In this blogpost, Harsha Jeswani, Student, National Law Institute University, writes about what is caveat emptor and the exceptions to the rule.
Unrestrained productivity – what if there was no time constraint and no compulsion at your work?
There is always some work that we do not want to do – cleaning, standing in the queue, travelling to work. Work that you do because your boss will fire you if you don’t. We complain about these chores that seem to be unavoidable in our lives.
There are people who manage to avoid this kind of work altogether – yogis, rockstars, people who just refuse to be reasonable and do what they want to do, millionaires or famous artists rich enough to hire people to relieve them from most of such chores. They are few in number, they always will be few in number. Most of us will never be a rockstar or the guy who lives on the street because he doesn’t do what he does not want to do.
There are others who are clever and insightful and find out ways to reduce the chores, or manage them well. Some even introduce automatic systems so that they are left with a lot of time to do things that they really want to do – like Tim Ferriss and Ramit Sethi.
Here comes the tricky part. Why would you work when there is no compulsion to work? How do you decide what to do when you have no one telling you what to do? It is way easier to pretend you have no time to do what you want to do because you are forced to take a course of action by forces of nature, or because you have to do what others are telling you to do, or because you are too busy ‘managing your time’.
Reverse the cycle. No matter whether you have time in hand or not, first identify what you would do if time was not scarce, and no one was telling you what to do. Then figure out how you can get time to do what you want to do.
Legal Enforceability of ‘Termination for Convenience’ Clause in India
This article is written by Nimisha Srivastava, a student of Gujarat National Law University.
What is a ‘Termination for Convenience’ Clause?
A typical commercial contract usually contains a mechanism for exiting or terminating the contract. Such provision in a contract is termed as a ‘termination clause’. The termination clause is basically of two kinds, a) termination with cause and b) termination without cause. The ‘termination without cause’ is also called as termination for convenience clause as the party has an option of exiting the contract after expiration of a pre- determined notice period, without providing any reason.
Enforceability
Specific Relief Act, 1963 governs the principles relating to specific performance and injunctions. Section 14 of the said Act reads ‘Contracts not specifically enforceable’ and Section 14 (1) reads as follows:
The following contracts cannot be specifically enforced, namely:—
(a) a contract for the non-performance of which compensation is an adequate relief;
(b) a contract which runs into such minute or numerous details or which is so dependent on the personal qualifications or volition of the parties, or otherwise from its nature is such, that the court cannot enforce specific performance of its material terms;
(c) a contract which is in its nature determinable;
Section 14 (1) (c) uses the term ‘determinable’, which means the contracts which are by nature revocable[1]. If a contract is by nature determinable, it will be hit by Section 14(1)(c) and cannot be specifically enforced. A contract providing for a termination for convenience clause, allowing a defendant to terminate the contract without notice and without assigning any reason, has been held as determinable in nature and therefore not specifically enforceable.[2]
In a 1991 judgment of Indian Oil Corporation Limited v. Amritsar Gas Service and Ors[3], Supreme Court elaborated upon what determinable means. The distributorship agreement between the parties contained a clause ‘termination for convenience’ clause, which empowered the parties to terminate the agreement by giving 30 days notice to either party without providing reason. Supreme Court held that such a clause falls within the category of determinable and hence specific performance cannot be granted under Section 14 of the Specific Relief Act, 1963. It was further noted by the Supreme Court that the relief that could be granted in such cases was compensation for loss of earning during the notice period. In another judgment[4] of 2001, the Supreme Court further reaffirmed this view. They held that a contract unilaterally terminable before delivery of possession is ‘determinable’ in nature.
In the case of Sadashiv Narayan Rao Jambhale v. Indian Oil Corporation Limited[5], it was held that ‘for termination of contract there for contract shall be determinable by reasonable notice.’ The dealership agreement in question was determinable by Respondents and thus specific performance could not be granted as claimed by Appellant. It was further held that contract between parties under which arbitration was sought, allows termination with as well as without cause in clauses of agreement. It was contended on behalf of Appellant that termination without cause should had been non-stigmatic and that could not take out of purview termination sought for such gross cause. It was seen that award did not suffer from vice of being against public policy or any of statutory provisions of any law nor it was against justice of morality or illegal.
The jurisprudence of Delhi High Court in its various judgments has further widened the definition of determinable, to include the contracts providing for ‘termination for convenience’. If we analyze and study these judgments, we can come to conclusion that the mere existence of a termination clause might lead to the contract being held determinable and hence, rendering it incapable of being specifically enforceable. In Crompton Greaves Ltd v. Hyundai Electronics[6], the contract in question was a joint venture agreement which contained a clause that each party could terminate the agreement if certain government approvals were not obtained within a given period. The presence of this clause prompted the Delhi high court to conclude the agreement was determinable and specific performance was denied. In Rajasthan Breweries v. Stroh Brewery Co[7] while deciding the dispute arising out of a technical know-how agreement between the parties, the Delhi High Court held that even in the absence of a specific clause enabling either party to terminate the agreement, in the event of happening of the events specified therein, it could be terminated even without assigning any reason and by serving a reasonable notice and was hence, determinable and not eligible for an injunction/ specific performance under the Act.
