LLP Act 2008
LLP Act 2008
Introduction:
its entrepreneurs as well as its technical and professional manpower has been acknowledged internationally. In this background, a need was felt for a new corporate form that would provide an alternative to the traditional partnership which exposes its partners to unlimited personal liability and a statute based governance structure of limited liability companies. Limited Liability Partnership [LLP] is viewed as an alternative corporate business vehicle that provides the benefits of the limited liability but allows its members the flexibility of organizing their internal structure as a partnership based on a mutually arrived agreement. LLP form is expected to enable entrepreneurs, professionals and enterprises providing services of any kind or engaged in scientific and technical disciplines, to form commercially efficient vehicles suited to their requirements. With this background, Limited Liability Partnership Act, 2008 [LLP Act] was enacted on January 7, 2009. Subsequently, Government of India [GOI] notified various provisions of LLP Act on 31st March 2009. GOI has, on April 1, 2009, also notified the Limited Liability Partnership Rules, 2009 [LLP Rules] in respect of registration and operational aspects under the LLP Act. NATURE OF LLP LLP is a "body corporate" formed and incorporated under LLP Act;
legal entity separate from its partners and has perpetual succession. [Section 3(1)] Two or more partners are required to form an LLP. Any individual or a body corporate can be a partner in a LLP. In case if individual is a partner, he should not be found to be of unsound mind; or an undercharged insolvent; or a person who has applied to be adjudicated as insolvent and the application is pending [Sections 5 and 6]
LLP shall have at least two "designated partners" who are individuals and at least one of them shall be "resident in India". In case one or more of the partners of a LLP are bodies corporate at least two individuals who are partners of such LLP or nominees of such bodies corporate shall act as "designated partners" "Resident in India" means a person who has stayed in India for minimum 182 days during the immediately preceding 1 year.
Designated partner is responsible for compliance with the provisions of LLP Act.
Designated Partner is required to obtain Designated Partner Identification Number [DPIN] from the Central Government.
Application for allotment of DPIN needs to be submitted online on the LLP website along with the necessary proof duly attested and certified as prescribed.
INCORPORATION OF LLP [SECTIONS 11 TO 21] Procedure for incorporation of LLP is similar to the procedure for incorporation of a company under the Companies Act, 1956. Applicants are first required to file the application for reservation of name with the Registrar of Companies [ROC]. Once the name applied is approved by the ROC, the documents for incorporation of LLP need to be filed.
Name of every LLP shall end with the words "Limited Liability Partnership" or "LLP".
Name which is undesirable or nearly resembles to that of any other partnership firm or LLP or any body corporate or trade mark, is not allowed.
Any entity (body corporate/registered partnership firm) which has a name similar to the name of LLP which has been incorporated subsequently may seek change of name of such LLP through ROC within 24 months from date of registration of such LLP.
No person shall carry on business under any name/title which contains the words "Limited Liability Partnership" or "LLP" without duly incorporating it as LLP under the LLP Act.
LLP is required to file with the ROC, the LLP agreement ratified by all the partners within 30 days of incorporation of LLP.
Mutual rights and duties of partners of an LLP inter se and those of the LLP and its partners shall be governed by an agreement between the partners, or agreement between the LLP and its partners. In absence of any such agreements, the mutual rights and duties shall be governed by the LLP Act.
Every partner of a LLP is, for the purpose of the business of LLP, the agent of LLP, but not of other partners.
LLP, being a separate legal entity, shall be liable to the full extent of its assets whereas the liability of the partners of LLP shall be limited to their agreed contribution in the LLP.
the partner in fact has no authority to act for the LLP in doing a particular act; and the person knows that he has no authority or does not know or believe him to be a partner of the LLP
LLP is liable if the partner of a LLP is liable to any person for wrongful act/omission on his part in the course of business of LLP/with its authority
Obligation of LLP whether arising in contract or otherwise, shall solely be the obligation of LLP. Liabilities of LLP shall be met out of properties of LLP.
Partner is not personally liable for the obligations of LLP solely by reason of being a partner of LLP.
No partner is liable for the wrongful act or omission of any other partner of LLP, but the partner will be personally liable for his own wrongful act or omission.
