Rights and equitable treatment of shareholders

Shareholder powers

What powers do shareholders have to appoint or remove directors or require the board to pursue a particular course of action? What shareholder vote is required to elect or remove directors?

Subject to the provisions of the articles of association (AOA) of a company, directors are appointed by the Board and hold their office until the next AGM, at which their appointment must be approved by the company’s members. Alternatively, directors can be appointed at a general meeting of the shareholders.

An Indian public company is required to have at least two-thirds of its directors liable to retire from their position by rotation. Such directors are appointed by the shareholders in general meetings by an ordinary resolution of the company, and they are required to retire within a maximum period of three years from their appointment date. Any reappointment of such directors requires fresh shareholders’ approval. Unless the AOA provide otherwise, the remaining directors of a public company and the directors of a private company (a company that restricts the number of its shareholders to 200) are also required to be appointed with shareholders’ approval.

Further, the appointment of IDs is approved at a shareholders’ meeting, and is eligible for reappointment on passing of a special resolution by the shareholders and disclosure of the reappointment in the Board’s report.

Thus, in India, shareholders generally have a say in the appointment and reappointment of directors. In the absence of a higher requirement adopted by a company in its AOA, directors are appointed by a simple majority vote. The Companies Act also provides companies with an option to adopt a proportional representation mechanism for director appointments, so as to enable the representation of minority shareholders on the Board.

To ensure wider shareholder participation in listed companies, the Companies Act provides for the appointment of one director by small shareholders of the listed company, where ‘small shareholder’ means a shareholder holding shares whose nominal value does not exceed 20,000 rupees. The Companies (Appointment and Qualification of Directors) Rules, 2014 specify that a listed company may either opt to have a small shareholders’ director suo moto, or appoint one upon receiving notice from at least 1,000 small shareholders of the company or one-tenth of the total number of small shareholders of the company, whichever is lower. A small shareholders’ director is an ‘independent director’ under the Companies Act and is not liable to retire by rotation; however, his or her tenure cannot exceed a period of three consecutive years, and at the end of the tenure he or she is not eligible for reappointment.

Subject to the provisions of the AOA of a company, the Board can appoint additional directors, alternative directors and nominee directors.

The shareholders have inherent powers to remove directors (including non-retiring directors) by a simple majority vote, provided a special notice to this effect has been served on the company by shareholders holding at least 1 per cent of the paid-up share capital of the company or holding shares on which at least 500,000 rupees have been paid up on the date of the notice, at least 14 clear days prior to the ensuing general meeting (excluding the day when the notice is served and the day of the meeting), a copy of such special notice has been forthwith provided by the company to the directors proposed to be removed, and the directors are given an opportunity to present their case before the shareholders either in writing or at the general meeting convened to consider their removal. The company is required to give special notice to the members of a general meeting convened for such a resolution at least seven days before the meeting. Directors appointed by the Tribunal under the provisions of the Companies Act and directors appointed by the proportional representation mechanism cannot be removed by the shareholders. An ID who is reappointed for a second term can be removed by the company only by passing a special resolution.

Generally, the Board is vested with the company’s management powers and the shareholders are only entitled to exercise control over those matters that are specifically reserved under the Companies Act or the company’s AOA, for shareholders’ approval. Thus, generally, the shareholders cannot interfere in the Board’s decision-making process or usurp any authority available to them. However, shareholders, by virtue of their authority to appoint or remove directors, can control the overall Board composition and can sometimes transact businesses, which for any reason cannot be transacted by the Board, including resolving matters, in the event of there being a deadlock between directors or there being an inadequate quorum at the Board level. The Companies Act specifically empowers shareholders holding at least 10 per cent of the paid-up share capital of the company to cause the company to notify its shareholders of any resolution proposed to be moved at a meeting of the shareholders, provided such a requisition is deposited with the company at least six weeks before the meeting in case the requisition would trigger the requirement of circulating a notice of the proposed resolution, and at least two weeks before the meetings for all other requisitions.

Further, judicial pronouncements also suggest that when the directors act mala fide or act extraneously to their powers and are the wrongdoers, the shareholders are entitled to take steps for redressal.

Shareholder decisions

What decisions must be reserved to the shareholders? What matters are required to be subject to a non-binding shareholder vote?

The Companies Act mandatorily requires shareholder approval for certain decisions including, among others, those relating to:

  • change in name, registered office or authorised share capital;
  • modification of the memorandum of association (MOA) and AOA of the company;
  • issuance of shares on a preferential basis;
  • issue of sweat equity shares;
  • approval of audited accounts;
  • declaration of dividends;
  • appointment and removal of auditors;
  • appointment and removal of directors and determining their remuneration;
  • appointment of more than 15 directors to the Board;
  • reappointment of IDs after the expiry of their term;
  • approving loans to directors;
  • disposal of a company’s undertaking;
  • borrowing and investing a company’s funds beyond certain limits;
  • approving any scheme of arrangement or compromise;
  • reduction in capital;
  • buy-back of securities;
  • liquidation of a company;
  • specified RPTs;
  • application to change the status of the company to ‘dormant’;
  • variation in the rights of shareholders; and
  • approving the directors’ holding of an office of profit (other than that as MD or managers) with the company or its subsidiaries.

