Navigating the power struggle at Byju’s
A shareholders’ agreement that appears to go against the basic principles of company law can come under scrutiny
Byju’s, a leading edtech company and once India’s highest valued startup, has recently been embroiled in multiple controversies surrounding its leadership and corporate governance. Amidst calls from investors for a change in management, Byju’s has asserted that the shareholders’ agreement entered between its founders and investors does not grant the latter the right to vote on changes to the company’s management.
A group of Byju’s investors had earlier issued a notice to Think and Learn Private Limited, the parent company of the startup, seeking an Extraordinary General Meeting (EGM) to address ongoing concerns. The resolutions for the EGM, which came to be passed by majority of the shareholders present and voting, included addressing governance and compliance issues, recommendations relating to the restructuring of the board and changing the company’s leadership. The investor group also proposed a new board for the company with nine members.
However, Byju Raveendran has stated that only a minority number of shareholders voted in favour of the resolutions. He asserted that he remained the CEO, the management remains unchanged, and the board remained the same.
Meanwhile, four investors of Byju’s have moved the Bengaluru bench of National Company Law Tribunal, seeking among other things to declare the founders as unfit to run the company. The dispute between Byju’s promoters and its investors has become a complex legal battle.
The controversy also highlights an intriguing clash between shareholders’ agreements and the statutory powers to remove directors. Byju’s has asserted that its shareholders’ agreement prevents investors from unilaterally ousting the CEO even through an EGM, leaving many wondering how potent these agreements can be.
ENFORCING SHAREHOLDERS’ AGREEMENT
shareholders’ agreement is a legally binding contract that is enforceable interse. Ideally, all the shareholders of the company and the company itself should be joined as parties so as to place the company under an obligation to give effect to the agreements between the shareholders and to indirectly bind the directors to give effect to the arrangements when exercising the powers conferred on them by the articles of association in managing the company. A shareholders’ agreement cannot exclude any legal remedies that may otherwise be available.
However, if a shareholder has explicitly consented to restrict their rights in any manner, the courts often refrain from intervening unless the other parties involved in the agreement
Facing the heat have violated its terms. The shareholders’ agreement itself or many of its provisions may be included as a part of the AOA.
Agreements can dictate supermajority thresholds for key decisions, making it harder to achieve even if most investors seek a CEO change.
However, as the AOA, unlike a shareholders’ agreement, is a public document and is open for public inspection, many parties do not incorporate the terms of the shareholders’ agreement in the company’s articles. In such cases, the shareholders’ agreement is most commonly used to supplement the AOA.
But assuming that there exists a certain provision in the SHA that has not been incorporated in the articles of the company, such an arrangement attempting to bind the company as regards its affairs, not provided for in the articles and memorandum of the company, may not be enforceable.
Certain fundamental principles mandated by the company legislation are nonnegotiable, creating safeguards that transcend private shareholder wishes. Company law establishes the basic framework of rights, duties, and procedures essential for the proper functioning of companies, and there can be no derogation of these provisions.
Provisions guaranteeing core rights like the right to vote, receive company information, or bring legal action against directors for wrongdoing are typically considered sacrosanct. Attempts to contract around core tenets of company law are unlikely to stand up in court.
As noted, the provisions in an agreement cannot be given effect to insofar as the management of the affairs of the company is concerned, unless those provisions have been incorporated into the articles. On the other hand, even if a provision is incorporated, it is subject to rights guaranteed under the Companies Act.
Therefore, if an agreement, for example, provides that a particular director would be a director for life and the same becomes incorporated into the company’s articles, any such arrangement cannot take away the right to seek reliefs against oppression and mismanagement of the shareholders of the company.