or more votes of the members in a general meeting. the Board of Directors are empowered to sell the whole or substantial whole of the undertaking only with the consent of the company by a special resolution. 2. Further, in case of a transaction of sale of assets o to or buying of

assets from the related party valuing 10% or more of the networth of the company or INR 1000 Million, whichever is less, the transaction of sale of property , the approval of the shareholders of the company by way of resolution and also, consent of Board of directors would be required. This limit applies to transaction or transactions to be entered into either individually or taken together with the previous transactions during a Financial Year URL: http://ebook.mca.gov.in/Default.aspx?page=main

Can members who represent 10% of Buyer’s capital call for a meeting?

Yes Yes Section 100 of the Companies Act, 2013

Section 100(2) of the companies Act 2013

As per Section 100(2) of the Act, the Board shall at the requisition made by members representing 10% or more of the paid up share capital of the company, call a general meeting of the company. URL: http://ebook.mc

a.gov.in/Default.aspx?page=main

Must all members of Buyer consent to add a new member?

Yes No Section 62 of Companies Act, 2013. Section 42 and Rule 14 of the Companies (Prospectus of Securities) Rules, 2014.

Section 62(1) ( c ) of companies Act, 2013

Must a member of Buyer first offer to sell his or her interest to the existing members before selling to a non-member?

Yes Yes Section 62 of Companies Act, 2013

Section 2 (68) (i) implies that before transfer to a new member, Buyer's meember will have to first offer it to existing member.

In case of a private company, the right to transfer the shares is restricted through Articles of Assocuation. URL: http://ebook.mca.gov.in/Default.aspx?page=main

Must Buyer have a management deadlock breaking mechanism such as a member exit buyout in case of disagreement?

Yes Yes Sections 163 and 169 of Companies Act, 2013

Section 174 Section 184, Section 241, and Section 242(2) of Companies Act, 2013

In the Companies Act 2013, several provisions provide mechanism to break the management deadlocks. Some of the key provisions are provided below: 1. Under Section 174 of the Act, a board meeting quorum has been prescribed as one third of its total strength or two directors, whichever is higher. Further, as per Section 300 the interested directors would not be counted for the purpose of forming a quorum. In order to resolve

a deadlock where the number of interested directors exceeds or is equal to two thirds of the total strength of the Board of Directors, it has been mentioned that non-interested directors who are atleast 2 in number shall be considered as quorum for the board meeting. 2. Under Section 184 of the Act, every director who is interested or concerned in a contract or arrangement shall disclose his interest in the board meeting in which such contract or arrangement is discussed and also, shall not participate in this meeting. In case of a private company (i.e. company in which public are not interested) where there are only 2 directors (say spouses) and one of them is interested party, passing a resolution for such contract/arrang

ement shall be a challenge and therefore, to break the deadlock in case of a private company interested directors are allowed to participate in the board meeting after disclosing their interest. 3. In order to break the deadlock of oppression and mismanagement, under Section 241 it has been provided that any member of a company who complains that— (a) the affairs of the company have been or are being conducted in a manner prejudicial to public interest or in a manner prejudicial or oppressive to him or any other member(s) or in a manner prejudicial to the interests of the company; or (b) the material change in the interests of, any creditors, including debenture holders or any class of shareholders of

the company, has taken place in the management or control of the company, whether by an alteration in the Board of Directors, or manager, or in the ownership of the company‘s shares, or if it has no share capital, in its membership, or in any other manner whatsoever, and that by reason of such change, it is likely that the affairs of the company will be conducted in a manner prejudicial to its interests or its members or any class of members, may apply to the National Company Law Tribunal (NCLT) for prevention of oppression or mismanagement. The application can be made to NCLT by 100 members or by atleast one tenth of the total number of members, whichever is less (in case of company with share capital) and by one fifth of the members

in case of company without share capital. 4. As per Section 242(2) of the Act, provides for obtaining an order from NCLT seeking purchase of share by any member or by the company. URL : http://ebook.mca.gov.in/Default.aspx?page=main

Is there a percentage of acquired capital that requires a new member to make a tender offer to all remaining members of Buyer? If yes, please specify what percentage.

No No Regulation 3 of SEBI (Substantial Acquisition of Shares and Takeovers) regulations, 2011 ("Takeover Code")

Regulation 3 of SEBI (Substantial Acquisition of Shares and Takeovers) regulations 2011

As per the Regulation, An acquirer who intends to acquire shares which alongwith his existing shareholding would entitle him to exercise 25% or more voting rights, can acquire such additional shares only after making a public announcement to acquire additional shares of Target Company from the shareholders through an open offer. Further, An acquirer who holds 25% or more shares or voting rights of a target company, can acquire such additional shares as

would entitle him to exercise more than 5% of the voting rights but less than the maximum permissible non-public shareholding i.e. 75% only after making a public announcement to acquire additional shares of target company from the shareholders through an open offer. This regulation is applicable only on listed companies. As in the instant case, the entity under observation is a private limited company, this regulation would not be applicable. URL: goo.gl/i6vsFZ URL: goo.gl/i6vsFZ

Must Buyer distribute profits or pay dividends at the latest one year from the declaration date?