In Airport Authority of India v. Dilbagh Singh[8] the Delhi High Court noted that agreement clearly showed that the appellant/ defendant had reserved the right to terminate the contract without assigning any reason. The contract is determinable in nature and cannot be specifically enforced, and therefore, no injunction can be granted to prevent breach of such a contract. As per the Specific Relief Act, an injunction cannot be granted to prevent the breach of a contract the performance of which would not be specifically enforced.
In a matter titled Rattan Lal v. S.N. Bhalla and Anr.[9] the Hon’ble High Court of Delhi observed an agreement to sale with a clause that the same shall be terminated if the requisite approvals are not received within six months, was not specifically enforceable under the Act. Be that as it may, the Supreme Court in its choice of the advance against Delhi High Court’s decision observed that the pertinent provision of the agreement being referred to was never intended to give the committed party an option to escape the obligation. The party was not entitled to determine the Agreement and hence the agreement was held to be wrongly terminated. In this case, the Court decreed the suit for costs to the Appellant instead of specific performance due to the steep hike in the real estate prices the Court.
In its 2006 decision of Turnaround Logistics Limited v. Jet Airways Limited[10], the Delhi high court held an agency contract to be determinable, stating that the term ‘determinable contract’ means a contract that can be put to an end and, thus, all revocable deeds and voidable contracts would fall within this term.
Further, the High Court of Orissa in its judgment in Orissa Manganese and Minerals Pvt. Ltd. v. Adhunik Steel Limited[11] noted that the agreement in question in which the ‘Termination clause’ stated that either party had to before termination of contract serve notice of 90 days to the other party to remedy the breach, was not determinable and hence, specifically enforceable. The Court said, occasion of such nature never arose and hence the contract was not determinable unless the condition therein was fulfilled. Despite the fact that, the case was appealed before Supreme Court, the Court did not especially dealt with the issue of the specific performance as per Section 14(1)(c) of the Specific Relief Act.
In another case before the High Court of Orissa[12] a dealership agreement entered into between the parties stated that the agreement shall remain in force for five years and continue thereafter for successive periods of one year each until determined by either party by giving 3 months’ notice in writing to the other of its intention to terminate the agreement and further, as per Clause 56(1) the Petitioner shall be at liberty to terminate the agreement if the dealer deliberately contaminates or tamper with the quality of any of the Corporation’s product as such is determinable in nature. The Court held that the clause providing for termination made the contract determinable in nature and went on to set aside the orders of the trial court as well as the appellate court that granted injunctions with respect to the agreement.
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In a matter titled Atlas Interactive (India) Private Limited v. Bharat Sanchar Nigam Limited[13], the Rajasthan High Court observed that the contract may be determinable in nature but the instrumentality of the State has to act in a fair and just manner and not arbitrarily.
In another case of Ministry of Road Transport and Highway, Government of India v. DSC Ventures Private Limited[14], the High Court of Delhi, citing Indian Oil case, observed that an agreement that provides for termination by providing a sixty days notice to resolve the default in any event of default falls within the ambit of determinable contracts. Notably, this view of the Delhi High Court is contrary to that of the High Court of Orissa in Orissa Manganese case.
Conclusion
Giving due respect to the perspective of different courts it is relevant that due thought and consideration is given while drafting the termination clause of any contract. At the end of the day, the parties to a contract must not downgrade or give less significance to the termination provisions of the contract. Judiciary should also consider equity, good faith and the respective positions of the parties to determine the validity of premature termination of contract.
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[1] Mulla:Indian Contract Act, (13th edn, 2007).
[2] Dharam Veer v. Union of India AIR 1989 Del 227
[3] (1991)1 SCC 533
[4] Her Highness Maharani Shantidevi P. Gaikwad v. Savijbhai Haribhai Patel, AIR 2001 SC 1462
[5] 2014(2) BomCR 126
[6] (1999) CLT 25
[7] AIR 2000 Delhi 452
[8] 1997 IAD Delhi 722
[9] AIR 2012 SC 3094
[10] MANU/8/DE/8474
[11] AIR 2005 Ori 113
[12] Indian Oil Corporation Ltd. v. Freedom Filing Station, 2011(I)ILR-CUT 93
[13] 2005 (40) RAJ 585
[14] 2015(2) ARBLR 142 (Delhi)
Analysis Of The Concept Of Independent Directors
In this blogpost, Harsha Jeswani, Student, National Law Institute University, Bhopal analysis the concept of independent director
INTRODUCTION
With the rise of unscrupulous practices by a company, the government felt the need to introduce various remedial measures to prevent corporate larceny. One of such methods is to continuously raise the standard of Corporate Governance. With the rising level of corporate governance, the concept of independent directors has gained momentum in recent years.
The board of directors occupies a core position in the corporate governance. Shareholders in a company appoint a board of directors who are empowered to supervise management and ensure that all activities are performed in the best interests of the company. Among these directors, the companies now are appointing directors who work on an individual basis. The presence of independent representatives on the board who are capable of opposing the decisions of the management plays a significant role in protecting the interests of shareholders as well as other stakeholders. Because of this very reason, the word ‘independence’ has become such a critical issue in determining the constitution of any board and being a huge helping hand in the area of corporate governance.
CONCEPT OF INDEPENDENT DIRECTORS
An independent director plays a very important role by often challenging various policy decisions and strategies of the company which are not in conformity or are against the interests of the company. They also examine the working of the management and hold them accountable for their actions. Because of lack of affiliation which otherwise might prejudice their decisions, their independence enables them to accomplish these tasks more efficiently and effectively. Even though they are accountable for the acts of the company, they are less likely to be affected by self-interest in these actions. This makes possible for them to question the practices of the company. It is because of this advantage; the independent directors are often viewed as “adversaries” within the board. With the passage of time, their position has become more relevant and acceptable since these independent directors create a balanced environment in a corporation.
