This article has been edited and published by Shashwat Kaushik.
Table of Contents
Shareholders can be considered owners of the company, as they play an important role in its success. But shareholders can be any person who owns at least one share of that company. They don’t participate in the day-to-day management of the company as ownership and control are separated. Shareholders can be differentiated into two categories:
- Individual shareholders; and
- institutional shareholders.
Individual shareholders are general people like you and me, and institutional shareholders are big institutions or organisations like banks, pension funds, or mutual funds that invest on behalf of others. Both types of shareholders can benefit from the company’s success, as they have a stake in the company’s profit.
Generally, most of the shareholders don’t attend the general meeting as they believe that almost all the powers lie in the hands of majority shareholders and directors and that’s why they focus on the value of their shares and dividends. It may also happen that they switch their investment to any other company in case they are not getting a good return from the current company.
Generally, we see two types of shareholders, i.e., equity and preferred.
- Equity shareholders: From the perspective of a startup, it is the riskiest type of shareholding but it is also most rewarding when the company does well. They have voting rights but preferred shareholders do not. In cases of bankruptcy, they are the last ones to get anything from the proceeds after the sale of all the assets and payment to all the creditors.
- Preferred shareholders: They get priority in the payment of dividends and usually receive a larger share than equity stockholders. Because of their preferred status, they don’t have voting rights. In the event of liquidation of the company, they will be preferred over equity shareholders in payment of the proceeds.
Rights of shareholders
Different types of rights are available to shareholders and some of them are listed below:
Appointment of directors
Shareholders possess an important role to play in the appointment of directors. Shareholders appoint directors by passing an ordinary resolution. Also, various kinds of directors are to be appointed by the shareholders; these are as:
- An additional director: He will hold the meeting until the next general meeting.
- An alternate director: He will act as an alternate director for three months.
- A nominee director: They are appointed for any situation in which there is a casual vacancy in the office of any director appointed in a general meeting of a public company.
Other than this, shareholders can also oppose any resolution passed for appointing any director in the general body meeting.
Appointment of company auditors
Company auditors are also appointed by shareholders themselves. According to the Companies Act of 2013, the board of directors is the one who appoints the auditor at an earlier stage but after that, shareholders are authorised to appoint these auditors in the annual general body meeting on the recommendation of the directors and the audit committee. Generally, the appointment is for five years and can be ratified by passing a resolution at the annual general body meeting.
Right to vote
According to the Companies Act of 2013, every Indian company is required to hold an annual general meeting of its shareholders once every year. The meeting can be held at the head office of the company or at any other place decided by the company. The shareholders should have the ultimate control of the company and for that, they should come together once a year to look into the workings of the company. In this meeting, directors and auditors are retired, new directors and auditors are appointed, dividends are declared, annual accounts are represented for the consideration of the shareholders, etc.
According to the Companies Act of 2013, when a resolution is passed by the members of the company, it can only be passed by the votes of the shareholders.
According to the Act, there are four types of voting:
Voting by the show of hands (Section 107)- Each shareholder present in the meeting is considered to have one vote, which is to be represented by the showing of their hands.
Voting done by polling (Section 109)- In this, the voting by poll is demanded by the chairman of the shareholders. Also, in the case of differential rights as to voting, a particular class of equity shares may also have weighted voting rights.
Voting done by electronic means (Section 108)- Any company that has more than 1000 shareholders is required to provide a facility for voting through online means.
Voting by means of postal ballot (Section 110)- This means voting by post through any electronic means.
In the event that shareholders are not able to attend the meeting, they can also appoint a proxy on their behalf to attend the meeting. Even though the proxies are not considered a part of a quorum, the Companies Act of 2013 provides a procedure through which proxies can be used.
Right to appoint a proxy
In case the shareholder is not able to attend the meeting in person, he can appoint a proxy for him to attend and vote in the meeting. The proxy can be a member or a non-member. But this provision is available only to public companies or to subsidiaries of a public company, not to a private company. And in some cases, companies are limited by guarantee.
Here’s a detailed breakdown of the proxy process and its implications:
Appointment of a proxy:
- A shareholder who is unable to attend a meeting can appoint a proxy to represent their interests and exercise their voting rights on their behalf.
- The proxy is authorised to attend the meeting, participate in discussions, and cast votes on behalf of the shareholder.
Eligibility of proxies:
- The proxy can be either a member or a non-member of the company.
