Tag Archives: Companies Act 2013

Post-Merger Corporate Governance

Corporate governance is an important aspect for the success and growth of any organisation. A well-structured corporate governance regime becomes even more important post a merger (strategic or otherwise). It might prove to be especially beneficial in the smooth transition and functioning of the business of the merged entity, especially during the early stages after the merger. At the same time, a weak corporate governance structure may be detrimental to the success of the merged entity.

In a merger, the merging entities commonly come together to work and operate as a single merged entity. This would mean the integration of different cultures, mindsets, viewpoints, work ethics, principles, etc. Therefore, post-merger corporate governance becomes important so that all discussions between the key stakeholders of the merged entity are seamlessly documented leaving zero scope for potential conflict in the future. This would also help the key stakeholders to run the business of the merged entity without having to worry about internal conflicts, mismanagement, etc. Also, depending on the end goal or the objectives of the merging entities, there has to be a clear understanding on the type of merger to be undertaken. Refer to our previous post on M & A: Different structures and a comparative to know more about different structures of M&A.

What is Corporate Governance?

Before moving on to the different aspects of corporate governance to be considered post a merger, let us try to understand the meaning of the term ‘corporate governance’. With respect to early-stage unlisted entities, corporate governance generally refers to the internal rules and policies of the organisation, the relationship between the shareholders, the roles and responsibilities of the directors and the top management and the decision-making structure, including the financial and operational decision making. In a nutshell, it includes all aspects which govern the organisation and basis which business is conducted and an organisation is run, both with respect to internal stakeholders, as well as external stakeholders.

Significance of Post-Merger Corporate Governance

Merger of entities, more often than not, would mean the integration of different cultures, mindsets, viewpoints, work ethics, principles, etc. Even though the end goal would be the same, that is, the success and growth of the merged entity, perspectives on the means to achieve the end goal may differ from person to person. However, since the merging entities would no longer be separate entities, it is important that the means to achieve the end goal is also aligned. Thus, while corporate governance is very important for every organisation, it gains even more significance post a merger.

There has to be a clear understanding on the structure of the corporate governance post-merger, which could primarily be recorded discussions and step plans to achieve the objectives of the merger. For example, if the main objective of a merger is market expansion of the business, it would be good to have a clear step plan detailing out the potential markets, key people to target the same, timelines and other operational parameters which could eventually determine achievement of results as agreed amongst the key stakeholders. If a merger involves employee movement, a clear plan for the transitioning of employees, in terms of location, identification, compensation plan, positive interactions across teams and often (in new age companies) regular counselling on challenges faced may prove to be tremendously beneficial in the long run.

Also, post the merger, it is always better to have each and every discussion documented. Such discussions (including the informal discussions) should also be conducted at the board level, which would help in ensuring that the important stakeholders are part of these discussions. The objective is not to increase bureaucracy but to ensure that the operations are seamless. This might not seem to be important especially during the initial stages after a merger. However, the importance of documenting every discussion comes into play when, at some point, the difference of opinion arises. In order to avoid tense and awkward situations at that point of time, if every decision or discussion in relation to the business and operations is documented and is taken with the knowledge of all the key stakeholders, it would to a large extent help in solving the issue at hand in a much more efficient and faster manner.

A merger would, in most circumstances, result in a change in the board composition and management. The board of the merged entity will play an important role in effective management and quick transition. The composition of the board (and the committees of the board) is usually determined prior to the closing of the transaction and is documented in the transaction documents. The composition of the board (and the committees of the board) will have to be properly thought through and well planned. Every member of the board/committee needs to understand their respective roles. It is important to ensure that there is equal representation for all the key stakeholders. The members of the board/committees have to be diverse, experienced and should have a clear understanding of the goals of the merger. Also, it is important to conduct review meetings to ensure that the goals or targets are being met and if not, analyse on the reasons and improve on the same. The board/committee meetings may be conducted on a regular basis.

It may be a good option to appoint an independent director to the board. This will help in situations where there is a difference of opinion between the various members of the board since the independent director will be a neutral party and would be able to give unbiased opinions. The independent directors bring objectivity and an independent opinion to the decisions made by the directors. They can also help in bringing more transparency to the proceedings of the board and also ensure that the interests of the shareholders are given due regard. However, an independent director can play a major role in ensuring good corporate governance only as long as he/she functions independently. His/her decisions should not be influenced by the other board members. Refer to our previous post on Independent Directors to know more about independent directors and their independence.

