CORPORATE LAW AND GOVERNANCE

1
CORPORATE LAW AND GOVERNANCE

• A. B. Suraj
• PGP Business Law

2
Relevant Themes

• Form of Business entity Proportional regulation
• Role and Responsibility of Actors Promoters
  Directors and Shareholders
• Corporate Governance Normative framework to
  Enforcement mechanisms
• Process and Procedure of Corporate Restructuring
  Transparency requirements

3
Formation of a Company

• Company organization of persons and funds for
  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 also
  shareholders agreement

4
Promoter of a Company

• Promoter one who promotes the formation of the
  company entrepreneur
• Personally liable for contracts before completion
  of the incorporation process
• Fiduciary relationship and legitimate expenses
  are payable sweat equity

5
Objects Clause

• MoA Main, Ancillary and Other Objects
• Investor protection and as caution to outsiders
  Doctrine of Ultra Vires exceeding the legal
  power
• Ultra vires actions are not binding on the
  Company however beneficial they are

6
Articles of Association

• For internal management rules for day-to-day
  activities
• Rule of Constructive notice presumed knowledge
  of the AoA by anybody dealing with the Company
• Rule of indoor management an exception of
  procedural compliance to protect external
  interests with reasonable efforts

7
Corporate Entity Principles

• Independent of shareholders Saloman case
• Capacity to sue and to be sued
• Perpetual succession common seal limited
  liability
• Multiple relationships possible with an
  individual Director, Creditor, Shareholder,
  Employee

8
Company Contracts

• Company can authorize any person to enter into
  contracts on its behalf express or implied or
  ostensible authority
• Even oral agreements even without seal
• Pre-incorporation contracts valid only if
  ratified freshly by the Company

9
Role of Directors

• Board of Directors Principal Body
• Remuneration generally not gt11 of net profits
• One Director chosen for management need not
  be a shareholder
• Fiduciary Duty to take care and statutory
  duties
• Difference between ownership and control
  elected and voting powers except for nominees
  government debenture trustee

10
Control

• Controlling stake treated as Promoters
• Control Powers Proactive (positive) and
  Reactive (Negative)
• Regulation 2(1)(c) of the Takeover Code to
  include the right to appoint majority of the
  directors or to control the management or policy
  decisions exercisable by a person or persons
  acting individually or in concert directly or
  indirectly, including by virtue of their
  shareholding or management rights or shareholders
  agreements or voting agreements or in any other
  manner
• Full and effective control usually the Board of
  Directors
• Protective rights of financial investors
  Negative in nature
• Board representation quorum rights
  supermajority rights
• Not absolute at best a veto power usually by a
  single nominee

11
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 is negligent -
  senior management liable
• Whistleblower policy still at infancy in India

12
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 Corporation
  and the Investigating Authorities
• Concern of confidential information

13
Criminal Liability

• Rationale for Criminal liability enormous
  influence on economy
• Strict degree of Vicarious criminal liability
  attribution of collective mens rea of
  Executives
• Gross negligence or breach of duty
• Test of Organizational approach
• Applies to Partnerships/Trusts/Unions too
• Statutory compliances also covered for liability

14
Criminal Liability

• Fundamental Rights of a Corporation
• Fair trial Procedural safeguards
• Issue of Political funding
• Punishments for Corporations
• Restitution Fines Probation under Court
  supervision Forfeiture clauses and Public
  apologies

15
Culpability of Corporations

• Crime committed by an employee despite strong
  Corporate policy against it?
• Crimes committed by contractors/ consultants?
• Crimes committed in ignorance or wrong
  understanding of law?
• Serious frauds committed by senior management?

16
Enforcement of Corporate Governance
17
Review of Managerial Decisions

• Concept of Fiduciary duty different from best
  practices norms aspirations
• Due care and good faith to be demonstrated in all
  actions
• Interest of the company and law as an objective
• Compliance requires fiduciary discharge of
  functions
• Document actions/decisions extensively

18
Legal Duty of CareDirector Vs. An Agent

• Fiduciary in nature
• Has to only benefit Companys interest
• Has to make up Losses caused Profits made
• Unequal position with shareholders
• Responsible to minority shareholders and Society
  as well

• Contractual nature
• Self-interest may also be served
• Has to compensate only for the losses
• Equal negotiating capacity of parties
• Responsible only to the other Party

19
Elements of Corporate Governance

• In India Clause 49 of the Listing Agreement
  between a Company and Stock Exchanges
  introduced in 2000
• In addition to other SEBI Rules and Regulations
• In the US Public Company Accounting Reform and
  Investor Protection Act, 2002 also known as
  Sarbanes-Oxley Act
• DIP Guidelines of SEBI in 2000 itself
• Accountability imposed on Public and Listed
  Companies monitor aggregation of capital

20
Elements of Corporate Governance

• Composition of the Board 1/3rd to 50 of IDs on
  the basis of nature of leadership
• Independent Directors elaborate guidelines to
  determine independence
• Qualified and Independent Audit Committee for
  mainly Financial matters
• Management Discussion and Analysis Report on
  Company prospects as evaluated by the Board
• CEO/CFO certifying compliance by a declaration

21
Mandatory disclosures

• On related party transactions and arms length
  justifications
• Accounting and Risk Management practices
• Complete details of Directors remuneration
  including Stock options other perks and
  perquisites
• Disclosure of any Contingent Liability

22
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
Issues for Discussion

• Objective of Corporate Governance maximization
  of shareholder value vs. governance norms
• Various stakeholders interests 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
Corporate Restructuring

• Companies Act allows for any scheme of
  restructuring and reorganization of company
• Internal restructuring/ Winding up/ MAs/
  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
  the MoA Objects benefit evaluated
• Fair value of assets and shares contextual
  and based on relevant facts no set rule or
  process

25
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
Case Study Issues

• Regulatory bodies in Indian Corporate Law
• Ministry of Company Affairs Company Law Board
  High Court SEBI and the Competition Commission
  (in specific circumstances)
• What if foreign Companies are involved?
• Public interest domain scope and content?
• Validity and legitimacy of a personal contract
  and shareholder resolutions
• 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 maintaining majority and
  uniting of interests and seamless continuity

27
Case Study Issues

• Standing of creditors and employees/ labour
  workforce
• Not in decision-making but in protection of
  interests
• What if the transferor-Company is declared as
  being a Sick Company?
• Transfer of all assets and liabilities
• Rights IPRs Privileges Powers beneficial
  Contracts
• Does it amount to Sale? Capital gains?
• Benefits of contracts? Status of Employees?