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Shareholders Rights

Who is a Shareholder?

A shareholder is a person, company, or institution that owns at least one share of a company's stock. They are commonly known as stockholders. The shareholders are the actual owners of the company and they enjoy the benefits of the company's success when there is an increase in stock valuation. The number of shareholders in a company is based upon the type of the company. The two types of shareholders in a company are:

  • Equity Shareholders
  • Preference Shareholders

What are Shareholder Rights?

Suppose, you buy the shares in Disney, does this mean you will have a free visit to Disneyland? This hypothetical example is highly unlikely but it may raise the question that what are the rights and privileges a shareholder has? Many shareholders are unaware of their rights which sometimes cause their exploitation by the organization. So, a shareholder needs to get complete knowledge about their rights to avoid any uncertainty.

Shareholders Rights

The shareholders should also be aware of the fact that the rights are given in a hierarchical structure for three main classes of securities: bonds, preferred stock, and common stock.

Rights of a Shareholder

There are various rights of a shareholder in a company mentioned in the Companies Act 2013. Such rights are described below:

1. Appointment of Directors

The shareholders play a vital role in the appointment of a director. The shareholders pass an ordinary resolution for this purpose. Apart from this, the shareholders can appoint various types of directors which include:

  • An official director who will get the responsibility to hold the office until the conduction of the next general body meeting.
  • An alternate director who will play the role of alternate director for three months.
  • Director appointed when there is a casual vacancy in the office of the director appointed in the general meeting.
  • A nominee director.

Other than this, the shareholders can challenge any resolution also that is passed for appointing a director in the general body meeting.

2. Legal action Against Directors

Shareholders have the right to take any legal action against the directors of the company by the rules mentioned in the Companies Act 2013 in case of any fraud or insolvency. These rules are as follows:

  • If the director did any act in any manner that is against the prejudicial affairs of the company.
  • If the director did any act that is against the law or the constitution of the country.
  • Any fraud is done by the director with direct or indirect involvement.
  • If the company's assets are transferred at an undervalued rate by the director.
  • When there is a diversion of the company's funds.
  • If any action is performed in a mala fide manner by the director.

3. Appointment of Company Auditors

The shareholders have the right to appoint the auditors of the company. As per the Companies Act 2013, the first auditor of the company is appointed by the BoD but further appointments are done by the shareholders with the recommendation of directors at the company's annual general meeting. Generally, the working period of an auditor is 5 years. However, it can be ratified by passing a resolution in the annual general meeting but in this case, the approval of the shareholders is required again.

4. Right to Vote

Voting is another right of the shareholders. They can vote at the annual general body meeting of the company. It is necessary for every company in India to conduct a general meeting once a year as per the Companies Act 2013. The company can call this meeting anywhere, i.e., at the head office or any other place of the company's choice. Many mandatory agendas are discussed in this meeting such as the adoption of financial statements, appointment or ratification of directors and auditors, etc. But any such resolution or decision can't be taken without involving the shareholders. The shareholders are free to give their vote in favor or against any decision.

A shareholder can also appoint a proxy of his/her to attend the meeting if he/she is unable to do so. However, the proxy does not have the right to take part in the quorum of the meeting in case of voting but it is permitted by following a procedure that is stated in the Companies Act 2013.

Shareholders Rights

There are several types of voting as per the Companies Act 2013 which include the followings:

  • Voting by Showing of Hands
    Every shareholder who is attending the meeting has one vote. So, in this type of voting the shareholders can give the vote to the person or the decision of their choice only by showing their hands.
  • Voting by Polling
    In this type of voting, a poll is provided to the shareholders to give their votes.
  • Voting by Electronic Means
    It is not an easy task to conduct the voting physically for a company with a large number of shareholders. So, every company with more than 1000 shareholders opts for the facility of online voting or voting by electronic means.
  • Voting by Means of Postal Ballot
    A company can pass any resolution by using the mode of postal ballot voting also.

5. Right to Transfer Ownership

This right allows the shareholders to trade (buy and sell) their stock on an exchange without the permission of the company. This means a shareholder can sell his/her stake of shares into the share market whenever required. It makes the shares highly liquid. This key factor makes them different from an investment in real estate. For example, it can take a lot of time to convert a property into cash while in the case of shares it is very easy. This liquidity also allows the investors to move their money into other places instantaneously.

6. Entitlement to dividends

Shareholders have a right to claim to the company's profit that the company pays in the form of dividends along with the assets of the company. The company can either keep the profit in the form of retained earnings or can distribute it as a dividend. Whenever the dividends are distributed, the company can't eliminate any shareholder from receiving the dividend of his/her share. However, the shareholders have no right to interrupt the decision of the percentage in which the profit should be paid out (BoD is free to take this decision).

7. Right to Call for General Meeting

As per this right, the shareholders can call for a general meeting. They can pass orders to the director of the company to call for an extraordinary meeting. Other than this, the shareholders can also approach the Company Law Board for conduction of any such meeting if it is not done as per the statutory requirements.

8. Right to Inspect Registers and Books

Shareholders have the right to inspect the company's account books and registers whenever they want. Also, they can enquire about it if any fault or discrepancy is found.

9. Right to Ask for the Copies of Financial Statement

It is the right of the shareholders that they can ask for copies of the company's financial statements whenever they want. Also, it is the responsibility of the company to send a copy of the financial statements to the shareholders either quarterly or annually.

10. Winding up of the Company

If a company is going to wound up, then the shareholders have the right to get the prior information about it and also company can't exclude any shareholder from the distribution of assets (if remaining). But a point should be noted here that the assets are distributed as per the hierarchical structure in the case of winding up or bankruptcy of the company. As per this structure, the creditors are the first to have their outstanding debts paid, then the bondholders get their return which is followed by preference shareholders, and at last, the common shareholders get their share of assets.

Some Other Rights of a Shareholder

There are some additional rights of a shareholder which are as follows:

  • They have the right to approach the court if they found any insolvency in the company or its financial statements.
  • It is the right of a shareholder to get prior information whenever a company is going to convert into another company and this can only be done after the approval of the shareholders. The same approval is required at the time of acquisitions and mergers.
  • All the appointments including auditors and directors are done with the approval of the shareholders in the company's general meeting.

Corporate Governance

Other than the rights given above, it is also required for the shareholders to keep an eye on the companies' policies of the corporate governance in which they are investing. These policies determine the treatment of a company towards its shareholders and also the information that the company provides to its shareholders. Corporate governance policies may vary from company to company.

Shareholder Rights Plan

This plan describes the rights of the shareholders in a specific corporation. These plans help the BoD in protecting the interests of the shareholders in the event an outsider is attempting to acquire the company. The working of shareholder rights plan can be understood by an example. Suppose, A's Textile Company notices that its competitor, B's Textile Company has bought more than 25% of its shares. Then, the shareholder rights plans might stipulate that the existing shareholders can purchase shares at a discount.

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