Yes Yes Section 123, Section 124 and Section 127 of the Companies Act, 2013..

Section 123 read with Section 124 and 127 of the Companies Act, 2013.

Once a dividend is declared , the company is required to deposit the dividend in the designated bank account within 5 days from the date of declaration of dividend and within 30 days the dividend shall be paid to

the members. URL: http://ebook.mca.gov.in/Default.aspx?page=main

Must members of Buyer meet once a year?

No Yes Section 101, 102 and 103 of the Companies Act, 2013 and Rule 18 of the Companies (Management & Administration) Rules, 2014.

Section 96(1) of the Companies Act 2013

As per section 96(1), every company shall in each year hold an annual general meeting where all the shareholders would meet and such annual general meeting is required to be held within 15 months from the date of last annual general meeting. URL: http://ebook.mca.gov.in/Default.aspx?page=main

Must annual financial statements of Buyer be audited by an external auditor?

Yes Yes Sections 139, 143(2) and 143(3) of the Companies Act, 2013 and Rules 11 and 12 of the Companies (Audit and Auditors) Rules, 2014.

Section 139, 143 (2) and 143(3) of the Companies act, 2013 and Rules 11 and 12 of the Companies( Audit and Auditors) Rules, 2014.

Yes, the annual financial statements need to be audited by an external auditor. URL: http://ebook.mca.gov.in/Default.aspx?page=main

II. Listed companies

In the following questions, please assume that Buyer is a publicly traded listed corporation or its functional equivalent in India Mumbai. It is not state-owned and has issued stock that is publicly traded and is listed on your country‘s largest stock exchange. Examples include the Joint Stock Company (JSC), Public Limited Company (PLC), C Corporation, Societas Europaea (SE), Aktiengesellschaft (AG) and Société Anonyme/Sociedad Anónima (SA).

It has not adopted specific bylaws or articles of association that differ from default corporate law or securities regulations. It does not follow any code of corporate governance, model charter, or code of good practice, unless it is mandatory.

If there is no stock exchange or if there are fewer than 10 firms actively traded on the stock exchange, please assume that Buyer is a joint-stock company with a large number of shareholders.

Last year

This year

Last year law Applicable Law Comment

Does the sale of 51% or more of Buyer’s assets require shareholder approval? (whether such sale occurred in a single transaction or several transactions taking place within 1 year from the date of the first transaction)

Yes Yes Section 180 and 188 of the Companies Act, 2013 read with Rule 15(3) of the Companies (Meetings of Board and its Powers) Rules, 2014.

Section 180 of the Companies Act, 2013. Section 188 of the Act read with Rule 15(3) of the Companies (Meetings of Board and its Powers) Rules, 2014

1. As per Section 180 of the Act, the sale of whole or substantial whole of the undertaking of the company (i.e. which values 20% or more of the value of the undertaking) would requie to be approved by 3/4 or more votes of the members in a general meeting. the Board of Directors are empowered to sell the whole or substantial whole of the undertaking only with the consent of the company by a special resolution. 2. Further, in case of a transaction of sale of assets o to or buying of assets from the related party valuing 10% or more of the networth of the company or INR 1000 Million, whichever is less, the transaction of sale of property , the approval of the shareholders of the company by

way of resolution and also, consent of Board of directors would be required. This limit applies to transaction or transactions to be entered into either individually or taken together with the previous transactions during a Financial Year URL: http://ebook.mca.gov.in/Default.aspx?page=main

Can shareholders who hold 10% of Buyer’s share capital call for an extraordinary meeting?


Section 100(2) of the Companies Act, 2013

As per Section 100(2) of the Act, the Board shall at the requisition made by members representing 10% or more of the paid up share capital of the company, call an extraordinary general meeting of the company. URL: http://ebook.mca.gov.in/Default.aspx?page=main

Must Buyer obtain shareholder approval to issue unissued share up to its authorized share capital?

Yes Yes Section 62 of Companies Act, 2013. Section 42 and Rule 14 of the Companies (Prospectus of Securities) Rules, 2014.

Section 62 of Companies Act, 2013

As per Section 62(1)©, the company can issue its capital to any person, if it has received consent of 3/4th of the members present at the meeting. Also, the shares are required to be first offered to the existing shareholders in the proportion of paid up share capital (right issue). URL:

http://ebook.mca.gov.in/Default.aspx?page=main

Are shareholders automatically granted subscription (preemption) rights on new shares?