Conclusion

Even though there is no specific statute or law governing corporate governance as a whole in case of unlisted companies, there are various provisions under the Companies Act, 2013, SEBI guidelines, etc. which indirectly strives to have a good corporate governance system like provisions for appointment of independent directors and their roles and duties, appointment of audit committees, role of directors, etc.

To achieve the goals and objectives of the merged organisation and for a smooth transition, a well-structured corporate governance is vital.

 

Author: Paul Albert, Associate at NovoJuris Legal

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Issuance of Equity and Preference Shares with Differential Rights and Variation of Rights

Background

The term differential rights with respect to shares can be interpreted to mean the existence of rights different in nature than the rights that are inherently associated with ordinary shares. The holder of these shares has rights which are different from the holder of ordinary shares. Differential Rights in association with shares are in relation to voting rights, dividend or otherwise.

Issuance of shares with differential rights may be used as a tool for strategizing control and dilution of voting rights in a company.

Shares with Differential Rights under the Companies Act, 2013

Section 43(a) of the Companies Act, 2013 provides for the issue of equity shares having differential rights in accordance with Rule 4 of the Companies (Share Capital and Debentures) Rules, 2014. Rule 4(1) of the Companies (Share Capital and Debentures) Rules, 2014 stipulates that a company limited by shares can issue equity shares with differential rights as to dividend, voting or otherwise, only if such issue of shares meet the following conditions:

  • The issue should be authorised by the articles of association;
  • The issue should be authorised by the shareholders of the Company by way of an ordinary resolution; (issue of such shares of a listed company shall be approved by shareholders through postal ballot)
  • The shares with differential rights shall not exceed twenty-six percent of the total post-issue paid up equity share capital including equity shares with differential rights issued at any point of time;
  • The company should have a consistent track record of distributable profits for the last three years;
  • The company has not defaulted in filing financial statements and annual returns for three financial years immediately preceding the financial year in which it is decided to issue such shares;
  • the company has no subsisting default in the payment:
  1. a declared dividend to its shareholders or
  2. repayment of its matured deposits or
  3. redemption of its preference shares or debentures that have become due for redemption or
  4. Payment of interest on deposits or debentures
  • The Company should not have defaulted on:
  1. Repayment of loans from banks and public financial institutions or interest thereon
  2. Payment of dividend on preference shares
  3. Payment of statutory dues for employees
  4. Depositing moneys into the Investor Education and Protection Fund.

However, a company may issue equity shares with differential rights upon expiry of five years from the end of the financial year in which such default was made good.

  • The Company should not have been penalized by any Court or Tribunal during the last 3 years of any offence under RBI, SEBI, SCRA, FEMA or any other special Act, under which such companies being regulated by sectoral regulators.

Additionally, the notice of the general meeting for issuing equity shares with differential rights shall contain particulars in the explanatory statement as provided in Rule 4(2) of the Companies (Share Capital and Debentures) Rules, 2014.

Private companies have been exempted from the applicability under Section 43 vide a Ministry of Corporate Affairs Notification G.S.R 464 (E) dated June 5, 2015. As Section 43 is read in accordance with Rule 4 of the Companies (Share Capital and Debentures) Rules, 2014, the said rule shall also not be applicable to private companies.

However, the question still remains whether private companies are at a full liberty to structure their share capital as they are not required to comply with Section 43 of the Companies Act, 2013.

Differential Voting Rights

Voting Rights of Holders of Compulsorily Convertible Preference Shares

As per Section 47(2) of the Companies Act, 2013, a holder of compulsorily convertible preference shares shall vote only on those resolutions:

  • That directly affects the rights attached to his preference shares
  • For winding up of the Company.
  • For repayment or reduction of its equity or preference share capital.

However, a holder of compulsorily convertible preference shares is eligible to vote on all resolutions placed before the Company in case the Company fails in paying the dividend in respect if those preference shares, for a period of two years or more. Private companies are exempted from complying with Section 47, where memorandum or articles of association of the private company so provides.

