Rights of Shareholders as Members of a Company

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Shareholders play an important part in the corporation. They are very vital for the company. They have the power to take company decisions and influence the working of the company. The shareholders are able to exercise such influence and control over company only when they are free to exercise their rights in a legitimate manner. The shareholders have numerous rights which have been laid down in the Companies Act, 1956. Under the Act, the shareholding of a company is determined by rights, entitlement, ownership etc. The best way of controlling the company, among other rights, is through voting right[1]. Voting is one of the powerful instruments in the hands of the shareholders. They can also raise a motion and call a meeting. Shareholders are also eligible to appoint directors and auditors so that the future course of the company can be decided. The information and disclosure should be all time maintained between management and shareholders as only the well informed shareholder could actively participate in the decisions of the company and could also effectively contribute in shaping the functioning of the company. Thus, through these rights, they are able to exert control on the decisions of the company. Company’s management on the other hand plays its part in involvement of shareholders in companies’ matters so to provide a check and balance system. This is done to ensure transparency in the companies matters. A company functions through board and shareholders take part in voting to shape up the decisions of the company through various modes provided by Law. To see the company functioning smoothly and effectively, every shareholder should make vigorous efforts in the decision-making process. The legislature on the other hand should make laws keeping the changing scenario of capital market in mind so that the laws could be implemented not just in theory but in practice too. However, the company often loses the sight of minority shareholders when it comes to providing rights to them. They are also shareholders in the company and in fact it is the minority shareholder that keeps a check on the power of majority shareholders and the board. Minority shareholders help in the governance of a company[2]. However, the concerns of the minority shareholders could be met if the company ensures the basic rights to them. Thus this chapter enumerates the rights which belong to the shareholders by virtue of being the members of the company. These rights have been categorized under 5 heads by the researcher for the sake of brevity.
  1. EQUITABLE TREATMENT
The shareholders have the right to be treated equally with the other shareholders. They all should get equal treatment by the company[3]. The equality of the shareholders can be traced from two angles. One is equal treatment vis-à-vis company and other is vis-à-vis other shareholders. Equal treatment of shareholders can be best explained in relation to corporate distributions and re-organization shareholders may have many things in common but what is necessary to note here is whether same shareholders in the same situation are treated differently. In normal scenario the distribution occurs according to the shares held by shareholders. But the constitution of the company or articles of association may provide for different criteria to distinguish among shareholders. With respect to the treatment vis-a-vis the company is a limit on the power of the company to maintain the equilibrium among shareholders and not to adopt any scheme which goes against the interests of some of the shareholders placed in the same situation. With respect to treatment vis-a-vis other shareholders, all are to be treated in the same manner. OECD has laid down six principles of Corporate Governance and Equal treatment of shareholders forms one of those six principles. This places emphasis on the point that protection of minority shareholders is of utmost importance and it should be done in all fairness, whether shareholders are small or large, they would get equal treatment by law[4]. Equal treatment is with respect to the shareholders of the same class. So each share of same class will be entitled to get same rights, liabilities, responsibilities etc. this shows that differences among different classes should also be taken into consideration[5]. This is precisely the reason that controlling shareholders have more duties which are not borne by minority shareholders as the difference among different classes of share are recognized by the law. For example, right to vote, right to receive dividends are subjective depends upon the shares person holds, so equality is different, whereas certain rights like to receive information, to get notices, here equality assumes different perception. The principle of equality does not aim at giving minority shareholders the same treatment as the majority. As the weaker party in a company, minority shareholders only need an equitable and fair treatment protecting their rights as provided by law and the capital they have invested in the company.10 . Shareholders might have many things in common, but not all ofthese are relevant for company law and for the rule of equal treatment, so it isnecessary to establish whether different shareholders are in thesamesituationornot.Usually,thedistributivecriterionadoptedbycompanylawistheshareof legal capital held by shareholders, but the competent jurisdiction couldprovide for different criteria or allow