Voting Rights of Shareholders

In the corporate framework, shareholder voting rights play a crucial role in decision-making and governance. Section 47 of the Companies Act, 2013, establishes the legal foundation for shareholders’ voting rights in India. This provision ensures equitable participation of shareholders in corporate affairs, outlining the specific rights of equity and preference shareholders.

Voting Rights of Equity Shareholders

Equity shareholders, as the primary owners of the company, have the fundamental right to vote on every resolution presented during company meetings. Their voting rights are directly linked to their shareholding and are vested in individuals whose names appear in the company’s register of members.

A person whose name is recorded in the share register as a holder of shares, without any qualification, is entitled to vote at company meetings. This means that the right to vote is an inherent aspect of share ownership and cannot be arbitrarily denied. However, there are certain exceptions where voting rights may be restricted.

For instance, directors and shareholders found guilty of breaching trust concerning the company’s property may be disqualified from voting. In Leavens & Canada National Fire Insurance Co. v. Gt. West Permanent Loan Co. (No. 2) (1927) 3 WWR 486 (Can), it was held that individuals involved in such misconduct could not vote on a resolution concerning whether the company should be removed as a party to an action initiated by a shareholder.

Additionally, a company’s manager does not have the right to attend general meetings or vote on shares forfeited and held in trust for the company.

The right to vote also includes the right to have one’s vote recorded. If a shareholder is denied the opportunity to vote, they may seek legal recourse. In Gobinda Prosad Das v. Akhoy Kumar Dey (1905-06) 10 CWN 906 (Cal—DB), shareholders who were barred from voting at a meeting successfully sued for a declaration of their right to vote. The court reaffirmed that there was no provision in the Companies Act that prevented the jurisdiction of civil courts in such matters.

Voting Rights of Preference Shareholders

While preference shareholders generally do not have voting rights on all matters, they do possess specific voting privileges under certain conditions. Their rights can be summarized as follows:

1. Types of Preference Shares: Preference shares may be cumulative or non-cumulative, affecting how dividends accumulate and are paid.
2. Voting on Specific Resolutions: Preference shareholders are entitled to vote on resolutions that:
   • Directly affect their rights as preference shareholders.
   • Involve the winding up of the company.
   • Relate to repayment or reduction of share capital, whether equity or preference.
3. Voting in Case of Dividend Arrears: If dividends on preference shares remain unpaid for two consecutive years or more, preference shareholders gain the right to vote on all company resolutions at general meetings. Notably, the Companies Act, 2013, does not differentiate between cumulative and non-cumulative preference shares in this regard, unlike the Companies Act, 1956.
4. Proportional Voting Rights: The voting power of preference shareholders relative to equity shareholders is determined by the proportion of paid-up preference share capital to paid-up equity share capital. Mathematically, this can be expressed as:

Voting rights of preference shareholders ÷ Voting rights of equity shareholders = Paid-up preference capital ÷ Paid-up equity capital.

Judicial Interpretations on Preference Shareholder Rights

A company’s articles of association may include provisions affecting voting rights. In Bradford Investments Ltd., Re (1991) BCLC 224 (Ch D), a provision stating that preference share dividends “shall be deemed to be payable” was interpreted to mean that dividends were payable irrespective of company profits. Consequently, when dividend payments were in arrears, preference shareholders were entitled to vote on all company matters.

However, an important omission in the 2013 Act is the absence of an explanation previously included in Section 87(2)(b) of the 1956 Act. Under the old provision, preference shareholders were deemed to have outstanding dividends for voting purposes, even if no formal dividend declaration had been made.

Voting Rights in Share Capital Alterations

Shareholder voting rights become particularly relevant in cases where companies propose alterations to share capital. For example, when directors propose increasing share capital by issuing additional equity shares funded through reserves, preference shareholders must approve the resolution if it affects their rights. The case Re John Smith’s Tadcaster Brewery Co. Ltd. (1952) 2 All ER 751; (1953) 1 All ER 518 underscored the broad interpretation of the word “affect,” emphasizing that any action influencing preference shareholders’ rights requires their consent.

Interrelation with Other Provisions of the Companies Act, 2013

Section 47 interacts with several other provisions of the Companies Act, reinforcing corporate governance and shareholder rights:

• Section 43: Defines different classes of shares, including equity shares with differential voting rights and preference shares. The classification of shares under this section directly determines the application of voting rights under Section 47.
• Section 50(2): Specifies that shareholders who have made advance payments on their shares do not acquire additional voting rights for such payments until officially called up by the company.
• Section 188(1): Relates to related party transactions, where shareholders’ voting rights become crucial in approving agreements involving directors, key management personnel, or related entities.

Corporate Governance and Shareholder Empowerment

The voting rights framework under Section 47 has significant implications for corporate governance:

The law empowers shareholders by granting them voting rights proportionate to their shareholding, ensuring they have a voice in critical company decisions such as mergers, acquisitions, and board elections. This framework enhances corporate democracy and aligns decision-making with shareholder interests.

Additionally, the conditional voting rights granted to preference shareholders serve as an essential safeguard, particularly when dividends remain unpaid for extended periods. This provision protects minority shareholders, ensuring their interests are not overlooked in corporate governance matters.

Furthermore, the principle of proportionality ensures equitable decision-making by aligning voting power with financial commitments. This fosters transparency and fairness in corporate affairs, creating a balanced environment where all shareholders have an appropriate level of influence.

Conclusion

Section 47 of the Companies Act, 2013, is a fundamental provision governing shareholder voting rights in India. It balances the interests of equity and preference shareholders, ensuring fair participation in corporate decision-making. By aligning voting power with financial stakes and providing conditional rights for preference shareholders, the provision fosters a transparent and democratic corporate environment. Understanding these rights is essential for investors, company directors, and legal practitioners to navigate corporate governance effectively.

Bibliography

• Ramaiya, Guide to the Companies Act (19th ed. 2020)
• T Ramappa, Commentary on the Companies Act, 2013 as Amended by the Companies (Amendment) Act, 2015
• Section 47, The Companies Act, 2013
• Bradford Investments Ltd., Re (1991) BCLC 224 (Ch D)
• Re John Smith’s Tadcaster Brewery Co. Ltd. (1952) 2 All ER 751
• Leavens & Canada National Fire Insurance Co. v. Gt. West Permanent Loan Co. (No. 2) (1927) 3 WWR 486 (Can)
• Gobinda Prosad Das v. Akhoy Kumar Dey (1905-06) 10 CWN 906 (Cal—DB)

This article is presented by CA B K Goyal & Co LLP Chartered Accountants, your trusted partner in audit and compliance solutions. For expert assistance, feel free to contact us.