Overview of Addition and Removal of Directors and Shareholders

In the growth path of any expanding enterprise, change is the one constant factor. As a company expands, adapts to market dynamics, or faces internal shifts, its foundational structure-both the Board of Directors in terms of leadership and the Shareholders in terms of ownership-must change. Ensuring these important transitions are seamless is not purely an administrative exercise but a core pedestal on which rests the edifice of corporate stability and legality. Addition and removal of directors and shareholders are guided by the Companies Act, 2013, in India. The said Act has expressly provided a step-by-step procedure for the addition and deletion of both directors and shareholders, which, while assuring openness, secures the rights of stakeholders and perpetuates good corporate governance practices.

Pre-requisites for Appointment of Directors in a Company

Before any appointment of a director in a company, the person who is proposed to become a director should satisfy some minimum requirements as given below:

• DIN: Every director must have a valid DIN that shall be allotted upon filing Form DIR-3 with the ROC.
• Consent: The person shall give in writing his consent to act as the director of the company in the form as specified in Form DIR-2.
• Eligibility and Declaration: He/ she shall confirm that he/ she is not ineligible to act as a director under the Companies Act, 2013.

Process for Appointment of Director in a Company: Section 152

The usual route for an appointment of a director under the Companies Act, 2013 is by the company through a General Meeting, which might be an Annual General Meeting or an Extraordinary General Meeting. These usually follow the order as given below:

• Board Meeting: This is a meeting of the Board of Directors, which has to approve the proposal for the new appointment and resolve to call a General Meeting.
• Issue Notice: Formal notice of the General Meeting containing the resolution for the appointment of the Director is issued to all the shareholders.
• Shareholder Resolution: At an AGM or EGM, the shareholders pass an Ordinary Resolution approving the appointment of the new director.
• ROC Filing: The company has to file Form DIR-12 with the ROC within 30 days, giving particulars of the appointment, including the DIN and name of the director, and the date of joining.

Appointment of Additional Director in a Company: Section 161

The immediate solution is provided by the Companies Act, 2013, at times when there is an urgent need for a new director and holding a General Meeting is not practically possible. Under Section 161, the Board of Directors itself may appoint an Additional Director, provided it is permitted under the company’s Articles of Association (AOA).

• Board Resolution: In a meeting, the Board resolves to appoint an Additional Director.
• Tenure: An Additional Director holds office only up to the date of the next AGM or the last day on which the AGM ought to have been held, whichever is earlier.
• Regularisation: The appointment is to be regularised by the shareholders at that AGM itself by passing an Ordinary Resolution, so that they may continue their tenure beyond the AGM. A fresh Form DIR-12 is filed for this regularisation.

Removal of Director in a Company Under Company Act 2013

Section 169 of the Companies Act, 2013 lays down the procedure for removing a director (other than a Tribunal-appointed director) before the expiry of their term. The director must be given a fair chance to present their case, and the company must follow a proper notice and voting process. The process of removal of directors from the company is given below:

• Special Notice Requirement: The process requires that a member intending to move a resolution for removal has to, in the first instance, give a Special Notice to the company.
• Company Intimation-Sec 115: The company should forthwith send a copy of the resolution to the concerned director on receipt of the special notice. It is to be given at least 14 days before the General Meeting.
• Right to be Heard: A statutory right to be heard at the General Meeting is available to the director who is proposed to be removed. He may send a written representation, and if the time scale allows, the company must circulate his statement to all members. If circulation is not possible, the statement must be read out at the meeting.
• Ordinary Resolution: Shareholders have to pass an Ordinary Resolution for the removal after the expression of views.
• Final Filing: The company files Form DIR-12, informing the ROC about the vacancy created within 30 days.

Appointment of Shareholders in a Company

The appointment of a shareholder in a company under the Companies Act, 2013, actually involves a change in the ownership structure of the company. This largely takes place through two routes: either by the transfer of existing shares or by the allotment of new shares by the company. Both the routes of appointment of shareholders in a company are discussed in detail below:

Transfer of Existing Shares: Sections 44 and 56

Transfer of shares by an existing member allows a new shareholder to be inducted. Under Section 44, the shares are regarded as movable property, and they can be transferred according to the company's AOA as follow:

• Executing the Share Transfer Deed (Form SH-4): The transferor and transferee will execute the share transfer deed in Form SH-4, duly stamped with the date and attested in accordance with the relevant Stamp Act.
• Submission and Review: The deed is submitted to the company along with the original share certificate or letter of allotment.
• Board Approval: The Board of Directors approves the documentation and passes a resolution for the transfer. For private companies, the AOA may restrict transfers, and such restrictions must be strictly followed.
• Update Records: The company updates its Register of Members and then issues a new share certificate to the transferee, the new shareholder.

Allotment of New Shares under Companies Act, 2013

If a company issues new shares, this means it directly increases the share capital and adds new members. The process of allotment of the new shares to the new members of the company is given below:

• Board Resolution: The Board hereby resolves to approve the issuance of new shares.
• Issue Mechanism: This is usually done through a Rights Issue method involving the offering of shares proportionally to existing members-or a Private Placement method offering shares to a selected group.
• Receipt of Money and Allotment: The concerned parties are issued applications accompanied by share money. Thereafter, the Board meets again to approve the list showing the final allotment.
• ROC Filing: The company has to file Form PAS-3 with the ROC within 30 days, listing the securities allotted and all new shareholders.
• Update and Issue Certificate: The Register of Members is updated, and share certificates are issued to new shareholders within two months of the allotment date.

Termination of Membership: Removal of Shareholders in a Company

While the process for removing a director is direct, there is no direct provision under Companies Act, 2013 for the forced removal of an existing shareholder. Cessation of membership usually occurs through mechanisms structured to meet legal requirements or those within the company's AOA as follow:

• Voluntary Transfer: The most straightforward approach for the shareholder is to voluntarily make the transfer to another party, in accordance with the aforementioned formalities (Form SH-4).
• Buy-Back of Shares Sections 68-70: A company can reduce the stake of a shareholder or even eliminate it by buying back its own shares, subject to strict conditions about financial ratios and as authorised by the AOA, approval via a Special Resolution in a General Meeting.
• Forfeiture of Shares: This mechanism is reserved for the shareholders who have failed to pay call money on their shares. Forfeiture must be explicitly provided for in the company's AOA.
• Reduction of Share Capital Section 66: This is one of the major corporate actions whereby capital is either cancelled, repaid, or reduced.
• Compulsory Acquisition: This usually occurs in major corporate restructuring, such as mergers or schemes of arrangement (Sections 230-232), wherein a scheme approved by the NCLT can require that shares be acquired from minority shareholders.

The Companies Act, 2013, acts like an elaborate roadmap for the transformation of companies. Addition and removal of directors and shareholders, is such a critical juncture of a company's life cycle. This needs to be full compliance with statutory provisions, scrupulous record-keeping, and filing of the prescribed e-Forms within the stipulated period. Since the mechanisms, even of removal of directors or shareholders, including the buy-back of shares by a company or reduction of capital, are so complicated in nature, often the most prudent course of action to take is to seek legal and secretarial advice so one can be confident of these transitions.