the article of association to distinguishamong different classes of shares.By contrast, the equal treatment of shareholders vis-à-vis the company is alimit to the powers of company’s bodies, so its infringement might lead toannulment of a corporate decision or to sue the directors for damages 11 .Beingthis a duty burdened to behaviours and decisions of company’s bodies, thecompetent jurisdiction can admit exceptions under specific circumstances 12 .In addition, in all jurisdictions the question arises as to whether company’sdecisions that treat shareholders formally equal, but in reality affect themdifferently due to personal positions or interests of such shareholders, areencompassed by equality vis-à-vis the company or by other principles orfiduciary duties, such as the “abuse” of majority powers or the “fraud” on theminority. To sum up, each jurisdiction is free to shape autonomously thecontours of this principle. In addition, there is no shared view among legalscholars and among member states regarding the content of the principle ofequal treatment 13 . The former is the basic distributive principle upon which the relations amongshareholders are built, which answers the basic question “Equality ofwhat?” 10 . Shareholders might have many things in common, but not all ofthese are relevant for company law and for the rule of equal treatment, so it isnecessary to establish whether different shareholders are in thesamesituationornot.Usually,thedistributivecriterionadoptedbycompanylawistheshareof legal capital held by shareholders, but the competent jurisdiction couldprovide for different criteria or allow the article of association to distinguishamong different classes of shares.By contrast, the equal treatment of shareholders vis-à-vis the company is alimit to the powers of company’s bodies, so its infringement might lead toannulment of a corporate decision or to sue the directors for damages 11 .Beingthis a duty burdened to behaviours and decisions of company’s bodies, thecompetent jurisdiction can admit exceptions under specific circumstances 12 .In addition, in all jurisdictions the question arises as to whether company’sdecisions that treat shareholders formally equal, but in reality affect themdifferently due to personal positions or interests of such shareholders, areencompassed by equality vis-à-vis the company or by other principles orfiduciary duties, such as the “abuse” of majority powers or the “fraud” on theminority. To sum up, each jurisdiction is free to shape autonomously thecontours of this principle. In addition, there is no shared view among legalscholars and among member states regarding the content of the principle ofequal treatment 13 .
  1. The shareholders should get same rights within each class.
The shareholders who belong to the same class must form one group and would be entitled to the same rights. Each share in that group represents the same claim on corporate assets, returns, dividend etc[6].
  1. Dividend Distributions
Shareholders are to be treated equally with respect to dividend distribution if they form same group. When dividend is decided to be distributed, each shareholder must receive dividend equal to the dividend paid to the other shareholders placed equally in the particular class[7]. Dividend is the share of profit that falls to the share of each individual member of a company[8]. There is no express authority in the articles of association or memorandum of association to enable company to pay dividends. It is implied. There is no set amount which is distributed to the shareholders. Without prescribed criteria for distribution, the shareholders would have no control or would have no awareness as to when the management could allot more dividends to some shareholders ignoring others.
  1. Variation of Shareholders rights subject to voting
The share capital of a company is divided into two groups:- ordinary shares and preference shares[9]. Both these constitute separate class. The rights attached to one class of shares may be different from other class. A shareholder who has a pre-emptive right to purchase shares on further issue of shares constitute separate class and this right must not be taken away from him without his consent[10]. If the rights attached to the class need to be altered, certain procedure need to be followed. Firstly, there should a provision in the articles of association or memorandum of association of the company entitling it to vary such class rights. Secondly, the holder of three-fourth of the issued shares of that class must have given their consent in writing or a special resolution sanctioning the variation must have been passed at a separate meeting of the shareholders of that class. Thirdly, the holders of at least ten percent of the shares of that class who did not consent to or vote in favour of the resolution may apply to the tribunal and then variation shall not take effect unless and until it is confirmed by the tribunal[11]. The application should be filed within 21 days of the date of consent or resolution.[12] The tribunal then should grant to the applicant or any other person who apply to the tribunal a hearing[13]. If the tribunal after having regard to all the circumstances of the case, is satisfied that variation would unfairly prejudice the shareholders of that class, it would be disallowed. But if it is reasonable and fair, it would be confirmed. The decision of the tribunal is final n this regard[14]. The company shall thereafter send within thirty days a copy of the Tribunals order to Registrar[15].
