Exercise 10

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EXERCISE 1

1. The investors discovery of the fact that company had filed a case of fraud
against the former head of IT department, who was involved in manipulating
the payroll software in the company, will not give a right to exit and will trigger
the exit mechanism because there is no occurrence of material change in the
company and the activity exposure is under the covenants and undertakings
decided between the investors and promoters. Since there is no breach of duty
and the exposure of this incident is not required to be shared with the investors
according to shareholders agreement. So the information obtained by the
investors is not sufficient to claim exit from the company because this was not
brought out in the due diligence as only lawsuits involving higher than a
specific amount were considered.

2. The investors has a right to claim for exit in this scenario because investee
company engaged in the business of consumables such as hair care and skin
care products had secured funding from the investor with a covenant that 80%
of the funds would be used to develop this business. However, it now uses 15%
of the funds to grow ready-to-eat snacks business. This is a breach of
covenants ,undertakings and warranties.

Breach of representations or warranties

If any representations or warranties (made by the promoters or the company) as t


the state of affairs of the promoters, the company or its business at the time the
investment was made, are subsequently discovered to be incorrect

Breach of a covenant or undertaking

A covenant is an undertaking about a future course of action. As a condition for


receiving the investment, founders agree to carry out the business of a company in
a particular manner. This is usually specified in a separate clause on covenants and
undertakings. For example, breach of a covenant under the SHA to carry on only
those activities which are permitted by law (and after obtaining necessary
authorizations) can trigger the exit rights.

In case of occurrence of an event of default, the company usually has an


opportunity to remedy the consequences of any breach once it is notified of the
breach by the investor within a specified "cure period (say, 90 days). Failure to
remedy the breach within the cure period will allow the investor to invoke exit
rights. Usually, an investor can invoke either any one or multiple exit mechanisms
simultaneously. Investors may exercise any of their exit rights partially, to sell off
their shares successively in phases (with each phase called a 'tranche').

EXERCISE 2

1. Given the structure of Indian labor laws, there is no standard process to


terminate an employee in India. An employee may be terminated according to
terms laid out in the individual labor contract signed between the employee and the
employer. Equally, the terms may be subject to the country’s labor laws. Here,
employers should note that India’s labor laws supersede the provisions of labor
contracts—any termination policy or clause outlined within a contract should be
checked against the law by a professional.

 The employee termination decision most probably falls under one of the reasons
described above. Whatever the cause of firing the employees, certain federal
and central rules must be followed by every organization. the 6 important rules
that one must abide by before terminating one’s employees.

 A 30-to-90-day notice period is standard for terminating the workforce in one’s


organization. Stated under the Industrial Disputes Act of 1947, the law
mandates that when terminating more than 100 members working in a
manufacturing plant, mine or plantation unit, government approval is required.
Terminating employees in other sectors requires only a government
notification.
 Wrongful termination, or not following due process as defined by the respective
state laws, will result in legal punitive consequences for the employer. In
addition, the courts may order the employer to pay fines and award additional
compensation to an employee that was terminated.
Employers that review labor laws and, explicitly, state procedures for
terminating employees in their contracts, significantly reduce the potential
for labor disputes related to the termination of an employee.
Beyond this, however, employers must ensure that management teams and
HR professionals are fully briefed on termination procedures. Contracts can
protect employers; yet, management teams and HR professionals must
ensure labor law compliance to protect them from any adverse litigation.

2. Companies may decide to pay compensation at the time of discontinuing the


services of Key Managerial Personnel (KMP). The Companies Act provides
restrictions for companies which are paying compensation to KMP at the time
of termination of service. KMP refers to the individuals who have overall
responsibility for the functioning of the company. KMP is also responsible for
the company’s compliance with the provisions of the Companies Act, 2013.
KMP includes the Chief Executive Officer (CEO), Company Secretary, Chief
Financial Officer (CFO), Managing Director (MD), Whole-time Director (WtD)
and General Manager (GM) of a company. Appointment of KMP is mandatory
when the assessee is a listed company. In case of whole time director of
sarvajanya directors are not eligible to receive compensation. The
compensation should be paid as consideration for the retirement of the KMP
from the service of the company. However, the retirement should not have been
voluntarily made by the KMP. The company should have decided to remove the
KMP on account of business-related reasons.

Compensation for Transfer of Controlling Interest

 At a general body meeting of the company, an offer may be made for


purchasing the shares of the company. The purchase may result in the
availability of controlling interest for the buyer. A controlling interest
means the ownership of more than thirty-three percentage in the paid-up
capital of a company.

 An offer of shares made at a general body meeting could result in the


transfer of controlling interest to the buyer of the shares. The KMP may
receive compensation in connection with the agreement for the transfer.
The compensation received in such cases will be governed in the same
manner as compensation paid for loss of office

 Further, the payment of compensation should also be approved by the


shareholders in a general body meeting. To indicate approval, the
shareholders should pass a resolution. The resolution should indicate that
shareholders have no objection to the payment of compensation to the
KMP.

The resolution passed by the shareholders for approving the payment should
contain the following details:
Name and Directors’ Identification Number (DIN) of the KMP
The amount which is proposed to be sanctioned
Particulars of the event concerning which compensation has become payable
and justification for the amount paid
Board meeting details for the board meeting which recommended that
compensation should be paid
The reference number of the Form MGT 14 which was submitted to the
Registrar of Companies (RoC) for filing the minutes of the board meeting
The fact of whether any of the directors refrained from participating in the
proceedings of the meeting although physically present, together with the
reason for non-participation

In case a director in the company has any financial interest in the resolution, the
reference number of the Form MBP 1 which was submitted to the RoC for
filing the details of the financial interest
The payment may have been made before the shareholders passed the
resolution. In such cases, the KMP should hold the money in trust on behalf of
the company. In case the resolution is rejected by the shareholders, the funds
should be returned. In case the KMP fails to make the repayment within
seventy-five days, a fine of one lakh rupees should be paid. The penalty will
also be payable in case a default is made in complying with any other legal
requirement which applies to the payment of compensation.

Compensation Limit

The maximum period for compensation should be remaining years of service or


three years, whichever is shorter. The maximum per month compensation should
be a three-year average remuneration. The average should be calculated by
considering the salary drawn during three years preceding the date on which the
termination was implemented.

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