Rights and Liabilities Under Forms of Shares

In one of the landmark English cases it was pertinently that “A share is a right to a specified amount of the share capital of the company carrying with it certain rights and liabilities…." [1] Investors who acquire shares of a particular company can enjoy a number of rights as stipulated under the Company’s Act pertaining to their ownership. In sharp contrast to partnership law, where the owners of businesses are also the primary managers of the businesses, shareholders of the company do not directly control the running the Company which is a function generally bestowed upon the Board of Directors. Similarly in a corporation shareholders are also shielded from personal liability for the debts and obligations of the corporation. However in spite of the absence of direct controlling powers as well as direct liability, shareholders in a company do enjoy certain rights as well as associated liabilities.

However before delving into the extent and the nature of the rights of the shareholders, it will be useful to briefly explore the various forms of share capital which carries with it different rights and liabilities. In a corporation broadly two types of financing are available i.e. equity financing and debt financing. Equity financing refers to the issuance of stock with the object of raising capital for the company, which investors purchase and which represent a share in the ownership of the corporation. In other words the capital of a company refers to the capital raised by virtue of issuance of share. As required by the law, the capital clause in Memorandum of Association must stipulate the amount of capital with which company is registered. Further the Memorandum must also contain details about the number of shares and the type of shares of the company. The significance of determining the nature and amount of shares within the Memorandum of Association lies in the fact that a company cannot issue share capital in excess of the limit specified in the Capital clause of the Memorandum of Association.

The Company’s Act contemplates two forms of shares i.e. equity shares and preference shares. Within the Company’s Act in order to qualify as preference share two particular conditions have to be fulfilled. Firstly preference shares carry with it preferential rights in respect of dividend. In other words dividends to preference share holders must necessarily be paid at fixed amount or at fixed rate i.e. dividend payable is payable on fixed figure or percent and this dividend must paid before the holders of the equity shares can be paid dividend. Secondly preferential rights also extend to payment of capital on winding up or otherwise.

Equity shares on the other hand have been described under Section 85 of the Companies Act as any form of shares which is not preference shares. Equity shares do not guarantee a fixed rate of dividend. Dividend to the equity shareholders are decided only after fixed rate of dividend has been allotted to the preference share holders. In case of winding up procedure the equity shares are only paid back after payments have been made to the equity shareholders. So a brief look at the two forms of share capital clearly underlines the fact that preference shares in general enjoys priority over equity shares.

Thus the above discussion points to the fact that holders of shares in a corporation are not a unanimous body which enjoys identical rights and liabilities. The rights and powers of the equity shareholders are noticeably different from that of the preference shareholders.

This paper will focus exclusively on the rights which are associated with the ownership of equity shareholders. The paper will firstly try to look into the various classifications of rights which can be exercised by the equity shareholders and the different forms of rights which have been guaranteed under the Companies Act. In the next section the paper will attempt to deal with one specific right in particular i.e. the right of equity shareholders to vote. In the last section the paper will try to analyze the “majority rule" and the extent to which the voting rights impact the balance within a company. The Court will analyze the briefly the concept of judicial non intervention which forms the crux of the majority rule and also the ways and means by which the Court tries to respect the voting rights of shareholders without totally prejudicing the interests of the minority shareholders.

Research Questions

What are the nature and scope of the rights enjoyed by equity shareholders in a company?

What are the statutory provisions guaranteeing voting rights to the equity shareholders of a Company? Whether the voting rights of Indian shareholders correspond to the rights enjoyed by equity shareholders under English law?

Whether the majority rule upholds the importance of shareholder’s right to their vote? Is it a right beyond judicial scrutiny?

An Overview of the Rights of the Equity Shareholders

Scholars have attempted to classify the rights of equity shareholders in a company to two broad categories. These are the individual rights that shareholder’s enjoy and the corporate rights. The clear demarcation between these two broad categories of rights have been underlined in the case of Suresh Chandra Marwah v Lauls (p) Ltd. [2] In this case it was observed that the difference between the individual and corporate rights of the equity shareholder’s is that every shareholder can on his own enforce his individual rights whereas in order to enforce corporate rights the support of the majority is required.

