Sanjivani College of Engineering, Kopargaon

Department of MBA

304-Corporate Governance
Unit No.2. Models and Mechanisms,
Shareholder, Stakeholder
2.2 Shareholder Rights,
Responsibilities
Presented By:
Prof. Y. L. Aher

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 Common Shareholders' Six Main Rights
• 1. Voting Power on Major Issues:
• This includes electing directors and proposals for fundamental
changes affecting the company such as mergers or liquidation. Voting
takes placeat the company's annual meeting. If you can't attend, you
can do so by proxy and mail in your vote.

• 2. Ownership in a Portion of the Company:

• When business thrives, common shareholders own a piece
of something that has value ie., they have a claim on a portion of the
assets owned by the company. As these assets generate profits, and
as the profits are reinvested in additional assets, shareholders see a
return in the form of increased share value as stock prices rise

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 Common Shareholders' Six Main Rights
3. The Right to Transfer Ownership:
Right to transfer ownership means shareholders are allowed
to trade their stock on an exchange.. Liquidity is one of the
key factors that differentiates stocks from an investment like
real estate. If you own property, it can take months to convert
your investment into cash. Because stocks are so liquid, you
can move your money into other places almost instantly.

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 Common Shareholders' Six Main Rights
• 4. An Entitlement to Dividends:
• Along with a claim on assets, you also receive a claim on
any profits a company pays out in the form of a dividend.
Management of a company essentially has two options with
profits:
• they can be reinvested back into the firm (hopefully
increasing the company's overall value) or
• paid out in the form of a dividend. Whenever dividends are
declared, common shareholders are entitled to receive their
share.

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 Common Shareholders' Six Main Rights
• 5. Opportunity to Inspect Corporate Books and
Records:
• This opportunity is provided through a company's public
filings, including its annual report. Now a days, this isn't
such a big deal as public companies are required to make
their financials public. It can be more important for private
companies.

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 Common Shareholders' Six Main Rights
• 6.The Right to Sue for Wrongful Acts:
• Suing a company usually takes the form of a shareholder
class-action lawsuit. A good example of this type of suit
occurred in the wake of the accounting scandal that rocked
WorldCom in 2002, after it was discovered that the
company had grossly overstated earnings, giving
shareholders and investors an erroneous view of its
financial health. The telecom giant faced a firestorm of
shareholder class-action suits as a result.

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 Responsibilities of Share Holders
• 1. Changes to the constitution of the company
• 2. Declaring a dividend
• 3. Approving the financial statements of the company
• 4. Winding up of the company by way of voluntary
liquidation
• 5. The shareholders of any company have a responsibility to
ensure that the company is well run and well managed.
They do this by monitoring the performance of the company
and raising their objections or giving their approval to the
actions of the management of the company

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 Minority Shareholders‟ Protection
• General protection - Against unfair prejudice:
• A shareholder may apply to the court by petition on the
ground that the company's affairs are being or have been
conducted in a manner which is unfairly prejudicial to the
interests of its shareholders generally or some of them
(including at least the applicant), or that any proposed act
or omission of the company would be so prejudicial (CA 06
s.994).
• If the petition is successful the court has wide powers to
order redress for a minority shareholder who has suffered
unfair prejudice (CA 06 s.996). Among other things the
court may make an order:
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 Minority Shareholders Protection
• Regulating the conduct of the company's affairs in the
future,
• Requiring the company to refrain from doing or
continuing an act complained of, or to do an act it has
omitted to do,
• Authorizing civil proceedings on behalf of the company,
as appropriate,
• Providing for the purchase of the shares of any
shareholder by other shareholders or by the company
itself.

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 Specific protection
• There are numerous provisions allowing minority shareholders to
apply to the court on particular issues, which the court will then
decide whether to approve or disallow. In most cases there is a fairly
short time limit for making the application.
• 1. Alteration of the Articles of Association
• Any shareholder can apply to the court for a special resolution to alter
the Articles of Association to be set aside if it is not bona fide for the
benefit of the company as a whole. (This is a common law right, not
under the Companies Acts.)

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 Specific protection
• 2. Variation of class rights:
• Where shares in a company are divided into separate classes (e.g.
ordinary shares and preference shares), CA 06 s.630 makes provision
for varying the rights of a class. The holders of at least 15% of the
issued shares of the class so varied may apply to the court to have the
variation cancelled. The applicants must not have consented to or
voted in favor of the variation. (CA 06 s.633)
• 3. Re - registration as a private company:
• A public company may by special resolution be re-registered as a
private company (CA 06 s.97). Holders of not less than 5% of the
shares, or of any class of shares, or not less than 50 of the company’s
shareholders, may apply to the court to have the resolution cancelled
(CA 06 s.98).
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 Specific protection
• 4. Striking off the register:
• The directors of a private company which has ceased to trade may
apply for the company to be struck off the register (CA 06 s.1003).
Shareholders must be notified of the application and any
shareholder or other interested party can object on various grounds.
Subsequently any shareholder (or creditor, or the company itself),
may apply to the court for the company to be restored to the register
(CA 06 s.1030) although this must generally be done within 6
years.

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 Specific protection
• 5. Company voluntary arrangement (CVA):
• Part 1 of the Insolvency Act 1986 (IA 86) makes
provision for company voluntary arrangements, in the
form of a composition with a company’s creditors or a
scheme of arrangement of its affairs. Any shareholder
may apply to the court if unfairly prejudiced by the CVA
or if there has been a procedural irregularity. (IA 86 s.6).

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 Specific protection
• 6. Other insolvency procedures:
• Where a company is involved in insolvency procedures IA 86 makes
provision for various issues on which any shareholder may (in
appropriate circumstances) apply to the court or take certain
procedural steps. In practice these are rarely invoked.
• 7. Accounts:
• Shareholder has a right to demand a copy of the company's last
annual accounts and directors' report and a copy of the audit report,
without charge.

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 Shareholder Protection
• Shareholders' protection is a contingency process detailing what will
happen to a shareholder's shares if the shareholder dies or becomes
seriously ill.
• In the interests of financial security, business stability, and
continuity – particularly for private limited companies where there
may only be a small number of principal shareholders – it is
essential to provide a safety net following the loss of a shareholder.
• Shares may go to the deceased’s family, which has no interest in the
business and would prefer a cash sum
• The company or other shareholders will want to retain control by
buying lost shares – but may not have the resources to do so
• The shares may be taken over by someone who does not share the
company’s objectives – and may even be a competitor

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 Shareholder Protection
• Shareholder protection establishes a contractual
framework to support business continuity and succession
planning if a shareholder suddenly dies or becomes
seriously incapacitated.
• Without formal arrangements in place to manage business
succession and provide financial support for dependents
of a sick or deceased shareholder, the worst case scenario
can arise. Putting in place appropriate shareholder
protection should ensure that…..

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 Shareholder Protection
• 1. The shareholder’s interest doesn’t pass to an heir who
may not have the necessary skills, experience or interest
to continue the business.
• 2. Time is not lost looking for a replacement shareholder
from outside the business.
• 3. Other shareholders who will not inherit a co-owner’s
shares will have the financial resources and authority to
acquire them.
• 4. The shareholder’s dependents have a mechanism to
turn inherited shares into cash should they wish to exit the
business or need the funds to settle an outstanding debt
such as Inheritance Tax.
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Thank You
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