The liability of the LLP and partners who are found to have acted with intent to defraud creditors or for any fraudulent purpose shall be unlimited for all or any of the debts or other liabilities of the LLP.
Cessation of a partner on grounds like resignation, death, dissolution of LLP, declaration that a person is of unsound mind, declared/applied to be adjudged as insolvent etc. will not be effective unless
the person has notice that the partner has ceased to be so; or notice of cessation has been delivered to ROC. The notice of cessation may be filed by the outgoing partner if he has reasonable cause to believe that LLP has not file the said notice. CONTRIBUTION BY PARTNER [SECTIONS 32 AND 33]
A contribution of a partner to the capital of LLP may consist of any of the tangible, movable or immovable property intangible property other benefit to the LLP including money, promissory notes, contracts for services performed or to be performed.
The obligation of a partner for the contribution shall be as per the LLP agreement.
Creditor, which extends credit or acts in reliance on an obligation described in the LLP agreement, without the notice of any compromise made between the partners, may enforce the original obligation against such partner.
LLP shall maintain the prescribed books of accounts relating to its affairs on cash or accrual basis and according to the double entry system of accounting.
The accounts of every LLP are required to be audited, except in following situations: Turnover does not exceed Rs. 40,00,000 in any financial year; or Contribution does not exceed Rs. 25,00,000
Central Government has powers to exempt certain class of LLP from requirement of compulsory audit.
LLP are required to file following documents with the ROC Statement of Account and Solvency, within 30 days from the end of 6 months of the financial year; Annual return within 60 days from the end of the financial year.
The rights of a partner to a share of the profits and losses of the LLP and to receive distribution in accordance with the LLP agreement are
transferable, either wholly or in part. However, such transfer of rights does not cause either disassociation of the partner or a dissolution and winding up of the LLP.
Such transfer of right, shall not, by itself entitle, the assignee or the transferee to participate in the management or conduct of the activities of the LLP or access information concerning the transactions of the LLP.
On establishment of a place of business in India, foreign LLP are required to file prescribed documents for registration with ROC within 30 days of the establishment in India.
Any alteration in the constitution documents, overseas principle office address and partner of foreign LLP are required to be filed with the ROC in the prescribed form within 60 days of the close of the financial year.
Any alteration in the certificate of registration of foreign LLP, authorized representative in India and principle place of business in India are required to be filed with the ROC in the prescribed form within 30 days of alteration.
Foreign LLP ceasing to have a place of business in India, are required to give notice to ROC in the prescribed form within 30 days of its intention to close the place of business and from the date of such notice, the obligation of Foreign LLP to file any document with the ROC
shall cease, provided it has no other place of business in India and it has filed all the documents due for filing as on the date of the notice. CONVERSION OF PARTNERSHIP FIRM/PRIVATE COMPANY/UNLISTED PUBLIC COMPANY INTO LLP [SECTIONS 55 TO 58, SECOND, THIRD AND FOURTH SCHEDULES] GOI has, on May 22, 2009, notified provisions relating to conversion of a partnership firm as defined under the Indian Partnership Act,1932 into LLP; a private limited company into LLP; an unlisted public company into LLP. Second, Third and Fourth Schedules to the LLP Act contain provisions relating to conversion of a partnership firm into LLP, a private limited company into LLP and unlisted public company into LLP, respectively. Eligibility for conversion: Firm into LLP: Firm can be converted into LLP if all the partners of firm become the partners of LLP and no one else. Company into LLP: Private limited company/unlisted public company can be converted if and only if (a) there is no security interest in its assets subsisting or in force at the time of application for conversion; and (b) all the shareholders of the company become partners of LLP and no one else.
