A company's leadership and ownership structure must be adaptable to its growth and changing needs. As businesses expand and evolve, the necessity to add or remove directors and shareholders becomes apparent. The Companies Act, 2013, offers a comprehensive framework to facilitate these changes while maintaining legal compliance and upholding good corporate governance. It sets forth procedures for the appointment, resignation, and removal of directors, ensuring that the leadership remains effective and responsive to the company's requirements. Similarly, the Act outlines the mechanisms for altering the composition of shareholders, including the issuance and transfer of shares. These provisions are designed to protect the interests of all stakeholders, promote transparency, and ensure that corporate actions align with statutory obligations. By adhering to the guidelines of the Companies Act, 2013, companies can navigate leadership and ownership transitions smoothly, thereby fostering stability and trust among investors, employees, and other key parties.

  1. ADDING OF DIRECTOR

The addition of a director in a company under the Companies Act, 2013, India, involves various sections that outline the procedures and requirements.

1.1 Appointment of Directors

  1.  Section 149: Board of Directors for Company
  • Each business must have a board of directors made up of individual directors.
  • The kind of company (public, private, or one person company) can affect the minimum and maximum number of directors.
  1. Section 152: Appointment of Directors
  • All directors shall be appointed by the company at its general meeting, unless otherwise specified by the Act.
  • To hold the position of director, an individual must be qualified and give their permission.
  • Within thirty days of the appointment, the company must file the consent with the Registrar.
  • Provisions related to the retirement of directors by rotation in the case of public companies.
  1. Section 161: Additional, Alternate, and Nominee Directors

Additional Director:

  • If the Articles of Association permit it, the Board of Directors may designate one more director.
  • This extra director will only be in office until the following annual general meeting, or until the last day the AGM was scheduled to take place, whichever comes first.

Alternate Director:

  • If permitted by its bylaws or by a resolution, the Board may designate a substitute director in the event that the original director is unable to serve in India for a minimum of three months.
  • Until the original director returns or resigns in accordance with the Act's provisions, the alternate director assumes office.

Nominee Director:

  • The central government may appoint a director in accordance with its shareholding in a government company, or any institution may nominate directors in accordance with any agreement or currently enacted law.
  1. Section 160: The ability of individuals who are not retiring directors to stand for directorship
    • If a person who is not a retiring director leaves a written notice under his hand at least 14 days prior to the meeting, he or she is eligible to run for directorship.
    •  A deposit of one lakh rupees, or the maximum amount prescribed, must be made; this deposit will be reimbursed if the candidate is elected to the position of director or receives more than 25% of the total valid votes.

Section 170: List of directors and important executives along with their ownership stakes

  • Each company is required to maintain a register at its registered office that includes information about its directors and senior management, including shares they own in the company, its holding company, its subsidiary, and its associate companies.
  • During business hours, the register will be accessible for inspection, and copies may be taken.

Compliance and Documentation

  • DIR-2: Consent to serve as a company director.
  • DIR-12: specifics regarding the appointment of directors and important managerial staff, as well as any changes within them.

Filing with ROC

Following the appointment and any required shareholder approvals, the company must ensure the official record is updated with the Registrar of Companies (ROC). Section 153 of the Companies Act, 2013 mandates the filing of e-Form DIR-6 within 30 days from the date of appointment. This e-form serves as a vital communication channel, providing the ROC with essential details about the new director, such as their name, DIN (Director Identification Number), and contact information. This filing process ensures transparency and maintains a central record of the company's directors with the government body.

2. REMOVAL OF DIRECTOR

A director's departure from a company can occur through various avenues, each outlined in the Companies Act, 2013 with specific procedures to ensure fairness and transparency.

  • Resignation (Section 168): The most straightforward method is a director's voluntary resignation. A director may resign under Section 168 of the Act by sending a formal resignation letter to the business. This written document serves as a formal notification and helps maintain a clear record of the director's departure.
  • Removal by Shareholders (Sections 169 & 115): Shareholders also possess the power to remove a director before their term ends. This process hinges on Section 169, which empowers shareholders to pass an ordinary resolution at a general meeting. However, exercising this right requires adherence to due process as outlined in Section 115. According to this section, the director must receive a special notice outlining the reasons for removal at least 14 days prior to the meeting. The director also has the right to speak up during the meeting and give their opinion prior to the shareholder vote.
  • Removal by Tribunal: The removal of a director by the Tribunal under the Companies Act, 2013, is governed by Section 242(2)(h) and Section 167(1). This procedure usually kicks in when a director's actions negatively impact the company's, its members', or the public's interests. By outlining these procedures, the Companies Act ensures that the removal of a director is a well-considered and documented process, protecting the interests of both the company and the director.

3. ADDING A SHAREHOLDER

The addition of a shareholder in a company under the Companies Act, 2013 involves certain procedures and compliance requirements.

3.1Relevant Sections and Provisions

  1. Section 44: Nature of Shares or Debentures
  • Any member's shares, debentures, or other interests in a company are movable property that can be transferred in accordance with the terms outlined in the articles of organization.
  1. Section 56: Transfer and Transmission of Securities
  • Lays out the procedure for transfer and transmission of shares, including the requirement for proper documentation and registration by the company.
  1. Section 59: Rectification of Register of Members:
  • Describes the process for amending the membership list in the event that there is a disagreement over the transfer of shares.

