Invested in a company which is splitting what rights do I have in it

600 votes

As per your query if you are a shareholder in the company then a certain amount of share in the profit and loss of the company will be allocated to you. This would be clearly mentioned in the document while incorporating the Company initially which would be subject to change in the even you have invested more capital into the company as time has passed. Your rights in the company that is being sold have will have to be audited before they can close their books of accounts and upon it being audited and of the books shows a profit, such profits have to be shared amongst the shareholders to the extent of the shares owned by each person.

With respect to whether you would have a share in the new company which is being formed will have to be looked into upon reading of the MOU, MOA and the initial terms of incorporation.

Advocate Abhay Anand J LawRato

949 votes

Dear client,

I am writing to respond your query posted above. At the outset, it has been assumed that:
(i) your company is a small company (whose paid up share capital does not exceed fifty lakh or turnover is lesser than the prescribed threshold);
(ii) there may be two cases of splitting either by scheme of arrangement for demerger where the shares would be swapped in duly determined swap ratio (“Case I”) or the existing company may sell a division of the business through business transfer agreement to a newly incorporated company or some other company (“Case II”); and
(iii) You may have a founders’ agreement which are duly reflected and recorded in the Articles of Association of the existing company.

Please note that every founding shareholders rights are generally enshrined under the Articles of Association of the Company if Founders’ Agreement is well negotiated and same has been recorded in the Articles of Association of the Company.

Case 1(split under the scheme of arrangement): if your company is a small company then it has to approach to Regional Director, Registrar of Companies and Official Liquidator for approval for splitting through demerger. In that case one of the steps is that a members’ meeting shall be called to where you can raise your concern and objections. If your company is not a small company then it has to approach National Company Law Tribunal (“NCTL”) for approval where also a member’ meeting shall be called upon, in that case also you can raise your concern, issues and objections. It is the mandatory requirement to serve a notice to all stakeholders inviting suggestions and objections with respect to the scheme of arrangement of demerger.

Case 2 (Business Transfer): if your existing company proposes to transfer one of the business division then it may amount to sale or transfer of undertaking. Under Section 180 of the Companies Act, 2013 a board of directors of a company can exercise the power of selling or transferring any undertaking of the company if it has been empowered by special resolution passed in the members’ meeting. Special resolution requires 75% or more voting in the members’ meeting. Hope you are holding more than 25% of stake in the company. If that is the scenario then you can raise your objections and may cast a negative consent in members’ meeting and block the proposal.

Hope the above clarifies your query.

Best regards,

Disclaimer: As to matters of law, I limit my response to the laws of India and the laws/rules/regulations of the state under whose jurisdiction the subject matters falls. Further, my response is limited to the facts presented by the client and laws in existence on the date of this response and at no subsequent time. This response is delivered to you in connection with the query raised/posted, and may not be utilized or quoted by you for any other purpose or relied upon by any other person or entity without prior consent. Further, this response does not create any attorney client relationship.
 

Advocate Sangeet Sindan LawRato