However the line between the individual rights and corporate rights tends to be extremely thin in certain cases to the extent that it is very difficult to discern whether an individual has a personal right or his right is one which is shared by the general body of shareholders. In those instances when the infringement of both the rights takes place, a composite action may be initiated, which can act as a sufficient mechanism for the enforcement of the rights.

The law in this respect was to a great extent established by the apex court in Balkrishna Gupta v Swadeshi Polytex Ltd. [3] The Supreme Court elucidated upon the scope of and the interaction between the corporate rights and individual rights. The Hon’ble Court observed that Court’s will only consider a right to be personal in nature when it tantamount to a special interest which can be clearly distinguished from the general rights of the shareholders as has been stipulated within the Companies Act as well as the Memorandum and Articles of Association of the Company.

In other words, unless a right which is exclusively applicable to an individual shareholder in general is violated, it would not be considered as an infringement of a personal right. However in case of the alleged infringement of personal right, proceedings can be initiated in the name of both the wrongdoer as well as the Company. However in case of the infringement of a corporate right can only be initiated in the name of the company.

Now that the difference between the personal rights and the general rights that a equity shareholders accrue have been elucidated, the various rights that are guaranteed by the Company’s Act can be briefly enunciated.

One of the foremost rights which have been bestowed upon the shareholders is his right to vote at all the meetings of the Company. This right has been enshrined under Section 87 of the Companies Act and will be dealt with in more detail in the next section. Another right which is closely related to the right to vote is the right to receive notice to a general meeting which is dealt with under Section 172. Other ancillary rights include the right to appoint a proxy, the right for a shareholder which is a body corporate to appoint a representative, etc.

However the most significant development in relatin to rights of shareholder’s rights was the decision in Life Insurance Corporatio of India v Escorts Ltd. [4] In this case the Hon’ble Supreme Court went beyond the statutory rights and formulated new rights which could be enjoyed by the shareholders. In the process the Supreme Court was instrumental in expanding considerably the nature and extent of rights of equity shareholders. [5] One of the principle rights recognized by the Court was the right of te shareholders to choose the shareholders and thu indirectly run the company. The rights of the shareholders to enjoy the profits as well the surplus of the Company n case of winding up was recognized. The Court further bestowed upon the shareholders the right to vote in resolutions introduced in meetings of the Company. However the most significant contribution of the Court is that it underlined the right of the shareholders to approach the company law board in case of oppression, mismanagement or for applying for the undertaking of winding up proceedings.

However a general discussion on shareholder’s rights would not be complete without a brief reference to the concept of class rights which has been enshrined under Section 86 of the Companies Act. Class rights refer to the different rights accruing from the different classes of shares that may be created by the Company. English la also recognizes th creation of class of shares where the prima facie equality of the shares can be modified by the process of division of the share capital into different classes with different rights with regard to dividends, capital or voting or with different nominal values. [6] It is not necessary that class rights should be mentioned in the Articles or Memorandum of Association. Class rights may be created at the time of issue or by virtue of a special resolution. Hence equity shareholders may also be divided into a number of different groups and their rights may vary on the basis of their respective class rights.

Voting Rights of Equity Shareholders

As has been pointed out before, one of the most significant rights that accrue upon a shareholder of a company is his right to vote. This right has been embodied in Section 87 of the Companies Act. But before exploring the voting rights mentioned under the Indian Companies Act, it will be helpful to determine the extent and nature of this right under the framework of English law.

English law also recognizes the right of a shareholder to vote. Usually each equity shareholder receives one vote per share. Howeve as has been pointed out before voting rights may be different in case of the presence of various classes of shares. In such a situation the previlaged classes of shareholders are entitled to more number of votes per share. The procedure of voting in England is usually by the show of hands. However if a request is put forward by the Chairman then a poll can also be by virtue of a poll.

