The Bombay High Court recently considered whether the requirement to hold shareholders' meetings under the Companies Act 1956 can be dispensed with and substituted by electronic voting and postal ballot under Section 110 of the Companies Act 2013. The question arose in a matter relating to a scheme of amalgamation, whereby an application was made to dispense with an actual meeting and replace it with postal ballots and electronic voting. The final determination on the issue is still pending, as the order passed reflects only the court's prima facie views. The order discusses whether shareholders' voices would be muted by dispensing with shareholders' meetings altogether.
In February 2014 Godrej Industries Limited announced an intended merger with Wadala Commodities Limited. At the time, only certain provisions of the 2013 act were in force by virtue of a notification dated September 12 2013.
Section 110 of the 2013 act, which deals with postal ballots, took effect on April 1 2014, replacing Section 192A of the 1956 act. Relying on Section 110 of the 2013 act, Godrej and Wadala approached the court in a company summons for direction regarding a scheme of amalgamation under Sections 391 and 394 of the 1956 act. The companies sought to dispense with the requirement to hold a physical shareholders' meeting in order to approve the scheme of amalgamation, and instead to conduct the meeting by way of an electronic vote and postal ballot, as purportedly mandated under Section 110 of the 2013 act.
The court considered whether – pursuant to Section 110 of the 2013 act and a Securities and Exchange Board of India (SEBI) circular of May 21 2013 – a scheme of amalgamation could be approved by a majority of the equity shareholders casting their votes by postal ballot, instead of an actual meeting. In other words, the court had to decide whether the 2013 act, read with various circulars and notifications, eliminated the need for an actual meeting to be convened altogether.
The primary arguments advanced on behalf of the petitioner were as follows:
- The legislative mandate of the 2013 act was to do away with all meetings other than those required in certain limited circumstances.
- A SEBI circular of April 17 2014 (which relates to Clauses 35B and 49 of the Equity Listing Agreement) has made voting by postal ballot compulsory, thus making the requirement to hold a physical meeting obsolete.
- The broad non-obstante clause in Section 110 of the 2013 act (ie, "Notwithstanding anything contained in this Act") overrides the provisions of the 2013 act, including Section 103 regarding the quorum for meetings.
- Electronic voting would be limited to shareholders voting from remote locations.
The court-appointed amicus curiae submitted that instead of completely removing the requirement to hold a meeting, a more viable interpretation of the 2013 act would be that postal ballots should be seen as an additional facility that encourages greater inclusiveness and ensures compliance with the quorum requirement as stipulated under Section 103 of the 2013 act.
The court analysed both arguments and the legislative intent behind the act and made the following observations:
- The provisions pertaining to postal ballots and electronic voting aim to encourage greater inclusiveness by enabling more shareholders to vote.
- Clause 49(I)(A) of the Equity Listing Agreement, which was amended by a SEBI circular of April 17 2014, provides for rights that cannot be effectively exercised by postal ballot. A shareholder has an inalienable right to ask questions, seek clarifications and receive responses before deciding which way to vote.
- If the applicant's interpretation of Section 110 of the 2013 act were accepted, no shareholder or director could suggest an amendment to a scheme of arrangement or compromise; thus, the scheme could be passed or rejected only in its original form, which is contrary to the mandate of Sections 391 and 394 of the 1956 act.
- The non-obstante clause in Section 110 of the 2013 act reads "Notwithstanding anything contained in this Act", meaning the 2013 act, and does not apply to Sections 391 and 394 of the 1956 act.
- Section 110 of the 2013 act cannot extend to scheme matters, and any SEBI circulars or notifications that make electronic voting or postal ballot the exclusive method of voting on such schemes are unlawful and contrary to Sections 230 and 232 of the 2013 act and Sections 391 and 394 of the 1956 act. Further, Section 110 refers to meetings called by the company. However, meetings to approve schemes under Sections 391 and 394 of the 1956 act and Sections 230 and 232 of the 2013 act are not called by the company, but are instead convened by the court.
The court held that even members attending a meeting could cast their votes digitally, just as they might do if they were voting from a remote location.
The court also held that provisions for compulsory voting by postal ballot and electronic vote which exclude holding an actual meeting do not apply to court-convened meetings.
Electronic voting must also be made available at the venue of the meeting. Any shareholder that voted by postal ballot or by electronic vote from a remote location (ie, other than the venue of the meeting) cannot vote at the meeting. However, the shareholder may attend the meeting and participate in the proceedings.
The effect, interpretation and implication of the 2013 act and the relevant SEBI circulars and notifications – to the extent that they mandate the conduct of certain items of business by postal ballot to the exclusion of an actual meeting – must be considered further. In view of the ramifications of the issue at hand, the court directed the registry to take steps to place the matter before the appropriate bench. Additionally, the court directed the company registrar to send copies of the order to the additional solicitor general and SEBI so that the ramifications can be assessed when the matter is next taken up for consideration.
Among other things, the court's order brings to light one of the many hazards of not completely repealing and replacing an existing statute. Piecemeal repeal is the primary cause of the disconnect between the 2013 act and the 1956 act. However, the issue that necessitated the court's intervention was more fundamental than this. The 1956 act also provided for business to be conducted through postal ballot; nonetheless, the scope of Section 110 of the 2013 act is what caught the court's attention, prompting it to observe that the provision has far-reaching consequences for important shareholders' rights.
When investing in a company, a shareholder is entitled to certain rights, including the right to attend and participate in shareholders' meetings. These shareholders' meetings are not mere formalities. They provide a platform for shareholders to query the manner in which the company is managed. A provision that eliminates the need for shareholders' meetings defeats the rights of shareholders and deprives them of their right to question, debate, clarify and choose wisely. In today's age of enhanced shareholder consciousness, a provision that eliminates meetings altogether may not stand up against scrutiny when considered in light of the basic principles of corporate democracy. To quote the judge: "A shareholder cannot be restricted to this level where all he can do is say aye or nay but not seek any clarifications, express any doubts or reservations, or raise any questions."
A shareholder's right to participate cannot be restricted to voting.
On the face of it, the intention of the legislature appears to be to provide – within the 2013 act – shareholders residing in remote location with different ways to exercise their mandate. The legislature should not be read as barring companies from holding general meetings, as such an interpretation would impede true and full shareholder participation.
The Ministry of Corporate Affairs has now issued General Circular 20/2014,(1) which clarifies a few issues connected with postal ballots and electronic voting.
While the high court's order appears to be a step in the right direction, the circular is arguably a step backwards insofar as it clarifies that items specified under Rule 22(14) of the Companies (Management and Administration) Rules 2014 can be transacted only through postal ballot and not at a general meeting. The items specified under Rule 22 include:
- changing the objectives for which a company has raised money from the public through prospectus where the company has not used all the funds that were raised;
- issuing shares with differential rights regarding voting or dividends; and
- altering the rights attached to a class of shares or debentures.
The court also touched on the fact that shareholders should be given an opportunity to debate and question management on these issues in a meeting.
While this issue is still being discussed, in the meantime, shareholders can only hope that no restrictions are imposed on their ability to voice opinions on important matters.
For further information on this topic please contact Naresh Thacker or Rhia Marshall Banerjee at Economic Laws Practice by telephone (+91 22 6636 7000), fax (+91 22 6636 7172) or email (firstname.lastname@example.org or email@example.com).
(1) The General Circular 20/2014 can be viewed on this link: http://www.mca.gov.in/Ministry/pdf/General_Circular_20_2014.pdf.