The Companies Act does not provide a mechanism for a non-binding shareholders’ vote. Though the primary authority to call general meetings and decide the agenda lies with the Board, the shareholders are permitted to requisition general meetings to carry out proposed business or demand the circulation of resolutions proposed by them for consideration at the ensuing Board-initiated general meeting. Any decisions on resolutions so initiated by shareholders, if approved by the requisite majority as prescribed under the Companies Act and the company’s AOA, bind the Board. For further information, see questions 3 and 7.

Disproportionate voting rights

To what extent are disproportionate voting rights or limits on the exercise of voting rights allowed?

Indian listed entities are prohibited from issuing shares in any manner that may confer on any person superior rights as to voting or dividend with regard to the rights on equity shares that are already listed as per regulation 41 of the Listing Regulations. However, private limited companies and unlisted public companies are permitted to issue equity shares with a disproportionate right as to voting, dividends or otherwise, subject, inter alia, to the existence of a specific authority in this regard in their AOA and shareholders’ approval. The preconditions to be met by a company for such an issuance are prescribed conditions, including having a consistent track record of distributable profit for the last three years, and at any time, shares with differential rights cannot exceed 26 per cent of the total paid-up equity share capital of the company (including equity shares with differential rights). Companies are not under any limitation while determining disproportionate rights. Though equity shares with zero voting rights are generally considered extraneous to the Companies Act, through an amendment to the Companies Act in June 2015, the restriction in the Companies Act in regard to non-voting equity shares has been made inapplicable to private companies, subject to appropriate authorisation in the AOA, and therefore, private companies, which are not subsidiaries of public companies, are able to issue equity shares with zero voting rights. This flexibility will benefit private companies that want to obtain equity funding without dilution of control.

Preference shareholders do not have voting rights at general meetings, except on resolutions that directly affect their rights. However, voting rights on a par with the equity shareholders accrue to them in the event of the company defaulting in the payment of dividends to preference shareholders for a period of two years or more.

Shareholders’ meetings and voting

Are there any special requirements for shareholders to participate in general meetings of shareholders or to vote? Can shareholders act by written consent without a meeting? Are virtual meetings of shareholders permitted?

Shareholders who are recorded in the register of members or in the records of the depository (for paperless shares) are entitled to attend and vote at general meetings. In the case of bearer securities (such as share stocks), when the shareholders present proof of ownership of the company’s shares, as per the AOA, they become entitled to attend and vote at general meetings.

Shareholders who are natural persons can either attend general meetings themselves or appoint a proxy to attend and vote at the meeting. Shareholders who are legal entities are required to appoint natural persons as their authorised representatives to attend and vote at general meetings. These representatives can exercise all powers of the original shareholders including appointing a proxy. Proxies are prohibited from speaking at the meetings and unless the AOA provide otherwise, they can vote only by poll (and not by show of hands). The Companies Act prohibits a person from acting as proxy on behalf of more than 50 members, and members whose aggregate holding in the company exceeds 10 per cent of the total share capital of the company. When there is a show of hands, every shareholder has one vote irrespective of his or her shareholding in the company and on poll (if requisitioned) every shareholder has voting rights in proportion to his or her share in the company’s paid-up equity capital.

If there are partly paid-up shares, voting rights are conferred based on the amount paid up on such shares and such rights would be unavailable on partly paid-up shares on which calls remain unpaid. For listed companies, and companies with more than 200 shareholders, approval on certain items requires the adoption of a postal ballot mechanism, in which votes are cast through postal ballots dispatched by the company to each of its shareholders individually. The Companies (Management and Administration) Rules, 2014 (2014 Rules) mandatorily require certain business to be transacted only by voting through postal ballot, including the following:

  • alteration of the objects clause of the MOA;
  • change in the location of the registered office outside specified limits;
  • issue of shares with differential rights;
  • buyback of shares; and
  • the disposal of a company’s undertaking.

For voting rights available to preference shareholders, see question 5.

Shareholders may also participate in meetings through video conferencing and vote electronically through secure electronic platforms, as the 2014 Rules make it mandatory for listed companies and companies with more than 1,000 shareholders to provide an electronic voting facility to its members for all general meetings. A ‘virtual meeting’ of the shareholders of a company, that is, a meeting without any physical venue, is not permissible under the Companies Act, as minimum quorum requirements, which are applicable to shareholders’ meetings of public companies and private companies, require the requisite number of members to be personally present at the venue of such meeting.

