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If you are interested in the investment and financial sector, then you must have heard the term 'shareholders'. Essentially shareholders are owners of a company who reap benefits when the business makes a profit. 

But, how are they decided? Do shareholders have any rights and duties? 

Let's dive deep into the different types of shareholders, their roles, rights, and importance in the business world. 

What Does the Term Shareholder Mean?

Shareholders or stockholders are legal entities that own at least one share of a business's stock. This ownership gives them the right to shareholder equity and the right to vote at meetings. Shareholders make a profit on the share when the stock price appreciates or due to cash dividends. But the benefits of being a shareholder varies on the amount of stock and the type of stock they own. 

As shareholders benefit from a company's success, they also need to share its failure. But in challenging times, these shareholders lose money when the stock value drops. There is also a possibility that shareholders may lose their entire investments if the company fails.

Are There Different Types of Shareholders?

The majority of businesses have two types of shareholders - equity and preferred. Depending on the type of stock a person owns, their type is decided. Each type has different rights, duties, and privileges. 

1. Equity Shareholders

As the name suggests, these are owners of a business's equity. These shareholders have voting rights over matters that concern the business. Also, they can exercise these rights, such as filing a class-action lawsuit against matters that can harm the business. 

Here are some general facts about equity shareholders: 

  • They are more prevalent because the equity stock is less expensive and has a larger supply 
  • Have voting rights, usually one vote per share, that gives them a voice to make certain decisions 
  • Equity shareholders only receive dividends when the Board of Directors votes to make payments to them. The board decides how much dividend is to be paid 
  • If the business goes bankrupt, then equity shareholders are the last people to receive any proceedings once the assets get sold and creditors are repaid. 

2. Preferred Shareholders

Preferred shareholders receive more priority than equity shareholders when a business's profit distribution comes into play. But, they do not have the right to vote on matters that affect a company's executive decisions. Also, preferred shareholders are entitled to receiving fixed dividend rates, even when the company's profitability is at stake. 

When a company started having positive performances, both equity and preferred shareholders see a rise in their value. But, the equity shareholders experience higher losses or gains. 

Why is it Important to Have Shareholders? 

Shareholders play an important role in a company's financing, operating, governing, and controlling, along with investing. Here's why shareholders are important: 

  • Operations: Shareholders directly influence company operations by the appointment of senior management professionals. For example, investors can choose which stocks to invest in that meet their expected earnings. This forces the company to meet its daily sales targets. 
  • Financing a Company: Companies are offered financial support in lieu of ownership rights. Start-ups and private companies raise funding by private placements or shares issued to select funding institutions. 
  • Governing: Board members in public companies must maintain transparency with their shareholders when it comes to business operations. Senior management must spend time and discuss matters about the company with shareholders. 
  • Company Control: Shareholders have the power to choose the people they want to run the company. They can effectively prevent takeover attempts when they do not agree upon specific conditions. 

So, with the control of majority operations in a company, shareholders play a significant role in the overall profits and performance.

What Rights do Shareholders Have? 

Shareholders have the following rights: 

1. Appointment of Directors

Shareholders play a direct role when it comes to the appointment of directors in a company. Other than this, they can also appoint: 

  • An additional director who holds office until the next general body meeting 
  • An alternate director who acts for three months 
  • Nominee director appointed in case of a vacancy.

Other than these, shareholders can also contest any resolution passed for the appointment of directors in the general body meeting. 

2. Legal Action 

Shareholders have the right to take legal action against directors as per the Companies Act 2013. These include: 

  • Acts have been done by the director that is prejudicial against the company 
  • Acts have done beyond the constitution or law 
  • Any fraud 
  • If assets are transferred or sold at an undervalued rate 
  • When there is a division of funds in the company 
  • Any mala fide acts 
  • Appointment of auditors without the shareholders' consent.

3. Appointing Company Auditors

Under the Companies Act 2013, the auditor of the company is to be appointed by the board of directors. Also, the shareholders at the annual general body meet the recommendation of directors and the audit committee. The appointment is usually done within 5 years and can be further approved by passing resolutions in the annual general body meeting. 

4. Voting Rights

Shareholders have the right to attend and vote at the annual general body meetings. Every company that is registered in India requires compliance with the provisions of the Companies Act 2013. All companies must hold at least 1 annual general meeting. At the meeting, various mandatory agendas can be discussed, such as the adoption of financial statements and the appointment or ratification of directors or auditors. 

When resolutions are brought by members of companies, then according to the Companies Act 2013, it is passed only by means of voting by shareholders. The Companies Act 2013 recognizes the following types of voting: 

  • Voting by a showing of hands 
  • Voting is done by polling 
  • Voting done via electronic means 
  • Voting is done via postal ballot.

A shareholder also has the right to appoint a proxy on his behalf when he is unable to attend the meeting. However, the proxy should not be allowed to be included in the quorum of the meeting and is allowed by following a procedure mentioned in the Companies Act 2013. 

5. Rights to Call for the General Meeting

Shareholders have the right to call for general meetings and can approach the Company Law Board for the conduction of general body meetings if it is not done according to the statutory requirements. 

6. Right to Inspecting Registers and Books 

Shareholders are the main stakeholders in a business, as they have the right to inspect the registers and the books of the firm. They ask questions about the same when they feel so. 

7. Right to Getting Copies of Financial Statements 

Shareholders have the right to get financial statement copies. The business must send the financial statements to the company as annual or quarterly statements. 

8. Winding Down the Company

Before a company is wound up, all shareholders need to be informed. Also, all the credit has to be given to all shareholders.

Duties of Shareholders

The main duty of shareholders is to pass resolutions at general meetings by voters in a shareholder capacity. The duty is particularly important as it allows shareholders to exercise ultimate control over the company and how it should be managed. Shareholders can vote in two options - on a show of hands or through a poll vote where each vote will be proportionate to the number of shares held by shareholders. A show of hands is usually the preferred option of voting that takes place in general meetings.

1. Ordinary Resolutions

An ordinary resolution is passed by shareholders when a simple majority of shareholders present at the meeting vote in favor of proposals. Thus, more than 50% of votes must be cast in favor with a show of hands. 

2. Special Resolutions

Special resolutions sometimes require the Companies Act 2013 in certain cases. These include changing the Articles of Association or other important or sensitive issues. The Articles also require a special resolution. For special resolutions to be passed, a 75% majority needs to be in favor. When there is no specific mention of what type of resolutions are required, these presumptions are that there will be a vote on ordinary resolutions. 

Wrapping Up

Now that you know what are the Rights & Duties of a shareholder concerning your company. By exercising your rights as shareholders, you can now impact your business. While knowing your duties will keep you out of trouble and make sure that you do a good job. 

If you need further guidance on what your rights and duties are as a shareholder, then hire a lawyer or contact a financial advisor for legal advice.   

About Author

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Founder & Managing Director of Investor Diary

I, Vishnu Deekonda, am dedicated to providing the proper financial education to every individual interested in becoming financially independent through intelligent investments.

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