elective corporate law and governance

7/28/2019 Elective Corporate Law and Governance

1/27

CORPORATE LAW ANDGOVERNANCE

A. B. Suraj

PGP Business Law


2/27

Relevant Themes

Form of Business entity: Proportional regulation

Role and Responsibility of Actors: Promoters;Directors and Shareholders

Corporate Governance: Normative framework toEnforcement mechanisms

Process and Procedure of Corporate Restructuring:Transparency requirements


3/27

Formation of a Company

Company = organization of persons and fundsfor common purpose

Only an Incorporation makes it a legal entity registration under Companies Act, 1956 conclusive proof of valid formation

Memorandum and Articles of Association alsoshareholders agreement


4/27

Promoter of a Company

Promoter = one who promotes theformation of the company entrepreneur

Personally liable for contracts beforecompletion of the incorporation process

Fiduciary relationship and legitimateexpenses are payablesweatequity


5/27

Objects Clause

MoA Main, Ancillary and Other Objects

Investor protection and as caution tooutsiders Doctrine of Ultra Vires exceeding the legal power

Ultra vires actions are not binding on theCompany however beneficial they are


6/27

Articles of Association

For internal management rules for day-to-dayactivities

Rule of Constructive notice = presumedknowledge of the AoA by anybody dealing withthe Company

Rule ofindoormanagement an exception of procedural compliance to protect externalinterests with reasonable efforts


7/27

Corporate Entity Principles

Independent of shareholders Saloman case

Capacity to sue and to be sued

Perpetual succession; common seal; limitedliability

Multiple relationships possible with an individual Director, Creditor, Shareholder, Employee


8/27

Company Contracts

Company can authorize any person toenter into contracts on its behalf express

or implied or ostensible authority

Even oral agreements even without seal

Pre-incorporation contracts valid only ifratified freshly by the Company


9/27

Role of Directors

Board of Directors Principal Body Remuneration generally not >11% of net profits

One Director chosen for management neednot be a shareholder Fiduciary Duty to take care and statutory duties

Difference between ownership and control elected and voting powers except fornominees; government; debenture trustee


10/27

Control

Controlling stake = treated asPromoters

Control Powers = Proactive (positive) and Reactive (Negative) Regulation 2(1)(c) of the Takeover Code toinclude the right to appoint

majority of the directors or to control the management or policydecisions exercisable by a person or persons acting individually or inconcert directly or indirectly, including by virtue of their shareholding ormanagement rights or shareholders agreements or voting agreementsor in any other manner

Full and effective control usually the Board of Directors

Protectiverightsof financial investors Negative in nature Board representation; quorum rights; supermajority rights Not absolute; at best a veto power; usually by a single nominee


11/27

Corporate Veil

Natural persons behind the legal entity Commission of Crimes Tax evasion Fraudulent intent To distinguish between holding and subsidiary Where the Company is being used as an agent of the

shareholders/directors

Corporate Criminal Liability principles Corporate Manslaughter

and Corporate Homicide Act, 2007 in UK = if Company isnegligent - senior management liable

Whistleblower policy still at infancy in India


12/27

Criminal Liability

Tests for Prosecution of a Corporation: Nature and seriousness of crime Complicity and pervasiveness within the Company History of similar conduct Corporations timely, voluntary disclosure and

cooperative efforts Presence of a compliance and ethics code

Prosecution = combined efforts of the Corporationand the Investigating Authorities Concern ofconfidentialinformation


13/27

Criminal Liability

Rationale for Criminal liability = enormous influenceon economy Strict degree of Vicarious criminal liability attribution of

collectivemens reaof Executives Gross negligence or breach of duty

Test of Organizational approach

Applies to Partnerships/Trusts/Unions too

Statutory compliances also covered for liability


14/27

Criminal Liability

Fundamental Rights of a Corporation Fair trial = Procedural safeguards

Issue of Political funding

Punishments for Corporations:

Restitution; Fines; Probation under Courtsupervision; Forfeiture clauses; and Publicapologies


15/27

Culpability of Corporations

Crime committed by an employee despite strongCorporate policy against it?

Crimes committed by contractors/ consultants?

Crimes committed in ignorance or wrong

understanding of law?

Serious frauds committed by senior management?


