If you are running a business as a company, many corporate actions take place in the company. One among them is Change in management. The Companies Act, 2013, serves as a foundational law regulating corporate management in India and it establishes the rules and procedures for the composition, appointment, resignation, and removal of directors and other key managerial personnel (KMP). The Act aims to provide transparency, accountability, and better corporate governance in the corporate sector by bringing several changes time-to-time including guidance on board reports and secretarial standards issued by the Institute of Company Secretaries of India. One of the important aspects of corporate governance is the ability to make timely and compliant changes in the management of a company, whether through new appointments or the resignation and removal of existing members.

Changes in management are not only operationally critical but also need to comply with statutory provisions to ensure the company’s alignment with both internal governance policies and the law. This guide by GenZCFO is here to help you explore the legal framework for changing management, the relevant sections of the Companies Act, 2013, and the necessary procedures for ensuring compliance.

Key Definitions and Terminologies

• Board of Directors: The collective body of directors responsible for the management and affairs of the company.

• Managing Director: A director entrusted with substantial powers of management, as defined in Section 2(54).

• Whole-Time Director: A director in full-time employment with the company.

• Independent Director: A non-executive director who fulfills specific criteria outlined in Section 149(6).

Composition of the Board of Directors

The composition of the board plays a pivotal role in determining the company's management structure. Section 149 of the Companies Act, 2013, prescribes the composition requirements for the board, including:

• Minimum of 3 directors for public companies, 2 for private companies, and 1 for One-Person Companies (OPCs).

• At least one woman director in certain classes of companies.

• Appointment of independent directors (at least one-third of the board in listed companies must be independent).

Additionally, specific categories of companies, such as listed companies, must adhere to additional corporate governance norms, including the presence of independent directors and the formation of key committees. Proper due diligence before corporate action can help you in many ways to help you safeguard the interest of each person involved.

Appointment of Directors under Companies Act, 2013

Section 152 is there for the appointment of directors. A company may appoint directors in various capacities, including first directors, additional directors, or casual vacancy directors.

• First Directors: As per the Articles of Association, the first directors are usually named at the time of incorporation. If not specified, the subscribers to the Memorandum of Association (MOA) serve as the first directors.

• Additional Directors (Section 161): The board has the power to appoint additional directors, but they hold office only until the next Annual General Meeting (AGM).

• Rotational Directors: Section 152(6) mandates that at least two-thirds of directors in public companies should retire by rotation. Such directors may be reappointed at the AGM.

To appoint a director, shareholder approval is necessary in some cases, particularly when the Articles of Association of the company require it. As a business owner, you should connect with a company secretary who can check your company's AOA and guide you if any changes are required. If you need help with a CS, GenZCFO has experienced company secretaries on its panel and can help you.

Resignation of Directors (Section 168)

Resignation of a director is a formal process governed by Section 168 of the Companies Act, 2013. The resigning director must send a resignation letter to the company, specifying the reason for resignation.

Key points:

• The resignation becomes effective when the company receives the notice or at a later date specified by the director in the notice.

• The company must file the resignation with the Registrar of Companies (ROC) using Form DIR-12 within 30 days.

• The resigning director must also file Form DIR-11 to intimate the ROC.

The filing of these forms to ROC ensures that the resignation is legally recorded and communicated to the public.

Removal of Directors (Section 169)

Section 169 outlines the procedure for the removal of directors before the expiry of their term. Key steps include:

1. Special Notice: Shareholders intending to remove a director must give special notice to the company.

2. Shareholders' Meeting: A general meeting is convened where the director can present their defense.

3. Resolution: The removal is subject to an ordinary resolution passed by shareholders.

4. Filing with ROC: The company is required to file Form DIR-12 with the ROC after the director’s removal.

Exceptions to this process include independent directors who can only be removed through a special resolution.

Role of Nomination and Remuneration Committee (Section 178)

The Nomination and Remuneration Committee (NRC), established under Section 178, plays a critical role in recommending candidates for directorship and KMP appointments. The NRC is responsible for:

• Formulating criteria for board nominations.

• Ensuring transparent and fair remuneration policies for directors and KMPs.

• Recommending the appointment and removal of directors.

The presence of an NRC is mandatory for listed companies and certain other large companies.

Appointment of Key Managerial Personnel (Section 203)

Key Managerial Personnel (KMP) play an essential role in the day-to-day operations of the company. Section 203 mandates certain categories of companies (like listed and large companies) to appoint:

• Managing Director (MD) or CEO.

• Chief Financial Officer (CFO).

• Company Secretary (CS).

These appointments require board approval and are subject to continuous compliance with various statutory provisions.

Role of Shareholders in Management Change

Shareholders hold significant power in the appointment, resignation, and removal of directors. Major management changes, especially concerning the board, typically require shareholder approval in a general meeting. Shareholder activism, particularly in listed companies, can influence these decisions. It is recommended to have due diligence done for the sake of shareholders's interest.

AGMs and Extraordinary General Meetings (EGMs) are platforms where shareholders exercise their voting rights, impacting the company's leadership.

Appointment of Independent Directors (Section 149)

The Companies Act, 2013 emphasizes the importance of independent directors in promoting good governance. Section 149 outlines the qualifications and requirements for independent directors, including:

• A tenure of five consecutive years with eligibility for reappointment for another term.

• Mandatory presence on the board for certain companies.

Independent directors ensure checks and balances by providing unbiased oversight in the company's decision-making.

Director Disqualification and Vacation of Office

Section 164 deals with the disqualification of directors for reasons such as insolvency, non-payment of calls, or conviction of an offense. Section 167 outlines instances where directors automatically vacate their office, such as failing to attend meetings for a consecutive period of 12 months or becoming disqualified.

Provisions Related to Alternate Directors

Section 161 permits companies to appoint alternate directors in the absence of a director for more than three months. This provision ensures continuity in board functions, especially when key directors are unavailable.

Role of Directors in Corporate Governance

Directors are bound by their duties outlined in Section 166 of the Act, which include acting in good faith, avoiding conflicts of interest, and exercising due diligence. These fiduciary responsibilities form the cornerstone of corporate governance, safeguarding the company's interests and ensuring ethical management.

Legal Compliance and Filing Requirements

Every appointment, resignation, and removal of directors or KMPs must be reported to the ROC by filing the necessary forms, such as DIR-12 for appointments and removals, and DIR-11 for resignations. You can visit www.mca.gov.in to learn more about this.

Penalties for Non-Compliance

The Companies Act imposes penalties on companies and directors for failing to comply with the statutory provisions. These penalties range from fines to disqualification, depending on the severity of the non-compliance. Section 447 is the major section of frauds and can be lethal to handle; therefore, speak to a company secretary at GenZCFO to prioritize your company compliance.

Case Studies and Judicial Precedents

Over the years, several judicial precedents have shaped the interpretation of the Companies Act's provisions on management changes. For example, cases related to improper removal of directors have established precedents on the scope of shareholders' rights and the role of the courts in corporate governance disputes. Effective management is crucial for a company's success, and changes in management must be carefully executed in compliance with the Companies Act, 2013. Following the legal procedures ensures smooth transitions and upholds corporate governance standards, fostering long-term growth and stability. If you are looking for a change in management in your business, feel free to reach out.