Provision for entrenchment

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

18 October 2013 Can any one please elaborate what is the Provision for entrenchment given in Clause 5 (3)of the companies act 2013?

It is stated as:
(3) "The articles may contain provisions for entrenchment to the effect that specified
provisions of the articles may be altered only if conditions or procedures as that are more
restrictive than those applicable in the case of a special resolution, are met or complied with".

Sanket

Sanket (Expert)
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18 October 2013 the recognition of entrenchment
provisions in the articles of association
of a company. The purpose of
shareholder agreements is to secure
certain rights for shareholders which
have not otherwise been made available
to them under law. For example, an
investor holding 20% shares in a
company may want a say in an
alteration of the investees articles which
affect its rights in the company. As the
law only mandates a special resolution
(3/4 th majority of shareholders present
and voting) for any alteration to the
articles to be approved, the consent of
the investor may not be required. In
such a situation, the shareholders
agreement may mandate an affirmative
vote of all shareholders for any such
alteration to be approved. While
inclusion of such rights has been the
norm in most shareholders agreements,
the same has been granted legal sanctity
under the 2013 Act[7]. Under the 2013
Act, articles of a company may contain
provisions for entrenchment such that
certain specified provisions of the
articles may be altered only upon the
satisfaction of conditions or procedures
that may be more restrictive than those
applicable in the case of a special
resolution.

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Sanket

Sanket (Expert)
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18 October 2013 There has been some debate on the
validity of affirmative rights in favour of
minority shareholders, for a company to
perform certain actions. The rationale
behind the debate being that such
affirmative rights place a higher
threshold on the company than what is
statutorily prescribed under law for
exercising such actions. The Punjab and
Haryana High Court[8] has, in the past,
ruled that a company is not prohibited
from providing a higher quorum for
board meetings in its articles than that
prescribed under the 1956 Act. The
underlying principle which may be
inferred from this decision is that it is
permissible for a company to adopt a
higher threshold of compliance than that
required under law. However, the
Company Law Boards decision in the
Jindal Vijaynagar[9] case invalidated the
affirmative rights of a minority
shareholder from preventing a change in
the location of the registered office of a
company. The new provision for
entrenchment does not expressly grant
recognition to affirmative rights in the
hands of minority shareholders in
situations where the statute provides for
voting thresholds. But, it at least grants
legal sanction to affirmative rights on
amendment of the articles of the
company.

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