The need for Independent Directors gained popularity in India after various corporate scandals were reported, the major one being the Satyam debacle in the year 2009. Satyam case was perhaps the biggest corporate fraud case where M/S Satyam Computer Services Ltd caused loss to the investors to the tune of Rs. 14162 crores. The brief facts underlying the cases are- The owner of the company Ramalinga Raju along with his family members obtained illegal gains amounting to Rs. 2743 crores by various fraudulent acts. The false sales invoices of the company reflected the inflated revenue of the company. Further, the false bank statements showed corresponding gains with the connivance of the Statutory and Internal Auditors. The annual financial statements of the company with increased revenue were published for several years which further led to the higher price of the scrip in the market. All these false activities of the company lured the innocent investors to invest in the company. Several attempts were made to conceal the fraud by acquiring the subsidiary companies of relatives. In order to avoid such corporate frauds in the future and to protect the interests of the investors, particularly the minority shareholders the concept of Independent Directors was introduced.
The Companies Act, 2013 was introduced with the objective of improving the standards of Corporate Governance and ensuring transparency to the minority shareholders. The provisions relating to Independent directors have been included in the 2013 Act. The term Independent Directors has been defined in Section 149(6) of the Act and Section 149(12) deals with the liability of such directors. Section 150 lays down the procedure for selecting Independent Directors. The code for Independent Directors has been provided in Schedule IV of the said Act. All these provisions pertaining to independent directors were added because of the view that the inclusion of independent director often brings a different point of view, a more knowledgeable view, and a more professional view.
ROLE OF INDEPENDENT DIRECTORS
Independent Directors have a significant role in the field corporate governance. The progress of any company depends on the key role of these independent directors. In fact, Independent Directors act both as a safeguard and a source of competitive advantage. The earlier law of 1956 did not provide for any duties of Independent Directors namely the executive directors, the promoters, or the shareholders, minority or otherwise. Independent Directors act as a watchdog to ensure that the promoters and executive directors of a company carry on the activities of the company in accordance with the interests of the shareholder. Also independent directors act as advisors to the board, critical to maximizing revenue and overall value of the company.
The primary function of independent directors is to adopt the role of supervisor to monitor that the assets of the company are used only for the company. This includes:
- to be aware of the business in which the company is dealing and be familiar with various activities of the company,
- inspect the accounts of the company,
- calling for additional information where the accounts show less than the actual picture,
- to supervise the policy decisions and the strategies of the company bearing in mind the interests of the company,
- attending board meetings to ensure ability to generally monitor of corporate affairs and policies and
- participating in the appointment, assessment and remuneration of directors generally.
CONCLUSION
Thus, the Satyam scandal and other corporate scams exposed the growing need for introducing the concept of independent directors in corporate governance. The 2013 Act defines the role of independent directors in accordance with the growing needs of the economy. The primary role independent directors play is not to protect the interest of the minority shareholders, but to supervise the activities of the board and to supervise the management of the company. The duty of the independent director is to look into the affairs of the company. It can, therefore, be said that indirectly the independent directors play a significant role in promoting the best interests of minority shareholders; when in fact the reality is that it is promoting the interest of all shareholders as a whole.
What Are The Pros And Cons Of Mergers And Acquisitions
In this blogpost, Sudhi Ranjan Bagri, Student, National Law Institute University, Bhopal, writes about the pros and cons of mergers and acquisitions
Introduction
Mergers and acquisitions (M&A) are two different concepts, however, over the period of time, the distinction has blurred, and now they are often used in exchange for each other. In mergers, two similarly sized companies combine with each other to form a new company. The acquisition, on the other hand, occurs when one company purchases another company and thus becomes the new owner. The process which is generally followed in both these concepts usually starts out with a series of informal discussions between the companies by their representatives, which is followed by formal negotiation, then the issuance of a letter of intent, the process of due diligence, entering into a purchase or merger agreement, and finally, the execution of the deal and the transfer of payment.[1]
The next question which comes into our mind is that why do these companies enter into such transactions.
Pros of Mergers and Acquisitions
Some of the most common reasons for companies to engage in mergers and acquisitions include-
To become bigger Most of the companies enter into M&A agreements to increase their size and to eliminate their rivals from the market. In the normal circumstances, it can take many years for a company to double its size, but the same can be achieved much more rapidly through mergers or acquisitions.
