Corporate Law – I

Internal Component I

SUBMITTED TO- SUBMITTED BY-

MR. Ajit Kaushal ANUJ KUMAR PAL
18GSOL1030037
Mr Anil Desai is engaged in trading activities as grocer. The business at present is a sole
propriety concern. He wants to expand the business by entering into the food processing,
for which a minimum investment of Rs. 200 lakhs as capital is required. His existing business
is worth Rs. 25 lakhs. He may be able to invest another 50 lakhs. Two of his friends are
prepared to invest a total amount of Rs. 120 lakhs provided the business is run as a
corporation. There are a few others who are prepared to be associated the new venture of
Anil Desai. But he is apprehensive. He wants to be quite sure that in spite of the association
of his two friends and few others in the capital control over the business concern shall
always remain with him.

In the above case –

Q1. How Anil Desai can retain control over the company?

Control of a company comes from controlling the board. Even if you have 1% of the share
base but if you can control the board and hence can control the company. The board
chooses the management team and the direction of the company.

When company is incorporated the amount of capital invested by the person decides the
amount of control over the board and the company, as in the above case Anil Desai is
investing larger sum of capital than any other member his control over the company will be
more. So technically, you can maintain “control” of the board until you control less than
50% of the seats. As a result, prior to hitting that 50% board control market, you can be in
“control” of the company with certain limitations.

Q2. Now what can you do once you hit that 50% board control mark? 2 things:

1. Start being cash flow positive so you don’t need to raise money from private
investors ever again. Or you have so much run way that you can wait and choose the
right investor with your terms.

2. Become such a hot shot company that investor line up to give you money and hence

you can name whatever terms you want. A term such as the new investor gets no
board seat. Note that you only have control on 1 or 2, is dependent not just on you
but also the market. And if the Anil Desai wants to remain in control he has to follow
the two things mentioned above, as more and more amount of other investors
invest the control of the company will dilute unless he can achieve any of the one
thing mentioned above or Have the company be cash flow positive on day 1 and
never raise a dime till you have the negotiation power to name your terms.