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How To Convert A Public company Into A Private Company

July 20, 2015
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This article is written by Ria Dalwani, a student of Symbiosis Law School, Pune.

We’re the largest company in terms of revenue to go from public to private. In another week or two we’ll be the world’s largest startup.” – Michael Dell (Founder and CEO, Dell Inc)

A public company is a company which has seven or more members and can invite public to subscribe to its shares. A subsidiary company of a public company is deemed to be a public company. A private company is a company which limits its number of members to 200 and cannot invite public to subscribe to its shares.

The Companies Act, 2013 provides for conversion from one type of a company to another. A public company registered under the Companies Act, can convert to a private company by altering the Memorandum of Association and Articles of Association of the company[1]. It is well established that a company can convert from a private company to a public company to raise capital, expand, develop markets amongst other reasons. Importantly, a company can also convert from a public company to a private company.

Some of you might be thinking – ‘Why would a company want to go from being a public company to a private company?’ The reasons to convert vary and are significant. A public company enjoys the inflow of public investment, capital and funds. The public can make a company rich but at the same time the public expects returns for their investment, more like the ‘give and take’ school of thought. When a company fails to earn for their shareholders, the real problems begin to simmer. In 2013, Blackberry, the smart phone manufacturer that once enjoyed a monopoly in global markets attempted to go private after the company’s stock prices plunged in the markets.

Conversion is a giant leap for a company. Majority of the shareholders of a public company are short-term retail investors and there is an increasing pressure gradient on the management to only take actions that will increase stock prices. Michael Dell took Dell from a Public Company to a Private Company to liberate himself from Wall Street investors, now the only investor he has to seek advise from is “himself”.  On being asked if functioning as a private company is fun, Michael said, We get to be bold and lead without fear of the guidance. When you have a public company, there’s a lot of things that occur as people are thinking about the next quarterly earnings statement. There’s a 90-day shot clock. We’re expanding and investing like never before, because we’re not afraid. It’s just a whole lot more fun to be thinking more about the medium and long term, and less about the short term.[2]

Further, public companies are subject to several regulatory and compliance requirements. Converting to a private company increases flexibility, reduces compliance and reporting requirements. Compliance activities churn substantial expenses for a public company and cannot be done away with.

At the outset, the modus operandi adopted to convert from a public company is exhaustive due to the widespread arms of a public company.  A public company is accountable to their shareholders, creditors, investors, employees and customers amongst other stakeholders. The interests of the company’s stakeholders should be taken into consideration before proceeding with a conversion.

A company requires approval of the Tribunal to convert from a public company to a private company (Presently, these powers have been delegated to the Registrar of Companies).

Legal compliance has always been a tedious task for entrepreneurs- now that we have simplified the red tape for you, understanding procedure never got easier!

 Step 1- Call for a Board Meeting to approve the conversion

(a) Notice

7 Days’ Notice
A Notice must be sent to the directors of the company to convene the Board Meeting. This notice must be sent not less than seven days prior to the date of the meeting. The notice should be given in writing to each director at his registered address by hand delivery, post or electronic means. The agenda of the board meeting should be attached to the notice.

Provision for Shorter Notice
The Board Meeting to convert to a private company can be convened at a shorter notice to “transact urgent business”. However, to transact urgent business at a shorter notice, at least one independent director has to be present in the meeting.  In the event that an independent director is absent, the decisions taken at the meeting will be circulated amongst all the directors but can only be finalized upon ratification of at least one independent director, if any.

(b) Pass Resolutions at the Board Meeting

It is imperative to note that the quorum for a Board Meeting is one-third of the total strength of the directors or two directors, whichever is higher[3]. Participation of directors by videoconference and audiovisual means is permissible.

At the Board Meeting, the resolution approving conversion from a public company to a private company has to be passed.

Secondly, a resolution to call an extraordinary general meeting must be passed. An extraordinary general meeting is imperative to get the approval of the members of the company before proceeding with the conversion.

Step 2 – Extraordinary General Meeting

 (a) The Board has to call for an extraordinary general meeting of the company.

Firstly, The Board must decide and fix a date, time and place to hold the Extraordinary General Meeting.
Secondly, The Board must approve the notice , agenda and explanatory statement that needs to be sent in accordance with the below mentioned specifications-

Notice to convene the Extraordinary General Meeting
21 Days’ Notice
The Board has to call for an extraordinary general meeting of the company[4]. This notice must be sent not less than twenty-one days prior to the date of the meeting[5]. The notice should be given in writing or through electronic mode to every member of the company, the auditor or auditors of the company and every director of the company at their registered address by hand delivery, post or electronic means.

The Notice calling the extraordinary general meeting must specifically mention the intention to pass a special resolution.
The notice has to include the date, time and place of the meeting.

An explanatory statement[6] specifying the business to be transacted at the meeting has to be annexed to the notice. The explanatory statement specifies the nature of concern and interest, financial or otherwise, of the director, manager, key managerial personnel and their relatives. Further, the statement encompasses any information, which will allow members to understand the meaning, scope and implications of conversion from a public company to a private company. It is advised to seek assistance of a Company Secretary while drafting the notice calling for an extraordinary general meeting.

