How can a company controls the composition of Board of directors of other company?

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Achyutha Guptha

23 Points Joined July 2023

Dear Experts,

Section 2(87) of the Companies Act, 2013 defines "subsidiary company" as a
company in which the holding company -
a)controls the composition of the Board of Directors; or
b)exercises or controls more than one-half of the total share capital either at its
own or together with one or more of its subsidiary companies:

Reslistically speaking how can a company contorls or have right to change the composition of Board of directors without being majority shareholder? Is there any real world example which I can relate with?

‘associate company’, in relation to another company, means a company in which that other company has a significant influence, but which is not a subsidiary company of the company having such influence and includes a joint venture company.

Explanation.—For the purpose of this clause—

(a) the expression “significant influence” means control of at least twenty per cent. of total voting power, or control of or participation in business decisions under an agreement;

(b) the expression “joint venture” means a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement;

Same with this clause what does it mean participation in business decision, I mean what is the fine line which separates the participation and non participation in business decision

Thanks in Advance!

Replies (3)

CA Rakesh Ishi

Working at Private Company

8637 Points Joined December 2011

In the context of the Companies Act, 2013, the ability to control the composition of the Board of Directors without being the majority shareholder can occur through various means, such as having special voting rights or agreements with other shareholders. One real-world example is the issuance of shares with differential voting rights. In such cases, a company might issue shares to its founders or certain investors with higher voting rights, allowing them to control key decisions like board composition even if they don't own more than half of the total share capital.

For the concept of "significant influence" in the definition of "associate company," it means having control of at least twenty percent of the total voting power or participation in business decisions under an agreement. This influence could come from having substantial voting rights or having the ability to participate in and influence strategic decisions, even if the ownership stake is less than 50%.

Regarding the fine line between participation and non-participation in business decisions, it generally depends on the specific terms of agreements and the actual influence exerted.

If a company is actively involved in key business decisions and has a say in matters that significantly impact the entity's operations, it would be considered as participating in business decisions. The line may not always be clear-cut, and legal interpretation may be needed in specific cases.