Yes Yes Section 62 of Companies Act, 2013

Section 62 of Companies Act, 2013

Yes, as per section 62(1)(a) where at any time a company having a share capital proposes to increase its subscribed capital by the issue of further shares, such shares shall be offered to existing shareholders in proportion to their paid-up share capital. The offer shall be open for minimum 15 days and not more than 30 days. URL: http://ebook.mca.gov.in/Default.aspx?page=main

Must shareholders approve the election and dismissal of the external auditor?

Yes Yes Sections 139 and 140 of Companies Act, 2013. Rules 3, 7 and 8 of the Companies (Audit and Auditors) Rules, 2014.

Sections 139 and 140 of Companies Act, 2013. Rules 3, 7 and 8 of the Companies (Audit and Auditors ) Rules , 2014.

Yes, the shareholders approve the election or dismissal of the external auditor in its general meeting. URL: http://ebook.mca.gov.in/Default.aspx?page=main

Can the majority vote of holders of the affected shares prevent changes to the rights of their class of shares?

Yes Yes Section 106 and 107 of the Companies Act, 1956. Section 29(3) of the Listing Regulations. Section 48 of the Companies Act, 2013 is yet to come into effect.

Section 48 of the Companies Act, 2013.

Yes, where the holders of not less than ten per cent of the issued shares of a class did not consent to such variation or vote in favour of the special resolution for the variation, they may apply to the Tribunal (i.e. NCLT) to have the variation cancelled, and where any such

application is made, the variation shall not have effect unless and until it is confirmed by the Tribunal URL: http://ebook.mca.gov.in/Default.aspx?page=main

Must the CEO and the chair of the board of directors be different individuals?

No Yes Sections 2(18), 2(54), 104, 203 of the Companies Act, 2013 and Regulation 17 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.

Section 203 and Schedule I , Clause 78 of Table F of the Companies Act, 2013

1. As per proviso to Section 203(1) of the Companies Act, 2013, an individual shall not be appointed as the chairperson of the company as well as the managing director or CEO of the Company unless the articles of the Company provides such appointment. In the instant case, as the Company has adopted the articles as provided under the Companies Act under Schedule I, Clause 78 ofTable F, the CEO and the chairperson are required to be different individuals. URL: http://ebook.mca.gov.in/Default.aspx?page=main

Must the board of directors (or supervisory board) include independent and non-executive board members?

Yes Yes Section 2(47), 135 and 149(4) of the Companies Act, 2013 read with Rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2014 and Regulation 17 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.

Sections 2(18) , 135 and 149(4) of Companies Act, 2013 read with Rule 4 of Companies (Appointment and Qualification of Directors) Rules, 2014 , Regulation 17 of SEBI's LISTING

yes

OBLIGATIONS AND DISCLOSURE REQUIREMENTSREGULATIONS, 2015 and Clause 49 of the Listing Agreement

Can shareholders remove members of the board of directors without cause before the end of their term?

Yes Yes Sections 163 and 169 of Companies Act, 2013

Section 169 of Companies Act, 2013.

Yes, the company can remove a director before expiry of the period of his office by passing an ordinary resolution after giving a reasonable opportunity of being heard. URL: http://ebook.mca.gov.in/Default.aspx?page=main

Must Buyer have a separate audit committee?

Yes Yes Regulation 18 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, Section 177 and 178 of the Companies Act, 2013 read with Rule 6 of the Companies (Meetings of Boards and its Powers) Rules, 2014.

Regulation 18 of SEBI's LISTING OBLIGATIONS AND DISCLOSURE REQUIREMENTSREGULATIONS, 2015. Section 177 of Companies Act, 2013 read with Rule 6 of the Companies (Meeting of Board and its Powers ) Rules, 2014.

Yes, as per the conjuctive reading of the stated provisions, the buyer being a listed entity must have a separate audit committee. URL: http://ebook.mca.gov.in/Default.aspx?page=main and http://www.sebi.gov.in/cms/sebi_data/attachdocs/1441284401427.pdf.

Is there a percentage of acquired shares which triggers a mandatory bid rule, requiring a potential acquirer to make a tender offer to all remaining shareholders?

Yes Yes Regulation 3 of SEBI (Substantial Acquisition of Shares and Takeovers) regulations, 2011 ("Takeover Code")

Regulation 3 of SEBI ( Substantial Acquistion of Shares and Takeovers )regulation, 2011 ('Takeover Code')

As per the Regulation, An acquirer who intends to acquire shares which alongwith his existing shareholding would entitle him to exercise 25% or more voting rights, can acquire such additional shares only after making a public announcement to acquire additional

shares of Target Company from the shareholders through an open offer. Further, An acquirer who holds 25% or more shares or voting rights of a target company, can acquire such additional shares as would entitle him to exercise more than 5% of the voting rights but less than the maximum permissible non-public shareholding i.e. 75% only after making a public announcement to acquire additional shares of target company from the shareholders through an open offer. The entity under obsevarion is a listed company, this regulation would be applicable. URL: goo.gl/i6vsFZ

Must Buyer distribute profits or pay dividends within a set maximum time period from the declaration date?