The primary purpose of voting is to pass resolutions. In this respect passing of resolutions can be by a simple majority which requires the vote of over fifty percent. However in cases of a special resolution the vote of more than seventy five percent of the shareholders are required. However all these percentage as is required by the provisions of the law should be calculated on the basis of the number of persons attending and voting. In deciding the percentage all the shareholders of a Cmpany is not taken into consideration.

Further it has been pointed out that by exercising their right to vote the individual equity shareholders are fulfilling their right to property. This right to property arising out of a share was acknowledged by the Courts in Astec (BSR) Plc, Re. In that instant case Parker J. observed that the right of a shareholder to vote is a right to property which the shareholders are free to exercise as per his own best interests. [7] 

This judgment entails that the shareholders are free the exercise their voting rights to further their own personal interest and it is not necessary that their voting should further the interests of the remaining shareholders. Herein lies the fundamental difference between individual equity shareholders and the directors.

This distinction was clearly elucidated by Walton J in Northern Counties Securities Ltd v Jackson & Steeple Ltd. [8] In this Judgment the Court observed ha whenever a Director of a Company is voting he is doing it under a fiduciary duty which he owes to the Company. However when an individual shareholder is voting, he does so without any fiduciary duties towards the company. Whenever an individual votes for or against a resolution he is doing so for the purpose of furthering his own personl interest and exercising the right to property which the shares carry. However the first landmark cases where this principle was established was Pender v Lushington. [9] In this case Sir George Wessel M.R. observed that there is no obligation on a shareholder to further something which other people might consider to be in the interest of the Company. The individual shareholder has a right to vote to further what he thinks to be in his personal interest.

The principle of voting rights in India closely mirrors the English position. Section 87(1)(a) stipulates that every shareholder in a limited company has the right to vote on every resolution that is put in front of a company. Section 87(1)(b) further stipulates the voting rights of an individual shareholder will be in proportion to his shares. As has been pointed out, this right to vote cannot be curtailed by provisions in the Memorandum or Articles of Association by stipulating a minimum number of shares which have to be acquired to exercise the right to vote. [10] 

Section 182 further solidifies the right to vote by stipulating that the right to vote cannot be contingent upon any member holding the share for a particular period of time. This principle embodied within Section 182 was upheld in the case of Anantlakshmi v H.I. & F Trust. [11] In the instant case the rule that voting rights will only be enjoyed by individual shareholders who have their names on the registers for more than two months was challenged. The Court found this rule to be in violation of Section 182 of the Companied Act which clearly stipulate that there should not be any time period for which a share has to be possessed by a shareholder before he could exercise his right to vote. However it has to be clarified in this respect that the wording of the statute clearly extends this rule to public companies. Private companies, apart from private companies which are subsidiaries of private companies, are exempted from the ambit of this rule.

Even though under the scheme of the Act provides a very exhaustive power on the companies to exercise their right to vote, however there might be certain circumstances when this right to vote may be curtailed. This is dealt with in Section 181 of the Companies Act. This section mandates that in case of the non-payment of call money by a shareholder which has become due is a ground for excluding the shareholder from his right to vote. A shareholder may be precluded from exercising this right also on the ground of non payment of other sums due to the company. Finally in case the Company has exercised the right t lie over the shares of a member he may be prevented from enjoying his voting rights.

The Majority Rule and Shareholder’s Rights

The previous section has enunciated the fact that shareholders have an intrinsic right to vote in regards to the passing of resolutions of a company. In order to pass a particular resolution it has to be voted upon by the majority of the shareholder. This section tries to explore what are the consequences of this rule and the role if any which the legal system should play in balancing the rights of the majority and the minority shareholders. The section will try to determine the extent and nature of the majority and minority shareholders.

