Becoming a shareholder in a company includes the right to share in the Company’s profitability, income, and assets. But many of the shareholders are unaware of their rights. This right that is possessed by all has an influence over the company management selection, pre-emptive rights to newly issued shares, and voting rights in general meeting. Here in this article, we will see the Variations in the Shareholder’s Rights and its procedure of Modification.
What are the Rights that the Shareholders enjoy?
The Shareholders of a company are granted various rights and protections under the Companies Act, 2013.
Following are the rights which the Shareholders enjoy –
Changes to MOA (Memorandum of Association) or AOA (Articles of Association)
A general meeting is held for any changes in the amendments of the MOA or AOA of the Company. The Shareholders have the right to vote on amendments relating to any kind of changes in the MOA or AOA of the Company. Some amendments require a special majority in which a vote of not less than 75 percent of shareholders is required.
Transferring of Shares
The Shareholders of the Company have the right to transfer shares to another shareholder in the Company, but the Board may refuse to register a transfer of shares if the shareholder transferring the Share is not approved by the Board. However, in a Private Limited Company, the transfer of shares is restricted by its AOA (Articles of Association).
The Dividends are paid to the shareholder from the profits of the Company. The declaration of the dividends is subject to shareholders’ approval at the Annual General Meeting. After the Dividend is announced at the General meeting, the Dividend must be paid within 30 days, and any unpaid dividends are transferred to the scheduled bank of the shareholder.
Attend and vote at the General Meeting
The companies hold an annual general meeting every year in which all the shareholders of the Company have the right to receive a notice convening about the annual general meeting and extraordinary general meetings. The shareholders also have the right to vote at such meetings for or against each of the resolutions passed at such meetings.
Read our article:Dividend Declaration: Sources, Mandatory Conditions and Procedure
What are the Variations in the Shareholder’s Rights?
The Share Capital of a company is divided into different classes of shares, and it is necessary to amend the rights attached to one or more classes of Share. But according to the MOA or AOA of the Company, the authorization to make any changes in the Shareholder’s right is not possible until the consent of the shareholder in writing.
- The rights attached to the shares of any class may be varied only with the consent in writing of the shareholders of not less than three-fourth of the issued shares of that class. The other method is to schedule a separate meeting of the shareholder of the issued shares of that class. A special resolution regarding this is passed only –
- If the provision with respect to such variation is contained in the MOA or AOA of the Company.
- In the absence of such provisions in the MOA or AOA of the Company, such variation must not be prohibited by the conditions of issue of shares of that class.
- The Shareholders of not less than 10 percent of issued shares of that class who have not consented to or voted for the resolution in the variation of rights may apply to the court to have the variation cancelled. The application needs to be made within 21 days from the date of passing of the resolution. The variation is effective only after it has been confirmed by the court. If the court has made any orders, the Company within 30 days after the service on the Company of any order, forward the copy of it to Registrar.
- The Company within 30 days of the date of the order of the tribunal file a copy with the Registrar.
- When there is any default in complying with the provisions, the Company will be punishable with fine which shall not be less than Twenty-five Thousand rupees and not more than five lakh rupees. Also, every officer of the Company who is in default will be punishable with imprisonment for a term which may extend to six months or with fine which shall not be less than twenty-five thousand rupees, and the fine may extend to Five Lakh Rupees.
Besides the above given requirement, these two are the major and mandatory requirements for variation in rights of the shareholder:
- The consent of three-fourths of shareholders shall also be taken if the variation by one class of shareholders touches the other class of shareholder’s rights.
- Public Company that is Unlisted and with more than 200 members shall pass the Special Resolution through postal ballot only. [Section 110 to be read with Rule 22 of the Companies Management and Administration Rules, 2014.
Procedures for the Variation in Shareholders Right
There are certain procedures which need to be followed for any variations in the shareholders right.
Modification of the Shareholders Rights
Every class of Share has specific rights mentioned in the Articles of Association or MOA of the Company. Any Kind of modification in the class rights must be approved by the shareholders in a meeting. Although in some cases, modification of class rights could be held without a class meeting.
Here we will see the modifications of class rights without holding a class meeting –
- A Board Resolution
A Board meeting is held which will pay the following resolutions:
- The Board will approve the proposal of variation of rights.
- The Board will approve the draft circular setting out the scheme of variation of right.
- A letter of consent needs to be obtained from the members holding the shares of the concerned classes.
- The record date is fixed by the Board. After this, the Board will authorize the (CS) Company Secretary or any other Director or Officer of the Company to forward a Circular and consent letter to the shareholders on the dates fixed by the shareholder.
- In the end, the Board will then constitute a committee of Directors to scrutinize the letters of consent received from the members.
The Shareholders enjoy several rights in a company, but at times the Shareholders’ rights in a company vary for different classes of shares. It is necessary to amend the rights attached to one or more classes of Share. Therefore, it requires compliance of certain procedure and must be as per the MOA or AOA of the Company or in accordance with the terms of the issue of shares of that specific class.
Read our article:Transfer and Transmission of Securities – Know the Procedure of Transfer, Time Limits, and Penalties