Yes Yes Section 123, Section 124 and Section 127 of the Companies Act, 2013..

Section 123 read with Section 124 and 127 of the Companies Act, 2013.

Once a dividend is declared , the company shall distribute the same to its members within 30 days of such declaration, failing which punishment u/s 227 shall apply. URL: http://ebook.mca.gov.in/Default.aspx?page=main

Is a subsidiary prohibited from acquiring shares issued by its parent company? If not, must the subsidiary dispose of the shares within a year and cannot exercise


Section 19 of Companies Act, 2013.

As per Section 19, no company shall hold any shares in its holding company.

any voting rights? URL:

http://ebook.mca.gov.in/Default.aspx?page=main

Must Buyer disclose ultimate beneficial ownership stakes (i.e. direct and/or indirect) representing 5%?

Yes Yes The Takeover Regulations and Sections 89 and 92 of Companies Act, 2013 and Rule 9 of the Companies (Management and Administration) Rules, 2014.

The Takeover Regulations, Section 89 and Section 92 of Companies Act, 2013

1. As per Section 89, where the company has received a declaration from any person about any beneficial interest in share of company, the Company shall file Form MGT 6 with Registrar within 30 days from date of receipt of declaration. Also, the Company shall make a note of such ownership/interest in its register of members. 2. As per Section 92 of the Act, the company is required to file annual return providing the particulars of shareholding pattern.

Must Buyer disclose information on other activities and directorships held by board members, including on their primary employment?

Yes Yes Sections 170 and 184 of Companies Act, 2013; Rules 17 and 18 of the Companies (Appointment and Qualification) Rules, 2014

Section 170 and 184 of Companies Act, 2013.

Yes

Must Buyer disclose on an individual basis the compensation of directors and high-ranking officers, including bonuses and incentive schemes?

Yes Yes Section 134 of the Companies Act, 2013, Rule 8 of the Companies (Accounts) Rules, 2014, Regulation 34(3) and Regulation 53(f) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 and Accounting Standards-18.

Section 134 of Companies Act, 2013, Rule 8 of Companies (Accounts)Rules , 2014 and Regulation 34 of LISTING OBLIGATIONS AND DISCLOSURE REQUIREMENTSREGULATIONS, 2015 And IND AS 24

Yes

Must Buyer publish the notice of shareholder meeting 21 calendar

No Yes Section 101, 102 and 103 of the Companies Act,

Section 101 and 102 of the

Yes, as per Section 101 of the

days in advance and include information and deadlines on participating and exercising voting rights remotely?

2013 and Rule 18 of the Companies (Management & Administration) Rules, 2014.

Companies Act, 2013 and Rule 20 of the Companies(Management and Administration ) Rules, 2014

Act, the company is required to give a notice of shareholder's meeting atleast 21 days in advance.

Can shareholders or members who hold 5% of Buyer's share capital put items on the general meeting agenda?

No No Section 100(2) of the Companies Act, 2013

Section 100(2) of Companies Act, 2013

As per Section 100(2) of the Act, the Board shall at the requisition made by members representing 10% or more of the paid up share capital of the company, call an extraordinary general meeting of the company.

Must a certified external accountant audit Buyer's annual financial statements?

Yes Yes Sections 139, 143(2) and 143(3) of the Companies Act, 2013 and Rules 11 and 12 of the Companies (Audit and Auditors) Rules, 2014.

Section 139, 143(2) and 143(3) of the Companies Act, 2013 and Rule 11 and 12 of Companies (Audit and Auditors) Rules, 2014.

Yes

Must Buyer disclose its audit reports to the public?

Yes Yes Section 134 of Companies Act, 2013, Rule 11 and Rule 12 of the Companies (Accounts) Rules, 2014

Section 136(1), 137 read with Section 399 of Companies act, 2013.Regulation 34 of SEBI's LISTING OBLIGATIONS AND DISCLOSURE REQUIREMENTSREGULATIONS, 2015

Yes

III. Conflict of interest case study

For the following questions, in addition to previous assumptions, please assume the following:

Mr. James owns 60% of Buyer. He sits on the 5-member board of directors (or management board) together with 2 other directors whom he elected. He is neither CEO nor chair.

Mr. James also owns 90% of Seller, which operates a chain of retail stores. Seller, facing financial difficulties, closed a large number of stores and is no longer using many of its trucks.

Mr. James proposes that Buyer purchase Seller‘s unused fleet of trucks to expand Buyer‘s distribution of its products. Buyer agrees and enters into the transaction.

All required approvals are obtained and all mandatory disclosures are made. Buyer pays Seller a cash amount equal to 10% of Buyer’s assets to acquire the trucks.

The transaction is part of Buyer‘s ordinary course of business and is not ultra vires (i.e. is not outside the power or authority of Buyer).