Shareholders and the board

Are shareholders able to require meetings of shareholders to be convened, resolutions and director nominations to be put to a shareholder vote against the wishes of the board, or the board to circulate statements by dissident shareholders?

Typically, the Board convenes a company’s general meetings. However, shareholders holding 10 per cent of the company’s paid-up share capital, by a written notice, may requisition the Board to convene an extraordinary general meeting (EGM). If the Board fails to call a meeting within 21 days after the date of deposit of a valid requisition on a day not later than 45 days after the original requisition date, the shareholders may themselves proceed to convene an EGM within a period of three months from the date of the requisition.

Shareholders holding 10 per cent or more of the company’s total voting power may requisition the company to circulate, along with the notice of a general meeting, any resolution that they intend to move at such meeting, along with a statement of the proposed matter to be dealt with in the resolution. However, the Companies Act does not provide for the circulation of statements by the Board as received from dissident shareholders, who only have a right to discuss their views in a meeting and challenge the unfavourable decisions against them before the Tribunal in certain circumstances.

A company’s general meeting may be called with not less than 21 clear days’ notice. A general meeting may also be called at shorter notice (for which consent can be given in writing or in electronic form):

  • in case of an AGM: with the consent of at least 95 per cent of the members entitled to vote at that meeting; and
  • in case of any other general meeting: if the company has a share capital, then with the consent of the members holding majority in number of members entitled to vote and who represent at least 95 per cent of such part of the paid-up share capital of the company as gives a right to vote at the meeting; or if the company has no share capital, then with the consent of members holding at least 95 per cent of the total voting power exercisable at the meeting.
Controlling shareholders’ duties

Do controlling shareholders owe duties to the company or to non-controlling shareholders? If so, can an enforcement action be brought against controlling shareholders for breach of these duties?

Controlling shareholders are expected not to oppress or act against the interests of the minority shareholders. Minority actions are allowed in cases of majority shareholders of a company proposing to benefit themselves at the expense of the minority, expropriating minority rights by carrying out modifications in charter documents or taking actions to oust the minority by the improper issuance of shares or otherwise.

Under the Companies Act, 100 shareholders in number or one-tenth of the total number of shareholders of a company, whichever is lesser; or shareholders holding not less than 10 per cent of the issued share capital of a company can bring actions against the controlling majority or the Board, where the affairs of the company are being conducted in a manner oppressive to any shareholder; or in cases of mismanagement prejudicing the interests of the company or the public at large.

In the dispute between Mr Cyrus Mistry and Tata Sons Limited, the Tribunal held that the term ‘issued share capital’ in the context of determining the qualification of shareholders to initiate an action for oppression and management before the Tribunal, includes preference capital as well, and therefore the complainants must, in aggregate, hold at least 10 per cent of the issued share capital of the company, which includes its preference capital, unless this requirement is waived by the Tribunal. On the issue of waiver of this requirement, the Tribunal held that such waiver is to be granted only in rare and compelling situations and further that the Tribunal shall only interfere if the actions of the Board or majority are unconscionable, unjust and fraudulent, so as to cause oppression to the complaining party. On appeal, the Appellate Tribunal noted that to form an opinion as to whether an application merits waiver, the Tribunal is not only required to form its opinion objectively, but also required to satisfy itself on the basis of pleadings or evidence on record as to whether the proposed application merits consideration. It further noted that the Tribunal is required to take into consideration the relevant facts and evidence, and is required to record reasons reflecting its satisfaction. It further noted that the Tribunal is not required to decide the merits of the application, but required to record grounds to suggest that the applicants have made out some exceptional case for waiver. The Appellate Tribunal held that taking into consideration the aforesaid facts and exceptional circumstances of the case as apparent from plain reading of the application and as some of them related to ‘oppression and mismanagement’, it was of the view that a case had been made for ‘waiver’.

To protect the interests of minority shareholders, the Companies Act also provides for class action by members of a company seeking restraining orders against certain actions of the company and for claiming damages or compensation from the company, its directors, auditors or any expert, adviser or consultant for any wrongful act or for any incorrect or misleading statement made to the company. The Companies Act provides that a class action may be initiated through an application to the Tribunal by at least 100 members of the company, or not less than 10 per cent of the total number of its members, whichever is lesser, or members holding 10 per cent of the issued share capital of the company. For companies that do not have a share capital, an application initiating a class action must be made by at least one-fifth of the total number of its members.

Shareholder responsibility

Can shareholders ever be held responsible for the acts or omissions of the company?

Generally, shareholders are not liable for the acts or omissions of a company. Shareholders’ liability, in any event, only extends to their contribution towards the company’s assets at the time of its winding up (without any limitation in cases of unlimited liability companies and to the extent of the amount unpaid on their shares or the amount guaranteed by them, in cases of limited liability companies).