- There may be specific eligibility criteria set by the company, such as age, residency, or professional qualifications.
Scope of authority:
- The proxy’s authority is limited to the specific meeting for which they are appointed.
- The shareholder can provide specific instructions or guidelines to the proxy regarding how to vote on certain resolutions or issues.
- The proxy exercises the shareholder’s voting rights as if they were present at the meeting.
- Proxies typically vote in accordance with the instructions provided by the shareholder, unless they are granted discretionary voting authority.
Limitations for private companies:
- The provision for appointing proxies is generally not available to private companies.
- Private companies may have their own rules and procedures for shareholder participation in meetings.
Right to get notice of the meetings
Every shareholder shall get notified about a meeting either personally or through post at his registered address or to any other address as provided by him. The notice shall contain the meeting’s place, day, and hour and the business to be transacted.
In the case of an AGM, if all the members who are going to attend the meeting can vote and agree in writing, then a shorter period of notice can be given. And for other AGMs, it will happen only when members with 95 % of the total voting power agree. A period of 21 days is given to shareholders to prepare and discuss the agenda and resolution of the meeting.
Right to call for general meetings
Shareholders have the right to call a general meeting. They also have the right to ask the directors of the company to call an extraordinary general meeting. In the event of failure to conduct the meeting, the shareholders can go to the National Company Law Tribunal (NCLT).
Right to attend the AGM
This meeting is held for shareholders only. In this meeting, the following happens:
- In this meeting, the director of the company will present the company’s annual report and will also narrate the performance of the company in the last financial year.
- In the meeting, shareholders can further ask any question to the director regarding the performance of the company.
- For any matter to be decided, a resolution must be passed through voting by the shareholders.
Right to inspect registers and books
Shareholders are the main stakeholders in the company and because of this, they possess various rights in the company which include the right to inspect the accounts, register and books of the firm. This inspection helps them take a look at the financial records and position of the company. Directors have to present those accounts before the shareholders and in case of default, according to Section 136 of the Companies Act of 2013 and Section 137 of the Companies Act of 2013, the failure will become a punishable offence. The shareholders are authorised to ask any kind of question regarding the accounts or affairs of the company.
Right to get the financial records
Being the owner of the company, it is the right of shareholders to get copies of the financial statements, financial reports, or directors’ reports on their demand. The company is responsible for sending the financial statements of the company to each of the shareholders. Shareholders are also entitled to get the share register for free.
Right to transfer ownership
Shareholders can also transfer their shares to any existing shareholder or any other person in the market. In cases of refusal to register the transfer of shares or transmission of any rights by the company, shareholders can approach the Tribunal against the refusal.
The Tribunal plays a crucial role in safeguarding the rights and interests of shareholders. It provides a platform for them to challenge the company’s refusal to register the transfer of shares or transmission of rights. By approaching the Tribunal, shareholders can seek an independent and impartial review of their case. The Tribunal has the authority to examine the company’s decision, assess its validity, and issue appropriate orders or directions to rectify any wrongful denial of shareholders’ rights.
Shareholders can initiate proceedings before the Tribunal by filing a petition. The petition should clearly state the facts and grounds on which the company’s refusal is being challenged. Supporting documents, such as share certificates, transfer deeds, and correspondence with the company, should be attached to the petition. The Tribunal will then issue a notice to the company, requiring it to file its response within a specified timeframe.
During the hearing, both parties will present their arguments and evidence. The Tribunal will assess the merits of the case, considering relevant laws, regulations, and established legal principles. It may also seek expert opinions or appoint independent valuers to assist in its decision-making process. After a thorough examination of the facts and applicable law, the Tribunal will issue its verdict.
Right to sue
Shareholders can also bring legal action against the director, officers, executives, etc. under the rules laid down in the Companies Act of 2013. They are:
- When directors are not acting in accordance with the company law and its stakeholders.
- When they are engaged in any action that harms the company and is not in accordance with the constitution.
- They are doing any kind of fraud.
- They are transferring the assets of the company at an undervalued rate.
- When there is fund diversion.
- Acted with mala fide intention.
Shareholders can also approach NCLT in cases of oppression and mismanagement.
Right to dividends
Shareholders have the right to receive some amount from the dividend payments. A fixed dividend can be given to the owner of preferred stocks. Preferred shareholders get priority over the equity shareholders in this regard.
