INDIA Law and Practice Contributed by: C R Dua, Sanjeev Kaul, Abhinav Rastogi and Ashish Malkotia, Dua Associates
6. Shareholders’ Rights as Regards Directors and Auditors 6.1 Rights to Appoint and Remove Directors Appointment of Directors Except as otherwise provided in the Act, the company should appoint every director in a general meeting. The board can appoint additional directors or alter- nate directors (if the articles permit) or fill a casual vacancy. In the case of a public company, unless the articles provide for the retirement of all the directors, not less than two thirds of the total number of directors should be persons whose period of office is liable to determi- nation by retirement by rotation and who are eligible to be reappointed at the AGM. Independent directors are not included in the computation of the total number of directors. At the AGM, one third of such directors, for the time being, are liable to retire by rotation and should retire from office. At the AGM at which a direc- tor so retires, the company may fill the vacancy by appointing the retiring director or some other person. A person who is not a retiring director can be appoint- ed as a director at any general meeting if they or some member intending to propose them as a director has provided to the company a written notice signifying their candidature as a director or, as the case may be, the intention of such member to propose them as a candidate for that office, along with the deposit of the prescribed amount, which is refundable in prescribed situations. Removal of Directors Shareholders have inherent powers under the Act to remove a director by passing an ordinary resolution at a general meeting, pursuant to receiving a “special notice” from shareholders of a resolution to remove a director. The Act provides for an elaborate process to be complied with in relation to the removal of a director. A notice of intention to propose a resolution must be provided to the company by members holding at least 1% of the total voting power or shares on which the required aggregate amount has been paid up. Upon receiving this notice, the company is obligated to
inform its members about the resolution at least seven days before the meeting, or, if that is not feasible, to publish the notice in newspapers. The director affected by the resolution has the right to make a written representation and can request the company to distribute that representation to all mem- bers. The company is required to do so if there is suf- ficient time available. Additionally, an independent director who has been reappointed for a second term can only be removed by a special resolution passed after allowing the direc- tor a reasonable opportunity to be heard. 6.2 Challenging a Decision Taken by Directors The board is vested with management powers over the company, while shareholders can only exercise power over matters reserved under the Act or the company’s articles for their approval. Therefore, shareholders generally cannot interfere with the board’s decision- making process, usurp any authority available to them or challenge a board decision that has been passed in compliance with the Act and that is not ultra vires of the memorandum and articles. The courts/Tribunal in India are usually reluctant to interfere with the management decisions taken in the best judgement of the directors unless it can be proved that the directors acted mala fide in a manner that is prejudicial to the interest of the company – in which case the shareholders may approach the Tribu- nal alleging mismanagement. See 2.11 Challenging a Resolution , which, to a greater extent, applies here as well. 6.3 Rights to Appoint and Remove Auditors Appointment of Auditors The first auditor of a company is appointed by the board within 30 days from the date of incorporation. If the board fails to appoint an auditor within this time- frame, the company must appoint one at a general meeting within 90 days. This auditor will hold office until the conclusion of the first AGM. At the first AGM, the shareholders will appoint an auditor who will hold office until the conclusion of the sixth AGM.
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