Tag: Corporate Law

4 steps to effective interactions between CA-CS for smooth audit

Statutory audit for a business is both a boon and a bane, with only the time horizon separating the two. Even the most favourably disposed will consider going through audit a pain as it involves additional work, requires work discipline and demands explanations for all deviations. Even at a later date benefits do not ‘emerge’, for absence of problems related to the audit period is the only gain.

Audit-pain can grow exponentially when two experts have a differing view on a given compliance issue. Often the difference could be between the company secretary who has implemented a given business decision and the statutory auditors who feels otherwise. These differences can lead to missed timelines, lost business opportunities and additional costs. Pre-empting differences or when differences emerge addressing them at early stages is the most viable way out. In practice this translates to having these four steps in place:

  1. Scheduled meetings at predefined intervals, say each quarter or half-year, without any specific agenda. This can be a good forum for not only strengthening their personal relationship, but also nipping any issues as they crop up.
  1. Identifying potentially contentious issues before taking decision and involving the two professionals in the decision making process. Illustrations of such issues can be private placement of shares, capital restructuring, using new borrowing instruments and affecting managerial compensation changes among others
  1. Once a difference has cropped up, recognize the difference and plan to resolve it. This involves documenting the difference and its implications as a preparatory step to the meeting for resolution.
  1. Prudence demands that a backup plan be agreed on identifying what will be the planned action should the situation turn unfavourable, which is agreed to between the two professionals.

As in all issues involving interpersonal relationship, while processes help avoid or minimize issues, the perfect solution is in the parties involved taking an objective view and use the cushion of personal goodwill to resolve the difference.

Veto Rights and Good Governance: Are the two in Sync?

One of the most debatable questions in CimplyFive’s First Survey on Secretarial Practice conducted in July 2016 was on the practice of taking Director’s consent for holding Board Meeting at shorter notice.

Though this is not a statutory requirement, our survey indicated that 81% of the respondents revealed that they took Directors consent for holding Board Meetings at shorter notice. Taking consent from all participants even though it is not mandatory seems to be a desirable practice as it meets the basic yardstick of good governance, which is to enable all the eligible members to participate in the decision making process. The moot question is, does a deeper scrutiny of this practice stand the test of good governance?

When we dig deeper, an unintended implication of this practice has the effect of providing a veto right to each and every director, as the failure of even a single director to give their consent has the effect of deferring the Board Meeting, even if every other director wants to have it.

In this context, it is worth noting an interesting observation made by the Robert’s Rules of Order, first published in 1876 which is considered the Bible of Parliamentary procedures, on getting consent from members. The options available are:  

All members, or  

All members present, or  

All members present and voting.

The Book reasons that getting consent from all the members or all members present has the effect of treating a vote to abstain or inability to vote for whatever reason, as a negative vote. Given this effect, this basis is not to be used unless the matter is of such grave importance that a positive consent from all the members is considered essential. Given this backdrop, it is worth examining how and why veto rights emerged, and is it an appropriate instrument for Corporate Board Meetings.

Veto rights or negative affirmative rights are basically negation of the power of majority to take decisions. This is a right not normally accorded in the statute books, which uphold the principles of democracy and endorses decision made by the majority. The rare exceptions where the rule of majority is negated by the statutes is when the rights of a minority group is adversely affected or a basic principle of their association is being modified, altered or substantially changed.

In sharp contrast, veto rights are a standard feature of private Shareholder Agreements that are used mainly by financial investors taking a stake in start-ups to protect their large financial outlay they bring to the table. Covering areas of Board representation, Approval for Financing plans and CXO appointments, Anti-dilution provisions and Shareholder Reward sharing mechanisms like Right of First Offer (ROFO), Right of First Refusal (ROFR), Tag along rights and Drag-along rights, veto rights have a logical and justified place, as in their absence it will be difficult for start-ups with ideas to attract capital, despite the knowledge that capital without entrepreneurs will remain idle cash. Hence, for dreams to be realized and idle cash to become riches, veto embedded in shareholder agreements is a valuable conduit.

In contrast to shareholder meetings where ownership rights are to be protected, the Corporate Board is more a body of collective wisdom to guide and run the company, which includes some high-end residual powers that involve day to day running of the company like powers to borrow and appoint representatives to present company’s interest. Given the nature of the Corporate Board, it is worth debating if consent from Directors should be obtained for holding Board Meetings at Shorter Notice.

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