  1. Right to receive share certificate
Company allots shares for public subscription. The persons who apply for such shares and subscribe for such shares become shareholders of the company[16]. Thus, an allottee of shares receives from a company a document known as share certificate certifying that he is the holder of specific number of shares in the company. The company has to deliver a certificate to the allottee within three months from the allotment. The central government may extend the period to nine months. In case company makes a default in this regard, the allottee may give a notice to company reminding of its obligation and if still company doesn’t make good the default within 10 days, the allottee may approach the central government. Thus, the delivery of the share certificate must be effected in accordance with section 53 of the Act[17].
  1. Right to transfer the shares subject to restrictions
Shares are movable property as provided by section 82 of the companies Act, 1956[18]. Shareholders by virtue of statute has a right to transfer the shares without the consent of anybody to any person , even though he be a man of straw, provided it is bona fide transaction in the sense that it is absolute disposal of property without retaining any interest in the shares therein[19]. The shares are freely transferable subject to restrictions laid down in the articles of a company, if any. A restriction which is not specified in the articles is not binding either on a company or shareholders[20]. Section 111A provides for free transferability of shares and allows a shareholder to transfer as he may think fit and approach the Company Law Board for registering transfer. If there are restrictions on transfer, then the shares must be first offered to existing shareholders and if they refuse then shares can be transferred to outsiders. There are number of case laws dealing with the subject-matter. In v.b rangaraj v. v.b gopalkrishnan[21], This case is related to private limited company, whereby it has two branches of family as shareholders. It was agreed orally by them that there should be no change in the proportion of shareholding and if any member wants to sell the shares then he must sell first to his own branch. The thing to note here is that the restriction that was placed was orally and not provided in the articles. The Supreme Court stated that shares are freely transferable and unless the restriction is provided in the articles of association, no private agreement can be taken as binding on the company or shareholders. Such private agreement is void ab initio. In Mafatlal Industries Ltd. v. Gujrat Gas Co. Ltd[22], This decision of the Gujarat High Court has an important point to make with respect to public limited company. Here, a shareholder sells 3.87 shares in an open market. The Court stated that the decision laid down in the above cited case holds true for the public limited company too. In M.s. Madhusudhanan v. Kerala Kaumudi Pvt. Ltd[23], This is in reference to private company. The case stems from the family dispute that arose out of an agreement which provided that there should not be any change in structure of the shareholding among the family. It also provided that in case of death of two shareholders, the shares would get transferred to Madhusudanan in certain percentage. This case seems to be similar to Rangaraj case dicussed above. However, the court distinguished this case with the former one stating that transfer of shares was specific and number of shares were identified in which company need not be a party. In Western Maharashtra Development Corporation v. Bajaj Auto Limited[24], In this case, in the year 1974, Western Maharashtra Development Corporation Ltd and Bajaj Auto ltd entered into an agreement whereby they decided to enter into joint venture and name it as Maharashtra Scooters Limited and accordingly company got incorporated as public company. The shares were listed on NSE and BSE. WMDC held 27 percent and Bajaj Auto held 24 percent, and 49 percent of public holding. There was an agreement between the two promoter shareholders that restricted the transfer of shares and it was provided in articles of association too. The agreement specifies that if any wants to sell the shares then the first offer to buy should be given to other party at such price as may be agreed. If other party agrees to purchase the shares within 30 days of such offer, then the selling party must sell the shares. Where the party agrees to buy but the price is not acceptable then such dispute should be referred to arbitration. The petitioner desired to sell the shares to Bajaj Auto at a price of Rs. 232.20 per share which was not acceptable by the petitioner. According to the terms, the dispute should be referred to the sole arbitrator. The arbitrator after considering all the circumstance by an award directed to sell shares to Bajaj Auto at a price of Rs. 151.63 per share. Thus, the award of the arbitrator didn’t go down well with the petitioner and hence, the petitioner petitioned to the Bombay High Court. The petitioner contended that the agreement restricting the transfer of shares was illegal and void as against section 111A of companies Act, 1956. Section 111A provides for free transferability and hence any agreement that restricts the transfer would be void and any award passed on it would have no meaning and could be set aside. Section 34 of the Arbitration and Conciliation Act, 1996 allows for setting aside arbitral award. On the other hand, Bajaj