To eliminate competition M&A deals are usually done so as to allow the acquirer company to eliminate the future competition by gaining a larger market share in its product’s market. However, there is a con attached to it, which is that a large premium is usually required to convince the shareholder of the target company to accept the offer. In such cases, the shareholders of the acquiring companies get disappointed by the fact that their company is issuing huge premiums to another companies shareholder’s, and thus the shareholders of the acquiring company sell their shares which further results in decreasing their value. [2]
Synergies and economies of scale This is usually one of the primary motivating factors for small companies as they have limited resources and usually deal with financial constraints. Companies merge to take advantage of synergies and economies of scale. Synergies occur when two companies who deal with the similar type of business combine with each other, as they can then consolidate or eliminate duplicate resources like a branch and regional offices, manufacturing facilities, research projects etc. Every amount of money which is saved goes straight to the bottom line, boosting earnings per share and making the M&A transaction an “accretive” one.[3]
Tax purposes Companies also enter M&A agreements for tax purposes, although this may be an implied rather than an overt motive. For instance, countries like U.S., have a huge corporate tax rate, so to avoid payment of these taxes, some American companies have resorted to corporate “inversions”. This involves a U.S. company buying a smaller foreign competitor and moving the merged entity’s tax home overseas to a lower-tax jurisdiction, in order to substantially reduce its tax bill.[4]
Cons of Mergers and Acquisitions
Substantial Increase in Prices A merger reduces competition and thus can give the acquiring company the monopoly power in the market. With less competition and greater market share, the new firm can increase prices of the products for consumers. For example let’s consider a hypothetical situation, where some major automobile companies merge with each other, the probable outcome is that they will substantially increase the prices of their product, because of the fact that the consumers will not do not have many options to choose from thus leaving them with no other option but to purchase those products at the increased prices. Thus, this is one of the biggest drawbacks of the M&As, wherein the market is highly disrupted, and the consumers are the ultimate sufferers.[5]
Job Losses: A merger can lead to a situation wherein the employees have to lose their jobs. Usually, while a merger or acquisition takes place, the companies tend to reduce and remove those assets which will not be resulting in their profiting rearing process. This is a particular reason for concern if it is an aggressive takeover by an ‘asset stripping’ company. An asset stripping company is a company, which seeks to merge and get rid of under-performing sectors of the target company.[6]
Diseconomies of ScaleThe new company may experience diseconomies of scale from the increased size. After a merger, since the size of the company is increased, it may lack the same degree of control and thus may struggle to motivate workers. If workers feel they are just part of a big multinational, they may be less motivated to try hard.[7]
Loss in productivity In cases where the small companies are being merged or acquired by big companies, the employees of the small companies may require exhaustive re-skilling. Thus, the time during which is required for such re-skilling, the company will have to suffer the non-productivity of those employees, which indirectly would cast a burden on the capital of the company. [8]
Author’s comment
Just like a coin has two faces, the same applies to the case of mergers and acquisitions. On one hand, it enables a firm to expand its area of business and eliminate competition, on the other hand, the concept of mergers and acquisitions often creates monopoly of a company thereby increasing the prices and often reducing the productivity of the company.
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References:
[1] See http://www.investinganswers.com/financial-dictionary/economics/mergers-acquisitions-ma-366
[2] R Renaud, Why do companies merge with or acquire other companies?, available at http://www.investopedia.com/ask/answers/06/mareasons.asp
[3] E. Picardo, How Mergers and Acquisitions Can Affect A Company, available at http://www.investopedia.com/articles/investing/102914/how-mergers-and-acquisitions-can-affect-company.asp
[4] Ibid
[5] T. Pettinger, Pros and Cons of Mergers, available at http://www.economicshelp.org/blog/5009/economics/pros-and-cons-of-mergers/
[6] Ibid
[7] Supra 5
[8] Y. Kumar, Advantages And Disadvantages Of Mergers And Acquisition Economics Essay, available at http://www.ukessays.com/essays/economics/advantages-and-disadvantages-of-mergers-and-acquisition-economics-essay.php
Analysis Of The Concept Of Delegated Legislation
In this blogpost, Harsha Jesawni, Student, National Law Institute University, Bhopal writes about the meaning, need, position under constitution and criticisms of delegated legislation in India
Introduction
The Constitution of Indian empowers Legislature to make laws for the country. One of the significant legislative functions is to determine a legislative policy and to frame it as a rule of conduct. Obviously such powers cannot be conferred on other institutions. But keeping in mind various multifarious activities of a welfare State, it is not possible for the legislature to perform all the functions. In such situation, the delegated legislation comes into the picture. Delegated Legislature is one of the essential elements of administration whereby the executive has to perform certain legislative functions. However, one must not forget the risk associated with the process of delegation. Very often, an overburdened Legislature may unduly exceed the limits of delegation. It may not lay down any policy; may declare any of its policy as vague and may set down any guidelines for the executive thereby conferring wide discretion to the executive to change or modify any policy framed by it without reserving for itself any control over subordinate legislation. Therefore, even though Legislature can delegate some of its functions, it must not lose its control completely over such functions.
Meaning
Delegated legislation (sometimes referred as secondary legislation or subordinate legislation or subsidiary legislation) is a process by which the executive authority is given powers by primary legislation to make laws in order to implement and administer the requirements of that primary legislation. Such law is the law made by a person or body other than the legislature but with the legislature’s authority.
Legislation by any statutory authority or local or other body other than the Legislature but under the authority of the competent legislature is called Delegated legislation. It is legislation made by a person or body other than Parliament. Parliament thereby, through primary legislation, enables others to make law and rules through a process of delegated legislation.
Need For Delegated Legislation
The process of delegated legislation enables the Government to make a law without having to wait for a new Act of Parliament to be passed. Further, delegated legislation empowers the authority to modify or alter sanctions under a given statute or make technical changes relating to law. Delegated legislation plays a very important role in the process of making of law as there is more delegated legislation each year than there are Acts of Parliament. In addition, delegated legislation has the same legal standing as the Act of Parliament from which it was created.