The case in which the extent of judicial intervention in respect to the majority rule was established was Foss v Harbottle. [12] In this case the main issue was whether the Court could interfere with the action of the actions of the Board of Directors and the majority, on the grounds that a minority of the shareholders was dissatisfied with the action of the Board as well as the individuals who constituted the majority. The Court answered this question in the negative and refused to interfere with the management of a company. [13] The principle of Foss was clearly elucidated by Mellish L.J. in Macdougall v Gardiner where he observed that the rule as propounded in Foss precludes the minority shareholders from complaining about any act which the majority are entitled to do regularly.

The rationale behind the decision of the Court in Foss is that the the Court recognizes the right of the majority and it cannot substitute its own decision in place of the decisions of the Board as well as the majority, which they exercise by virtue of their legitimate rights. This is closely related to the concept of the right of the shareholder’s to exercise their voting rights for personal interest as has been discussed in the previous section.

This point can be further substantiated with the aid of the observations of Herman J in Re Unisoft Group Ltd [1994] 1 B.C.L.C. 609. The learned judge observed in the instant case that shareholder’s are entitled to sell their shares, to vote their shares or to take any course in a general meeting simply to further their own interest. Thus the Court made an intelligent distinction between the individual shareholders actions in regards to voting from the unfair conduct of the business of a Company. Thus a distinction was made by the acts or conduct of the Company and the acts or conduct of a shareholder in his private capacity. The first type of action can be challenged whereas the second form of action will be outside the scope of judicial interference.

However certain exceptions have been curved out by the Courts to the general rule of non-interference which seeks to protect the rights of the minority shareholders. Under English law interference of the Court are allowed on equitable grounds. One such ground which has been underlined in the North West Transportation Co ltd v Beatty [14] case. In this particular judgment it was observed that Courts can interfere to safeguard the rights of the minorities in those cases when the directors have acted in breach of their fiduciary duties or some other wrong against the company and then try to obtain forgiveness from themselves by using their status of shareholders.

Such an action brought about by a minority shareholder is referred to as a derivative action. It is a form of action which is filed by an individual shareholder in his own name. However goal of such an action is for the advantage of the Company. The terms derivative is used as it seeks to enforce a right which is derived from the Company. [15] As has been observed in the case of Birch v Sullivan [16] the shareholder has to establish that the Company has a right to sue, but the in the absence of such an action taken by the Company, the shareholder gets the derivative authority to sue. [17] 

The legal framework in existence in India has also adhered to the principle propounded in the Foss case. However a number of statutory provisions [18] have been introduced to safeguard the rights of the minorities.

In the case of Bharat Insurance Co Ltd. V Kanhaya Lal Gauba [19] one such circumstance where action by minority shareholders was recognized. In the instant case the Court observed that the interference of the Courts is justified when the acts complained against are illegal and ultra vires. Another important ground on the basis of which the interference of the Courts are justified include fraud against the minority perpetuated by the Board and the majority,

Conclusion

The paper firsts tries to distinguish between the different forms of share capital in order to underline the fact that the right and liabilities accruing under the various forms of shares distinctly differ from one another. The paper attempts to specifically deal with the concept of equity shares and illustrates the statutory as well as other rights which owners of equity shareholders enjoy. The paper further tries to enunciate the concept of class rights where various classes of rights can be allotted within different groups of equity shareholders. Having given a broad overview of the nature of rights enjoyed by equity shareholders the paper tries to specifically deal with the voting rights of shareholders. The paper with the aid of landmark decisions tries to emphasize on the personal nature of voting rights as has been recognized by both English as well as Indian Courts. Then statutory provisions like sections 182 are analyzed to further substantiate the claims that the Companies Act provided exhaustive safeguards for the exercise of the right to vote. Finally the Foss v Hotbottle [20] decision is analyzed and on the basis of subsequent judgments the researcher concludes that the formulation of the principle of non-interference further underlines the Courts recognition of the importance of shareholders rights to vote.