Shareholders have the right to receive a portion of a company’s profits through dividend payments. Dividends are typically paid out of the company’s retained earnings, which are the portion of its earnings that are not reinvested back into the business. The amount of dividends that a shareholder receives is determined by the number of shares they own and the dividend per share that is declared by the company’s board of directors.
There are two main types of dividends: common dividends and preferred dividends. Common dividends are paid to holders of common stock, while preferred dividends are paid to holders of preferred stock. Preferred shareholders have priority over common shareholders in the payment of dividends, which means that they will receive their dividends before any dividends are paid to common shareholders.
Preferred dividends are considered to be safer than common dividends because they are paid out before any dividends are paid to common shareholders. This makes preferred stocks a more attractive investment option for investors who are seeking a steady stream of income. However, preferred stocks typically have lower growth potential than common stocks, as the fixed dividend amount limits the company’s ability to increase its dividend payments over time.
Shareholders shall get preference when a company issues further shares in the market.
Pre-emptive rights are a crucial aspect of corporate governance that protect the interests of existing shareholders when a company decides to issue additional shares in the market. These rights ensure that current shareholders have the opportunity to maintain their proportionate ownership stake in the company by giving them priority to purchase new shares before they are offered to outside investors.
Understanding pre-emptive rights
When a company issues new shares, it dilutes the ownership of existing shareholders as the total number of outstanding shares increases. Pre-emptive rights aim to mitigate this dilution by providing shareholders with the first chance to purchase their proportionate share of the new issuance. This mechanism helps preserve the shareholders’ voting power, influence over corporate decisions, and potential future dividends.
Rights of minority shareholders against oppression and mismanagement
If the director or the majority shareholders are acting in a way that violates the Article of Association, the Companies Act of 2013, and the terms of a contract it has entered into and that is adversely affecting the company, one-tenth of the minority shareholders can make an application to the National Company Law Tribunal (NCLT) in this regard. The procedure for the same is given under the Companies (Prevention of Oppression and Mismanagement) Rules of 2016 and Rules 81 to 88 of the NCLT Rules.
Right during the winding up of the company
When the company is about to wind up, the company is responsible for informing each of the shareholders about the same and also the credit to be given to them.
- Shareholders are entitled to get some amount from the sale of any material of the company.
- Before any merger or acquisition, the prior approval of shareholders is required. Further, every appointment should be done according to the procedure given.
- Shareholders are authorised or have the right to approach the court in cases of insolvency.
Responsibility of shareholders
Because the company is a separate legal entity, shareholders have limited liability, which means their personal assets are protected and they are responsible for only the amount that they have invested in the company. Also, a company’s assets do not belong to shareholders and that is why shareholders are not entitled to anything except for their ownership interest in the company.
- In case of any debt to the company, shareholders are not responsible, but at that time they are responsible for paying the company for any amount unpaid on their shares.
- When you are a shareholder and a director, you will have a wider range of responsibilities. As a director, you have to manage the company in its day-to-day affairs and work in the best interest of the company, which imposes a heavy burden compared to that of shareholders.
- Shareholders are to be well-versed in the applicable statutory provisions and ensure effective implementation.
- Responsible for participating actively in the shareholder’s meeting or AGM.
- One of the important duties of shareholders is to pass resolutions at general meetings through voting. This right enables shareholders to exercise their ultimate control over the company and its management.
There are two types of resolutions that can be passed in the meeting, i.e., ordinary and special resolutions.
When a simple majority of shareholders are present in the meeting and vote in favour of the proposal, then it will be an ordinary resolution passed. In this resolution, more than 50% of votes are in favour of the proposal, and the votes are usually shown by hand.
A special resolution is required only in a few critical and sensitive cases, such as the alteration of articles of association. In a special resolution, a majority of 75% votes are required in favour of the proposal and it is presumed that there is a vote on an ordinary resolution.
Shareholders may have additional duties that are specifically listed in the company’s shareholder agreement or company constitution.
Shareholders play an important role in the functioning of the company and therefore possess various rights and duties, which include the Appointment of Directors, company auditors, Right to vote, transfer ownership, sue, Pre-emptive rights, getting financial records, inspecting registers and books, etc.
They are responsible for only that sum that they have invested in the company, as the company is a separate legal entity. They have to attend the AGM. And when a shareholder is also a director of the company, his responsibility is doubled, as the director has to look into the day-to-day affairs of the company.