Allotment of Shares by Pvt. Ltd. Company

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

28 September 2010 Dear Sir,

Company A is a Pvt. Ltd. company. The articles of association of the company say that the company must abide by Article 81. However, Article 81 is itself not to be applied incase of pvt. ltd. company but still the articles of association mention that article 81 has to be followed. The shareholders % is given below :

X - Holds 66%
Y - Holds 20.71%
Z - Holds 6%
Total of several small shareholders - Hold total 6%

Company A has decided to increase its share capital to twice the current value.

Can Shareholder X oppress the Minority Shareholder Y and allot shares and offer only to X, Z and others and NOT OFFER THEM TO Y ?

Even if Special resolution is reached and passed which indicates a majority of over 75%, can the minority shareholder Y be oppressed or can Y fight for his rights as he has not been offered shares ? Can this be challenged in court ?

Please reply as this is not understood clearly yet.

Thank you.

Ankur Garg

Ankur Garg (Expert)
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29 September 2010 As section 81 is mandatory for your company you can take the route of section 81(1A) i.e preferential allotment by passing special resolution in the GM.

Hold a GM keeping in view all legalities like section 171, 173, 53. There should not be any oppression or mismanagement on your part to preclude Y for taking any action against you. According to me if there is a valid GM court can not interfere.

Rgds

Querist : Anonymous

Querist : Anonymous (Querist)

29 September 2010 Dear Expert,

Thank you for your comments. Unfortunately, I belong to the Y group(i.e. the minority shareholder holding roughly 20%). There was no General meeting called for and no shareholders resolution passed in the first place so ofcourse I can challenge this and there is a chance I will win. However, what is to prevent shareholder X from exercising his powers and calling for a General meeting and alloting shares only to himself and other members disproportionately ?

If I understand correctly, is this a loophole in our law ? If I hold less than 25% of a private limited company (20% in my case), my shareholding can be reduced to even 1% if majority shareholder decides to issue new shares and only allot to himself ? What is to prevent him from alloting future shares disproportionately ?

This is a rude shock and am surprised that there are no laws to protect the rights of the minority shareholder holding 20%.

Please advise.

Regards.

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Ankur Garg

Ankur Garg (Expert)
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29 September 2010 Kindly appreciate you are not a minority shareholder (holding 20%) so after consulting your lawyer avoid using this term for court proceedings.

If there is no GM then it is good for you. Kindly check the following things and ensure yourself:

1. As per latest available Article with ROC section 81 is still mandatory for the company.

2. There was no filing regarding preferential allotment with ROC.

3. Do not underestimate the other party as far as compliance are concerned. As notice of GM can be prepared later and proof of dispatch can be arranged easily.

Rgds

Ankur Garg

Ankur Garg (Expert)
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29 September 2010 In this case form 23 is required to be filed with ROC within 30 days of GM for registering special resolution passed u/s 81(1A).

Form 2 is required to be filed with in 30 days of allotment in the board meeting.

Kindly check.