VARIATION OF SHAREHOLDERS RIGHT

Rights that the Shareholders enjoy-

Dissenting shareholders are granted certain rights under Section 48(2) of the Companies Act, 2013. Section 48(2) states that in the event that the rights of any class of shares are modified, the holders of not less than 10% of the issued shares of that class, who are individuals who did not consent to the modification or vote in favour of the modification, may apply to the Tribunal to have the modification revoked. When such an application is presented to the Tribunal, the variation won’t take effect until the Tribunal has approved it.

The aforementioned application may be made on behalf of the shareholders eligible to do so by one or more of their number whom they may designate in writing for the purpose. It must be made within twenty-one days of the date on which the consent was given or the resolution was passed, as the case may be.

Changes to Shareholder Rights

The Companies Act, the company’s memorandum of formation, its articles of association, and the conditions of the share issue all govern a shareholder’s rights. “Clause rights” refer to the rights associated with a class of shares.

Shareholder rights include those regarding dividends, casting a vote at members’ meetings, and capital returns. Preference shareholders may have rights to a fixed amount or a fixed rate of dividend or to cumulative dividend. Where the ordinary shareholders are conferred the right to participate in the surplus assets on winding up of a company, it is not deemed to be a class right as it is implied even in the absence of any express provision in the articles.

According to Section 48(1) of the Companies Act of 2013, if a company’s share capital is divided into different classes of shares, the rights attached to each class’s shares may be changed with the written consent of holders of at least three-fourths of the issued shares of that class or with the approval of a special resolution adopted at a separate meeting of those holders. Furthermore, only the following actions can be taken to change a shareholder’s rights:

(1) if the company’s memorandum or articles of organisation contain a provision regarding such a modification; or

(2) if the terms of issue of the shares of that class do not prevent such a variation, and there is no such restriction in the company’s memorandum or articles of association.

The terms of this section must be followed, and the permission of three-fourths of the other class of shareholders must also be acquired if a variation by one class of shareholders affects the rights of any other class of shareholders. The Shareholders of a company are granted various rights and protections under the Companies Act, 2013.

Following are the rights which the Shareholders enjoy –

·      Changes to MOA (Memorandum of Association) or AOA (Articles of Association).

·      Any modifications to the MOA or AOA of the Company are subject to a general meeting. Shareholders may cast votes on amendments relating to any modifications to the Company’s MOA or AOA. Some amendments call for a special majority, which calls for a vote of at least 75% of shareholders.

Transferring of shares

The Board may refuse to record a transfer of shares if the shareholder transferring the Share is not approved by the Board, notwithstanding the fact that shareholders of the Company have the right to transfer shares to another shareholder in the Company. However, a Private Limited Company’s AOA restricts the transfer of shares (Articles of Association).

Receive dividends

The Company’s profits are used to pay the Dividends to the Shareholder. At the annual general meeting, shareholders must vote to approve the dividend declaration. Any unpaid dividends are transferred to the shareholder’s designated bank after 30 days from the date the Dividend was declared at the General Meeting.

Attend and vote at the general meeting

Every year, the firms convene an annual general meeting at which all of the company’s shareholders are entitled to receive notice of both the annual general meeting and special general meetings. The right to vote for or against each of the resolutions adopted at such meetings is also granted to the shareholders.

The share capital of a corporation is divided into a number of classes, and each class has a unique set of rights. According to Section 48 of the Companies Act, 2013 (the “Act”), the rights associated with one class of the company’s shares may differ from those associated with the other class of shares.

According to Section 48 of the Act, the firm may modify the rights associated with a class of shares with the written permission of the holders of more than three-fourths of the issued shares of that class. A special resolution adopted at a different meeting of the shareholders of the issued shares of that class may also change it. However, the holders of issued shares of a class may agree or adopt a special resolution to change the rights associated with that class of shares in the following circumstances:

  • The Memorandum of Association (MoA) or Articles of Association (AoA) of the corporation contain a clause addressing such a modification.
  • If the provision for variation is not provided in the MoA or AoA, such change is not barred by the issue terms of the shares of that class.

The permission of three-fourths of the other class of shareholders should also be acquired when changing the rights connected to one class of shareholders affects the rights of another class of shareholders.

Requirements for variation of shareholder’s rights

  • the agreement of at least three-fourths of the class’s issued shareholders.
  • if the change made by one class of shareholders affects the rights of the other classes of shareholders, the approval of three-fourths of the owners in those other classes.
  • Only by postal ballot could an unlisted public company with more than 200 members pass the special resolution.
  • Listed firms are required to inform the stock exchange where they are listed on the specifics of the proposed change in shareholders’ rights and pass the special resolution solely via postal ballot.

Process for variation of shareholder’s right

  • Check the MoA or AoA to see if there is a provision for changing the rights associated with a class of shares.
  • Make sure that the issue terms of the shares of that class do not forbid such a variation of rights if the MoA or AoA do not contain such a clause.
  • Change the MoA or AoA to provide variation of the rights linked to that class of shares when modification of the shareholders’ rights is not permitted under the MoA, AoA, or terms of issue.
  • Obtain the approval of more than three-fourths of the holders of the issued shares of that class, or adopt a special resolution at a separate meeting of those holders, for the modification of shareholders’ rights.
  • Hold a general meeting and vote to change the shareholders’ rights with a special resolution.
  • Within 30 days of the special resolution being passed at the general meeting, file MGT-14 of the resolution with the Registrar of Companies.

Cancellation of variation in shareholders’ right

The National Company Law Tribunal (NCLT) will consider requests to annul variations when shareholders holding at least 10% of the issued shares of a class do not support the special resolution or agree to the variation. When the shareholders apply to the NCLT to have the variation cancelled, the NCLT must first certify that the shareholders’ rights have indeed changed before the variation can take effect.

However, within 21 days of the approval being given or the passing of a special resolution for the variation, the shareholders must submit an application to the NCLT for cancellation of the variation of such rights. The shareholders must abide by the NCLT’s ruling. Within 30 days of the order date, the firm must submit the order copy of the NCLT to the Registrar of Companies.

Conclusion

There are many rights that shareholders have in a firm, but sometimes these rights change depending on the class of shares. The rights pertaining to one or more classes of Share must be changed. As a result, it must follow a certain method and be in conformity with the MOA or AOA of the Company or the requirements of the issuance of shares of that particular class.

Case law-

  • In the case of Rampuria Cotton Mills Ltd. vs Unknown AIR 1959 Cal 253, the Calcutta high court issued an application under Section 107 of the Indian Companies Act 1956 for an order that the variation of the rights of the holders of the ordinary shares in a company known as Rampuria Cotton Mills Ltd. in terms of a purported resolution dated 18-5-1957 be cancelled and the Company, its Directors, servants and agents be restrained by an injunction from giving effect to the said variation or to the said resolution dated 18-5-1957.

References-

  1. Rampuria Cotton Mills Ltd. vs Unknown AIR 1959 Cal 253
  2. https://cleartax.in/s/variation-of-shareholders-rights-section-48-companies-act-2013#:~:text=in%20Shareholders’%20Rights-,Variation%20of%20Shareholders’%20Rights%20of%20a%20Company,issued%20shares%20of%20that%20class.
  3. https://corpbiz.io/learning/variation-and-procedure-in-shareholders-rights/
  4. Companies act 2013
  5. Dr. Avtar Singh, “Company Law”, 7 th Edition (2016), Eastern Book Company Publications.
  6. N. D. Kapoor, “Elements of Company Law”, 30 th Edition (2016), Sultan Chand & Sons. Publications

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