If a Company has issued multiple classes of preference shares, the variation of rights (voting and dividend) of such classes of preference shareholders would be as prescribed by Section 48 which applies to both public and private companies. For the variation of rights for different classes of preference shareholders, a special resolution is required to be passed by the said class of shareholders for which the rights are to be varied.

Therefore, a Company may have different classes of preference shareholders having voting rights different from the voting rights available to ordinary class of preference shareholders.

Voting Rights of Holders of Equity Shares

Under Section 47(1) of the Companies Act, 2013, in regard to voting rights, it has been stated that:

  1. Every member of a company limited by shares and holding equity share capital therein, shall have a right to vote on every resolution placed before the company; and
  2. His voting right on a poll shall be in proportion to his share in the paid-up equity share capital of the company.

As mentioned earlier, Section 43 provides for issuing equity shares with differential rights which includes but is not limited to differential rights as to voting.

In case a Company has multiple classes of equity shareholders, the variation of rights (voting and dividend) of such classes of shareholders would be as prescribed by Section 48 which applies to both public and private companies.

In a recent change, the Government of India has come up with a draft ecommerce policy wherein it suggests that there should be differential voting rights in order to give Indian founders with minority stakes more control over the Company.

Conclusion

Shares with differential rights may have rights that are secondary to those attached to ordinary equity shares. Thus, these enable promoters to have control of the company. An investor investing funds into a company may also want beneficial voting rights (along with preference shareholding), in order to ensure that the company utilises the supplied funds judiciously and honour all obligations undertaken in the transaction documents. This can be achieved by way of shares issued to them having differential rights. Hence, the transaction documents of such issuance and subscription of the shares with differential rights must include the available rights (e.g. reserved matters) to the investor and detail the manner of exercise of such rights.

Authors: Mr Spandan Saxena Ms Alivia Das.

Change in Levy of Additional Fee for Delay in Annual Filings with Ministry of Corporate Affairs

Background

The Ministry of Corporate Affairs (the MCA) on 8 May 2018, notified the Companies (Registration Offices and Fees) Second Amendment Rules 2018. With this notification, all annual filings filed post 30 June 2018, would incur a penalty of Rs. 100 per day for the period of delay. The MCA has notified these amendment rules in pursuance of an amendment made in section 403 of the Companies Act 2013 (the “Act”), vide the Companies (Amendment) Act, 2017.

With this amendment, the delay in filing of Annual return under section 92 of the Act or Annual Financial Statements & Boards’ Report under section 137 of the Act would result in late filing fee of Rs. 100 per day with effect from 1 July 2018.

The levy of penalty/additional fee after the expiry of 30 June 2018 shall be as provided in the below table:

 

Particulars

Additional Filing fees

If the due date is after 30 June 2018

If the due date is prior to 30 June 2018

Form 23 AC, 23 ACA, 23AC- XBRL, 23 ACA- XBRL, 20 B, 21B under the Companies Act, 1956 Not applicable (As the due date would have expired under the Companies Act 1956)
Sl. No. Period of delay Additional fee payable (in Rs.) up to 30 June 2018
1 Up to 30 days 2 times of normal filing fees
2 More than 30 days and up to 60 days 4 times of normal filing fees
3 More than 60 days and up to 90 days 6 times of normal filing fees
4 More than 90 days and up to 180 days 10 times of normal filing fees
5 Beyond 180 days 12 times of normal filing fees

 

Plus

 

Rs. 100 per day with effect from 1 July 2018

Form MGT-7 under section 92 of the Act

OR

Form AOC-4, AOC-4 CFS, AOC-4 XBRL under Section 137 of the Act

Rs. 100 per day
Sl. No. Period of delay Additional fee payable (in Rs.) up to 30 June 2018
1 Up to 30 days 2 times of normal filing fees
2 More than 30 days and up to 60 days 4 times of normal filing fees
3 More than 60 days and up to 90 days 6 times of normal filing fees
4 More than 90 days and up to 180 days 10 times of normal filing fees
5 Beyond 180 days 12 times of normal filing fees

 

Plus

 

Rs. 100 per day with effect from 1 July 2018

Author: Ms. Shivani Handa is a qualified company secretary and works as an Associate at NovoJuris Legal.