16/27

Enforcement of

Corporate Governance


17/27

Review of Managerial Decisions

Concept of Fiduciary duty different from bestpractices; norms; aspirations

Due care and good faith to be demonstrated in allactions Interest of the company and law as an objective

Compliance requires fiduciary discharge of functions Document actions/decisions extensively


18/27

Legal Duty of CareDirector Vs. An Agent

Fiduciary in nature

Has to only benefit Companysinterest

Has to make up Losses caused+ Profits made

Unequal position withshareholders

Responsible to minorityshareholders and Society aswell

Contractual nature

Self-interest may also beserved

Has to compensate only forthe losses

Equal negotiating capacity ofparties

Responsible only to the otherParty


19/27

Elements ofCorporate Governance

In India Clause 49 of the Listing Agreementbetween a Company and Stock Exchanges introduced in 2000

In addition to other SEBI Rules and Regulations

In the US Public Company Accounting Reform andInvestor Protection Act, 2002 also known asSarbanes-Oxley Act DIP Guidelines of SEBI in 2000 itself

Accountability imposed on Public and ListedCompanies monitor aggregation of capital


20/27

Elements ofCorporate Governance

Composition of the Board 1/3rd to 50% of IDs on the basis ofnature of leadership

Independent Directors elaborate guidelines to determine

independence

Qualified and Independent Audit Committee for mainlyFinancial matters

Management Discussion and Analysis Report on Companyprospects as evaluated by the Board

CEO/CFO certifying compliance by a declaration


21/27

Mandatory disclosures

On related party transactions and arms lengthjustifications

Accounting and Risk Management practices

Complete details of Directors remuneration including Stock options; other perks and perquisites

Disclosure of any Contingent Liability


22/27

Trends in enforcement

Moving from principles-based to rule-based Weak regulatory oversight and monitoring Prevalent management override

Empower IDs more exclusive meetings Minority shareholders not strong despite legal powers Skill sets of Auditors and Managers Effectiveness of the Board of Directors needs to be evaluated Risk management no process in place

Remuneration of top management (CEOs) Ethical values and their relevance/enforcement CG specialists to be built as a professional team


23/27

Issues for Discussion

Objective of Corporate Governance maximization of shareholdervaluevs.governancenorms

Various stakeholdersinterests especially of a big company

Directors of a Company are like Ministers of the Government

Collective responsibility

Accountable to not only the enfranchised stakeholders

Enforceability of CG adequacy of institutional and legal regime

SEBI is the only regulator

Corporate Social Responsibility a much wider and timely initiative

OECD Guidelines and related mechanisms


24/27

Corporate Restructuring

Companies Act allows for any scheme ofrestructuring and reorganization of company Internal restructuring/ Winding up/ M&As/ Takeover

Does not cover buy-back of shares; mere acquisition of property Fairness is the basis for evaluating the entire process

Any arrangement facilitated even if ultra vires theMoA Objects benefit evaluated

Fairvalue of assets and shares contextual andbased on relevant facts; no set rule or process


25/27

Restructuring

High Court to approve the scheme of merger NCLT proposed as a single-window Fair, just and reasonable review not on merits

Public policy; Third Party interests (creditors, employees)

Due diligence based process Fair disclosure of bases for valuation

Best judgement by BoD of the target

Regulated by Competition Law principles


26/27

Case Study Issues

Regulatory bodies in Indian Corporate Law Ministry of Company Affairs; Company Law Board; High Court;

SEBI; and the Competition Commission (in specificcircumstances)

What ifforeignCompaniesare involved? Publicinterestdomain scope and content?

Validity and legitimacy of a personal contract and shareholderresolutions

Have not the Companies endorsed the Contract? Remedy available for Minority shareholders? IT benefits available only if transfer is by a minimum of 75% of

the shareholders of the transferor towards maintainingmajorityanduniting ofinterestsand seamless continuity


27/27

Case StudyIssues

Standing of creditors and employees/ labourworkforce Not in decision-making; but in protection of interests

What if the transferor-Company is declared as being aSick Company?

Transfer of all assets and liabilities Rights; IPRs; Privileges; Powers; beneficial Contracts

Does it amount toSale?Capitalgains?

Benefits of contracts? Status of Employees?

elective corporate law and governance

Documents