This article has been written by Digmber Singh pursuing Diploma in Corporate Law & Practice: Transactions, Governance and Disputes and edited by Shashwat Kaushik.
This article has been published by Sneha Mahawar.
Table of Contents
Introduction
A shareholder is a person or any legal entity that has held ownership of any preferable shares, debentures, or equity in a company. The number of shares held by the shareholder makes him entitled to the company’s profit and loss in the quantum of the value of his shares. Shareholder activism highlights various rights and insights. In this article, there are some insights about shareholder activism. Basically, shareholder activism is the action taken by shareholders to influence the management of a company. Sometimes this can also include proposals for amendments to corporate policies, proposing resolutions for shareholder votes to the board of directors, and so on. This article discusses how shareholder activism has become an increasingly important tool for investors to promote financial growth and hold companies accountable for their actions and responsibilities towards shareholders. By leveraging their ownership stake, shareholders can push for improved transparency and a clear focus on long-term sustainability rather than short-term profits.
Definition of share and shareholder
Basically, the word shareholder is an insightful combination of two important words (share and holder).
Share means a partial percentage or a unit of debenture, preferred share or equity. In simple terms, a percentage of legal ownership within the company and the owner of the debenture, preferred share or equity that enable a person’s share of the profit and loss of the company.
A shareholder is a person who has authority over the shares given by the company. Shareholder means the natural or legal entity that holds the share and is authorised by the company is known as the holder of the particular share, equity or debenture. We can say in simple terms that such natural or legal entities have partly ownership according to their shares and also an entitled share from the company’s profits and losses.
Shareholder’s right’s and responsibilities in corporate governance
Shareholders are not only the owners of their held shares; they have responsibilities and duties towards the company, and they have to fulfil rights and responsibilities both in corporate governance. Here are some of the key shareholder rights and responsibilities
Shareholders play a very important part in the company’s growth and have some insightful responsibilities, likewise passing ordinary and special resolutions in the general meeting of the company by exercising their powers of voting under Section 47 and Section 48 of the Companies Act, 2013. A shareholder can help in various ways to manage the company. Section 139(6) of the Companies Act, 2013 says that an auditor must be appointed by the board of directors within 30 days of the company’s registration. Section 2(34) of the Companies Act, 2013 gives the board of the company the power to appoint a director with the help of passing an ordinary resolution by the shareholder to appoint a director or additional director who will hold office until the next general meeting. Shareholders not only have the power to pass the resolution but also have the power to change it, and if it is necessary, shareholders can also take legal action against the passing resolution or against the director.
Responsibilities of shareholder
The shareholder has several responsibilities, like attending the annual general meetings and casting their vote on resolutions and important financial matters of the company. Duty to oversee the management to ensure that it acts in the best interest of the shareholders. Shareholders are responsible for conducting their own research and due diligence to make informed decisions when voting or buying and selling shares. Shareholders have always complied with all laws and regulations related to investing and corporate governance.
Winding up
According to Section 270 of the Companies Act 2013, winding up can be initiated in 2 ways by the tribunal and by the voluntary. Winding up form is filed in the prescribed form numbers 1, 2, or 3 under Section 272 and submitted in 3 sets.
Shareholders have the right to receive all information about the winding up and their credits from the company.
Types of shareholders
There are a few basic types of shareholders under the company, and those are: –
| Classification of Shareholders | ||
| Preference Shareholders | Debenture Shareholders | Equity Shareholders |
Shareholder activism
The term activist shareholder means a person who is investing his money, is more aware of his rights and power over the company and is also a great player in the share market with updated knowledge. Basically, if we discuss the current scenario, the activist, who is well aware of how to secure his interest and rights over the company or we can say that the shareholder, has the power to bring about changes in companies and also has the power to influence the company’s management to safeguard their interest in the company.
The necessity of activism
The term shareholder activism began in 1980, as a new rise in corporate governance became a hot topic in the 1980s, when investors were more conscious of their rights and interests. It was the beginning of a new era of activism where the shareholders were more participative towards the companies’ management and started to make an impact on the market. It is necessary to make shareholders aware of their rights so they can fight against any mismanagement or malice intention of the company’s director or, I can say, after that, they have a voice to raise against unfair participation and the right to sue the company’s director. Now shareholders have various types of legal and regulatory tools so they can control and influence those tools.
Insights of activism
In the new era of activism, there is a rise in the rights and awareness of shareholders:
Right to vote
On behalf of ownership over their share, a shareholder has the right to vote in the interest of their share ownership. For example, if a company splits some share or stock for any specific purpose, then the shareholders have the right to vote to pass or against it, and it also recognises various ways of voting for a general shareholder in the interest of protecting their rights under Section 43(2) and Section 50(1) of the Companies Act, 2013. Every member of the company who holds share capital or equity also has the right to vote to pass or fail any resolution in board meetings. Let’s see how it works, as we can see in the case of Eicher motors Limited and Royal Enfield, a subsidiary company of Eicher motors, During the 39th annual general meeting, there was a proposal for the re-appointment of the previous managing director for the next five years but the shareholders rejected that proposal in the interest of increasing the remuneration of the M.D., and the latter board clarified that according to Companies Act Section 198, the remuneration of the M.D. is not more than the cap of profit of 1.5%. This amendment in the proposal was passed by the voting and re-appointment the M.D
Right to receive information
Every shareholder has the right to inspect the annual reports of the company or any other records like the employee’s salary and insurance policy, personal details of the employees and their skills and academic record, any current machinery or property, the company’s trademarks, any 3rd party vendors, etc., the term and remuneration of the company’s directors and any information related to tax or any disclosure.