For conversion of firm/private limited company/unlisted public company into LLP, the partners of the firm/shareholders of company are required to file a statement and incorporation documents in the prescribed form with the ROC. On receiving the documents for conversion, ROC shall register the documents and issue certificate of registration specifying the date of registration as LLP. Upon registration by ROC, LLP shall intimate Registrar of Firm [ROF]/ROC, as the case may be, about conversion within 15 days of registration. On and from the date specified in the certificate of registration issued by ROC all tangible (movable/immovable) & intangible property, liabilities, interest, obligation etc. relating to the firm/private limited company/unlisted public company and the whole of the undertaking of the firm/private limited company/unlisted public company, shall be transferred to and shall vest in the LLP without further assurance, act or deed. firm/private limited company/unlisted public company shall be deemed to be dissolved and removed from the records of ROF/ROC, as the case may be. If any property/rights, etc. of the partnership firm/private limited company/unlisted public company is registered with any authority, LLP shall take steps to notify the authority of the conversion. Upon conversion, following things/events in favour of or against the firm/private limited company/unlisted public company on the date of
registration may be continued, completed and enforced by or against the LLP: all proceedings, conviction, ruling, order or judgment of any Court, Tribunal or other authority pending in any Court or Tribunal or before any authority on the date of registration every agreement irrespective of whether or not the rights and liabilities there under could be assigned, deeds, contracts, schemes, bonds, agreements, applications, instruments and arrangements every contract of employment appointment in any role or capacity any approval, permit or licence issued under any other Act, etc. In case of a firm, every partner of a firm which is converted into a LLP shall continue to be personally liable (jointly and severally with LLP) for the liabilities and obligations of the firm incurred prior to the conversion or which arose from any contract entered into prior to the conversion. In case any such partner discharges any such liability or obligation he shall be entitled (subject to any agreement with the LLP to the contrary) to be fully indemnified by LLP in respect of such liability or obligation. For a period of 12 months commencing on or before 14 days from the date of registration, LLP shall ensure that every official correspondence of LLP bears the following:
a statement that it was, as from the date of registration, converted from a firm/private limited company/unlisted public company into a LLP; and the name and registration number, if applicable, of the firm/a private limited company/an unlisted public company from which it was converted. WINDING-UP OF LLP [SECTIONS 63 AND 64] LLPs may be wound-up either voluntarily or by NCLT. LLP may be wound up by NCLT if LLP decides to wound up by NCLT; Number of partners is reduced below 2 for a period of more than 6 months; LLP is unable to pay its debts; LLP has acted against the interests of the sovereignty and integrity of India, the security of the State or public order; LLP has defaulted in filing Statement of Account and Solvency or annual return with the ROC for 5 consecutive financial years; or NCLT is of the opinion that it is just and equitable that the LLP be wound up In January 2010, MCA had notified that certain provisions relating to winding-up of a company under the Companies Act, 1956 will also be applicable to a LLP. The notification also provides details of modification in the provisions of the Companies Act relating to winding up for its
applicability to winding up of LLP under the LLP Act. Subsequently, on 30 March 2010, issued Limited Liability Partnership (Winding up and Dissolution) Rules, 2010. MISCELLANEOUS PROVISIONS
The Central government has been empowered to apply any of the provisions of the Companies Act, 1956 to LLPs with suitable changes or modification. [Section 67]
ROC may strike off the name of LLP from the register of LLP if LLP is not carrying on business or its operation, in accordance with the provisions of LLP Act in the manner prescribed. [Section 75]
Forms/documents required to be filed under the LLP shall be filed in electronic form online on the LLP portal duly authenticated by the partner/designated partner with a digital signature and further attested by the practicing chartered accountant/company secretary/cost accountant whenever required. [Section 68]
Presently all the provisions of the LLP Act, other than those relating to winding-up and dissolution of LLP and appellate provisions to be exercised by NCLT and National Company Law Appellate Tribunal [NCLAT], have been brought into force.
Till the constitution of NCLT and NCLAT under the Companies Act, 1956, the powers of NCLT and NCLAT will be exercised by the Company Law Board or High Court as is specified in the LLP Act. [Section 81]
Unless specifically provided, the provisions of the Indian Partnership Act, 1932 are not applicable to LLPs. [Section 4]
THIS Agreement of LLP made at ............ this.................... Day of ...................... 20............ BETWEEN 1. .., a company registered under the Companies Act, 1956, having its registered office at .. through its authorized representative . which expression shall, unless it be repugnant to the subject or context thereof, include their legal heirs, successors, nominees and permitted assignees and hereinafter called the FIRST PARTY, and 2. .. residing at ..which expression shall, unless it be repugnant to the subject or context thereof, include their legal heirs, successors, nominees and permitted assignees and hereinafter called the SECOND PARTY,
(BOTH THE FIRST & SECOND PARTY SHALL BE COLLECTIVELY REFERRED TO AS PARTNERS) WHEREAS the First Party is WHEREAS the Second Party is .. .