It is subsequently discovered that the price of the trucks was above market value. The transaction therefore causes damages to Buyer. Shareholders of Buyer want to sue Mr. James as well as board members who voted in favor.

Who provides the final authorization before Buyer can acquire Seller's trucks? The board of directors excluding Mr. James The general meeting of shareholders excluding Mr. James.

Applicable Law: Under Section 188 of the Companies Act, 2013, for a company to enter into a related party transaction, the approval of the board of directors is required by a resolution at a meeting of the board of directions. Further, Rule 15(3) of the Companies (Meetings of Board and its Powers) Rules, 2014 inter-alia states that contracts or arrangements pertaining to sale, purchase or supply of any goods or materials, directly or through appointment of agent, exceeding 10% of the turnover of the Company or INR 1,000,000,000 (Rupees one billion), whichever is lower, prior approval of the company by way of a special resolution would be required. A member who is a related party is not entitled to bote on a special resolution approving the transaction. The aforesaid requirements do not apply in cases of transactions entered into by the Company in its ordinary course of business and on an arms length basis. Rule 15(2) of the Companies (Meetings of Board and its Powers) Rules, 2014 states that a director shall not be present at the meeting during the discussions on the subject matter of resolution relating to contracts or arrangements in which the director is interested. Regulation 23 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 provides that all related party transactions shall require prior approval of the audit committee. However, the audit committee may grant omnibus approval for the related party transactions proposed to be entered into by the company subject to certain conditions listed under Regulation 23(3) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. Regulation 23(4) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 mandates that all material related party transactions shall require approval of the shareholders through special resolutions and the related parties shall

abstain from voting on such resolutions. Section 2(76), Section 188 and Rule 15 of the Companies (Meetings of Board

and its Powers) Rules, 2014 and Notification [F. No. 1/32/2013-CL-V-Part] dated 30 March 2017

If the transaction is with a related party (including company in which director of the company has substantial ownership)

and the property to be purchased is 10% or more than 10% of the net worth of the company or INR 1000 million (100

crores), whichever is lower, then the transaction needs to be approved by shareholders by passing a resolution in the

general meeting. Also, the consent of the Board of Directors by way of resolution is required for entering into any contract

or arrangement with a related party with respect to buying, property of any kind.

In the instant case, the value of the trucks to be purchased is equal to 10% of the net worth of the Buyer and therefore,

approval of shareholders as well as board of directprs would be required. Further, the voting of shareholders or directors

would exclude Mr. James as he being an interested party. Also, the limit of 10% applies to transaction or transactions to

be entered into either individually or taken together with the previous transactions during a Financial Year

Must an independent body, external to the company, review the transaction prior to its execution (e.g. external auditor, outside financial advisor, stock exchange or regulator)? (1) The Buyer must seek approval from the audit committee in accordance with Regulation 23(2) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 and Section 177(4) of the Companies Act, 2013 and (2) the Buyer would be required to make disclosures in compliance with the accounting standards on 'related party transactions' in its annual report. In terms of

Section 188 of the Companies Act, 2013 no approval of the Ministry of Corporate Affairs is required. yes

Applicable Law: Section 188 and 177(4) of the Companies Act 2013 and Regulations 18 and 23 of the SEBI (Listing

Obligations and Disclosure Requirements) Regulations, 2015. Section 177(6) of the Companies Act, 2013 empower Audit

Committee to obtain professional advice from external sources who may review the transaction before it is executed. The

list of transactions for which such professional advice can be obtained includes transaction with related parties.

What information about the Buyer-Seller transaction must Mr. James disclose to the board of directors before the transaction is concluded? Full disclosure of all material facts regarding Mr. James’ interest in the Buyer-Seller transaction. Full disclosure of all material facts regarding Mr. James‘ interest in the Buyer-Seller transaction.

Applicable Law: Sections 184, 297, 299 and 301 of the Companies Act, 2013. Rule 9 of the Companies (Meetings of

Board and its Powers) Rules, 2014. Applicable Law: Section 184, 188 and 189 of Companies Act , 2013

Rule 16 of The Companies (Meetings of Board and Powers) Rules, 2014

Regulation 23 of SEBI (LISTING OBLIGATIONS AND DISCLOSURE REQUIREMENTS) REGULATIONS, 2015

Which information about the Buyer-Seller transaction must be disclosed by Buyer to the public, the regulator or the stock exchange immediately (within 72 hours of closing the transaction)?

Last year This year

A description of the assets purchased by Buyer No Yes

The nature and amount of consideration paid by Buyer to Seller No Yes

Mr. James‘ ownership interest and/or director position in Buyer No Yes

The fact that Mr. James owns 90% of Seller No Yes

Applicable Law: Section 21 of the Securities Contracts (Regulation) Act, 1956; Regulation 68 of the SEBI (Listing

Obligations and Disclosure Requirements) Regulations, 2015. Regulation 30 of SEBI( LISTING OBLIGATIONS AND

DISCLOSURE REQUIREMENTS) REGULATIONS, 2015, the listed entity is required to disclose the transaction details

such as nature, amount, directors' interest, etc within 24 hours of occurrence of the event or information to the stock

exchange.

