CAN THE DIRECTORS OF A COMPANY EXPEL OR REMOVE A SHAREHOLDER BY INSERTING A NEW CLAUSE IN ARTICLES ?
No. It is not possible. It is ultravires the provisions of the Companies Act.
Departmental Circular no.32 of 1975 dated November 1, 1975, which provides that the insertion of an article providing for expulsion of a member is ultra vires the powers of the Company.
Further, it has been held by the Supreme Court in the case of Bajaj Auto Ltd. vs. N. K. Firodia (1971) read with Article 141 of the Constitution that 'assumption by the Board of Directors of a Company of any power to expel a member by amending its Articles of Association is illegal and void'.
However , there is an alternate route is viable to make dissenting shareholder(s) less prominent by resorting to the following:
One way to ensure that a member's influence is reduced is to have a rights / preferential issue and get shares allotted to others. The rights issue method works if the member who is to be sidelined is a minority and does not have the financial resources to match the others. Also, on record the need for a rights issue has to be established by way of a genuine business need.
To a large extent what a Company could do also depends on the provisions in the existing Articles/ Shareholders Agreement (if any), the percentage of shareholding of the existing member and whether the Comapny is a public or private company .