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Tarun Suthar
ย โขย
The Institute of Chartered Accountants of Indiaย โขย 2m
Can an MD/CEO Be Removed from Their Position? ๐ค 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 hereโs how it works: โ ๏ธ How to Amend the AOA? 1. Pass a Special Resolution 2. Requires approval of 75% of shareholdersโ 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. ๐ฅWhatโs the solution if A wants to protect his position? Enter: The Entrenchment Clause ๐ โ ๏ธ 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. โ ๏ธ Why is this powerful? With an entrenchment clause: A canโt be removed unless all founders agree Acts as a safeguard unless thereโs 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. ๐
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