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Vested Equity and Removal of company director
02-Oct-2023 (In Corporate Law)
We are a 7 man startup team, 3 of which are registered as the director of the company. The first director has 34% shares and the other two have 33% share. We filed the MOA in which this was mentioned. However now that we are ready to deploy our product the first director is not putting in the required effort and waiting to cash in if we succeed. We don't currently have a vested equity agreement. can we remove the director without giving 34% shares of the company to him. And how can we implement vested equity?
No you can't remove the director without giving him 34% of share of the company. What is your purpose behind the implementation of vested equity? Hard work must be done by every director of the company.
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Adv. Bharat Pandirao Pawar
Pune | 500+ Answers
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Your situation is not unique. There are a number of young companies which face such a challenge. Resolving such an issue is possible, although it may require a detailed understanding of facts. However, that the delinquent team member has only 34% shareholding makes it relatively favourable for you to effectuate an exit.
To answer your question: no, you cannot simply remove the delinquent team member. The fact that his name appears in the Memorandum of Association signifies that he is entitled to a certain number of shares. I assume the equity shares are declared to be issued as fully-paid up shares. However, depending on the specific facts of your case, there could be legal methods by which you could effectively disassociate such member from your company. The information required for me to advise you fully is: (a) What are the assets on the balance sheet of the company?, (b) Do you have a Shareholders' Agreement? If yes, a review of the same is required, (c) Do you have employment contracts with the team members?, (d) Are there emails exchanged in the past stating rights and obligations of each member? The answers to these questions are the starting points for designing an effective legal strategy.
Best wishes.
To answer your question: no, you cannot simply remove the delinquent team member. The fact that his name appears in the Memorandum of Association signifies that he is entitled to a certain number of shares. I assume the equity shares are declared to be issued as fully-paid up shares. However, depending on the specific facts of your case, there could be legal methods by which you could effectively disassociate such member from your company. The information required for me to advise you fully is: (a) What are the assets on the balance sheet of the company?, (b) Do you have a Shareholders' Agreement? If yes, a review of the same is required, (c) Do you have employment contracts with the team members?, (d) Are there emails exchanged in the past stating rights and obligations of each member? The answers to these questions are the starting points for designing an effective legal strategy.
Best wishes.
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Adv. Manish Acharya
Mumbai | 25+ Answers
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