Rights & Liabilities of Shareholders

A person or legal entity having an ownership interest in a company is a shareholder, to be very precise shareholders are owners of the company and they are issued shares. As ownership and control are separated, shareholders do not partake in the business’s daily activities. However, as equity owners, they enjoy certain rights and responsibilities.

 The statute of the Company must be carefully examined by the Investors and should consult their legal advisors for detailed information on the rights and obligations attached to shares in the Company and general meetings of the Company.

Many factors determine the rights and duties of a shareholder like the class of securities or whether it is preferred or common stock and terms of a shareholder’s agreement but there are certain rights and responsibilities common to all shareholders.

Although shareholders have general rights and liabilities, a shareholder’s agreement may vary those rights. A shareholder’s agreement is a legal contract between the shareholders of the company. It is an agreement that outlines the intention of the parties and regulates the rights, responsibilities, liabilities, and obligations of each shareholder.

Introduction

Companies Act of 2013 established and governed Companies. Shareholders play an important role in a company. A company needs to look after them as they should also be safeguarded and time to time proper bonus should be given to them. A shareholder, commonly referred to as a stockholder, is any person, company, or institution that owns at least one share of a company’s stock. Because shareholders are a company’s owners, they reap the benefits of the company’s successes in the form of increased stock valuation. Shareholders play an important role in the framing and profits of the company.

As a shareholder, you have certain rights and responsibilities over the company. Generally, your liability is limited to the amount outstanding on the shares you have bought. The debts of the company are separate from your own. The documents which will outline your responsibilities include:

  • company’s constitution.
  • shareholder’s agreement if applicable; and
  • company’s constitution if it has one.

Ways to Become a Shareholder

Firstly, the company may issue shares to you, either upon registration with ASIC or when the directors and shareholders agree to create new shares. 

Secondly, an existing shareholder may transfer their shares to you, which the company must register on the share register. 

In India, there are two types of companies, namely public limited company, and private limited company but because of fewer restrictions and more benefits, people prefer to open private limited firms.

Types of Shareholders

Equity Shareholders

Equity shareholders are the main stakeholders in a company and when the time of dividend distribution comes the preference shareholders would get the first.

Preference shareholders 

Preference shareholders generally have no voting rights because of their preferred status.  They receive fixed dividends, generally larger than those paid to common stockholders, and their dividends are paid before common shareholders.

Nature of Company and Shareholder

  • For a one-person company, one person is required.
  • For a private limited company, two persons are needed.
  • For a public limited company, a minimum of seven persons are required

Rights

  1. Right to Vote

The right to vote is the most important right a shareholder has. Companies Act 2013 recognizes the following types of voting: Voting by showing hands, Voting is done by polling, voting is done electronic means, voting is done through postal ballot.

This right enables shareholders to participate in corporate decision-making. Their voting power includes the right to appoint directors, the right to make proposals, the right to vote for structural changes such as mergers and acquisitions, or liquidation.

Following a procedure mentioned in the Companies Act 2013, the shareholder also has a right to appoint a proxy on his behalf when he is unable to attend the meeting. Though the proxy is not allowed to be included in the quorum of the meeting in case of voting.

2. Legal Action Against Directors

According to the rules laid down in the Companies Act 2013, shareholders can bring legal action against a director  if any act was done by the director in any manner which is prejudicial against the affairs of the company, commits fraud, any act is done which is beyond the law or against the constitution, when the assets of the company are being transferred at an undervalued rate, act done in mala fide manner, when there is a diversion of funds of the company.

3. Right to Call for General Meetings

Shareholders have the right to call a general meeting. Annual General Meeting is an annual gathering of a company’s shareholders. Here, the directors of the company present the shareholders of the company’s annual report and comment on its performance over the year. Here, shareholders may elect new directors, discuss directors’ remuneration, and ask questions regarding the company moving forward.  They also can approach the Company Law Board for the conduction of general body meeting if it is not done according to the statutory requirements.

4. Right to The Dividend

 The Company’s shareholders have the right to a share in the profit reflected in the annual, stand-alone financial statements audited by an independent auditor and approved by a resolution of the General Meeting to be paid out to the Company’s shareholders (the right to dividend).

5.Appointment of Directors

An ordinary resolution is required to be passed by the shareholders for the appointment of directors. Shareholders also can challenge any resolution passed for the appointment of a director in the general body meeting.

6. Right to Dispose of Shares

The Company’s shareholders have the right to dispose of Shares. The disposal of Shares includes the sale (transfer of ownership) and other forms of disposal, including the establishment of a pledge, the right of use, or lease of Shares.

7. Right to Inspect Registers, Books, And Financial Records

Shareholders are the main stakeholders in a company, they have the right to inspect the accounts register and also the books of the firm and can ask questions about the same if they feel so. shareholders have the right to inspect a company’s books and records. This is so that the shareholder knows how well the company is doing. The company may do this by providing audited financial statements or financial reports to the shareholders.

8. Pre-emptive Right

The Company’s shareholders have the priority right to subscribe for new shares in the Company also in the case of an issue of securities convertible into shares in the Company or incorporating the right to subscribe for shares of the Company. A resolution adopted to increase the Company’s share capital should set the date of determining the Company’s shareholders’ pre-emptive right to new Shares (the pre-emptive right record date

9. Winding Up of The Company

Before the company is wound up the company has to inform all the shareholders about the same and also all the credit has to be given to all the shareholders.