NOW The First & Second Party are interested in forming a Limited Liability Partnership under the Limited Liability Partnership Act 2008 and that they intends to write down the terms and conditions of the said formation and IT IS HEREBY AGREED BY AND BETWEEN THE PARTIES HERETO AS FOLLOWS 1. A Limited Liability Partnership shall be carried on in the name and style of M/s. LLP and hereinafter called as X.. LLP. 2. The X LLP shall have its registered office at .. and/or at such other place or places, as shall be agreed to by the majority of the partners from time to time. 3. The Contribution of the X LLP shall be Rs (Rupees .. only) which shall be contributed by the partners in the following proportions. First Party ..% i.e. Rs .. (Rupees .. only) Second Party % i.e. Rs (Rupees .. only) The further Contribution if any required by the X LLP shall be brought by the partners in their profit sharing ratio. 4. The X LLP shall have a common seal to be affixed on documents as defined by partners under the signature of any of the Designated Partners. 5. All the Partners of the X LLP are entitled to share profit and losses in the ratio of their respective contribution in the X LLP. 6. The business of the X LLP shall be of ... and other ancillary business more particularly described in the Schedule 1 annexed herewith or any other business in any other manner as may be decided by the majority of Partners.
7. No Person may be introduced as a new partner without the consent of all the existing partners. Such incoming partner shall give his prior consent to act as Partner of the X LLP. 8. The Contribution of the partner may be tangible, intangible, Moveable or immoveable property and the incoming partner shall bring minimum contribution of Rs. .. 9. The Profit sharing ratio of the incoming partner will be in proportion to his contribution towards X LLP.
Rights of Partner 10. All the partners hereto shall have the rights, title and interest in all the assets and properties in the said X LLP in the proportion of their Contribution. 11. Every partner has a right to have access to and to inspect and copy any books of the X LLP. 12. Each of the parties hereto shall be entitled to carry on their own, separate and independent business as hitherto they might be doing or they may hereafter do as they deem fit and proper and other partners and the X LLP shall have no objection thereto provided that the said partner has intimated the said fact to the X LLP before the start of the independent business and moreover he shall not uses the name of the X LLP to carry on the said business. 13. X LLP shall have perpetual succession, death, retirement or insolvency of any partner shall not dissolve the X LLP. 14. On retirement of a partner, the retiring partner shall be entitled to full payment in respect of all his rights, title and interest in the partner as herein provided. However, upon insolvency of a partner his or her rights, title and interest in the X LLP shall come to an end. Upon the death of any of the partners herein any one of his or her
heirs will be admitted as a partner of the X LLP in place of such deceased partner. The heirs, executors and administrators of such deceased partners shall be entitled to and shall be paid the full payment in respect of the right, title and interest of such deceased partner. 15. On the death of any partner, if his or her heir opts not to become the partner, the surviving partners shall have the option to purchase the contribution of the deceased partner in the X LLP.
Duties of Partners 16. Every partner shall account to the limited liability partnership for any benefit derived by him without the consent of the limited liability partnership from any transaction concerning the limited liability partnership, or from any use by him of the property, name or any business connection of the limited liability partnership. 17. Every partner shall indemnify the limited liability partnership and the other existing partner for any loss caused to it by his fraud in the conduct of the business of the limited liability partnership. 18. Each partner shall render true accounts and full information of all things affecting the limited liability partnership to any partner or his legal representatives. 19. In case any of the Partners of the X LLP desires to transfer or assign his interest or shares in the X LLP he has to offer the same to the remaining partners by giving 15 days notice. In the absence of any communication by the remaining partners the concerned partner can transfer or assign his share in the market. 20. No partner shall without the written consent of the X LLP,--
I.
Employ any money, goods or effects of the X LLP or pledge the credit thereof except in the ordinary course of business and upon the account or for the benefit of the X LLP.
II.