Dividends
Shareholders have the right to get their share of the company’s profits and losses in the form of dividends in the equivalent of the number of shares held by the shareholder, which makes them entitled to the company’s profit and loss in the quantum of the value of there shares.
Right to sue
Shareholders have the right to sue for any wrongful act, fraud or any act that is against securing the interest of their investment and done by directors of the company. According to the Companies Act 2013, shareholders have the right to take legal action against the company. For example, if the company transfers shares under the law at a higher price than the actual price with some mala fide intentions to secure their own interest and avoid the interest of shareholders, such an act is known as fraud, and shareholders can take legal action against the director of the company.
Foss vs. Harbottle (1843)
From this famous case few principles are laid down in said judgement passed first principle of “non-interference” and stated that courts will not intervene in those cases where the majority of the shareholders can ratify the irregular conduct but if we can see from the other side of the coin it was not in favour of the minorities shareholders that principle create a barred to taking any legal action against any misconduct that need to be ratification, and the other principle laid down “Proper plaintiff rule’’ if company face any loss due to fraudulent or negligent of the company director or any outsider in such situation only company can sue as a “separate legal entity” or a member of the company can take legal action who authorised to do in companies annual meeting through the resolution passed in the annual meeting
In addition to the above said principles, there are some exceptions as well:
- If the act is ultra-vire,
- The act is violative in nature of the article passed by some members of the special majority,
- Invasion of claimant’s personal and individual right, and
- Fraud on minority committed by majority.
Some recent insights
E- voting
Casting votes in annual general meetings is an inevitable right of shareholders. but since then, the pandemic world has changed with an upgrade in casting a vote of shareholders through the E-Voting. All listed companies must offer e-voting to shareholders at the annual general meeting.
Why E-voting
Minority shareholders who are far from the location and unable to attend annual general meetings can easily cast their vote irrespective through the E-voting mechanism. because a majority of the shares held by the shareholders have the right to vote on offered proposals and any important financial decisions. According to SEBI market regulators, all listed companies hold annual general meetings a period of 5 months before the closing date of the financial year. And offer e-voting to shareholders at the AGM.
Insights of E voting
- It is easy to use, with a simple login mechanism.
- Save time and money on travel.
- Have sufficient time to cast vote.
- The vote is recognised by board and easy to track in future.
- Paperless.
Activism is either good or bad
Nowadays, it is a very general question is activism good or bad? so it is totally dependent on the agenda behind it. Activism only highlights the opportunity for an upgrade in management, company policies, etc. It depends on the circumstances; sometimes it includes lawsuits or any settlements, making amendments to company policies, improving the functionality of management, etc.
Conclusion
The shareholders are an integral part of a company. Shareholders have certain rights and responsibilities that enable them to participate in the decision-making process of the company, like the right to cast their vote in the annual general meeting and call the annual general meeting and interfere in the mismanagement of the company’s directors the appointment and re-appointment of the company’s directors and so on, to safeguard their interests. With the rise of shareholder activism, shareholders are becoming more aware of their rights. They are using various legal and regulatory tools to control and influence the management and board of the company. The importance of shareholder activism lies in its ability to hold companies accountable for their responsibilities and actions towards shareholders and their interests, improve corporate governance and promote transparency. Moreover, shareholder activism can be a positive force for change in the corporate world if it is done responsibly and with the company’s best interests in mind. Shareholder activism is an important tool for investors to promote financial growth and hold companies accountable for their actions and responsibilities towards shareholders. By leveraging their ownership stake, shareholders can push for improved transparency and a clear focus on long-term sustainability rather than short-term profits.
References
- https://corporatefinanceinstitute.com/resources/equities/shareholder/
- https://smartmoney.angelone.in/chapter/what-are-the-rights-and-duties-of-a-shareholder/#:~:text=The%20main%20duty%20of%20shareholders,and%20how%20it%20is%20managed.
- https://lawlex.org/lex-bulletin/case-summary-foss-vs-harbottle-1843/24620
- https://lawlex.org/lex-bulletin/case-summary-foss-vs-harbottle-1843/24620
- Auditor Appointment by Companies under Companies Act, 2013 (taxguru.in)
- https://indianlawportal.co.in/rights-liabilities-of-shareholders/#Types%20of%20Shareholders
- http://corporatelawreporter.com/companies_act/section-47-of-companies-act-2013-voting-rights/
- https://blog.ipleaders.in/shareholder-activism-corporate-governance/
- https://www.researchgate.net/publication/228213231_The_Past_Present_and_Future_of_Shareholder_Activism_by_Hedge_Funds#pf1e
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