Rights of Shareholders in Private Limited Company

This article gives the reader all the knowledge about the legal aspect of shareholders in a private limited company. It talks about the right of minority shareholders along with the duties of shareholders in a private limited company. Then it briefly discusses the shareholder's agreement which is required to understand and determine the relationship between a company and its shareholders.
Estimated Reading Time: 9 minutes

Introduction

This Article majorly focuses on the rights of shareholders of a private limited company. Firstly, the article articulates about the categories of shareholders of a company. Secondly, it talks about the rights and duties of a shareholder in a private limited company. Thirdly, the article focuses on the rights of minority shareholders of a private limited company. Lastly, it delves into the discussion of shareholder’s agreement and its importance in the transactions pertaining to company and shareholders.

Brief Note on Private Limited Company

For determination of the rights of the shareholders, it is necessary to delve into the perusal of the role of shareholders in a company. Shareholders are the owners of the shares of a company. The Shareholders are granted various rights and duties in the private limited company under the Companies Act of 2013 (hereinafter referred as ‘the Act’). They are also referred to as stockholders of the company and are the owners of the company. The companies are mostly of two types i.e. private limited company and public limited company. A shareholder is any person who owns any number of shares in the company. Shareholders play a crucial role in governing the internal matters of the company and thereby achieving the goals of making profits while conducting business.  It shall be duly noted here that in a private limited company there can be a minimum of two shareholders or a maximum of two hundred shareholders. A shareholder of a private limited company can be a natural person or an artificial company including a foreign company. [1]Further, the meaning of a private limited company can be understood and perused from Section 2(68) of the Act which determines the paid-up share capital of a private limited company. Also, it puts a restriction on the transferability of shares of the company which draws a basic line of differentiation between private limited companies and public limited companies.

Categories of Shareholders in a company

There are majorly two categories of shareholders i.e. preferential shareholders and equity shareholders. These two categories give birth to a third category of known as shareholders with differential voting rights. These categories are as follows:

  1. Equity Shareholders: These are the main shareholders of a company and they take the major decisions in a company as they have voting rights. But during the time of the division of dividend, the first preference is given to preferential shareholders and they are paid off before equity shareholders.
  2. Preferential Shareholders: The preferential status acquired by these shareholders make them devoid of any voting rights in the company. They are paid a fixed amount by the company and are paid off before the general shareholders.
  3. Shares with differential voting rights: These shareholders acquire the shares in the company which are generally of lower value than the ordinary equity shares. These shares are also known as DVR shares.[2]

Rights of Shareholders in a company

A shareholder in a company is entrusted with various rights to maintain their position and to prevent any kind of suppression from any member of the company. Some of those rights are as follows:

Appointing the Directors of the company

A shareholder plays a crucial role in the appointment of directors of the company who are also considered as minds behind the company’s actions. A resolution has to be passed by the shareholders to appoint directors in a company. The shareholders can appoint many other categories of directors like additional director, alternate director, a nominee director or any person appointed as a director to fill up the casual vacancy for a meeting. Further, the shareholders can also object to any director appointed by the company by passing a resolution against such an appointment.

Appointment of auditors of a company

The shareholders of the company are also entrusted with the responsibility to appoint the auditors of the company. The Act envisages in this regard that the first auditors shall be appointed by the board of directors. Further, at the annual general meeting, the shareholders with the recommendations of the audit committee and the board of directors appoint the auditors for the firm. Auditors are generally appointed for a period of five years in the company.

Taking Legal action against the directors of the company

The shareholders of the company have the right to take legal actions against the directors of the company if they feel that there are rights are being infringed by the company and the directors of the company. They can also initiate legal actions against any of the directors of the company if they feel that the directors have acted in contrary to the interest of the company. They can also initiate legal action in case of commission of fraud or any act which is in contravention of law or constitution of the country. Legal action can also be taken when the shareholders have sufficient reasons to believe that the directors have acted mala fide and are diverting funds of the company illegally.

Voting Rights of the shareholders

The equity shareholders of a company have the right to vote in every general meeting and the company shall not take any steps for restricting the shareholder for exercising the same. The shareholders of a company are also bestowed with the right to appoint a proxy if they are unable to attend the meeting.

Right of shareholders to convene general meeting

The shareholders of a company are also endowed with the right to convene general meetings of a company. They can also convene extraordinary general meetings. (hereinafter referred as ‘EOGM’)

Copies of financial statement

The shareholder shall also be a copy of the financial statement of the company. The company is bound to serve all the shareholders with the copies of financial statement which can be either annual or quarterly.

Company’s winding up

When the company is wound up then it is the right of the shareholders to receive a notice regarding the same and the company is also liable to pay all dues to the shareholders of the company.

Inspection of register and books of the company

The shareholders of the company have the right to inspect the register and books of the company which depicts the financial status of the company. The shareholders can also inspect and examine other documents of the company and also have the right to raise questions about the same.

