Can a Founder With The Majority Share Be Fired From Their Company?

Introduction

As per the law, ownership and management are different. A shareholder owns part of the company but, a director holds an office that shareholders can take away. It would be wrong to assume that a founder owning majority of the shares in a company can not be removed from the management. The exact provisions lie in the Companies Act, 2013. A founder’s shareholding can essentially give voting rights and economic decision-making powers but the board seat is different and may be taken away. It is to be made clear that, just being the major shareholder does not mean that the founder cannot be removed from the management of the company as being a shareholder and being a director/executive in a company are two different things.

How a Founder can be Removed?

Section 169(1) of the Companies Act, 2013 says, A company may, by ordinary resolution, remove a director, not being a director appointed by the Tribunal under section 242, before the expiry of the period of their office after giving him a reasonable opportunity of being heard.

It simply allows the shareholders to remove a director before the end of their term, and applies to directors including executive and nominated. An important thing to note here is that a founder with majority shareholding can block the ordinary resolution regarding thier removal. A founder in minority shareholding has procedural safeguards under Section 169(4), the director may send a written representation, and by law the company must share it with the members if time permits.

For the removal of a founder with majority shareholding the authority usually comes from outside the company, for example, Sections 241-242 allows the NCLT to remove management if wrongful conduct is found, or by Central Government as under Section 241(2) as it can apply to the Tribunal if conduct is found against public interest, or in cases of forced exit by the pressure created by lenders.

When can the Founder Fight Back?

A challenged founder holds the right to make a written representation under Section 169(4). But what about a removed founder? A removed founder is not without remedy, Section 241 allows a member, holding at least one-tenth of the issued share capital. to approach the Tribunal (NCLT) in cases of alleged oppression or mismanagement.

It is important for the petitioner to show oppressive or prejudicial conduct by those in control. Appeals followed by NCLT’s decisions to NCLAT is also possible.

The major problems for the founder, against external forces is that it leaves the founder with little to zero reliefs, because each problem comes with its own statute and requires a specific set of conditions to be followed, and about external pressure though it does not have any statute but, it is not easy to bypass this by a founder in distress.

Quasi-Partnership Exception

One important thing that Indian courts do these days is, take a founder-friendly approach in these cases where specifically the substance is that the directorship or partnership runs on mutual trust.

Indian judicial system applies the principles from Ebrahimi v. Westbourne Galleries, a English House of Lords judgement closely related to this. In Hanuman Prasad Bagri v. Bagress Cereals, the Supreme Court said that the just and equitable ground needs a proper case. A family-controlled company is not enough to create a quasi-partnership.

A founder who was promised a continuing part in the management of a small closely held company matters. The parties’ understanding, shown by their conduct is what matters. Basically, in a closely held company working on promises and trust, the courts can interpret laws in a founder-friendly manner for an excluded founder.

A Major Example

Even strong shareholder backing may not protect a founder. Rana Kapoor, co-founder of Yes Bank, was reappointed by shareholders in June 2018 for a further three-year term.

The RBI, however, cut his tenure short and asked the bank to find a successor by 31 January 2019. The episode shows that, in regulated sectors, a founder’s tenure depends on regulatory approval as well as on a shareholder vote.

So, most of the times it is not basically because of the internal affairs of the company but it is about the externalities that affect the organisation.

Conclusion

The key takeaways from this article are that, majority shareholding by a founder does not guarantee a seat in the management. Under Section 169 of the Companies Act, 2013 a director can be removed simply by an ordinary resolution, a founder without controlling share would be exposed to this problem.

As for the founders with majority shareholding, it is important to note that founders with majority shareholding do not actually get out of the management because the management said so, because they can simply beat the resolution.

The major reason for their removal is because of externalities, pressure by some external forces can contribute to this like pressure created by the government, money lenders, or partners. Regulators can make founders step down, criminal proceedings against the founder, strategic investing by putting up conditions regarding stepping down of the founder can all contribute to this.

Thus, it can be said that a founder despite having majority share can still be removed from the management of the company. The founder can ensure their safety in the company by making things clear in the Articles of Association or shareholders’ agreements.

Key Takeaways

-Majority shareholding does not automatically guarantee a founder's position in the company's management.

-Ownership and management are two different aspects of a company. Being a majority shareholder does not necessarily mean having permanent control over the board.

-Under Section 169 of the Companies Act, 2013, shareholders can remove a director through an ordinary resolution, subject to the applicable legal requirements.

-A founder holding majority shares may block an ordinary resolution for removal through their voting rights.

-Sections 241 and 242 of the Companies Act, 2013 provide remedies against oppression and mismanagement and empower the NCLT to intervene in appropriate cases.

-Regulatory authorities, lenders, and external pressures can also influence or contribute to a founder's removal from management.

-The quasi-partnership principle may provide protection to founders in closely held companies where mutual trust and an understanding of continued management participation are involved.

-Founders can protect their management interests by clearly defining their rights and arrangements in the Articles of Association and shareholders' agreements.

Frequently Asked Questions (FAQs)

1. Can a founder with majority shares be removed from their company?

Yes. A founder with majority shareholding can still be removed from the company's management. However, majority shareholding provides significant voting power and may allow the founder to block an ordinary resolution for removal.

2. Can shareholders remove a founder from the position of director?

Yes. Under Section 169 of the Companies Act, 2013, shareholders can remove a director before the expiry of their term through an ordinary resolution, subject to the prescribed legal procedure and exceptions.

3. What happens to a founder's shares after removal from management?

Removal from the position of director does not automatically mean that the founder loses their shareholding. The founder can continue to hold their shares and retain the rights attached to them, even after being removed from management.

4. Can the NCLT remove a founder from company management?

Yes. Under Sections 241 and 242 of the Companies Act, 2013, the NCLT can intervene in cases involving oppression and mismanagement and may order changes in company management where the required legal grounds are established.

5. What legal remedies are available to a founder facing removal?

A founder may approach the NCLT under Section 241 in cases of alleged oppression or mismanagement, subject to the applicable eligibility requirements. A founder may also challenge relevant decisions through the available appellate process, including an appeal to the NCLAT.

6. What is the quasi-partnership exception in company law?

The quasi-partnership principle applies to certain closely held companies where the relationship between participants is based on mutual trust and an understanding of continued participation in management. Courts may consider these circumstances when examining the exclusion of a founder from management.

7. Can external authorities force a founder to step down despite majority shareholding?

Yes. In certain circumstances, regulatory authorities can influence a founder's tenure, particularly in regulated sectors. External pressures from lenders, government authorities, or strategic investors may also contribute to a founder's exit from management.

8. How can founders protect their management rights?

Founders can protect their interests by clearly defining management rights, directorship arrangements, voting rights, and other relevant protections in the company's Articles of Association and shareholders' agreements.

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