Case Study – Founders of Startup Pvt Ltd a Bangalore based Entity has finalized the Term Sheet with an investor who wishes to invest a sum of INR 2 cr in their Company. They are in need of fund to sustain and hence its imperative to do the pre-funding compliance at the earliest. However, due to lock down they are unable to open their Registered Office. More over out of the 4 present shareholders only one is in Bangalore and 3 others are stuck in their respected home states and due to travel restrictions cannot return to Bangalore.
This has created a peculiar situation, wherein the company cannot hold an Extra-ordinary General Meeting which is a pre-condition for receiving investment and delay of getting this fund is affecting the company’s business strategy. What is there any way out over here?
Applicable Legal Provision: As per the provision of Companies Act 2013,
- The board of Director may call upon the Extra Ordinary General Meeting of the company on its own or on the requisition of members of the company holding not less than ten percent of the share capital or the voting Rights in the company.
- The meeting shall be called at the registered office of the company or at any place mentioned in the Articles of the company.
- A twenty one day clear notice in writing or by electronic mode shall be given by the company to call the meeting of members. However, meeting of the members may be held at a shorter notice if consent of the atleast Ninety five of the members is obtained by the company.
- Notice of a meeting shall specify the place, date, day and the hour of the meeting and shall contain a statement of the business to be transacted at such meeting.
- A statement shall be annexed to the notice stating the special business that shall be transacted at the meeting.
- Unless the articles of the company provide for a larger number, the quorum for a Private company shall be two members personally present. If the quorum is not present within 30 minutes, the meeting shall stand adjourned to the same day in the next week at the same time and place, or to such other date and such other time and place as the Board.
- A resolution put to the vote of the meeting shall, unless a poll is demanded under section 109 or the voting is carried out electronically, be decided on a show of hands
Analysis: In the case of Startup Pvt Ltd, the company is in the process of raising funds from an investor. As per the provisions of the Companies Act 2013 and Share Capital and Debentures Rules 2014, the company is required to obtain prior approval of the members of the company in the meeting of members for Issue of Securities of the company. However due to COVID 19 pandemic, the company is unable to call the meeting of the members of the company at the registered office of the company for getting requisite approval from members for raising funds. Due to this, the business strategy of the company is getting adversely affected.
Procedure: As per recent notification by Ministry of Corporate Affairs dated 21st April 2020, a meeting of members of a company may be held through video conferencing (‘VC’) and other audio visual means (‘OAVM’) till June 30, 2020.
The pre-requisites for meeting of the members shall be as follows:
- A company can hold meeting of the members through Video Conference or through other audio visual means (‘OAVM’) if it satisfy both the conditions:
a) It has email address of at least 50% of its members with the company in terms of number of shares.
b) It has email address of at least 75% of its members with the company in terms of value of paid up capital.
- If both the conditions are not satisfied, the company may come up with public advertisements requesting its members to register their email address with the company. If both the conditions mentioned above are satisfied by the company after public advertisements, the company may hold its AGM through Video Conference or through other audio visual means (‘OAVM’).
- If any company is not required to provide e-voting facility to its members, the company shall contact all the members whose e-mail addresses are not registered with the company over telephone/any other mode, before sending notice to all the members.
- If the contact details of any members are not available in the records of the company, the company shall issue of public notice in English language and English newspaper having wide circulation in that district and electronic editions and in vernacular language and vernacular newspaper in which the registered office is situated stating the email address along with the contact details through which the members can update their contact details and participate in the meeting and voting. The company shall also publish in the public notice that the meeting of the members shall be convened through VC or OAVM and the company proposes to send the notice by email at least 3 days from the date of publication of the public notice
It may be noted that meeting of members may be conducted through the facility of VC or OAVM only by a company which has in its records, the email addresses of at least half of its total number of members, who –
a) in case of a Nidhi company, hold shares of more than one thousand rupees in face value or more than one per cent of the total paid-up share capital, whichever is less;
b) in case of other companies having share capital, who represent not less than seventy-five per cent. of such part of the paid-up share capital of the company as gives a right to vote at the meeting;
c) in case of companies not having share capital, who have the right to exercise not less than seventy-five per cent of the total voting power exercisable at the meeting.
Due to COVID 19, postal ballot facility cannot be utilized by the companies. So the framework leverages the strengths of digital India by using a combination of VC and e-Voting/simplified voting through registered emails to enable companies conduct meeting of the members. Also regarding the appointment of proxy is concerned, in the present scenario as the meeting will be conducted through VC or OAVM, the facility for appointment of proxies has been dispensed with, while representatives of bodies corporate will continue to get appointed for participation in such meetings.
To make the Extra-Ordinary General Meeting properly constituted, conducted and convened the MCA in addition to any other requirement provided in the Act or the rules, has also bring out with additional check like:
- All the companies using this option are required to maintain a recorded transcript of the entire proceedings in safe custody
- In case of public companies, they are also required to host this transcript on their website for greater transparency.
- Attendance of members through VC or OAVM shall be counted for the purpose of reckoning the quorum under section 103 of the Act.
- Further, all resolutions passed through this framework will be required to filed with the ROC within 60 days, so that such resolutions may be viewed publicly.
Other safeguards have also been included in the Circular to ensure transparency, accountability and protection of interests of investors.
There are other requirements that needs to be complied by a company to hold meeting of the members on digital platform such as
- Circulation of the board’s report, financial statements and other documents through e-mail instead of physical copies.
- The companies shall ensure that all other compliances associated with the provisions relating to general meetings viz making of disclosures, inspection of related documents/registers by members, or authorizations for voting by bodies corporate, etc as provided in the Act and the articles of association of the company are made through electronic mode.
- Meeting through VC/OAVM facility allows two way teleconferencing for the ease of participation of the members. The VC/OVAM facility must have a capacity to allow at least 500 members or members equal to total number of members, whichever is lower to participate on first come first serve basis.
- The members shall cast their vote on the resolutions only by sending their email addresses which are registered with the company. The said emails shall only be sent to the designated email address circulated by the company in advance.
- The company shall provide a designated e-mail address to all members at the time of sending the notice of meeting so that the members can convey their vote, when a poll is required to be taken during the meeting on any resolution.
- The representatives of the members may be appointed for the purpose of voting through remote e-voting or for participation and voting in the meeting held through VC/OAVM.
- The Quorum for the meeting should be counted before the commencing the meeting of the members.
- At least one independent director (if is required to appointed), and the auditor or his authorized representative, shall attend such Meeting through VC/ OAVM.
In case a notice for meeting has been served prior to the date of the EGM Circular, the framework proposed in the Circular may be adopted for the meeting, if the consent from members has been obtained in accordance with section 101(1) of the Act, and a fresh notice of shorter duration with due disclosures in consonance with the Circular is issued consequently.
Conclusion: Hence as per above stated provisions and notification issued by MCA dated 21st April 2020, the company may follow the procedure stated above to comply with the pre funding compliance required for raising the funds to achieving strategic goals and objectives of the business.