Keeping an Eye on the Board: Board Meetings and Board’s Powers Under Corporate Governance
The aim of this piece is to trace the evolution of corporate governance provisions relating to Board meetings and Board’s powers. The corporate scams committed in Enron, Worldcom and Sathyam has culminated in the inception of “Corporate Governance” in India. The emergence of corporate governance mainly imposed responsibilities on the Directors towards the company, its shareholders and on the shareholders towards the company. The corporate governance provisions fulfill the gap between the shareholders and the Directors by keeping constant check on both of them. The provisions under Chapter XII of the Companies Act, 2013 regulate the Board meetings and Board’s powers to preclude the Directors from indulging in activities outside the scope of the Companies Act, Memorandum of Association, Articles of Association and other rules/regulations passed under the Act. Thus, the purpose of such governance is to promote transparency, accountability between the principals (shareholders) and the agents (Directors) who should ideally always work towards the best interests of the company.
This piece is divided into three broad parts. The first and the second part deals with the evolution of the provisions regarding Board meetings, Board’s powers and limitations on those powers under Companies Act, 1956 ,2013 accompanied with case laws, analysis of the agency problems (gap) involved and the emergence of corporate governance to remedy the same, the recent developments in the light COVID-19 and a critical comment on its evolution and implementation. The third part constitutes the conclusion with a critical comment on these provisions.
With respect to research methodology, this piece provides a historical, critical, analytical and categorical analysis of corporate governance provisions with respect to Board Meetings and Board’s powers in India. The usage of primary and secondary sources such the Companies Act and Rules, 1956 and 2013, case laws, multiple journal articles, notifications, circulars and reports of the Ministry of Corporate Affairs provides for a comprehensive study altogether.
1. Preclusion of Board Secrets In Meetings:
There are a lot of differences between the Companies Act, 1956 and 2013.While the former statute provided only for a bare bone structure to be complied with by holding meetings, providing disclosures, voting etc., the latter provides for a regulatory regime that emerged from certain unfortunate corporate scams. These scams gave birth to immense distrust between the Directors, shareholders, outsiders and the company itself towards each other. The Indian Parliament negated the enforcement mechanism and opted for a liberal yet an effective regulatory mechanism to address the trust issues between parties the directors and the shareholders, the majority and the minority shareholders, the state enterprises and its shareholders, other stakeholders not covered within the puview above. This piece majorly addresses the agency problem of information asymmetry between the Directors and the shareholders.
Under this head, the researcher discusses the various changes brought about in the Company law paradigm in 2013 with respect to Board Meetings with reasons for the same.
Section 285 and 286 of the 1956 Act corresponds to section 173 of the 2013 Act. Section 173 of the Act provides for the requirements, manner and timespan within which a Board Meeting should be conducted. The changes are as follows: the 2013 Act provides for a Board Meeting to be conducted within 120 days whereas the 1956 Act provided for a gap of 90 days between two meetings. This illustrates that the 2013 Act, acknowledges the various issues and discrepancies that the Directors living in the country and abroad may envisage while meeting within short spans of time. Thus, the 2013 Act provided for a more relaxed time gap. Section 285 and 286 didn’t provide for an audiovisual conference due to lack of technology at that time but the 2013 Act does provide under section 173(2). This change was quite revolutionary in nature as it had remedied a lot of travelling discrepancies slowing down the progress of the company. A “seven” day notice period is provided under section 173(3) as opposed to “reasonable period” mentioned in the 1956 Act. The seven-day cap is introduced to clear the ambiguity of “reasonable time” mentioned under the 1956 Act. An even shorter period is provided for transacting urgent business under the 2013 Act. Earlier the form and content of the notice was not provided for in the earlier Act. Any notice which failed to comply with section 286 of the Act would render the meeting illegal and the business transacted in that meeting as null and void. SS -1, 2014 lists the requirements for a valid notice.
In addition, the 2013 Act imposes liability for non-compliance of notice requirements under section 173(4) of the Act. Section 173(5) further provides for a more relaxed timespan for Board Meetings to be conducted in One Person Companies, unlisted public companies and private companies.
