What are the Rights of Shareholders?

What are the Rights of Shareholders?

First let's understand the meaning of words, rights and shareholders.

1. Rights represent something that is due to an individual or any government body by nature, law, tradition, etc.
2. Shareholders are those people who invest funds in the share capital of a company.

In a company, the ownership is separated from the management. The shareholders are the owners of a company, and they collectively enjoy following important yet limited rights.

The principal rights of shareholders are depicted in the following image.

The four main rights of shareholders are as follows:

1. Shareholders have a right to receive income.
2. They also have a right to vote in the meetings of the company.
3. They enjoy a right to appoint a proxy (authorized representative) on their behalf.
4. They possess legal (statuary) rights to challenge the order of the company's management in the court of law, if such an order is not in favour of their interests.

Now let's discuss above rights of shareholders in brief.

1. Shareholders' rights to receive income

The shareholders invest funds (money) in the share capital of the company. As a result, they have an inherent right to get a share in the profits of the company. The profit shared is usually in the form of dividends.

The management of the company may distribute earnings either in the form of cash profit (i.e. dividends, interim dividends, etc.) or stock (i.e. bonus shares, rights issue, etc.).

1. Right to receive dividends once declared in the meetings ↓.

The shareholders must receive the dividends within a specific time period, once it is declared so in the meetings of the company. The management transfers the dividend in a separate bank account.

2. Right to receive issue of Rights shares and Bonus shares ↓.

The shareholders have a right to receive the bonus shares and right shares declared by the company. Usually, bonus shares and issue of rights shares are declared in the ratio of shares held by the shareholders.

2. Their rights to vote

The shareholders have a right to vote in the meetings conducted by the company at the regular intervals. Such meetings are either Annual General Meeting (AGM), Extra-ordinary General Meetings or General Meetings.

The shareholders also have a right to know about the voting procedures of the company. The standard voting procedure which is normally followed is “One Member One Vote.” However, in some companies, it depends on the share capital held by the members. There are also other procedures of voting like a postal ballot, etc.

1. Right to vote in meetings either personally or through proxies ↓.

Shareholders have a right to express their opinions by casting votes. They exercise this right to vote in the meetings either personally or through proxies as representatives acting on their behalf.

2. Right to demand a poll for voting on any resolution which shareholders feel are detrimental to their interest ↓.

The shareholders have a right to demand the poll, if they feel that the acts and affairs of the company are detrimental to their interest and are unfavorable towards the object clause and other clauses of the company.

3. Right of shareholders to appoint proxy

Sometimes shareholders may not be able to attend the meetings of the company. In such scenarios, shareholders are authorized to nominate their authorized representative to attend the company meetings on their behalf. These representatives of shareholders are known as Proxies.

However, before appointing any such proxies, the regulations contained in the Articles of Association of the Company needs to be referred and well-studied.

1. Right to appoint proxies as representatives of shareholders to attend the meetings of the company on their behalf ↓.

The shareholders have a right to appoint their representatives to attend the meetings of the company. However, the shareholders also have to inform the company about any such appointments within a prescribed time limit. In this matter, they are required to complete the necessary formalities of the appointments.

2. Right of the appointed proxies to cast vote on behalf of their principal shareholders ↓.

The proxies (appointed by shareholders), if required, can cast a vote on behalf of their principal shareholders. However, these proxies don't have a right to speak during the conduct of the meetings.

4. Legal rights of shareholders

The shareholders also possess legal (statutory) rights to challenge the order of the management of company in the court of law, if such orders are detrimental to their interests.

1. Right to receive reports and access to statutory books of the company ↓.

The shareholders have a right to receive various reports of the company within a prescribed time limit.

In this matter, shareholders have following rights:

1. Right to receive copies of the audited financial statements i.e. balance sheet, profit and loss statement, cash flow statement, etc.
2. Right to receive a copy of auditors' report, directors' report and other statutory reports within a prescribed time limit.
3. Right to inspect the minute books of the company meetings.

2. Right to apply for the investigation of affairs of the company ↓.

The shareholders also have a right to apply in the court of law to investigate the affairs of the company, if such affairs are detrimental to their interest.

In this matter, shareholders have following rights:

1. Right to file a civil or criminal case against the management of the company, if management's acts are illegal in nature.
2. Right to apply for the winding up of the company in the court of law, if the company is unable to pay its debts.
3. Right to apply to the company law board to investigate the affairs of the company, if shareholders have an evidence of the illegal trade practices carried on by the name of the company, etc.

Justification

The shareholders finance the treasury of the company and hence are collectively known as owners of the company.

Furthermore, shareholders are restricted to participate in the day-to-day affairs (i.e. management) of the company. It is so, since, in the company, ownership is separated from its management.

However, in case of any illegal acts or unfair trade practices followed by the management, the shareholders do have legally enforceable rights to initiate legal proceedings against the management.