A company acts via two bodies of people, namely, its shareholders and its board of directors.
A shareholder, also known as a member of the company, can be an individual, company, or institution that owns at least a single share of the company’s stock. The term shareholder is not defined in the Companies Act per se, but the shareholders are regarded as the actual owners of the company. The ultimate authority apropos the appointment and removal of the directors, auditors, and other managerial personnel rests with shareholders. The powers of the Board are also subject to the control and supervision of the shareholders. The company law does not lay down any disqualification, which would render a person unqualified for becoming a shareholder of a company. Hence, any person who is competent to enter into a valid contract is eligible to become a member of a company. They are entitled to share in the profits of the company at the ratio of their shareholding, in contrast to the directors who are responsible for the daily management of the company and its compliance.
The shareholders are the most powerful body in the company and control the composition of the Board of Directors of the company. The decisions by the shareholders are taken by passing resolutions in the meeting convened by the shareholders. Though most of the company decisions can be taken in the shareholders meeting by majority vote, (ordinary resolution). However, there are critical decisions that can be made by the approval of the 3/4th majority of the shareholder (special resolution).
A company is under a legal obligation to call and hold an annual general meeting (hereafter mentioned as AGM) every year. This is a statutory meeting of the shareholders which is obligatory under law. The following decisions can only be taken in an AGM:
• Approval of the audited books of account of the company
• Declaration the amount of dividend to be paid to the shareholder
• Appointment of auditors of the company
• Consideration and approval (including their disapproval) of the election of directors on rotation.
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Powers And Privileges Of Shareholders
Appointing The Officers: It is the responsibility of the shareholders to appoint corporation officers in order to help in the running of the business. Shareholders elect directors during annual general meetings. The directors constitute a board that is charged with the responsibility for the complete administration of the company. The shareholders are further required to appoint external auditors who examine the company’s books of accounts and furnish the audited statements at the end of every financial year.
Removal Of A Director: Usually, a shareholders’ ordinary resolution is required for the appointment and removal of directors under the Companies Act 2013. Further, the shareholders also can even bring legal action against the director in accordance with the rules laid down in the Companies Act 2013.
Right to Vote: Shareholders additionally have the right to attend and vote at the annual general meeting.
Right to call for general meetings: Shareholders are entitled to call a general meeting along with a right to direct the director of a company to call an extraordinary general meeting.
Right to appoint a proxy for their representation: A shareholder also has a right to appoint a proxy on his behalf in case they are unable to attend the meeting.
Right to challenge the resolutions: A single shareholder holding at least 10% of the company’s paid-up share capital is allowed to challenge a resolution adopted by a general meeting on the grounds of oppression or mismanagement. A single shareholder, irrespective of his shareholding, is eligible to bring a derivative suit, on behalf of the company, challenging a resolution adopted by a general meeting, if the resolution is perceived as detrimental to the company’s interest.
Right to Information: The management of a company ensures that proper books of accounts and records are maintained so that shareholders can inspect them to get an exact photo of the situation of the business.
Oversight: Shareholders have a responsibility to superintend the effective management of the company. They have a responsibility to call the board of directors to account for the performance of the company.
Amendment of Articles of Association(AOA) OR Memorandum of Association (MOA): Amendment to the article of association /memorandum of association can be done by means of convening a general meeting of the company.
Transfer of Shares: Shareholders have a right to transfer their shares, in accordance with provisions, along with the right to know the methods for stock registration and the identity of the Company’s main shareholders.
Winding up of the Company: Before the company is wound up the company is obligated to inform all the shareholders regarding the same and also all the surplus has to be distributed among all the shareholders.
Duties of the Shareholder
Shareholders are expected to act with loyalty towards the Company, and abstain from divulging in actions or behaving in a manner that would put the Company’s interests at risk, or which represent a disclosure of privileged information of the Company. As compared to the directors, the shareholders do not manage the daily business of the company. However, decisions in reference to the company’s ambition and overall performance ordinarily require shareholder approval, which includes (but are not limited to), the following:
• Changes relating to the constitution of the company;
• Declaring of dividend;
• Approval of the financial statements of the company;
• Winding up of the company by virtue of voluntary liquidation.
Though it is impracticable for shareholders to amend decisions made by directors or interfere with the management of the company, they can convene a general meeting and raise a motion to remove a director or the full board, or they can amend the articles and restrict the powers of the director.
Meaning of Director of Company
The term ‘Director’ has been defined in Section 2(34) of the Companies Act as follows:
“Director means a director appointed to the Board of a Company.”
The term ‘Board’ has been defined in Section 2(10) of the Companies Act as herein mentioned:
“Board of Directors or Board, in relation to a Company, means the collective body of the directors of the Company.”
It is necessary for every company to have a Board of directors consisting of individuals as directors and Section 149 of the Companies Act lays down the requirement for minimum number of directors in a company as follows:
1.Public Company– The minimum number of directors required in a Public Company is at least 3 directors.
2.Private company- The minimum number of directors required in a Public Company 2 directors.
3.One person company– The minimum number of directors required in a Public Company is 1 director.
The upper limit for all the companies is set to 15 directors, although a company is allowed to appoint more than 15 directors after passing a special resolution in this behalf.