Section 287 and 288 of the 1956 Act corresponds to section 174 of the 2013 Act which provides for quorum of a Board Meeting. There haven’t been any significant changes in 2013 Act with respect to quorum except for the presence of Directors in meetings through audio visual means.
Section 288 corresponds to section 175 of the 2013 Act which provides for resolution by circulation. The change in the 2013 Act, the Chairperson has to notify if an item had to be transacted in a Board meeting and in a resolution by circulation and this notification should be included within the minutes of the next meeting. This change was introduce to prevent important items getting transacted without proper deliberation.
Section 299 and 305 corresponds to section 184 of the 2013 Act. The 2013 Act has listed the specific disclosures of interests of Directors with respect to body corporates and firms under section 184(2) as opposed to the general ones under the 1956 Act in order to know the exact interests of the Director.
Section 301 corresponds to section 189 of the 2013 Act under which the Director is to sign the register with respect to all the business transactions he/she is interested in. The 2013 Act has added more interests in order to get the specificity of the transactions that a Director is involved in.
Section 193,194,195 and 197 corresponds to section 118 of the 2013 act dealing with the minutes of Meetings. The 2013 Act states that even the minutest details need to be taken into account as this document has a high evidentiary value attached to it. The non-recording of the minutes might turn to be detrimental to multiple stakeholders.
1.2. DETAILED ANALYSIS OF CORPORATE GOVERNANCE PROVISIONS REGARDING BOARD MEETINGS UNDER COMPANIES ACT, 2013:
Under section 173(1), first Board Meeting has to take place within 30 days of incorporation. Four meetings should be conducted in a year with a gap of 120 days. These provisions are not applicable for section 8 companies which need to have only 2 meetings in a year. The SS-1 requirements should also be satisfied.
Under section 173(2), audio visual means of meetings are permitted. Rule 3 of the Companies (Meetings of Board and its powers) Rules, 2014 lays down the manner in which such virtual meetings are to be held. Telephone/teleconferencing is not permitted since there is a lot of scope for a proxy to get involved instead of an actual director.Board Meetings through electronic mode is permissible without giving an intimation in the beginning of the year and the same is not violative of Rule 3. Mere suspicion of a third party attending a Board Meeting is not reason enough to discard Board meetings through audio visual mode.
Section 173(3) provides for a seven-day notice to be circulated to all the Directors before the meeting.A shareholder need not be given notice under this section.Even a Director who is not eligible to vote must be given a notice.Earlier, a document indicating the day and month of the meeting was considered as sufficient complianceEven a chance of meeting was enough.SS-1 provides the content of the notice to be given which is inclusive of date, place, time, business agenda, authority to call the meeting etc. However, stating the agenda in the meeting is optional in nature.However, if the absence of agenda in the meeting amounts to fraud, then the requirement of an agenda in the notice becomes mandatory.A Board meeting should always be in writing. If the AOA is silent, there isn’t any requirement to serve notices for an adjourned meeting. One notice holds good for all adjourned meetings. However, a fresh notice is required for a meeting adjourned sin die. Regulation 67 (ii) of Table F of the 2013 Act states that on the requisition of a Director, such notices can be served even by the Manager and Secretary. Section 173(4) provides for penalties for not serving notices along with rendering the meeting invalid and business conducted void. However, if the Directors present themselves even in the absence of the notice, then the meetings will not be void.A shorter notice would also suffice for certain urgent business transactions if at least one independent director is present to ensure a fair discussion. The minutes of this meeting should also be circulated. However, the notice requirement under sub-section 4 is not applicable on One Person Companies under section 173(5).
As per section 174(1) and 174 (2), the quorum should be 1/3rd of the total available strength of the directors excluding the vacant positions, or 2 directors whichever is higher. The Directors attending the meeting through electronic mode should also be counted for the quorum. However, the AOA can fix a higher quorum but the presence of lesser number of directors does not render the quorum invalid.Meeting with one director is invalid. Under section 174(3), in the absence of interested directors, even non interested directors could be included for the purposes of a quorum. Under section 174(3), if the meeting fails to happen due to want of quorum, the meeting stands adjourned on the same day next week. If that day happens to be a national holiday, then the meeting would happen on the succeeding day.