Auto files counter argument and states that agreement was valid because an agreement was not binding on all the shareholders but it binds two shareholders. The restriction was there in the article of association. Moreover section 111A doesn’t prohibit the restriction on transferability when it is agreed between specific particular shareholders providing for specific shares. However, Single Judge ofBombay High Court held that the word “free transferability” appearing in section 111A is of widest amplitude and legislature has made its intention clear by using the word freely transferable, that shareholders can transfer freely. Any agreement and articles of association providing for restriction on transfer would be violative of section 111A of the Companies Act and thus is void and the award based on it is void and illegal too. In Messer Holding Limited v. Shyam Madanmohan Ruia and Others[25] This decision has overruled the decision laid down in the above cited case of Bajaj Auto that transfer of shares is contrary to section 111A of the Act. In this case, Bombay Oxygen Ltd, (defendant) is a listed company. The majority shareholder was the Messer holding there was an agreement which provided that German company would acquire shares and provide know-how to the company. It was specified in the agreement that if either wants to sell shares then it must first be offered to other party except some of the situations. The arguments were that agreement was violative of section 111A and was also void because of fraud and misrepresentation. In this case, the Court looked into the relevance of section 111A and came to the observation that section 22A of SCRA, 1956 provided for free transferability in registered company in the year 1986. It said that company may refuse transfer on specified points. The section was adopted to fight the arbitrary powers of board of directors to refuse the transfer of shares. It is noteworthy to mention that section 22A was adopted to curb the powers of board of directors and not to curb the power of shareholders to transfer the shares by entering into agreements. Later, section 22A was deleted and new section 111A was adopted. It also provided for curbing the power of board of directors and also specified that board of directors cannot refuse to register transfer unless there is sufficient cause to do it. The Court states that right of shareholder is not restricted and if that was the intention of the legislature then it would have made an express provision in that regard. Therefore, the words “freely transferable” don’t curtail the right of the shareholder to enter into agreement with third party for transferring of shares. If the company desires to curtail that right of shareholders, should provide that expressly in articles of association or in the Act. Analyzing the decision of the Court, it could be seen that agreement relating to transfer of shares can be enforced and it doesn’t violate free transferability of shares with respect to section 111A. Moreover, it is required to be specified in the articles of association. After Messer Holding Case, the scenario has changed for transfer of shares. The ruling of the Messer holding emphasized on the fact that agreement to transfer the share is shareholders matter among themselves and not between shareholders and company. Company is not a party and thus the effect of it is that agreement is legal and valid and not violative of section 111A of companies Act, 1956. It emphasizes that restriction to transfer remains in the contract/agreement that is among the shareholders and it doesn’t find mention in the articles of association and thus it binds the shareholders and not the company[26]. The ruling of Messer Holding gave some respite to the shareholders as they are free to transfer and restrict by placing terms in the agreement but the issue remains open for the company. By keeping company out of the agreement of shareholders, the terms of the contracts cannot be inserted into articles of association and therefore the company cannot be restricted to transfer shares as the agreement is not binding on the company. So if company transfer shares in violation of terms of the agreement, shareholder would not have any remedy, as company was out of the agreement. Company law Board would not have jurisdiction as there was nothing in the articles of association. Shareholder should resort to civil jurisdiction then which is time-consuming and lengthy. Considering that the terms of agreement are placed in articles of association, it won’t be valid as seen from above cited cases. Restriction on transfer of shares with respect to companies act, 2013. The companies Act, 2013 has cleared the picture with respect to transfer of shares to some extent. Section 44 of the Act is akin to section 82 of the companies Act, 1956 which provides for that share of a company is movable property, transferable in a manner provided by the articles of the company. It is noteworthy here to mention that companies Act, 2013 provides for separate provisions for public company and private company. Clause (1) of section 58[27] provides for private company and clause (4) provides restriction of transfer of shares in public limited companies on sufficient cause. Clause (2) of the section mentions that shares are freely transferable and a proviso has been added which says that contract or agreement among shareholders inter se shall be enforceable as a contract. It is still not clear though as to what is sufficient cause in this regard.