There exists a clear-cut demarcation between the roles and responsibilities of various stakeholders, while the shareholders predominantly work towards the arrangement of the capital of the company and provide a direction for the company including making major policy decisions, the directors, on the contrary, are responsible for implementing the policies of the company and maximize the wealth of the shareholders or investors. Apart from that, the directors are further responsible for compliance with all the laws as applicable to the company.
It is the shareholders who appoint the first directors of the company by naming them so in the Articles of Association of the Company. The directors hold office until the satisfaction of the shareholders and can be removed by merely passing an ordinary resolution in the shareholder’s meeting. For the smooth functioning of the company, the directors take the day to day decisions in a directors meeting, also known as the Board of Directors of a Company. The decisions of the board of directors are taken on a simple majority, and every person holds a vote. The Board of Directors of a company is core to its decision making and governance process. Their accountability to make certain the company’s compliance with the law buttresses the corporate governance structure in a company, the ambitions of the promoters and the rights of stakeholders, all of which get enunciated through the actions of the Board.
Duties of a Director
Section 166 of the Act lays down the duties of the directors. In addition to the fiduciary duty and various other responsibilities as provided under the Act, the following are the duties of the directors:
- A Director of a company is expected to act in accordance with the Articles of the Company.
- A director of a company is obliged to act in good faith in order to promote the objects of the Company for the benefit of its members as a whole and for the protection of the environment.
- A director of a Company ought to exercise his duties with due and reasonable care, skill and diligence and should exercise independent and non-biased judgment.
- A director of a Company should not involve in any situation in which he might have a direct or indirect interest that conflicts, or possibly may conflict, with the interest of the Company.
- A director of a Company must not achieve or undertake to achieve any undue advantage or gain either to himself or to his relatives, partners, or associates and if such director is found guilty of making any undue gain, he will be liable to pay an amount equivalent to that gain to the Company.
Difference between Director and Shareholders
The shareholders and the directors are the pivotal to the corporate structure of a company and both are co-dependent for the smooth functioning of the affairs of the company.
Appointment: The primary difference between the shareholder and the director is that the initial shareholder(s) are the subscribers of the Memorandum of Association & Article of Association of the company. The subsequent shareholders are added by way of fresh allotment of shares by the company for consideration.
Directors are generally specified in the Articles of Association (AOA) of the company at the time of its incorporation. In the absence of the same, they are selected by the majority of memorandum subscribers as per Table F and in the event of non-applicability of Table F, all the subscribers are deemed to be first directors. They are appointed until the company successfully appoints subsequent directors. The shareholders generally make the subsequent appointments of the directors by way of the Extra-Ordinary General Meeting (EGM). However, the casual vacancy owing to the resignation or death of an existing director can be filled by the Board of Directors subject to confirmation by the shareholders in the Extra-Ordinary General Meeting.
Entitlement to become a member: Any Individual or any juristic person is entitled to become a shareholder, as compared to a director, whereby, only an individual is permitted to become a director in a company.
Roles: Both the shareholder, as well as the directors, play a crucial role in the company. While the shareholders are regarded as the owners of the company, the directors are the managers of the company. The same person can undertake both the roles subject to the authorization of the articles of association of the company.
Responsibilities: The shareholder’s primary responsibility is to introduce capital in the company and participate in the meetings of the shareholder such as the Extraordinary General Meeting or Annual General Meeting, whereas the directors of a company are entrusted with the responsibility to comply with legal formalities applicable to the company.
Role in decision making: The Board of Directors are entrusted with the responsibility of making the decisions regarding the day-to-day management of the company. The shareholders make crucial decisions such as the investment, declaration of dividend, alteration of the Memorandum of Association or Articles of Association of the company, appointment of the directors based upon the recommendation of the board of directors.
Burden of Liability: The shareholders have limited liability in the company which is restricted to the amount of their unpaid share of the subscribed share capital of the company as compared to the directors, who are personally liable for the lapses of compliance with all the applicable laws to the company. Generally, the liability of the director includes a huge amount of penalty, barring certain cases where they may be imprisoned after prosecution by the government.
Removal from Office: The shareholders can transfer their share in the company at their discretion subject to the provisions of the Articles of Association. However, they cannot be compelled to exit the company. The only exception to this being, the removal of shareholders in accordance with the orders of the courts or national company law tribunal (NCLT). The directors, on the other hand, hold office till they are discharging their responsibilities to the satisfaction of the shareholders. Removal of the director is a fairly easy procedure. the shareholders are required to convene an Extraordinary General Meeting and remove a director by passing a resolution on this behalf, requiring a simple majority vote. Additionally, Section 164 of the Companies Act also prescribes various grounds in view of which a director is declared as disqualified. Upon being a disqualified director under section 164, the director automatically vacates the office of the directorship and loses their capacity to act as a member of the board of directors.
Profit sharing or Remuneration: The shareholders are not entitled to any compensation, salary, or wages from the company, and their only interest is limited to the dividend or increase in the value of the shares owned by them in the company. On the other hand, directors are entitled to remuneration subject to the limits set by Section 197 of the Companies act and sitting fees.
It is evident from the above decision that a shareholder is a part-owner of a company and acquires his interest by way of capital contribution towards the formation of the company or by purchasing its shares. The Shareholders of a company are entitled to various rights and powers in return for their investment in the company and are subject to the responsibilities arising out of their ownership of the corporation. hence, Shareholders play a crucial role in the functioning of a company. To sum up it all, the shareholders are generally regarded as the owners of a company and directors are considered as the managers.