3.2 Steps to Add a Shareholder

  1. Subscription to Shares at Incorporation:
  • At the time of incorporation, subscribers to the memorandum become the initial shareholders.
  1. Transfer of Shares:
  • A new shareholder can be added by transferring existing shares from current shareholders.
  • Procedure for Transfer:
    1. Obtain a share transfer deed in the prescribed form (Form SH-4).
    2. Execute the transfer deed, duly attested by the transferor and transferee, and stamped, dated, and signed.
    3.  Include a letter of allotment or the original share certificate with the transfer deed.
    4. Deliver the documents to the company for registration of the transfer.
    5. The board of directors must approve the transfer.
    6. The transferee must receive a new share certificate from the company and update its membership register.
  1. Allotment of Shares:
  • A company may also add a shareholder by allotting new shares.
  • Procedure for Allotment:
  1. Pass a board resolution for the allotment of shares.
  2. Offer shares to the existing shareholders in proportion to their holdings (in case of rights issue) or to other persons as decided by the board (in case of private placement or public issue).
  3. Receive applications and money from the interested parties.
  4. Conduct a board meeting to approve the allotment of shares.
  5. File Form PAS-3 with the Registrar of Companies within 30 days of the allotment.
  6. Update the membership list and give share certificates to the recipients.

3.3 Compliance and Documentation

  • Share Transfer Deed (Form SH-4): Required for the transfer of shares.
  • Board Resolution: For approving the transfer or allotment of shares.
  • Form PAS-3:  within thirty days of the allotment, return the e-Form PAS-3 to the Registrar, along with the full list of allottees to whom the securities have been issued.
  • Register of Members: Must be updated with the details of new shareholders.

3.4Important Considerations

  • Stamp Duty: Ensure the share transfer deed is duly stamped as per the applicable stamp duty laws.
  • Share Certificate: Issue share certificates to new shareholders within two months from the date of allotment or transfer.
  • Private Companies: May have additional restrictions on the transfer of shares as specified in their AOA.

Adding a shareholder involves either the transfer of existing shares or the allotment of new shares, both of which require compliance with the procedures and documentation as specified in the Companies Act, 2013.

4. REMOVING A SHAREHOLDER

The Companies Act, 2013, does not explicitly provide a direct mechanism for the removal of a shareholder from a company. However, a shareholder can effectively cease to be a member of a company through certain mechanisms, such as the transfer of shares, buy-back of shares, forfeiture of shares, and reduction of share capital. Here is an overview of these mechanisms and the relevant sections:

4.1 Mechanisms for Removal of Shareholder

  1. Transfer of Shares
  • Section 44: Shares are movable property that can be transferred in accordance with the terms specified in the company's articles.
  • Section 56: Procedures for the transfer of shares.
    • The shareholder can voluntarily transfer their shares to another person.
    • The transfer must be executed through a share transfer deed (Form SH

4) and approved by the Board of Directors.

  1. Buy-Back of Shares
    • Sections 68 to 70: Buy-back of securities by a company.
      • A company can buy back its shares from shareholders, effectively reducing the number of shares held by the shareholder.
      • The buy-back must be authorized by the company's articles and approved by a special resolution in a general meeting.
      • Specific conditions and limits apply to the buy-back of shares.
  2. Forfeiture of Shares
    • Articles of Association: Govern the forfeiture of shares.
      • If a shareholder fails to pay the call money on shares, the company can forfeit the shares as per the provisions in its articles.
      • Forfeiture results in the shareholder losing ownership of the shares.
      • Proper notice must be given to the shareholder before the shares can be forfeited.
  3. Reduction of Share Capital
    • Section 66: Reduction of share capital.
      • A company can reduce its share capital in accordance with the procedure laid down in this section.
      • This can involve cancelling or reducing the unpaid share capital, returning excess capital to shareholders, or cancelling shares held by shareholders.
      • Requires a special resolution and confirmation by the National Company Law Tribunal (NCLT).
  4. Compulsory Acquisition Under a Scheme of Arrangement
    • Sections 230 to 232: Compromises, arrangements, and amalgamations.
      • A scheme of arrangement approved by the NCLT may provide for the compulsory acquisition of shares from shareholders.
      • This often occurs in mergers, demergers, or other corporate restructuring.

4.2 Compliance and Documentation

  • Share Transfer Deed (Form SH-4): For transfer of shares.
  • Board Resolution: For approving the transfer or forfeiture of shares.
  • Notice of Forfeiture: To be issued to the shareholder in case of non-payment of call money.
  • Register of Members: Must be updated to reflect the changes in shareholding.

4.3 Important Considerations

  • Stamp Duty: Ensure that the share transfer deed is duly stamped as per applicable stamp duty laws.
  • Share Certificate: Issue or cancel share certificates as per the changes in shareholding.

The process of removing a shareholder usually entails one or more of the following mechanisms: transfer, buy-back, forfeiture, or reduction of share capital. All of these mechanisms necessitate adherence to the protocols and records outlined in the Companies Act, 2013, as well as the articles of association of the company.

5. CONCLUSION

The Companies Act, 2013 guides companies through leadership and ownership changes, establishing clear procedures for adding or removing directors and shareholders. Adhering to these procedures minimizes legal risks, ensures transparency, and promotes good governance. However, shareholder removal can be complex, often requiring legal expertise to navigate agreements like buyback clauses or Articles of Association provisions. Legal professionals can help ensure compliance with the Act and company agreements. By following the Act's framework and seeking legal advice, when necessary, companies can manage changes confidently, fostering stability and enabling them to focus on strategic goals and value maximization for stakeholders.