Delegated Legislation is important because of several reasons. They are-
- Delegated Legislation reduces the burden of already overburdened Legislature by enabling the executive to make or alter the law under the authority of Legislature. Thus, this helps the Legislature to concentrate on more important matters and frame policies regarding it.
- It allows the law to be made by those who have the required knowledge and experience. For instance, a local authority can be permitted to enact laws with respect to their locality taking into account the local needs instead of making law across the board which may not suit their particular area.
- The process of delegated legislation also plays a significant role in an emergency situation since there is no need to wait for particular Act to be passed through Parliament to resolve the particular situation.
- Finally, delegated legislation often covers those situations which have not been anticipated by the Parliament during the time of enacting legislation, which makes it flexible and very useful to law-making. Delegated legislation is, therefore, able to meet the changing needs of society and also situations which Parliament had not anticipated when they enacted the Act of Parliament.
Delegated Legislation: Position under Constitution of India
The Constitution of India gives powers to the Legislature to delegate its functions to other authorities, to frame the policies to carry out the laws made by it. In the case of D. S. Gerewal v. State of Punjab[1], the Supreme Court held that Article 312 of the Constitution of India deals with the powers of delegated legislation. Justice K.N. Wanchoo observed “There is nothing in the words of Article 312 which takes away the usual power of delegation, which ordinarily resides in the legislature.
The phrase “Parliament may by law provide” in Article 312 should not be interpreted to mean that there is no scope for delegation in law made under Article312…. The England law enables the Parliament to delegate any amount of powers without any limitation. On the other hand in America, like India, the Congress can delegate only some of its functions. Thus, it does not have unlimited or uncontrolled powers. Thus, India allows for delegated legislation but in a defined and controlled manner with certain restrictions.
Criticism Of Delegated Legislation
Delegated legislation apart from having many advantages is criticized on many grounds-
- It is argued that delegated legislation enables authorities other than Legislation to make and amend laws thus resulting in overlapping of functions.
- It against the spirit of democracy as too much-delegated legislation is made by unelected people.
- Delegated legislation subject to less Parliamentary scrutiny than primary legislation. Parliament, therefore, has a lack of control over delegated legislation, and this can lead to inconsistencies in laws. Delegated legislation, therefore, has the potential to be used in ways which Parliament had not anticipated when it conferred the power through the Act of Parliament.
- Delegated legislation generally suffers from a lack of publicity. Since the law made by a statutory authority not notified to the public. On the other hand, the laws of the Parliament are widely publicised. The reason behind the lack of publicity is the large extent of legislation that is being delegated. There has also been concern expressed that too much law is made through delegated legislation.
Conclusion
In the end we can conclude that the delegated legislation is important in the wake of the rise in the number of legislations and technicalities involved. But at the same time with the rise in delegated legislation, the need to control it also arises because with the increase in the delegation of power also increases the chance of the abuse of power. The judicial control apart from the legislative and procedural control is the way how the delegation of power can be controlled. Thus, the delegated legislation can be questioned on the grounds of substantive ultra vires and on the ground of the constitutionality of the parent act and the delegated legislation. The latter can also be challenged on the ground of its being unreasonable and arbitrary.
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[1] 1959 AIR 512
Career Series: Webinar with Ketan Mukhija, General Counsel, SREI Group on Roles and Responsibilities of an In-house Counsel
Join us for a webinar with Ketan Mukhija, General Counsel, SREI Group on “Roles and Responsibilities of an In-house Counsel” this Tuesday (9th February) between 3 – 4 PM IST.
Webinar will be accessible here.
About the speaker
Ketan Mukhija is the General Counsel of SREI Group. Ketan had worked on the famous acquisition of Jaguar by Tata during his stint at the international law firm Herbert Smith. He specializes in banking and finance, energy and infrastructure, corporate restructuring, private equity, real estate and construction, telecommunications as also capital markets, both domestic and international. He has also worked at Pathak & Associates, Vaish Associates and Luthra & Luthra Law Offices earlier.
Law Regarding Voting Agreements In India
In this blogpsot, Harsha Jeswani, Student, National Law Institute University, Bhopal, writes about the nuances related to voting agreements, their meaning and conditions regarding enforceability.
What Are Voting Agreements
A group of shareholders may enter into a mutual agreement to pool their votes and cast them in a particular manner. Such agreements could also contain several other conditions which could result in curtailment of rights of certain individual shareholders or group of shareholders. This is known as voting agreement. Most American states recognize expressly that agreements between shareholders to vote their shares in accordance with voting agreements are valid.[1]
Thus, voting agreement is essentially An agreement between two or more shareholder if in writing and signed by the parties thereto, may provide that in exercising any voting rights, shares held by them shall be votes as provided by the agreement ,or as agreed among the parties, or as per the procedure agreed upon by them.
Pooling agreements are essentially kind of contracts which provides the manner agreed between the shareholders to vote their shares.[2]
Thus, a group of shareholders may enter into a mutual agreement to pool their votes and cast them in a particular manner. Such agreements could also contain several other conditions which could result in curtailment of rights of certain individual shareholders or group of shareholders. In a voting agreement or a pooling pact, each shareholder retains sole ownership of shares binding him only to vote for a specific person or in a certain way. The Supreme Court in the case of Mohan Lal Chandumall And Ors. vs. Punjab Company Ltd., Bhatinda[3] held such agreements to be enforceable in law since the right to cast a vote is regarded as a proprietary right and the shareholder can exercise such right as he wants.
