Tuesday, September 1, 2020

The Rights, Duties and Liabilities of shareholders of a share company

Shareholders

Shareholders are one of the main organs of Share Company. Not all persons connected with the activities of a share company are shareholders. Rather, shareholders are usually members of a share company who have subscribed to the capital of the company either at time of its establishment or later and who have been issued shares of the company.

Since any person even outside the company, who has initiated plans or facilitated the formation of the company shall have the status of a founder as per Art.307(4) of the comm.code, it follows that not all founders are necessarily shareholders. But those founders who have subscribed the whole of the capital or brought in contributions in kind may be shareholders.

Regarding the role of the shareholders in the management of a share company, the ultimate power of the management affairs of the company rests on the general body of shareholders. The general body of shareholders has an immense power to pass any resolution in respect of the company or its business where it thinks appropriate. Although members of the company may not claim to manage the affairs of the company merely by virtue of being shareholders, there is a possibility for a shareholder to be a pointed as a member of board of directors or as a manager in the company.

In case of control mechanism of a share company, shareholders can exercise power of control over the other organs of the company and their activities in various situations. Thus, shareholders' power of control may be exercised, for instance, over the directors during their appointment and later at the time of their removal. The ultimate control and destiny of the company is in the hands of shareholders in that the latter exercise this power of control over the company through meetings. Through the meetings, the general body of shareholders may take any action it thinks fit to the extent of changing and modifying the nature and purpose of the company.

Meetings of a share company are broadly divided into general and special meetings as per Art.390 of the comm.code. The agenda of a general meeting which should be held at least once a year may be provided in the articles of association. General meetings may be divided into ordinary and extraordinary general meeting the latter being held to discuss extraordinary matters.

The special meeting on the other hand is a meeting in which only special class of shareholders discuss issues pertaining to that class alone.

Shareholders are entitled to various rights in the share company. Likewise, they have duties and liabilities towards the company and third parties as the case may be.

i) The Rights of shareholders

Generally, shareholders are entitled to several rights. These bundles of rights may include: voting rights, the right to a share certificate, pre-emptive rights and rights to share warrants, the right to obtain a dividend, inspect the corporate records and the right to transfer their shares. Furthermore, as per Art 345(1), they enjoy rights arising out of shares such as a right to participation in the annual net profits and to a share in the net proceeds on a winding-up. Besides every shareholder has a preferred right, in proportion to his holding, to allotment of cash shares issued on an increase of capital (Art. 345 (4)).

 

ii) The Duties of shareholders

As they enjoy several rights, the shareholders have certain corresponding duties. The primary duty of a shareholder is to pay up all the subscribed shares fully and to meet calls on shares to that effect. It has been stated under Art.338(1) of the Comm. Code that shares subscribed in cash shall be paid up on subscription as to one fourth of their par value or a greater amount if so provided in the memorandum of association and , where appropriate, as to the whole of the premium. They may only be registered shares devoid of rights until they are fully paid.

As per Art.342(4)& (7) of the comm.code, the company may fifteen days after the receipt by the shareholder of a registered letter demanding payment offer the unpaid shares for sale by auction. These shares shall be cancelled and new shares delivered to purchaser. A member who fails to make payments on shares when they become due shall lose his voting rights.

iii) The liabilities of shareholders

It is the advantage of a share and private limited company that the liabilities of a shareholder are limited to the extent of his initial investment in the company. The liabilities of a shareholder may be either towards the company or a third party or both. Hence, where a shareholder fails to pay the call at the due date, he shall be liable to pay interest at the legal rate where no rate has been provided in the articles of association (Art 342(3)). The shareholder is liable to the company for calls on shares which have been pledged in which the pledgee may sell out the shares if the calls are not met by the shareholders (Art. 329(3)).   In case shares are held jointly by several persons, the joint owners of the shares shall be jointly and severally liable as shareholder.

As regards the liability of a shareholder towards third party, the shareholder may be liable to a usufructuary for repayment up on the expiry of the usufruct of the share where the latter who is liable for the calls as per Art 329(4) has met the calls on shares.

Holders, previous assignees and subscribers shall be jointly and severally liable for calls on shares as per Art.342(1) of the comm. code. Any subscriber or shareholder who has assigned his share shall cease to be liable for calls only after two years from the date of the assignment (Art.342(2)).

 

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