Voting Rights of Shareholders

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Preference shares may be cumulative or non-cumulative.

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 shares),i.e.,  Voting Rights of Preference shareholders /Voting Rights of equity shareholders = Paid-up preference capital/Paid-up equity capital.  

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A provision in a company’s 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.

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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.

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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 company’s 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. 

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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. www.newbusinessregistration.in

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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. www.newbusinessregistration.in

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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 . www.newbusinessregistration.in

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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. www.newbusinessregistration.in

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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. www.newbusinessregistration.in

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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.

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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. www.newbusinessregistration.in