One of the key characteristics of corporations is the free transferability of shares: shareholders can sell their shares at will. This right of alienation flows from the fact that shares are a form of personal property. Section 44 of the Companies Act, 2013 clearly states that the shares, debentures, or other interest of any member in a company are movable property capable of being transferred as provided in Articles of the Company.
Voting agreements have not been given an exact definition as per the Indian Law but the definition of Control which includes the right to appoint majority of the directors or to control the management or policy decisions, exercisable directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner.[4] This throws light on the fact that control with respect to i) Appointment of Majority of Directors and ii) Voting Agreements also enable to control the management or policy decisions of a company.
Enforceability Of Voting Agreements
The Shareholder’s Agreement became popular in India with the flourishing of modern forms of businesses. The statutes of India do not specifically provide for any laws relating to them, nor are there any cases exclusively inclined in that direction.
A voting or a pooling agreement may be utilized in connection with the Election of Director or Shareholders Resolution where shareholders have a right to vote[5]. A shareholder is dealing with his own property and is entitled to consider his own interest, without regard to the interest of other shareholders.[6]
The Supreme Court in Gherulal Parekh v. Mahadeo Das Maiya [7] held that freedom of contract can be restricted by law only in case of public interest. The court held that such agreements are valid provided that they are entered into keeping in mind the best interest of the company. It is important that such Shareholder’s Agreement must be in accordance with the Articles of Association of the company. The essential purpose of a shareholder’s agreement is to ensure proper and effective internal management of the company. There is no express provision under Companies Act 1956, FERA 1973, RBI regulations or I.T. Act, which restricts shareholders of a company from entering into agreements regarding exercised of voting rights attached to their shares.
A leading case where the court talked about the enforceability of voting agreements is Rolta India Ltd v Venire Industries Ltd. In this case, the Bombay High Court held that-
- The pooling agreement can be defined as an agreement between two or more shareholders which deals with the procedure of exercising voting rights by the shareholders in accordance with the shares held by them; it is a contract to the effect that the shares held by them shall be voted as one single unit. The agreement enables the shareholders to vote according to their mutual agreement. In a pooling agreement, each shareholder retains sole ownership of shares binding him only to vote for a specific person or in a certain way. These agreements are enforceable because the right to vote is a proprietary right.
A reading of the above judgments indicates that the courts are very reluctant to enforce such pooling agreements. The pooling agreements, which are enforced, are only concerned regarding the right to vote of the shareholders. The courts have not been granting specific performance of the agreements whereby the powers of the Directors stand denuded.
When Not Enforceable
Section 6 of the Companies Act, 2013 provides that any provision contained in the memorandum, articles, agreement or resolution, which is inconsistent with the provisions of the Act are void to the extent of its repugnancy.
The Supreme Court in V.B. Rangaraj v. V.B. Gopalakrishnan[8] ; held that a restriction on the transfer of shares contrary to the articles of association of a private company was not binding on the private company or its shareholders.
In the case of Rolta India v. Venire Industries Ltd., the court held that any Shareholder Agreement, which deprives the Board of Directors of their statutory rights to manage the company is void since the shareholders cannot by virtue of pooling agreement achieve anything which they are not allowed in case of voting individually. Therefore, a pooling agreement which enables shareholders to unite cannot be permitted if such agreements supersedes the powers of directors. Thus, the provision of a shareholders’ agreement curtailing the rights of directors declared is unenforceable in law.
The law, therefore, is that the shareholders are not entitled to infringe the rights and duties of the directors of the company by virtue of pooling agreement. Even Directors are not empowered to enter into an agreement, thereby agreeing not to increase the number of Directors when there is no such restriction in the Articles of Association. The shareholders cannot dictate the terms to the Directors, except by amendment of Articles of Association or by removal of Directors.
Conclusion
It is evident from the above that though the Companies Act, 2013 does not provide any express provision governing the validity of Shareholders’ Agreement still the Supreme Court of India has held in catena of cases that such pooling agreements are valid and enforceable in law. However any such agreement which is contrary to the provisions of Articles of Association of a company and supersedes the powers of Board of Directors cannot be enforced and is considered as void.
[1] M Thomas Arnold ,Shareholder Duties Under State law,28 Tulsa L.J. 213,228 (1992)
[2] Franklin A. Gevurtz, Corporation Law 35-36
[3] AIR 1961 P H 465
[4] Section 2(27) ,Companies Act,2013
[5] Section 2(27), Companies Act,2013
[6] Section 44, Companies Act,2013
[7] Gherulal Parekh v. Mahadeo Das Maiya (1959) SCR supp (2) 406
[8] V.B. Rangaraj v. V.B. Gopalakrishnan AIR 1992 SC 453.
Analysis Of The Enemy Property Ordinance, 2016
In this blogpost, Sudhi Ranjan Bagri, Student, National Law Institute University, Bhopal, analyses the Enemy Property Ordinance, 2016.
The Foundation of the Act
After the Indo-Pak war of 1965 and 1971, there was migration of people from India to Pakistan on a large scale. The Government of India took control of the properties and companies run by persons who took the nationality of Pakistan, by exercising their powers given under the Defence of India Rules framed under the Defence of India Act. These properties, as per the Act, are termed as ‘enemy properties’[1]. Further such properties were vested by the Central Government with the Custodian of Enemy Property for India.[2]
The Enemy Property Act (hereinafter referred to as the Act) was enacted in the year 1968, by the Government of India, which provided that the enemy property which was vesting with the custodian would continue to do so[3]. The enemy property spread across many states of India, and so did the authority of custodian over those properties. Such enemy properties comprised of immovable as well as moveable properties. The Office of the Custodian of Enemy Property is located at Mumbai with a Branch office at Calcutta[4].
