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Voting Rights of Shareholders


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Title: Voting Rights of Shareholders

Voting Rights of Shareholders 
Business Registration
Voting Rights of Preference Shareholders
  • Preference shares may be cumulative or
  • The holders of preference shares have voting
    right on any resolution of the Company which is
    directly affecting their rights, for winding up
    of the company, for payment or reduction of share
    capital(whether equity or preference)
  • Preference shareholders have a voting right on
    all resolutions of the company at any meeting if
    their dividends are in arrears for an aggregate
    period of not less than two years. Here, the 2013
    Act does not make a distinction between
    cumulative and non-cumulative preference shares,
    unlike 1956 Act.
  • Voting rights of one preference shareholder in
    relation to voting rights of one equity
    shareholder shall be directly proportional to the
    proportion between paid-up equity shares (per
  • Voting Rights of Preference shareholders
    /Voting Rights of equity shareholders Paid-up
    preference capital/Paid-up equity capital.

Arrears in dividend and Voting Rights
  • A provision in a companys articles that the
    preference share dividend shall be deemed to be
    payable was taken to mean that the dividend was
    deemed payable whether or not there were profits
    out of which it could be paid. Consequently, as
    the dividend on the preference shares was in
    arrears the preference shareholders were held to
    be entitled to vote on all matters affecting
    the company. However, one significant omission
    under the 2013 Act is the explanation to
    Sub-section (2)(b) of section 87 of the 1956 Act
    which provided that dividend should be deemed to
    be due on preference shares in respect of any
    period, where a dividend had been declared on
    such shares or not. As such, irrespective of
    whether the dividend was declared, if the
    preference shareholders had not received dividend
    for the stipulated time, then they would be
    entitled to vote on all resolutions placed before
    the business registration.

Business Registration
The issue as to whether a preference shareholder
of a company which had incurred losses due to
which it could not declare dividend, was entitled
to voting rights was examined by the Supreme
Court. Relying on the Explanation to sub-section
(2)(b) of section 87 of the 1956 Act, the Supreme
Court held that notwithstanding the provision of
section 205 of the 1956 Act, which prohibited
declaration of dividend except out of profit, in
view of the Explanation in Section 87, the said
preference shareholder was entitled to voting on
all resolutions of the company. Now, with the
omission of this Explanation in the 2013 Act, and
Section 123 therein providing that no dividend
shall be declared or paid by a company except out
of profit, the issue as to whether a preference
shareholder of a company which has no profits can
exercise voting rights on the preference shares
has been kept open. The preference shareholders
are not even allowed to have a say in management
of the preference shareholders are not even
allowed to say in a management of the company
such a situation may work against the interest of
preference shareholders. In essence, what the
author views is that the position remains the
same notwithstanding the omission of the
explanation. Therefore, it should not make any
difference whether the dividend is declared or
not a mere fact that preference shareholders
have not been dividend will vest them with the
power to voting on all resolutions.
Resolutions affecting the voting rights attached
to preference shares
  • Where a private company allotted shares to more
    than fifty persons and for the reason became a
    public company by operation of law, it was held
    that its preference shareholder became entitled
    to voting because their dividend was in default
    for the requisite period. It was immaterial that
    the formalities for compliance with the
    requirements consequent upon conversion were
    still to be complied with.
  • Where the directors proposed to increase the
    share capital of the company by the issue of
    further equity shares, by capitalizing an amount
    standing to the credit of the companys reserve
    account, and applying the same in paying up the
    new equity shares, and distributing the same as
    fully paid among the equity shareholders and
    could, therefore, be only carried out with their
    sanction. Rights of preference shareholders are
    held not affected by the issue of additional
    ordinary shares, through their voting rights are
    thereby weekend.

Manner of exercising voting rights
  • The 1956 Act provided for three modes of voting
    show of hands (section 177 of the 1956 Act) and
    by poll (Section 179 of the 1956 Act) and by
    postal ballots (Section 192 A of the 1956 Act).In
    the 2013 Act an additional mode has been added
    i.e., voting through electronic means. Thus we
    have four modes of exercising voting rights under
    the 2013 Act.
  • By show of hands
  • by electronic means
  • by poll
  • by postal ballots
  • To elaborate, postal ballot under Section 110 of
    the 2013 Act is an alternative to a meeting. In a
    postal ballot as well, certain companies will be
    required to offer the facility of electronic
    voting. Postal ballot is permissible for every
    matter other than the ordinary business of the
    AGM and matters that involve a right of
    representation. Postal ballot is mandatory for
    several items of business. If the company opts
    for the meeting .Voting at the meeting may
    happen, in the first instance, by show of hands.

