What are the rights of a shareholder in a company?

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What are the rights of a shareholder in a company?

A shareholder plays an essential role in a company. Their rights and duties are linked to the class of their shares, the constitution of their company, and whether they are a public or proprietary company shareholder. 

If you are a shareholder, you must know all the rights you have since they allow you to have an impact on your company and enable you to enjoy the full benefits of being a shareholder. It is essential to know your duties as well, since they ensure that you perform your role in a proper and ethical manner which helps you stay out of trouble.

In this article, we will discuss both the rights and duties which you have as a shareholder of a company. Let’s begin with the basics first.

What is a shareholder?

A shareholder is an individual, company or entity which owns at least one share of a company’s stock. Since shareholders are the owners of a company, they benefit from the success of the company in the form of increased stock valuation. The role of shareholders in the framing and the profits of the company is crucial. They are also commonly referred to as stockholders (not to be confused with stakeholders).

The shareholders have been categorized into two different types:

• Equity Shareholders: Equity shareholders are the main stakeholders in a company and generally have the voting rights in decisions of the company. Their dividend payments are not certain and are dependent on the company’s profitability.
• Preference shareholders: Preference shareholders have fixed dividend payments which are usually larger than those paid to the equity shareholders and their dividends are also paid before common shareholders. They do not have voting rights due to their preferred status.

The number of shareholders in a company depends on the type of the company:

• For a One Person Company (OPC), one shareholder is required.
  
• For Private Limited Company (Pvt Ltd.), two shareholders are needed.
  
• In case of a Public Limited Company (PLC), a minimum of seven shareholders are needed.

What is a Shareholder’s Agreement?

There are some general rights and duties which a shareholder has but they may vary according to the shareholders agreement. A shareholders agreement is basically a legal contract between the shareholders of a company. This legal contract outlines the intentions of the shareholders and helps to regulate their rights, duties and liabilities. This agreement must be drafted carefully without any errors in order to be enforceable. This agreement also protects the minority shareholders and mentions those who will get offered the new shares of the company.

Rights of the Shareholders

A shareholder has various rights which they should be aware of. These rights are mentioned below in detail:

Appointment of Directors

When it comes to the appointment of the directors, shareholders play an essential role. For the appointment, an ordinary resolution must be passed by the shareholders. In addition to this, shareholders have the right to appoint the various types of directors namely:

• A nominee director;
• An additional director for the purpose for holding the office until the next general body meeting takes place;
• An alternate director who can maintain his role for a period for 3 months;
• Director appointed to fill a casual vacancy in the office.

Not only do the shareholders have the right to choose the directors but they can also challenge the resolution passed for the director’s appointment in the general body meeting. 

Legal action against the Directors

A shareholder has the right to take legal action against the director according to the Companies Act 2013. According to the act, the legal action can be taken for the following reasons:

• Any act done by the director in a manner that is prejudicial to the company’s affairs
• Any act which is against the constitution or beyond the law.
• Fraud
• When the company’s assets are getting transferred at an undervalued rate
• When there is a diversion of the company’s funds 
• Any act carried out in a mala fide manner

Appointment of company auditors

The shareholders are given the right to appoint the auditors for the company. According to the Companies 2013, the first auditor of the company must be appointed by the board of directors. Furthermore, the shareholders attend the annual general meeting for the recommendation of directors and the auditing committee. The appointment is generally done for a period of 5 years and can be approved only by passing a resolution in the annual general body meeting.

Voting rights

Shareholders have also been granted the right to attend and give their votes at the annual general body meeting. All the companies in India must comply with the provisions of the Companies Act 2013. Holding an annual general meeting once every year is mandatory for all the companies in India. The meeting can take place anywhere at the company’s head office or some other place mentioned by the company. During the meeting, various matters and agendas are discussed such as the appointment of directors/auditors, adoption of financial statements, etc. As per the Companies Act 2013, when the members of a company bring a resolution, it can only be approved by means of voting done by the shareholders.

Under this act, following types of voting are recognized:

• Voting by showing hands 
• Voting through electronic means
• Voting through postal ballot
• Voting through polling 

Right to call for general meetings

Shareholders have the right to announce a general meeting for discussing the matters of the company. They can direct the director of the company to call an extraordinary general meeting. If the general body meeting is not done as per the statutory requirements, the shareholders can approach the Company Law Board.

Right to inspect registers and books

Shareholders, being the main stakeholders in a company, have the right to inspect the accounts registers and books, and may question the management, director, etc. if they feel the need to.

Right to get copies of financial statements

Shareholders are granted the right to get copies of the financial statements of their company. It is the responsibility of the company to provide the financial statements in a timely manner to all the shareholders either in a quarterly or annual statement.

Winding up of the company

Before the company is wound up, all the shareholders have the right to be informed about the same and all the shareholders must get a say in this.

Other Rights of the Shareholders

• The shareholders are entitled to receive an amount when the sale of any material of a company is done.
• For converting a company into another one, a prior approval must be taken from the shareholder.
• The individual votes and wishes of shareholders are taken into account while appointing directors, auditors, etc. 
• In case of any wrongful acts, the shareholders have the right to approach the court.

Duties of the Shareholders

Being a shareholder comes with some duties which need to be performed. These are some of the duties of a shareholder which must be fulfilled

• To partake in the general body meetings in order to oversee and advise on matters which need their interference.
• To consult on matters of finance and other crucial topics relevant to the company.
• To stay in touch with other members of the company to learn about the company’s work progress.

Conclusion

The role of shareholders is an important one when it comes to the functioning of a company. Shareholders have several rights such as the right to appoint the company’s director, auditor and voting rights. Along with these crucial rights, shareholders also have responsibilities which they must fulfill diligently. 

We hope the article was helpful in understanding the rights of a shareholder in a company. In case of any doubts or queries, feel free to connect with Registrationwala! Our team experts are always looking forward to helping you!

Frequently Asked Questions (FAQs)

Q1. Are shareholders the owners of a company?

A. Yes, shareholders are the owners of a company. If the company has more than one shareholder, then the shareholders are technically part-owners. They are not always involved in daily affairs of the company’s business as the same is the duty of the directors and the management of the company. Nevertheless, the company directors can also be shareholders of the company.

Q2. Can a shareholder serve on a company's board of directors?

A. The answer is yes. The shareholders can be members of the board as well. These two roles are different and it is the responsibility of the shareholders to be aware in which capacity they are serving at all times. There is a potential for conflicts of interests when parties serve more than a single role.

Q3. What are the differences between shareholders and stakeholders?

A. People often use these words interchangeably even though they carry different meanings in the business world. Shareholders are owners of a company, but the stakeholders are not. Stakeholders are those individuals, communities or organizations which are interested in the activities and performance of a company. We can say that the employees of a company are also the stakeholders of a company since their livelihoods depend on the survival of the company.

Q4. Can the director of a company also be its shareholder?

A. Yes, it is normal for companies to have one person who is a shareholder and director at the same time, but both these roles have different responsibilities and requirements and must be balanced smoothly. That said, a director does not need to be a shareholder and a shareholder does not need to be a director.  

Q5. How do the shareholders earn money?

A. Shareholders get a dividend on each and every share owned by them, and this dividend is generally paid once or twice a year. This money comes from the profits which are made by their company.

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