Provision for Shorter Notice
The extraordinary general meeting can be called at shorter notice if the consent of not less than ninety-five percent members eligible to vote at the meeting is given in writing or through electronic mode.

Thirdly, the board must authorize a Director or Company Secretary to sign and send the approved notice of the extraordinary general meeting to all the concerned parties.

(b) Pass Special Resolutions at the Extraordinary General Meeting

The quorum for a public company is five members personally present if the number of members as on the date of meeting is not more than one thousand; fifteen members personally present if the number of members as on the date of meeting is more than one thousand but up to five thousand and thirty members personally present if the number of members as on the date of the meeting exceeds five thousand.  However if the Articles of Association provide for any other quorum, then the quorum requirements mentioned in the Articles of Association will prevail.

To pass a special resolution[7], the votes cast in favor of the resolution should be three times the number of votes cast against the resolution.

At the extraordinary general meeting, a special resolution approving the alterations to the Memorandum of Association and Articles of Association needs to be passed[8].

To constitute a valid extraordinary general meeting-

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Step 3- File form MGT-14 (Filing of Resolutions and agreements with the Registrar)

The company has to intimate the Registrar of Companies within thirty days of passing the resolution to convert from a public company to a private company.  Resolutions are filed with the Registrar in Form MGT-14 along with the prescribed fees as prescribed in the Companies (Registration offices and fees) Rules, 2014.  The resolution, notice calling the extraordinary general meeting and the explanatory statement should be filed with the Registrar[9].

Form MGT-14 is available on the website of the Ministry of Corporate Affairs. The instruction kit provided with the form is helpful and self-explanatory. The form can be filled in English or Hindi.  The form has to be certified and digitally signed by a whole time practicing Chartered Account or Company Secretary or Cost Accountant.

The following documents have to be attached with the form:

The altered Articles of Association will have to contain all the details, which the Articles of Association of any Private Company would contain. It is crucial to note that the copy of each resolution that has the effect of altering the articles of association must be annexed to the copy of the amended Articles of Association.

Remember, No alteration to the Memorandum of Association and Articles of Association can be given legal effect if it is not in compliance with the provisions laid down in Section 13 and Section 14 of the Companies Act, 2013 respectively.  The alterations must be made in every copy of the Memorandum of Association and Articles of Association[10].

Step 4- File form INC-27 (Conversion of public company into private company or private company into public company)

 Pursuant to Section 14 of the Companies Act, 2013, any alteration to the articles of association has to be intimated to the Registrar vide Form INC-27 to enable the conversion.  Further, Rule 33 of the Companies (Incorporation) Rules, 2014 provides that Form INC-27 has to be filed in order to give effect to the conversion of a public company into a private company. The form has to be filed with the Registrar of companies, along with the application fees as prescribed in the Companies (Fee for filings with the Registrar of Companies) Rules, 2014.

 Form INC-27 is available on the website of the Ministry of Corporate Affairs.  The instruction kit given with the form is helpful and serves as a guidance note to fill the requisite details. The form can be filled in Hindi and English language.

The following documents have to be submitted along with the form-

This order must be filed in Form INC-27 within fifteen days of receipt of the order from the Central Government

Step 5- The Registrar of Companies will issue a fresh certificate of incorporation

After all the application forms have been submitted, the Registrar will verify the documents and register them.  The Registrar will close the earlier registration of the company and thereafter issue a fresh certification of incorporation[11].

The new registration will not affect the debts, liabilities, obligations or contracts entered into by the company before the conversion took place. They will still be enforceable, in the same manner as they were before the conversion[12].

Step 6- Addition of the word “Private” to the name of the company

Upon conversion the company will have to add the word “Private” to the name of the company. Approval of the Central Government is not necessary when the only change in the name of the company, is the addition of the word “Private” as a result of conversion of the company from one class to another[13].

The life of a company is a journey- there’s a rise, a fall and if you’re lucky like Apple Inc., a rise again! There is a stereotype approach that when a company converts from a Public Company to a Private Company it is an indication that the company is not prospering. A company can convert if it believes that the conversion will benefit the company in the long term, strategically and objectively.

 

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References:

[1] Section 18 of The Companies Act, 2013

[2]http://www.cnbc.com/2014/09/23/michael-dell-on-the-state-of-pcs-and-going-private.html

[3] Section 173 (1) of the Companies Act, 2013

[4] Section 100 (1) of the Companies Act, 2013

[5] Section 101 of the Companies Act, 2013

[6] Section 102 of the Companies Act, 2013

[7] Section 114 (2) of the Companies Act, 2013

[8] Section 14 of the Companies Act, 2013

[9] Section 117 of the Companies Act, 2013

[10] Section 15 (1) of the Companies Act, 2013

[11] Section 18 (2) of the Companies Act, 2013

[12] Section 18 (3) of the Companies Act, 2013

[13] Section 13 (2) of the Companies Act, 2013

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