To ensure the continuous vesting of the enemy properties with the Custodian, an Ordinance was propagated in the year 2010, by the then Government, to make appropriate amendments to the Enemy Property Act, 1968. After the Ordinance lapsed on September 2010, a bill seeking the concerned amendments with some more modifications was presented in the Lok Sabha on 15th November 2010. However, the bill could not be passed during the 15th term of the Lok Sabha, and it lapsed.[5]
The present government, following the path of the previous UPA government, has been eager to amend the Enemy Property Act.[6] Finally on January 07, 2016, the Enemy Property (Amendment and Validation) Ordinance, 2016 was promulgated by the President of India to make necessary amendments to the Enemy Property Act, 1968.[7]
Amendment
Following are some of the amendments which have been brought up by the Ordinance of 2016.
- once an enemy property is vested in the custodian, it shall continue to be vested in him as enemy property irrespective of whether the enemy, enemy subject or enemy firm has ceased to be an enemy due to reasons such as death etc;
- the law of succession does not apply to enemy property;
- any property vested in the custodian cannot be transferred by an enemy or enemy subject or enemy firm;
- the custodian shall preserve the enemy property till it is disposed of in accordance with the provisions of the Act.
These amendments were done with intent to cover all the loopholes which were present in the 1968 Act. Section 18 of the Act talked about ‘divesting of enemy property which was vested in the Custodian’. It mentions that the Custodian can divest the enemy property, which has been vested in him and is still in his custody, only if the Central Government directs to do so either by general or special order passed in that regard. The property can be transferred to the owner of the property or any other person as specified by the directions of the Central Government, and upon such transfer such property shall cease to vest in the Custodian.[8]
Further, Section 10 of the Act also needs to be looked upon to understand the situation more clearly. As per Section 10(1) of the Act, where a company has issued any security, and such a company is an enemy property, the Custodian may proceed to sell those securities, and such securities may be purchased by such company itself after receiving the consent of the custodian in this behalf. Further, it states that such company can re-issue its securities on its discretion.
On a careful reading and interpretation of the provision, it can be observed that this provision provides a great amount of discretion to the custodian, as the company can purchase back its securities only after the prior permission of the custodian. And it has nowhere been mentioned that the custodian before granting such permission needs to take the prior approval of the Central Government or even needs to imitate the same to the Central Government.
So, the amendment seeks to remove such scopes wherein the enemy property can be transferred to such enemy or any person on behalf of such enemy person. Further, the amendment also states that such property would not be subject to the law of succession. It clarifies that no person can thus claim the property on the ground that the property being his ancestral property belongs to him, on the death of the real owner. The amendment also mentions that the property would not cease to be enemy property merely on the death of the enemy.
Conclusion
So from my viewpoint, this Ordinance has been promulgated with a view to curb the arbitrary powers of the custodian and for the intervention of Central Government as and when required. The Act initially gave discretionary powers to the Custodian, but the applicability of the Ordinance would limit the exercise of the powers. Hence, it is seen as a positive move of the Government to restrict the powers of the Custodian.
[1] Section 2(c) of the Act.
[2] Defence of India Rules, 1962.
[3] Section 5
[4] http://commerce.nic.in/epactdet.htm
[5] See http://pib.nic.in/newsite/PrintRelease.aspx?relid=134302
[6] See http://www.ptinews.com/news/6949004_Prez-signs-ordinance-to-amend-Enemy-Property-Act.html
[7] Ibid
[8] Section 18 of the Act
Approach Of International Financial Institution (IMF) Towards Developing Countries
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This article is written by Shristhi Debuka, a student of Jindal Global Law School
The International Monetary Fund is an international organization which was introduced in the year 1944 at the Bretton Woods Conference. This organization was set up to improve the economies of the member countries when required. IMF is an organization with 188 member countries, nurturing global monetary cooperation, sustainable economic growth, facilitate international trade, promote high employment, secure financial stability by making financial resources available to member countries when in need and also to secure balance of payment needs, exchange rates and reduce poverty.
The main aim of the organization was to assist the world in international payment system, thus the fund in this organization is contributed by the member countries so that the countries in crisis can borrow these funds when required. However by lending the fund, IMF demands for change in certain policies (conditionality) of the member countries, whereby working for the improvement in the economy of the member country which leads it to the crises.
The conditionalities are majorly adopted by the Washington consensus, it is the policies put by IMF on the borrowing countries so as to secure the re- payment of the borrowed fund whereby helping the countries to get out of the financial crises. The contribution of the countries towards the fund is on the basis of the ‘share of trade’ therefore, the process of voting in the country is according to contribution made by the member countries and not as one country one vote, for \example, US contributes SDR 42,122.4 million in the IMF and the number of votes they have is 421,961 i.e. 16.75% of the total votes whereas Argentina contributes SDR 2,117.1 million and the number of votes they have is 21,908 which is 0.87% of the total votes. Therefore, larger the country, stronger is its financial position, and is generally less likely to accept conditions which it does not want to agree whereby being in a stronger position to negotiate vis-à-vis the fund. On the other hand, a country with financial crisis is forced to accept all the conditions which may be considered politically unacceptable. Therefore it can be said that-
“When the Fund consults with a poor and weak country, the country gets in line. When it consults with a big and strong country, the Fund gets in line.”[1]
The funds lend by the IMF are short-term lending with structural changes in the economy of that particular country. Therefore, the borrowing countries are compelled to adjust according to financial imbalances forgoing the development and growth of the particular countries.