This section along with Rule 5 discusses the manner in which the business is conducted in a meeting.This is also provided in the AOA. According to Schedule 1 of the Act the matters are decided upon by casting of votes. In case of a tie, the Chairman gets to cast a second vote. Votes can be cast either at a Board Meeting or a circulation. Circulation is done when all the necessary papers and drafted and circulated for approval. A detailed deliberation is not done in such matters. A decision backed by all or a majority of Directors becomes binding on all Directors. However, as per section 175(2), if 1/3rd of the Directors agree, then an item could be transacted at a Board Meeting and not by circulation.
An act done by a Director in a Board meeting appointed through invalid means cannot be struck down.
Minutes of the Board meetings should be recorded in the minutes book as it provides provides information about the discussion in the meeting, holds a high evidentiary value in Court, acts as a check against insider trading and other illegal activities that may be indulged into by the directors. As per Lord Esher, “the minutes are kept for the shareholders to know why, when and what have the Directors been doing (to avoid information asymmetry).SS-1 provides a detailed guidelines as per which the minutes of a Board meeting needs to be recorded. These minutes should be signed by all the Directors present and duly certified by the Company Secretary.
This section requires the Directors to make disclosures regarding his interests in any of the assets of the company or with any other firm with which the company might have an association with.
Under this section, a register is kept that consists of all the contract arrangements and other business transactions that has been entered into by the Directors due to their interests in them.
1.3 COVID-19 UPDATES:
The Ministry of Corporate Affairs with its notification dated 19.03.2020 stated that meetings through electronic modes should be done as a practice in the pandemic. Another notification dated 24.06.2020 increased the gap between two meetings to 180 daysup to 30.09.2020 instead of 120 days mentioned under section 173(1) of the 2013 Act. Further, the mandate under Schedule 4 of the Act which wants the independent Directors to meet without non independent directors at least once in a year has been relaxed in light of the social distancing policies of COVID-19. They are no more obligation to meet once in 6 months till 30.09.2020.It also relaxed Rule 4 requirements and notified that urgent business transactions could also be conducted online. It also relaxed various SS-I requirements which mandated a physical Board meeting.
2. Disarmament of Abusive Powers of the Board
Since the Directors are vested with umpteen amount of powers, there is a very high probability of such powers being misused. The misuse of such powers would adversely affect the shareholders of the company and other stakeholders. In order to address the gap between the powers of ownership (shareholders) and control (Directors), the Companies Act, 2013 provides for various safeguards.
1.1. COMPANIES ACT, 1956 v. COMPANIES ACT, 2013:
Under this head, the researcher discusses the various changes brought about in the Company law paradigm in 2013 with respect to Board’s powers and limitations on those powers with reasons for the same.
Section 291 and 292 corresponds to section 179 of the 2013 Act. This section talks about the powers of the Board. Many powers of different kinds have been added to the 2013 Act in order to allow the Directors to do things in a speedy manner without an express permission from other members of the company. But, of course, such powers are subject to regulations and scrutiny. The powers introduced in the 2013 Act are as follows: issuing debentures even outside India, guaranteeing, borrowing and grant loans, approving financial statements and Board’s report, diversifying the business of the company, approving mergers and amalgamations, obtaining a controlling stake in a company,appointing an external and internal auditor and the power to remove key managerial personnel. With respect to delegation, there isn’t any cap on the extent of delegation to a Committee or a person. There is also no necessity to specify the amount up to which that power could be utilized. The purpose behind such free delegation is to reduce the burden of the Directors in running the company. As opposed to the 1956 Act, the resolutions passed under section 179(3) read with Section 117(3) (g) of the Act and Rule 24 of the Companies (Management and Administration) Rules, 2014 have to be filed with the Registrar of Companies mandatorily within 30 days for public companies. The filing of resolution has been mandated as it serves as a reliable source of evidence in Court.
