Principle of Proportional Representation for Appointment of Directors

BACKGROUND

As per the scheme of the Company jurisprudence the appointments of directors at the meetings of the shareholders are done through simple majority. Therefore the simple majority has the right to elect all the directors and a substantial minority cannot succeed in placing a even a single director on the Board. Therefore section 265 of the erstwhile Companies Act 1956, had provided that the minority shareholders shall have an opportunity of placing their representatives on the Board of Directors where the concerned company has adopted the system of proportional representation by providing in its articles of association. Since then Section 265 has been replaced by section 163 of the Companies Act 2013 {Act} which reads as follows:-

SECTION 163

163. Notwithstanding anything contained in this Act, the articles of a company may provide for the appointment of not less than two-thirds of the total number of the directors of a company in accordance with the principle of proportional representation, whether by the single transferable vote or by a system of cumulative voting or otherwise and such appointments may be made once in every three years and casual vacancies of such directors shall be filled as provided in sub-section (4) of section 161.

ANALYSIS

As stated this section is corresponding to section 265 of the erstwhile Companies Act 1956 and is by and large in the same lines. Earlier section applied to only public company or a private company which is subsidiary of a public company, but the present section applies to all companies.

A breakup analysis of this important section can be done as follows:-

• The opening line is “Notwithstanding anything contained in this Act…” which means that if there is anything in other provisions of the Companies Act 2013 which is contrary to this section, the section will prevail. Significantly the provisions of section 162 of the Act regarding appointment of directors to be voted individually stand excluded.
• The articles of association of a company may provide for the appointment of not less than two-thirds of the total number of the directors of a company which indicates that the requirement of provisions in the articles is imperative for invoking the section, however there is no compulsion on companies to have such provisions in their articles.
• But if such provision is made, the minimum number of directors to be appointed through this system shall be two third which can even go beyond two third of the total number of the directors. It is however not very clear whether such total would be the maximum permissible directors mentioned in the articles or the actual total number of directors holding their positions at the relevant time.
• Pertinently the appointment has to be in accordance with the principle of proportional representation, whether by the single transferable vote or by a system of cumulative voting or otherwise . As discussed proportional representation enables minority shareholders to appoint their directors. The use of the term “otherwise” indicates that this section can be invoked even by any other process, other than by single transferable vote or cumulative voting.
• Pertinently this section can be invoked only for appointment of directors and not for any other matter.
• Such appointments may be made once in every three years. Use of the term”may” denotes non mandatory interpretation.
• In case of casual vacancies of such directors they shall be filled as provided in sub-section (4) of section 161 which states that in default of and subject to the regulations in the articles, the vacancies shall be filled by the Board of Directors at its meeting { circulatory resolution will not be possible} and the person so appointed shall hold office only up to the date up to which the original director would have held office if it had not been vacated.
• Pertinently directors appointed according to the principle of proportional representation cannot be removed in terms of section 169 of the Companies Act 2013 regarding removal of directors.
• Vide notification issued on 5^th June 2015, the Central Government has granted exemption from applicability of this section to certain Government companies.

Meaning of Single Transferable vote and system of Cumulative voting

Interestingly in spite of such important right of minority shareholders, the relevant terms are not defined and their implementations are left to various corporate practices across the world. It is advisable that the Central Government should come out with clarifications making the section more lucid.

In Single Transferable vote all the names of the candidates for election as directors are entered in the ballot paper. Each voter has only one vote. He is permitted to indicate his first preference, second , third, etc in the ballot paper. These preferences will be equal to the number of candidates to be elected.

As per literature on Cumulative voting by C M Williams in 33 Harvard Business Review 108, 1955-11, Business Lawyer 9, this is a system by which several directors are to be voted for at the same time by casting votes for the whole number of shares held multiplied by the number of directors to be elected for a candidate or distributing the votes among a part of the vacancies to be filled instead of straight voting or casting votes according to the number of shares held, for all the vacancies.

It was the view of John G Sobieski, In support of Cumulative Voting {1960} JBL 316 that cumulative voting is a voting procedure which permits a substantial minority of stockholders to elect one or more directors. Here, each shareholder’s vote is more critical than straight voting. In USA this process has, in some cases, enabled removal of inefficient managements by placing directors through cumulative voting. [Ref case: Ved Prakash Juneja, Proportional Representation on Boards of Companies, {1969} 2 Comp LJ 29.]

CONCLUSION

Although the objective of the section 163 of the Companies Act 2013 is very laudable enabling minority shareholders to place their directors on the Board, it is not evident as to what extent this provision is implemented in the corporate world. Perhaps this only has theoretical implications. Clarifications from the Government to some of the undefined provisions therein may bring this important minority right into focus.