Voting Rights of Shareholders

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Voting Rights of Shareholders 
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Business Registration
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Voting Rights of Preference Shareholders

• 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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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.

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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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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.

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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.

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Business Registration
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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.

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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 .

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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.

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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.

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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.

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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.