Section 293 corresponds to section 180 of the 2013 Act. In order to avoid information asymmetry and deviation of corporate opportunities, certain restrictions have been imposed on the powers of the Directors. In the 2013 Act, a special resolution is required to transact in the items mentioned under section 180(1) as opposed to an ordinary resolution under the 1956. This change ensures that more stakeholder take cognizance of the transactions of the company. Previously, section 293 was applicable on public listed and deemed companies whereas now section 180 was applicable on all companies until recently a circular released by the MCA dated 5.06.2020, negated its application to private companies. The application of this provision was narrowed to not impose onerous obligations on small unlisted companies as it will hinder the progress of the company. Lastly, the definition of “undertaking” is included in order to clear the confusion between term “business”, “properties” of the company and the entire organization of the company for the purpose of selling them under section 180 (1)(a) of the 2013 Act.
1.2. DETAILED ANALYSIS OF THE BOARD’S POWERS AND
LIMITATIONS ON THOSE POWERS:
This section read with Rule 8 of the Companies (Board Meetings and its Powers) Rules, the Board is entitled to do exercise all powers except those which are inconsistent with Companies Act, 2013, the MOA, the AOA, other rules/regulations of the Companies Act and those acts which the company in its general meeting is supposed to do. These powers are also subject to the special resolution passed by the shareholders of the company. Thus, the power to institute a suit is dependent upon the resolution of the shareholders. This section clearly distinguishes between proper management control and proper shareholder control. It is well within the powers of the Board to transact an item which is inconsistent with the shareholder resolution passed in a general meeting but consistent with the Articles of Association. Thus the Board’s relationship with the general meetings is more of a federation rather than superior or subordinate. Further, transactions given under section 179(3) needs to be read with Rule 8 which provides for certain things to be mandatorily transacted in a physical Board Meeting only (not possible now because of the corona pandemic).
Apart from the Act, the shareholders can interfere with the powers of the Board since the inherent, residuary and ultimate powers of the company lie with the general meeting of the shareholders. The shareholders can also replace the existing management with a new one if the existing one is not responsive to the interests of the shareholders. These situations are as follows:
When the company itself is the wrongdoer, then the shareholders are given the duty of supervision to check the malafide and pass a resolution accordingly.When the Board becomes incompetent to act, the Board meeting could be taken over by the shareholder meetings.When there is a deadlock in the administration resulting from the fact that the directors were unwilling to act and exercise their powers, the company through its shareholders can appoint additional directors.The residuary powers of the company vest with the shareholders. Thus, the shareholders can pass resolutions and get them incorporated under the AOA. Therefore, as a result of this, the Board becomes obligated to follow the AOA. Moreover, the outsiders like the creditors, investors are also protected due a check imposed in the Directors. The consent of the general meeting can be given by conduct as well.
The Board under section 180 can do transactions mentioned under 180 (1)(a) to (d) only after getting a special resolution from the general meeting. Third party purchasers acting in good faith are protected by the statute in case of a fraud and these restrictions mentioned form (a) to (d) are not applicable on companies dealing with properties. Sections 181 and 182 alos impose certain restrictions on the Board.
This section empowers the company to make bonafide charitable funds subject to the resolution of the company meeting. Moreover, the charity amount should not cross 5 percent of the average profits.
The power to make political contributions was introduced only in 1985 by an amendment but this is not applicable on government companies or companies established not lesser than 3 years. However the political contribution should not cross 7.5 percent of the average profits with the defaulting company punishable with five times the amount and defaulting officers with fine of the same amount and imprisonment extending up to six months. This political contribution can be done by a resolution passed in the Board Meeting itself and this transaction has to appear in the company accounts.
Donation can be made under this section to the National Defense Fund notwithstanding anything mentioned in the Act itself, its rules, the MOA or the AOA. However, this transaction should appear in the company accounts.
In conclusion, it is stated that the present pandemic has diluted most of the corporate governance provisions mentioned under the Act as equal access to all resources cannot be expected. This increases the distrust between the various parties involved in the company’s interests. There is a necessity of stability in the corporate governance provisions as the Legislature keeps amending them quite often and it is going to become very difficult to comply with the corporate governance provision after the pandemic. This is because, all the activities and business transactions that might be entered by th Directors would become difficult to trace. Thus, one day like Sathyam, all these untraceable transactions would bust and leave us with a situation of far more corporate governance provisions. This literally is forming a vicious cycle.
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