Which information about the Buyer-Seller transaction must be disclosed by Buyer in its annual financial statement?

Last year This year

A description of the assets purchased by Buyer Yes Yes

The nature and amount of consideration paid by Buyer to Seller Yes Yes

Mr. James‘ ownership interest and/or director position in Buyer Yes Yes

The fact that Mr. James owns 90% of Seller Yes Yes

Applicable Law: Section 134 of the Companies Act, 2013, Accounting Standard 18, and Rule 8 (2) of the Companies

(Accounts) Rules, 2014 and Clause 53 of the Listing Regulations. Section 134 of companies act 2013 and IND AS 24

Can shareholders representing 10% sue Mr. James for the losses that the transaction caused to Buyer? Yes, both. Yes, both.

Applicable Law: Section 241 to 245 of the Companies Act, 2013 are not notified hence Sections 397 to 403 of the

Companies Act, 1956 are still applicable. Section 241 of the Companies Act 2013 deals with application to Tribunal for

relief in cases of oppression wherein the affairs of the company have been conducted in manner prejudicial to members,

provided such member has a right to apply under section 244 of the Act

Section 244 of the Act provides that 10 % or 1/10 of the total number of its member have the right to file an application for

oppression. Further, as per Section 245 the Tribunal after receiving an application from the members can make an order

to to claim damages or compensation from or against the directors for any fraudulent, unlawful or wrongful act or omission

or conduct or any likely act or omission or conduct on its or their part.

Which of the following is the least difficult to prove for shareholders and would be sufficient to hold Mr. James liable for the damage that the transaction causes to the company? That Mr. James was grossly negligent, committed fraud, or acted in bad faith. That Mr. James was grossly negligent, committed fraud, or acted in bad faith.

Applicable Law: Section 188(3) of the Companies Act, 2013. Section 397 of the Companies Act, 1956. Section 102 of the Indian Evidence Act, 1872.

Case Law: Needle Industries (India) Ltd. & Needle Industries Newey (India) Holding Limited

For relief under section 241 of the Companies Act a conduct which lacks in probity, conduct which is unfair to and which causes prejudice to the applicant in the exercise of his legal and proprietary rights as a shareholder must be shown to exist.Further, to prove that the transaction caused damage to the Buyer the Applicant has to provide the details and the manner in which the same resulted in a financial loss to the company.Also, as per Section 102 of the Indian Evidence Act, 1872 the burden of proof in a suit or proceeding lies on that person who would fail if no evidence at all were given on

either side.For conviction under criminal laws, guilt must be proved beyond reasonable doubt. Under Section 241(1) of

the Companies Act 2013 any member of a company may file an application to Tribunal for relief in cases of oppression

wherein the affairs of the company have been conducted in manner prejudicial to members, public interest or company,

provided such member has a right to apply under section 244 of the Act i.e. he holds 10% of the issued share capital or

one tenth of the total number of members applied to Tribunal.

Further, as per the Section 102 of the Indian Evidence Act, 1972, the burden of proof in a suit or proceeding lies on that

person who would fail if no evidence at all were given on either side.

Applicable Law: Section 241 of the Companies Act

Which of the following is the least difficult to prove for shareholders and would be sufficient to hold the other board members liable for the damage that the transaction causes to the company? That there was a conflict of interest, that the transaction was unfair and/or that it caused damages to the company. That there was a conflict of interest, that the transaction was unfair and/or that it caused damages to the company.

Applicable Law: Section 241 of the Companies Act, 2013 (Section 397 of the Companies Act, 1956); Indian Contract Act,

1872; Civil Procedure Code, 1908; Indian Penal Code, 1860; Code of Criminal Procedure, 1973. Under Section 241(1) of

the Companies Act 2013 any member of a company may file an application to Tribunal for relief in cases of oppression

wherein the affairs of the company have been conducted in manner prejudicial to members, public interest or company,

provided such member has a right to apply under section 244 of the Act.

Powers of the Board Members are enumerated under Section 179 of the Act wherein they are entitled to exercise all such

powers and to do all acts and things as the company authorise however these powers should be subject to provisions of

act, memorandum and articles of the company.

Director of a company should act in good faith ,apply due dilligence and reasonable care, skill and dilligence. In the

present case they can be held liable for not applying due diligence.

Applicable law: Sec 241, 179, 166 of the Companies Act 2013.