Lend money or give credit on behalf of the X LLP or to have any dealings with any persons, company or firm whom the other partner previously in writing have forbidden it to trust or deal with. Any loss incurred through any breach of provisions shall be made good with the X LLP by the partner incurring the same.
III.
Enter into any bond or becomes surety or security with or for any person or do knowingly cause or suffer to be done anything whereby the X LLP property or any part thereof may be seized.
IV.
Assign, mortgage or charge his or her share" in the X LLP or any asset or property thereof or make any other person a partner therein.
V.
Compromise or compound or (except upon payment in full) release or discharge any debt due to the X LLP except upon the written consent given by the other partner.
Meeting 21. All the matters related to the X LLP as mentioned in schedule II to this agreement shall be decided by a resolution passed by a majority in number of the partners, and for this purpose, each partner shall have one vote. 22. The meeting of the Partners may be called by sending 15 days prior notice to all the partners at their residential address or by mail at the Email ids provided by the individual Partners in written to the X LLP. In case any partner is a foreign resident the meeting may be conducted by serving 15 days prior notice through email. Provided the meeting be called at shorter notice, if majority of the partners agrees in writing to the same either before or after the meeting.
23. The meeting of Partners shall ordinarily be held at the registered office of the X LLP or at any other place as per the convenience of partners. 24. With the written Consent of all the partners, a meeting of the Partners may be conducted through Teleconferencing.
25. Every limited liability partnership shall ensure that decisions taken by it are recorded in the minutes within thirty days of taking such decisions and are kept and maintained at the registered office of the X LLP. 26. Each partner shall-I. Punctually pay and discharge the separate debts and engagement and indemnify the other partners and the X LLP assets against the same and all proceedings, costs, claims and demands in respect thereof. II. Each of the partners shall give time and attention as may be required for the fulfillment of the objectives of the X LLP business and they all shall be the working partners. Duties of Designated Partner 27. The Authorized representative of First Party and the Second Party shall act as the Designated Partner of the X LLP in terms of the requirement of the Limited Liability Partnership Act, 2008. 28. The Designated Partners shall be responsible for the doing of all acts, matters and things as are required to be done by the limited liability partnership in respect of compliance of the provisions of this Act including filing of any document, return, statement and the like report pursuant to the provisions of Limited Liability Partnership Act, 2008. 29. The Designated Partners shall be responsible for the doing of all acts arising out of this agreement.
30. The X LLP shall pay such remuneration to the Designated Partner as may be decided by the majority of the Partners, for rendering his services as such. 31. The X LLP shall indemnify and defend its partners and other officers from and against any and all liability in connection with claims, actions and proceedings (regardless of the outcome), judgment, loss or settlement thereof, whether civil or criminal, arising out of or resulting from their respective performances as partners and officers of the X LLP, except for the gross negligence or willful misconduct of the partner or officer seeking indemnification.
Cessation of existing Partners 32. Partner may cease to be partner of the X LLP by giving a notice in writing of not less than thirty days to the other partners of his intention to resign as partner. 33. No majority of Partners can expel any partner except in the situation where any partner has been found guilty of carrying of activity/business of X LLP with fraudulent purpose. 34. The X LLP can be wounded up with the consent of all the partners subject to the provisions of Limited Liability Partnership Act 2008. Extent of Liability of X LLP 35. I. X LLP is not bound by anything done by a partner in dealing with a person if the partner in fact has no authority to act for the X LLP in doing a particular act; and II. the person knows that he has no authority or does not know or believe him to be a partner of the X LLP. Miscellaneous Provisions 36. The limited liability partnership shall indemnify each partner in respect of payments made and personal liabilities incurred by him
I.
in the ordinary and proper conduct of the business of the limited liability partnership; or
II.
in or about anything necessarily done for the preservation of the business or property of the limited liability partnership.