Business Registration
Voting rights in case of banking Companies
  • Section 12 of banking regulation Act, 1949 as
    amended by the banking Regulation (Amendment)
    Act, 1994, provides and the section 2 of that Act
    says that the provisions of that Act shall be in
    addition to and not, save as otherwise expressly
    provided in that Act, in derogation  of the
    Indian Companies Act. A regulation adopted under
    State Bank of India Act providing that a member
    of the bank shall have only one voting in respect
    of each block of 50 shares during 3 months prior
    to the date of the meeting was held to be not
    valid. Any such restriction could have been
    envisaged under the provisions of the Act only,
    and not under regulations.

Pledge or attachments of shares , effect upon
voting rights
  • Voting rights of a member are not affected by
    that fact that his shares have been attached or
    pledged  or a receiver has been appointed. This
    is even if the member is a company whose
    management is taken over by the Central
    Government under the Industries (Development
    Regulations) Act, 1951. Nor the member be
    prevented from issuing the notice requisitioning
    a meeting under section 169 or from exercising
    voting rights at the requisitioning meeting
    merely because a receiver has been appointed of
    those shares. However the pledges to exercise
    voting rights, the voting rights vest with the
    pledge. Unless there is some provisions in the
    articles which empowers to say that the bankrupt
    is no longer a member and is therefore unable to
    vote, the bankrupt still remains a member as long
    as he is on the register , notwithstanding that
    by taking appropriate steps under the appropriate
    provisions the trustee in bankruptcy may be able
    to secure business registration as to proprietor
    of the shares .

Voting Rights of pledge 
  • The shareholder pledged his shares to a bank. He
    executed an agreement in favour of the pledge
    bank authorizing it to exercise voting rights.
    The company was also a party to the agreement. It
    was held that the pledge bank was entitled to
    exercise voting rights at a meeting of
    the company on filing with the company the
    transfer documents. The entry in the register of
    members of the name of the pledge bank is a mere
    formality in such cases. The question of validity
    of the pledge agreement and associated documents
    could not be decided by the chairman of
    the company under the in-house procedure.

Mortgage of shares and voting rights
  • While a pledge is a mere transfer of possession
    of shares coupled with a right to sell in the
    event of default, a mortgage is transfer of
    property, with the understanding that the
    mortgagor may clear the debt and redeem the
    property. Hence, in a mortgage will enjoy the
    voting rights also, unless a different intent
    transpires from the mortgage document.

Share transfer under defective procedure and
voting rights
  • Where shares in a private company had been
    transferred without the correct procedures as
    laid down in the articles of association having
    been complied with, the transfers were still
    effective to pass beneficial ownership in the
    shares.  Accordingly the transferees were
    entitled to exercise the votes attached to the
    shares in question. The error had been one of
    from rather than of substance. An interim
    interdict to stop the exercise of the votes was
    therefore refused. Transfers of shares were
    effected in favour of a group of foreign
    investors without obtaining prior acknowledgement
    of the Reserve Bank. The Companies Act recognizes
    property rights in shares and also confers voting
    rights as a statutory right irrespective of any
    restrictions in the contract or the articles or
    Banking Resolution Act. But under Section 12(2)
    of the banking resolution Act, Voting rights can
    be restricted to 10 but could not be washed out.

Injunction against the use of voting rights
  • In a novel case Vinelott J held that the court
    has inherent jurisdiction, similar to that
    exemplified by the Mareva injunction remedy, to
    restrain a shareholder from doing something to
    the asserts of the company so as to constitute a
    detriment to the interests of the creditors. Such
    jurisdiction was, however, only to be exercised
    in the extreme cases. In this particular case
    leading shareholders in a company that was in a
    financial difficulties were ordered not to oppose
    a scheme of reconstruction which had as a key
    element their removal as Directors, because, if
    the rescue of the company failed, their shares
    would become worthless and damage would be done
    to creditors. Majority shareholders were
    restrained in an Australian case from exercising
    their voting power for removing existing
    management and to replace it with a set of
    directors who to all intent and purpose wanted to
    use asserts of the company for the benefit of the
    majority shareholders only.