[1] Section 87, Companies Act, 1956 [2] Anirudh Laskar & Aveek Datta, Sebi plans platform for minority shareholder, Mint, Nov, 2011, available at http://www.livemint.com/Companies/VJqplNNF2GtbOdYv24KwKN/Sebi-plans-platform-for-minority-shareholders.html [3] OECD, Equal treatment of shareholders and protection of their rights, available at http://www.oecd.org/daf/ca/corporategovernanceprinciples/1930044.pdf [4] OECD Principles of Corporate Governance, OECD 2004, Available at http://www.oecd.org/corporate/ca/corporategovernanceprinciples/31557724.pdf [5] Victor Brudney, Equal Treatment of shareholders in Distributions and Reorganization, California Law Review, Article 9, Volume 71, Issue 4, July 1983, available at http://scholarship.law.berkeley.edu/cgi/viewcontent.cgi?article=2127&context=californialawreview [6] Ibid [7] Ibid [8] AVTAR SINGH, COMPANY LAW, 381, Eastern Book Company, Eighteenth Edition, 2005 [9] Section 85, companies Act, 1956 [10] Cumbrian Newspapers Group Ltd v. Cumberland and Westmorland Herald Newspaper and Printing Co. Ltd (1986) 1 WLR 26 [11] Section 107(1), Companies Act, 1956 [12] Section 107(2), Companies Act, 1956 [13] Section 107(3), Companies Act, 1956 [14] Section 107(4), Companies Act, 1956 [15] Section 107(5), Companies Act, 1956 [16] AVTAR SINGH, COMPANY LAW, Eastern Book Company, Eighteenth Edition, 2005, pg 187 [17] This section requires delivery by post or by personal delivery [18] Section 82, Nature of shares-The shares or other interest of any member in a company shall be movable property, transferable in the manner provided by the articles of the company. [19] Avtar Singh, COMPANY LAW, 142, Eastern Book Company, Eighteenth Edition, 2005 [20] Ibid [21] (1992) 1 SCC 160 [22] 1997 [23] (2003) VOL. 117 Comp Cases 19 [24] 2010 [25] 2010 (Appeal No. 855 of 2003 in Notice of Motion No. 534 of 2002 in Suit No. 509 of 2001 and Notice of Motion Nos. 1308 and 3956 of 2005, 4118 of 2007 and 1973 and 1418 of 2008) [26] Suresh, Restriction on Transfer of shares in public Company, January 15, 2012 available at http://www.lawyersclubindia.com/articles/Restriction-on-Transfer-of-Shares-in-a-Public-Company-4407.asp#.U3nzJ1K6Zdg [27] Section 58- (1) If a private company limited by shares refuses, whether in pursuance of any power of the company under its articles or otherwise, to register the transfer of, or the transmission by operation of law of the right to, any securities or interest of a member in the company, it shall within a period of thirty days from the date on which the instrument of transfer, or the intimation of such transmission, as the case may be, was delivered to the company, send notice of the refusal to the transferor and the transferee or to the person giving intimation of such transmission, as the case may be, giving reasons for such refusal. (2) Without prejudice to sub-section (1), the securities or other interest of any member in a public company shall be freely transferable: Provided that any contract or arrangement between two or more persons in respect of transfer of securities shall be enforceable as a contract. (3) The transferee may appeal to the Tribunal against the refusal within a period of thirty days from the date of receipt of the notice or in case no notice has been sent by the company, within a period of sixty days from the date on which the instrument of transfer or the intimation of transmission, as the case may be, was delivered to the company. (4) If a public company without sufficient cause refuses to register the transfer of securities within a period of thirty days from the date on which the instrument of transfer or the intimation of transmission, as the case may be, is delivered to the company, the transferee may, within a period of sixty days of such refusal or where no intimation has been received from the company, within ninety days of the delivery of the instrument of transfer or intimation of transmission, appeal to the Tribunal. (5) The Tribunal, while dealing with an appeal made under sub-section (3) or subsection (4), may, after hearing the parties, either dismiss the appeal, or by order— (a) direct that the transfer or transmission shall be registered by the company and the company shall comply with such order within a period of ten days of the receipt of the order; or (b) direct rectification of the register and also direct the company to pay damages, if any, sustained by any party aggrieved. (6) If a person contravenes the order of the Tribunal under this section, he shall be punishable with imprisonment for a term which shall not be less than one year but which may extend to three years and with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees.
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