37. The books of accounts of the firm shall be kept at the registered office of the X LLP for the reference of all the partners. 38. The accounting year of the X LLP shall be from 1st April of the year to 31st March of subsequent year. The first accounting year shall be from the date of commencement of this X LLP till 31st March of the subsequent year. 39. It is expressly agreed that the bank account of the X LLP shall be operated by the Second Party. 40. All disputes between the partners or between the Partner and the X LLP arising out of the limited liability partnership agreement which cannot be resolved in terms of this agreement shall be referred for arbitration as per the provisions of the Arbitration and Conciliation Act, 1996 (26 of 1996). IN WITNESS WHEREOF the parties have put their respective hands the day and year first hereinabove written Signed and delivered by the For and on behalf of .(Name of LLP) (Partner)
(Partner)
Witness:
If you are involved in a joint venture company, or with capital investors, you may well have to take into account the interests of substantial minority shareholders, who are not willing to allow the unrestricted power of the controlling majority. Reserving Control A minority shareholder in such a situation may wish to obtain certain protection in a shareholders' agreement. This protection may include:
The right to appoint one or more directors A veto on matters affecting the value of his shares A minimum dividend Restrictions on share transfers And pre-emption rights on new share issues.
Minority shareholders may seek to impose an obligation on the directors that they provide regular reports on the business. Shareholders rights to such information are otherwise rather limited. It makes sense to establish in advance those matters requiring minority shareholder approval and the procedure that must be followed if approval is not forthcoming. Buy-Out Mechanisms The minority shareholder may also seek to impose a requirement that any person buying a controlling interest in the company should offer to buy his minority shareholding at the same price and/or he may demand a mechanism to resolve deadlock by requiring the majority shareholders to buy out the minority shareholders (or vice versa).
Such matters can be dealt with by a shareholders' agreement or by the Articles of Association. The Articles of Association have the advantage of binding the directors rather than just the parties to the shareholders' agreement. The disadvantage of using the Articles of Association is that they are open to public scrutiny whereas a shareholders' agreement is a private document.
Why minority protection? Before elaborating on the protection of minority shareholders in the Netherlands, it will be useful to make some short remarks on why minority shareholders should receive protection and what the ultimate goal of this protection should be. At least three different reasons justifying minority protection come to mind. First, if the Dutch legal system does not provide adequate protection of minority shareholders compared with foreign legal systems, foreign investors will not invest in companies and investors will increase their investments in foreign companies. Second, and related to the first point, weak protection of minority shareholders increases the average cost of capital for a company, putting it at a competitive disadvantage with foreign companies. A final reason for an adequate protection of minority shareholders rights is more normative. There seems to be no good reason why it should be considered fair and equitable to disproportionately disadvantage minority shareholders compared with larger shareholders, only on the grounds that they hold fewer shares. In our opinion, all shareholders, large or small, should receive adequate protection from the law. Rights Shield for Minority Shareholder Reserved or veto or affirmative vote matters or consent rights are a bunch of contractually-agreed matters provided in a joint venture agreement or a shareholders agreement that need consent of all the partners before being approved and implemented.
They cannot be implemented unless the partners agree, even if the majority partner has sufficient shareholding to approve them. These matters generally protect the rights of the minority shareholders. Due to the importance of reserved matters, minority shareholders are seen fiercely negotiating for them when a joint-venture agreement is discussed. Some instances: amendments to the charter documents, declaration of dividend, creation and issue of new shares, appointment and removal of auditors, change of company's name or registered office, disposal of company's assets, investment in other entities beyond a certain value, company's dissolution, corporate restructuring, etc. Since these are critical matters, it is important that they are legally enforceable. Otherwise, their purpose will be defeated. The Companies Act, 1956, provides that matters before the shareholders may be approved by a simple majority vote - more than 50% vote - or a special majority vote - at least 75% vote. For example, declaration of dividend requires only a simple majority vote, while a change of company's name requires a special majority vote. In a 50:50 joint venture, reserved matters are 'generally' not provided. This is because a partner cannot pass a resolution with his 50% vote - he will need the vote of the other partner. To that extent, both partners are sufficiently protected. However, the situation in a 51:49 venture is different. A 51% partner is in a position to pass all matters that require a simple majority. The consent of the 49% partner is required only for matter requiring special majority. In a 76:24 venture, the situation is such that the majority partner is in a position to get all matters passed without the consent of the minor partner, irrespective of whether they require simple or special majority.