If shareholders are successful in their action(s) against Mr. James, what remedies are available? Last year This year

He pays damages Yes Yes

He repays personal profits made from the transaction Yes Yes

He is disqualified from serving in the management of any company for 1 year or more

No Yes

Applicable Law: Section 188(3), 188(4), 224 and 245 of the Companies Act, 2013. Section 188(3) and 188(4) provide that the company can file a suit against the director concerned and such director will be required to indemnify the company for the loss sustained by the company due to his actions. Section 245 provides that the shareholders can claim damages or compensation for acts done by the director that are prejudicial to the company's interest. However, this section has not been notified. Additionally, Section 224(5) of the Companies Act, 2013 provides that if fraud has been committed and due to such fraud a director has taken undue advantage or benefit, the Central Government can file an application before the tribunal and seek disgorgement of the benefit and for holding the director personally liable for the loss to the company. This section has not been brought into force and instead Section 242 of the Companies Act, 1956 is still in operation and provides that if on investigation the Central Government thinks that a fraud has been committed, it can initiate proceedings against the person responsible. Sections 166 and 188(3) of the Companies Act, 2013 read with Rule 15 of

the Companies(meetings of Board and its Powers) Rules, 2014. As per Section 242 of the Companies Act 2013, if the

Tribunal on an application is of the opinion that the company's affairs have been conducted in a manner prejudicial or

oppressive to any member of the company the Tribunal may setting aside of any transfer, delivery of goods , exection,

further removal of the managing director and recovery of undue gains made by any managing director.

Section 224 , deals with action to be taken in pursuance of Inspector report, the Inspector is appointed under Section 213

of the Act wherein 10 % of the shareholders can file an application for seeking an order to conduct investigation. As per

section 224(5) wherein based on the report of the Inspector, Central Government may file an application before the

Tribunal for any appropriate order and held director personally liable without any limitation.

Disqualification - As per Section 243, where an order made under section 242 terminates, sets aside or modifies an

agreement then no managing director or other director or manager whose agreement is so terminated or set aside shall,

for a period of five years from the date of the order terminating or setting aside the agreement, without the leave of the

Tribunal, be appointed, or act, as the managing director or other director or manager of the company.

Damages and Compensation - Further in terms of Section 245 (1)(g), the members can claim damages or compensation

for any act done by the director which is prejudicial to the company's interest.

In view of above, the shareholder upon successful claim can ask Mr. James to pay damages, compensate by repaying

personal profits made from the transaction and also, Mr. James can be disqualified for a period of 5 years from the date of

termination or setting aside of the transaction/agreement.

Applicable law : Section 164, Section188(3), (4) and (5) 242, 243,224, 245 of the Companies Act 2013.

Can a court void/rescind the transaction upon a successful claim by shareholder plaintiffs (please select the least difficult argument to prove that would likely succeed)? The Buyer- Seller transaction can be challenged by the Buyer's Shareholders on the ground that it amounted to oppression or mismanagement of the company. A petition may be filed in the court of law for declaring the transaction to be null and void. Yes, if there was a conflict of interest, if the transaction was unfair or caused damages.

Applicable Law: Sections 241, 244 and 245 of the Companies Act, 2013 have not been notified hence section 397, 398,

399 of the Companies Act, 1956 are still applicable. The Buyer -Seller transaction was conducted in a manner prejudicial

to interest of buyer's shareholder therefore they can seek relief from the court on the ground of oppression and

mismanagement. As per Section 242, the Tribunal has the power to terminate, to set aside or modify, any agreement,

entered between the company and the managing director, any other director or manager, upon such terms and conditions

as may, in the opinion of the Tribunal, be just and equitable in the circumstances of the case. Accordingly, yes the court

can declare a transcation to be void/rescind the transaction upon a successful claim.

Applicable Law: Section 241, Sec 242(2) (g) read with Sec 242(2) (i), section 244 and 245 of the Companies Act 2013

and these sections have been notified.

Before filing a suit, can shareholders representing 10% obtain internal company documents such as minutes of board meetings, contracts and purchase agreements in connection with Buyer's acquisition of the trucks? Yes, through an external investigator. Yes, directly.

Applicable Law: Sections 128(3), 189, 206, 207, 208 of the Companies Act, 2013 Yes, the shareholders representing 10

% may inspect the minute-books of general meeting without charge subject to reasonable restriction as imposed by

company article or in general meeting.

As per Section 189 with reference to contract and purchase agreement, a register containing particulars of all contracts or

arrangements wherein the Director of a company is directly or indirectly concerned or interested in a contract or

arrangement should be kept at regsitered office and the same shall be open for inspection by any member during

business hours and extracts can be on payment of prescribed fees.

Applicable Law: Section 189 of the Companies Act 2013

In a civil trial, what is the scope of information that the plaintiff can ask the judge to compel?

From the defendant: Any information that may lead to discovery of relevant information. Any information that may lead to discovery of relevant information.

From an uncooperative witness: Any information that may lead to discovery of relevant information. Any information that may lead to discovery of relevant information.

