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Tarun Suthar
•
The Institute of Chartered Accountants of India • 7d
Can an MD/CEO Be Removed from Their Position? 🤔 Scenario: Mr. Shyamlal registers a private limited company and includes a clause in the Articles of Association (AOA) that he will remain a director for lifetime. But later, he is warned that this might not protect him in the long run. What does the Companies Act, 2013 say? Even if a person is appointed as a director for lifetime, they can be removed by altering the AOA. And here’s how it works: ✅️ How to Amend the AOA? 1. Pass a Special Resolution 2. Requires approval of 75% of shareholders’ voting rights Once amended, any clause - including lifetime directorship - can be changed, and the person can be removed. Example: 4 founders: A, B, C & D Each holds 25% equity "A" is the Managing Director (MD) / CEO If B, C, and D come together (75% voting rights), they can amend the AOA and remove A from the position of MD. 💥What’s the solution if A wants to protect his position? Enter: The Entrenchment Clause 🚀 ✅️ What is Entrenchment? Entrenchment means adding special conditions to the AOA that make it more difficult to alter certain clauses (like removal of MD). Instead of 75%, the AOA can specify that 80%, 90%, or even 100% voting is needed to remove the MD. This becomes a protective barrier. ✅️ Why is this powerful? With an entrenchment clause: A can’t be removed unless all founders agree Acts as a safeguard unless there’s a major shift in shareholding Conclusion: In startups or closely held private companies, Articles of Association (AOA) play a huge role in determining control, protection, and removal of directors. Using entrenchment smartly helps maintain balance between power and protection. . . . If You are looking for Your Company Registration or any other Legal Compliances. we "sutharcompanies" and team of CA and CS are here to help you out. 🚀
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