Duties

The shareholders of the Company must comply with their duties, acting loyally, in good faith, and transparently, within the framework of the corporate interest as an interest that should prevail over each shareholder’s interest, and under the Company’s Corporate Governance System, accepting the substantive and formal limitations to which their rights are subject and the rules on conflicts of interest and competition, and ensuring the transparency of related-party and significant transactions and the truth of public disclosures and exercise their rights in respect of the Company and the other shareholders.

  1. Duty to be in touch with other members of the company so that they can see the work progress of the company. 
  2. Shareholders are not entitled to anything except for their ownership interest in the company.
  3. Shareholders should consult on the matters of finance and other topics.
  4. Shareholders are also not responsible for the company’s debt. However, if a company is liquidated, creditors are first in line to have their debts paid, then bondholders, and then common shareholders. However, an exemption to this is that a shareholder is liable to pay the company for any amount unpaid on their shares.
  5. Shareholders should participate in the general body meetings so that they can see and also can advise on the matters which they feel is not going well.

Conclusion

In the smooth functioning of a company, shareholders play an important role. They have various rights which include the appointment of the company’s director, auditor, to voting rights and having a say when the company goes insolvent, right to access financial records, right to sue for wrongful acts, right to vote, right to attend the AGM, and right to transfer ownership.

Rights and duties attached to a share follow the share to any transferee to whom it may be transferred and the transfer includes all the payable and unpaid dividends and dividends to be payable, as well as, as the case may be, the corresponding share in the reserve funds and provisions. The ownership of a share shall imply ipso facto the acceptance of the present Memorandum and Articles of Association and the decision of the general meetings.

However, these rights may vary depending on the company’s shareholder agreement and company constitution and with every right, comes a corresponding responsibility which the shareholder must carry out diligently. There should be a proper balance between the two.

Q & A

Q.1 Who Is A Shareholder of a Company?

A.1 A shareholder, commonly referred to as a stockholder, is any person, company, or institution that owns at least one share of a company’s stock. Because shareholders are a company’s owners, they reap the benefits of the company’s successes in the form of increased stock valuation. Shareholders play an important role in the framing and profits of the company. To be very precise shareholders are owners of the company and they are issued shares. As ownership and control are separated, shareholders do not partake in the business’s daily activities. However, as equity owners, they enjoy certain rights and responsibilities.

Q.2 How Can One Become A Shareholder of a Company?

A.2 One can become a shareholder of a company, firstly when the company may issue shares to you, either upon registration with ASIC or when the directors and shareholders agree to create new shares. 

Secondly, an existing shareholder may transfer their shares to you, which the company must register on the share register. 

Q.3 Explain Types of Shareholders?

A.3 Types of shareholders- 

1.Equity Shareholders

Equity shareholders are the main stakeholders in a company and when the time of dividend distribution comes the preference shareholders would get the first.

2.Preference shareholders 

Preference shareholders generally have no voting rights because of their preferred status.  They receive fixed dividends, generally larger than those paid to common stockholders, and their dividends are paid before common shareholders.

Q.4 What Rights Are Available to A Shareholder of a Company?

A.4 Following rights are available to a shareholder of a company-

  1. Shareholders have a right to bring legal action against the director when any act done by him in any manner is prejudicial against the affairs of the company.
  2. Shareholders also have the right to attend and vote at the annual general body meeting.
  3. Shareholders also have a right to appoint the company auditors.
  4. Shareholders have the right to call a general meeting. They have a right to direct the director of a company to call an extraordinary general meeting.
  5. Shareholders have the right to get copies of financial statements. The company must send the financial statements of the company to all its shareholders.
  6. Before the company is wound up the company has to inform all the shareholders about the same.
  7. When a company is converted into another company then it requires prior approval of shareholders.
  8. Right to inspect the corporate books and records of the Company.
  9. All shareholders shall have the right to receive dividends.

Q.5 What Are the Duties of Shareholders of a Company?

A.5 Shareholder must perform-

1. Duty to be in touch with other members of the company so that they can see the work progress of the company.

2. Shareholders are not entitled to anything except for their ownership interest in the company.

3. Shareholders should consult on the matters of finance and other topics.

4. Shareholders are also not responsible for the company’s debt. However, if a company is liquidated, creditors are first in line to have their debts paid, then bondholders, and then common shareholders. However, an exemption to this is that a shareholder is liable to pay the company for any amount unpaid on their shares.

5. Shareholders should participate in the general body meetings so that they can see and also can advise on the matters which they feel is not going well.

References

  1. https://www.lawinsider.com/clause/rights-and-obligations-attached-to-the-shares
  2. https://www.quora.com/What-are-the-various-rights-and-duties-of-shareholders-of-a-company
  3. https://legalvision.com.au/rights-liabilities-shareholder-company/
  4. http://www.gtc.com.pl/ri/GlobalLOOK_CMS/upload/Rights%20and%20Obligations%20Related%20to%20Shares.pdf
  5. http://14.139.60.114:8080/jspui/bitstream/123456789/693/28/Rights%20of%20Shareholders%20under%20the%20Companies%20Act.pdf

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