Applicable Law: Order VIII Rule 1A, Order XI and Order XVI Rule 6 of the Code of Civil Procedure, 1908. The courts generally consider (i) the relevancy of the document to the subject matter in the suit, (ii) the necessity of document for effective disposal of suit while deciding an application for production of documents. In districts and high courts where the commercial courts and/or commercial divisions have been established the amended Order XI as provided under the

Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts Act, 2015 shall apply. The

court may summoned to produce a document without being summoned to produce evidence.

Applicable Law: Order XVI Rule 6 and Order VIII Rule 1 A of the Code of Civil Procedure, 1908.

How specific must the plaintiff’s request to the judge be to compel evidence from a defendant or witness in a civil trial? The request must specifically identify the documents sought (i.e. list the title, author, date and contents). The request must specifically identify the documents sought (i.e. list the title, author, date and contents).

Applicable Law: Section 30 and Order 11 of Code of Civil Procedure Code 1908. In districts and high courts where the commercial courts and/or commercial divisions have been established the amended Order XI as provided under the

Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts Act, 2015 shall apply. Court

may on the application of any party may make orders related to the delivery and answering of interrogatories, the

admission of documents, facts, and the discovery, inspection, production, impounding and return of documents or other

material objects producible as evidence and further issue summonses to persons whose attendance required to give

evidence or to produce documents and order any fact to be proved by affidavit.

Applicable Law: Section 30 of Code of Civil Procedure Code , 1908

Which statements best describe the process of questioning defendants and witnesses in civil trials?

From the defendant: Plaintiff or plaintiff’s lawyer performs the examination without prior approval by the court of the questions posed. The plaintiff or plaintiff‘s lawyer performs his own questioning without prior approval by the court of the questions posed.

From an uncooperative witness: Plaintiff or plaintiff’s lawyer performs the examination without prior approval by the court of the questions posed. The plaintiff or plaintiff‘s lawyer performs his own questioning without prior approval by the court of the questions posed.

Applicable Law: Order XVIII of the Code of Civil Procedure pertains to hearing of the suit and examination of witnesses,

Chapter IX and X of the Indian Evidence Act, 1872. The process of hearing of suit and examination of witnesses is

elaborated in Order XVIII of the Code of Civil Procedure, 1908,

Must the company or defendants reimburse the legal expenses (e.g., court fees, attorney fees and related expenses) of shareholders in their action against company directors? At the court's discretion Yes but the court has discretion whether to reimburse at all or not. Applicable Law: Rule 341 of Companies (Court) Rules, 1959; Code of Civil Procedure, Part I Section 35; Part VI Chapter II of Bar Council of India Rules 1975 made under Section 49(1) of the Advocates Act, 1961. Legal Expenses - As per the Companies (Court) Rules, 1959 R. 341. Costs in the discretion of the Court.-- (1) Costs shall be in the discretion of the Court and no costs of, or incidental to, a proceeding shall be allowed between party and party, unless the same are expressly awarded by an order of the Court. (2) The Court may, in any proceeding where costs are awarded to a party, direct payment of a sum in gross in lieu of taxed costs. Code of Civil Procedure, 1908 Part I Suits in General - Section 35 - Costs (1) Subject to such conditions and limitations as may be prescribed, and to the provisions of law for the time being in force, the costs of and incident to all suits shall be in the discretion of the Court, and the Court shall have full power to determine by whom or out of what property and to what extent such costs are to be paid, and to give all necessary directions for the purposes aforesaid. The fact that the Court has no jurisdiction to try the suit shall be no bar to the exercise of such powers. Contingency Fees - Part VI, Chapter II of the Bar Council of India Rules, 1975 (Rules) made under Section 49(1) of the Advocates Act, 1961 prescribe Standards of Professional Conduct and Etiquette to be followed by Advocates enrolled with the Bar Council of India. The Rules mandate that an advocate shall not stipulate for a fee contingent on the results of

litigation or agree to share the proceeds thereof. As per National Company Law Tribunal Rules 2016, Rule 113 whenever

the Tribunal deems fit, it may award cost for meeting the legal expenses of the respondent of defaulting party. Further

Tribunal in certain cases may direct respondent to bear the cost of litigation of the other side and impose exemplary cost

on defaulting party on abusing the process of court.

As per Sec 242 of Companies Act 2013 if the Tribunal is of the the opinion the the company affairs have been conducted

in manner prejudicial or oppressive to any member the Tribunal on such application may make order as it thinks fit. An

order may provide for imposition of costs as may be deemed fit by the Tribunal.

Section 35 (1) of Code of Civil Procedure, 1908 deals with Costs wherein the costs of and incident to all suits shall be in

the discretion of the Court, and the Court shall have full power to determine by whom or out of what property and to what

extent such costs are to be paid and may give all necessary directions for the same.

Applicable Law: Section 113 of National Company Law Tribunal Rules, 2016 , Section 242 of Companies Act 2013 and

Section 35 OF Code of Civil Procedure , 1908

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