The conditionality put forward by IMF have improvised many developing countries which were and are in financial crises, even after the assistance given by the IMF. The IMF’s leniency with Argentina and the mistake it created in 1990s, contributed to the country’s major economic crisis in the late 2001[2]. The first important cause of the trouble in 1990 was the government’s decision to maintain a fixed rate of exchange; one peso for one U.S. dollar. In the past years, US dollars overvalued and so peso also overvalued. This means that the government has to give guarantee to anyone who wants dollar in exchange of peso and thus, there was a decline in demand for Argentine exports. Here, IMF supported Argentina by giving a loan of $40 BILLION which eventually got piled up as a foreign debt which was impossible to pay back.[3]
In 2001, IMF again gave loan on the condition that the Argentine government would eliminate its budget deficit. So, in December 2001/January 2002, under the economic policies imposed by the IMF supported programe, there was public debt default, fixed exchange rate abandonment, high levels of unemployment, and social and political turmoil. At this time, the fund refused to disburse one of its tranches and this defaulted Argentina on its debts and the value of the peso fell. This shows about the fragility of the IMF as previously, Argentina’s economic situation was very weak but now after the indulgence of IMF, it has now become unattainable.[4]
Another developing country whose economic conditions are not improved even after the assistance given by the IMF is Ukraine. Ukraine took seven loans from the IMF either financed fully or partially whereby leading to debt accumulation. In the year 2008, the country was supported by IMF to restore its economic and financial conditions, and in exchange agreed upon the conditions i.e. the reform package which were recapitalization of the banking system, pegged to a flexible exchange rate and restrictions on fiscal, monetary and wage policies. Therefore, the IMF provided Ukraine with three tranches but in case of the fourth tranche, IMF failed to make positive statement.[5] However, due to IMF failure in 2008, Ukraine, in 2014, is still facing economic crisis after six years for the second time. The main reason for the crisis is a steady rise in indebtedness, overvalued exchange rate accompanied by loose fiscal policy etc., these made the economy of the country more vulnerable to economic and political shock whereby leading to the current crisis.[6]
Therefore the two countries which are still in crisis even after being assisted by the conditionality of the IMF are not out of the crisis and still indebted. Hence, it is clear that these conditionalities are not as effective as it is thought to be and it does not help the developing countries to overcome their financial crisis fully. Moreover, the IMF also stepped in as a lender in the countries like Mexico, Indonesia, Brazil, Thailand, etc. during their financial crisis. Even after supported by IMF it could not stop the financial crisis amongst the countries whereby spreading to the other countries as well. Hence the conditionality’s were proved to be a bad medicine
Hence, at the end it can be seen that the IMF conditionality imposed by IMF does not help a developing country to overcome its debt to a very large extent. The clear picture of the failure of IMF is seen in the case of Argentina and Ukraine as these countries were forced to take multiple loans to come out of its financial crises. IMF also invades in the sovereignty of a country, by enforcing structural changes whereby governing their economy. The IMF conditionality is a hindrance in growth and development of a developing country, because of the structural changes made by them and are not left to the government of the country to decide, IMF forces the government of the developing country to reduce its expenditure in public sectors and welfare not paying any attention towards the growth of the economy. Therefore, due to the failure of the IMF conditionality, its major critique can be that it does not provide the countries with the time to experiment things which may be suitable for its economy as IMF provides with short term loans, only demand management is concentrated on them, the problem of inequality is also not assessed by them, and very importantly, IMF controls the exchange rate of the countries which should be determined by the market. Therefore, IMF conditionality is not helping the developing countries to develop in particular but is hindering its growth, leading to impoverishment in the long run.
[1]Ariel Buira, AN ANALYSIS OF IMF CONDITIONALITY, (G-24 Discussion Paper No. 22) August 2003
[2] Todd Benson, Report Looks Harshly at I.M.F.’s Role in Argentine Debt Crisis, The New York Times, http://www.nytimes.com/2004/07/30/business/report-looks-harshly-at-imf-s-role-in-argentine-debt-crisis.html (last visited 14th Nov. 2014)
[3]Independent Evaluation Office( IEO), The Role of the IMF in Argentina, 1991-2002, http://www.imf.org/external/np/ieo/2003/arg/index.htm (last visited 14th Nov, 2014)
[4] Carol Graham and Paul Robert Masson, The IMF’s Dilemma in Argentina: Time for a New Approach to Lending? http://www.brookings.edu/research/papers/2002/11/globaleconomics-graham (last visited 14th Nov, 2014)
[5] Fyodor I. Kushnirsky, Ukraine and The IMF: An Uneasy Cooperation (July 2014), http://thejournalofbusiness.org/index.php/site/article/view/572 (last visited 14th Nov. 2014)
[6] IMF Survey, Ukraine Unveils Reform Program with IMF Support, http://www.imf.org/external/pubs/ft/survey/so/2014/new043014a.htm (last visited 14th Nov, 2014)
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