Therefore, in all partnerships that are not equal, it is critical for the minority shareholder to be protected through reserved matters. As for legal enforceability of these matters, the issue has never been tested and there are no direct judicial precedents on this point. One view is that these matters are enforceable - both against joint-venture partners and against the joint-venture company if the matters are incorporated in the bylaws or the articles of association (AoA) of the company. This view arises as there is nothing in the Companies Act that prohibits contractual agreement on such matters. There is, however, another view: under the Act, shareholders have the right to vote in direct proportion to their shareholding. Being a legal right, it cannot be denied to them by the company. Therefore, if a shareholder has requisite shareholding to pass a matter by a simple or a special majority, the company cannot deny that right, even if the shareholders have contractually agreed otherwise. So, as a company cannot deny this right, it cannot be legally bound to honour reserved matters and the shareholder has freedom to vote on his shares in the manner he wants and have resolutions passed, provided he has the requisite shareholding to pass them. Therefore, a provision contrary to this in the bylaws will be against the Act and, hence, void. In a less-known matter of Jindal Vijayanagar Steel, such a question - though not directly on reserved matters - came before the Company Law Board (CLB). There was a provision in the shareholders agreement requiring shareholders' mutual consent to shift the company's registered office. However, this provision was not incorporated in the AoA of the company. The CLB held that this clause requiring mutual consent cannot be forced on the company as the provision was not incorporated in the company's AoA.
It also held that such a clause when incorporated in the AoA would run contrary to the spirit of the Act and, so, would become void. The CLB reasoned that the Act permits shifting the registered office by a special majority vote and a denial of that right to a shareholder with the requisite majority will be against the spirit of the Act. Although there are no direct judicial precedents on the issue and, therefore, reserved matters hold good, it is worth considering the above decision while agreeing on reserved matters.
Who is the minority shareholder? In legislation, established case law and doctrine, you can look in vain for a general definition of a minority shareholder. Law assesses whether a specific right or action should be given to a minority shareholder on a situation-tosituation basis and also decides from case to case whether one qualifies as a minority shareholder. This decision whether one has a right or an action is usually described in law in terms of percentage of the issued share capital, but sometimes also in terms of the absolute book value of the shares required, or as a combination of both. The fairness of this adherence to percentages in deciding whether a shareholder is a minority shareholder can be questioned. Dutch law, for instance, permits the issue of priority shares. These shares have special controlling rights attached to them, making it possible to control the company without holding a large percentage of the shares and without providing a large share of the companys capital. A consequence of this is that a shareholder providing the majority of the capital may sometimes not control the company. In such a case the majority shareholder is effectively in a minority position with regard to the exercising of controlling rights. Under Indian company law, capital and control are not necessarily in line, so it is, in
our opinion, impossible to define the concept of minority shareholder without bearing in mind the control situation in the company. When a company makes use of a specific control structure, whether that be priority shares, a pyramid structure, or preference shares, percentages lose much of their relevance. Under these circumstances we would define minority shareholders as those shareholders who, irrespective of the amount of capital they provide, are unable to exercise any significant form of control within the company.
What are minority rights? In Indian company law several rights are given to all shareholders, irrespective of the number of shares they hold. Not all of these rights can be qualified as minority rights. The right to vote in the general meeting of shareholders, for example, will usually not be a minority right for two reasons. First, because this right is not specific to minority shareholders and second, because this right usually has no significant meaning for minority shareholders. In the event of a disagreement, they will be the ones to lose the vote at the general meeting of shareholders. In our opinion, for a right to be a true minority right, it needs to possess the characteristic that it creates the possibility that an outcome can be reached that is different from the outcome that the majority of the shareholders wish. This means that the minority shareholder can interfere through a minority right in the affairs of the company, thereby correcting the policies of the majority shareholder. Within the minority rights we draw a distinction between positive and negative rights. By positive rights we mean the ability to initiate policies by the company that would not have been pursued without the initiative . By contrast, negative rights refer to the possibility for a minority shareholder or a group of minority shareholders to block a resolution that is desired by the majority. In addition to these two categories we can mention a third: that of the so-called normalising minority rights. These are rights that the minority shareholder can exercise to force the
company to comply with statutory provisions or the articles of association. In this report we will not treat these rights as a separate category since Dutch company law does not contain many of them.