Prior approval of company

The shareholders of the company need to give prior approval to the company if the company has to be converted.

All the shareholders of the company must have the right to approach courts on matters relating to the insolvency of the company.[3]

Duties of the shareholders of a company

It is generally said that rights come with responsibilities. So, in the matter of shareholders also, they have to comply with some responsibilities which are as follows:

  1. It is the basic duty of the shareholders that they should attend the general meetings of the company and they shall also give advice on major issues of the company.
  2. The shareholders shall also keep in check the growth and working of the company.

Rights of Minority Shareholders of a Private Limited Company

In private limited companies, mostly the stock of the company is not readily valued and hence not sold to the public at large. The minority shareholders in the private limited company are generally more prone to being oppressed by the majority shareholders and other members of the company. Therefore, to protect their rights, they are being given certain rights which can be exercised by them whenever they are being oppressed in the company. Those rights are as follows:

The fiduciary duty of the majority shareholders

It is a well-settled notion that the majority shareholders of a company have a fiduciary relationship to act with fairness and bona fide. The minority shareholders of the company have the right to expect that the other officers and majority shareholders of the company will act with fairness and in the best interests of the company. whenever there is a contravention seen in this particular notion then the minority shareholders can challenge such actions which are against the best interest of the company. Also, the minority shareholders shall keep in mind that they shall also not act mala fide and shall take all necessary steps to ensure the company’s wellbeing.

Access to the company’s financial records

All the minority shareholders have the right to attend the meetings of the company and also to vote in such meetings. The minority shareholders shall also have access to the documents and financial records of the company. Any shareholder who seeks access to any document of the company shall request in the writing to the company and shall also provide a reasonable ground for accessing such document of the company.

Minority discount to minority shareholders

The minority shareholders of a private limited company shall be bestowed with the right to get minority discount. It is a discount which is assigned to minority shareholders when a private limited company values its shares to transfer or sell off such shares of the company. This generally acts an indication that the shares held by minority shareholders are of not that much importance as generally shares are and the minority shareholders do not have much ownership in the company. Contrary to aforementioned belief, in practicality, a minority shareholder owns fewer shares as compared to other investors, but they are bestowed with all the benefits which are supposed to be given to stock owners of a company.This proves to be an advantage of becoming a minority shareholder in a company.

Benefits of shareholders of a company

All the minority shareholders akin to the other majority shareholders are entitled to receive dividends at particular intervals of time. It is quintessential to mention the same separately to ensure that the rights of such minority shareholders of the company are not oppressed by the majority shareholders of the company. Further, if the rights of a minority shareholder of a company are being violated then such minority shareholder can always consult an attorney who can assist such minority shareholder to protect his/her rights in the company.[4]

Shareholder’s Agreement

The document is generally used by the companies and the shareholders to agree on terms relating to additional rights of the shareholders in a company. These rights include rights of shareholders relating to board meetings, access to additional information and documents of the company, management of the company and liquidation. A typical Shareholder’s Agreement shall contain rights, obligation, operational control and liabilities of shareholders in the company. Generally, this document is not required to be made public but certain clauses relating to management and governance are required to be listed in the Articles of Association which is a public document. Apart from this, commercial agreements are not required to be mentioned in public and can be kept to the company and its members. In a private limited company, there are restrictions on transferability of shares and no person or member for this purpose can contravene the same. Therefore, while entering into any shareholder agreement the company, its promoters and other members who are a party to such agreement shall keep in mind the restriction on transferability of shares and shall draft such agreement in the same manner to not violate this law mentioned under the Act.[5] This Agreement shall also not be enforceable against any third party as in accordance with the general rule of privity of the contract an agreement is only enforceable against parties to contract and not against third parties. 

Conclusion

This article aims to give the reader all the knowledge about the legal aspect of shareholders in a private limited company. It also talks about the right of minority shareholders along with the duties of shareholders in a private limited company. It also briefly talks about the shareholder’s agreement which is required to understand the relationship between a company and its shareholders and the determination of terms and conditions between both. The article peruses all the aspects of the shareholders in a private limited company.

Also Read about Functions of Board of Directors in a Company


[1]Private Limited companies in India, Madaan& Co., http://www.madaan.com/private_limited_company_india.html

[2] Sunil Fernandes, What are the Different Types of Shares in India, Good Returns, https://www.goodreturns.in/classroom/2015/11/what-are-the-different-type-shares-issued-india-409259.html

[3] Kumar Gourav, Rights and duties of shareholders of a company,https://blog.ipleaders.in/shareholders-rights-duties/

[4] Minority Shareholders Rights and Why they matter, KPPB Law, https://www.kppblaw.com/attorneys/

[5] Ankur Kashyap, Shareholder’s Agreement, Legal Services India, http://www.legalserviceindia.com/article/l314-Shareholders-Agreement.html

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