Understanding Shareholder Control: De Jure & De Facto Elements under Companies Act 2013
Introduction:
As far as the corporate structure of business is concerned, the most important feature is that the company is owned by shareholders and is managed by the board of directors appointed by the shareholders. Even though the board manages the company, the owners of the company, that is, shareholders have control over the company through their voting rights.
There are some situations under the Companies Act 2013 (‘the Act’) like the appointment of directors, auditors, etc. where the shareholders can exercise their control through voting rights. In this article, we shall deliberate upon the types of controls available to shareholders by virtue of the Act through which they can control the company.
Meaning of control under the Act:
Section 2 clause 27 of the Act defines the term ‘control’ as, “(27) “control” shall 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;”.
This definition is an inclusive definition and elaborates multiple manners in which control can be exercised by the members on the company.
Effect of Inclusive definition:
Generally, the word ‘include’ is used in any definition to enlarge the meaning of the words used in that definition. The use of the word ‘include’ widens the scope of the definition. The use of word ‘include’ should be construed to mean that there can be more possibilities than enumerated in the definition.
The definition of control under the Act uses the word ‘control’ twice. Once where it lists the ways of exercising control and second it lists the ways of obtaining management rights. The use of the word ‘includes’ at the first place indicates that there can be more possible ways to control the company which are not listed here. Whereas the use of ‘include’ at second place implies that there can be more possible ways to obtain management rights. This shows that the definition of control is very much open-ended.
Types of control:
Control can be bifurcated in to two main types. They are, (a) de facto control and (b) De-jure control. As per Blacks law dictionary, De-jure means – As a matter of law, existing by right or according to law. Whereas de-facto means actual/existing in fact, having effect even though not formally or legally recognized.
As per these dictionary meanings, ‘de-jure control’ refers to that control, which is given by law. For example, the right to appoint directors is given to shareholders by law. On the other hand, ‘de-facto control’ refers to that control which is not given by law but exists due to any other reason. For example, the right to participate in policy decisions is given to shareholder not by law but through shareholder agreement.
Element of de-jure control:
As discussed above, ‘de-jure control’ refers to that control that is granted to any person by virtue of provisions of law. The definition of control says that a person who has the right to appoint majority directors on the board has control over the company. This right to appoint directors is given to shareholders by the Act through the provision of section 152 sub-section (2). As per this provision, the shareholders can appoint directors through voting at the general meeting. That means, the shareholder having majority voting rights has power to appoint directors. Since all this process of appointment is as per the procedure of law, the control through the appointment of directors is an example of de-jure control.
Element of de facto control:
De facto control, as mentioned above, arises not out of provisions of law but by virtue of any contractual or any other right. If we look at the second type of control in the definition, it talks about the control through participation in policy decisions by the virtue of any kind of shareholder agreement or any other agreement. Even though this type of contract is not an outcome of a legal provision but still does exist and is enforceable. Therefore, this kind of control can be classified as de facto control.
Judicial pronouncements on de facto and de jure control:
Hon ‘able Supreme Court of India has accepted the existence of elements of de-facto and de-jure control in the definition of control. The Hon ‘able Supreme Court of India in its judgment dated 4th October 2018 in the matter of ArcelorMittal India Private Limited V. Satish Kumar Gupta & Ors, while analysing the definition of control held that, “47. The expression “control” is therefore defined in two parts. The first part refers to de jure control, which includes the right to appoint a majority of the directors of a company. The second part refers to de facto control. So long as a person or persons acting in concert, directly or indirectly, can positively influence, in any manner, management or policy decisions, they could be said to be “in control.” A management decision is a decision to be taken as to how the corporate body is to be run in its day-to-day affairs. A policy decision would be a decision that would be beyond running day-to-day affairs, i.e., long-term decisions. So long as management or policy decisions can be, or are in fact, taken by virtue of shareholding, management rights, shareholders agreements, voting agreements or otherwise, control can be said to exist.”
Conclusion:
In conclusion, the concept of control within the corporate structure of businesses, as defined under the Act, encompasses both ‘de jure’ and ‘de facto’ elements. ‘De jure’ control pertains to rights granted by law, such as the ability to appoint directors through shareholder voting, while ‘de facto control’ stems from contractual or agreement-based arrangements that influence management or policy decisions. The inclusive definition of control under the Act signifies that control is not limited to specific scenarios but extends to various mechanisms through which shareholders can wield influence over company affairs.
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This article is written by Ms Rutuja Umadikar – Research Associate – [email protected]
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