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".
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.
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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