Equity Ownership
Equity means the amount of money that would be returned to a company’s shareholders if that company were to liquefy their assets, pay off their debts and then distribute the remainder of its capital. It is of significant importance as today’s business is extremely dynamic. Investors, lawyers, and stakeholders must understand equity ownership's intricacies.
This blog aims to examine and conduct a comprehensive exploration of the rights, liabilities and legal obligations of holding equity in a company. It also aims to provide a better understanding to the reader about the fiduciary duties and compliance requirements that the equity holders have to go through.
This blog also highlights the importance of and provides the reader with knowledge of the complexities of equity ownership, corporate governance and the multifaceted world of these equity ownership holders, their rights and legal obligations.
Table of Content💻
Introduction
Sometimes referred to as “owner’s equity” “shareholder’s equity” or even “stockholder’s equity”, in the context of corporations, equity ownership reflects the ownership interest of the company’s shareholders and represents the net assets that belong to them. It includes common shares, also known as equity shares and preferred stock, also known as preference shares.
These shareholders are also called as common shareholders as they hold equity shares in numbers. They play a crucial role in the decision-making processes of the company.
Anything and everything are initially dependent on the shareholders; whether a company will make it through the deep trenches and acquire a name for itself or eventually break down, not being able to face the challenges posed in front of it. Hence, equity shareholders are of key importance in majority company matters.
Equity shareholders can be both an individual or an entity that can hold shares in a company. Holding Shares entitles the equity shareholders to a part of the company’s ownership. Individual shareholders are general people like you and me…and institutional shareholders are big institutions or organisations for example- Banks, Mutual fund companies etc.
Shareholders have a plethora of rights but most of the time, they are not aware of their rights. They feel the matters of a company lie in the hands of only the shareholders who hold a majority of equity in the company.
Hence, they do not attend the meetings at times. Right from the appointment of auditors, and directors to the right of acquiring financial records, equity shareholders are the first preference in almost all cases.
Exploring shareholder rights and their importance
As said earlier, a shareholder or an equity shareholder is an individual, company or institution or somebody that possesses more than one share in a company. They are the proprietors of the company.
Not only do the equity shareholders reap dividends when the company does well, they also have to face the downfall if the company faces losses. But this does not mean that the liability these shareholders hold is personal. It’s only till the portion of their holdings in the company that they are liable. Their personal assets go untouched.
The Companies Act, 2013 is pivotal in understanding a lot about shareholders. Under the Companies Act, 2013 we can find the definition of member under Section 2(55).
It states that a member means -
(a) any subscriber to the memorandum of the company,
(b) every other person who agrees in writing to become a member of the company,
(c) every person holding shares of the company and whose name is entered as a beneficial owner in the records of a depository.
This definition closely resembles the word “shareholder”.
Rights of Equity Shareholders
Many of the equity shareholder rights are elaborated as follows-
1. Right to receive dividends -
Under Section 123 of the Companies Act, all shareholders are entitled to receive dividends. The section provides specific criteria and certain conditions under which a company must declare dividends.
2. Right to Vote -
Right to vote is a fundamental and foundational right of every shareholder. This ensures their influence and part in the company matters. Every shareholder can cast one vote typically. This is provided under Section 47 of the Companies Act.
3. Right to sue for mismanagement -
Shareholders who face discrimination or the brunt of mismanagement have the option to take recourse to the National Company Law Tribunal i.e the NCLT. The NCLT has the authority to address and solve such instances of mismanagement.
4. Right to Information -
The equity shareholders have every right to demand financial documents like the balance sheet, dividend certificate etc. This promotes transparency and helps shareholders feel that they belong to the company. This also helps shareholders make a well-informed decision for the matters of the company.
5. Right to inspect corporate records -
Section 94 of the Companies Act, 2013 elaborates the right of equity shareholders’ access to corporate records is an integral part of transparency. It outlines the specific location where key records have to be kept.
6. Right to attend general meetings -
Under Section 103 of the Companies Act, 2013 the shareholders have a right to attend general meetings and to be physically present at company meetings which ensures direct involvement in all the crucial decision-making processes. This section aims at informed participation by the shareholders.
Cruciality of Shareholder Rights
Now, the main point is, why are equity owners and shareholders clothed with so many responsibilities and rights?
The rights of shareholders are protected mainly because they are one of the primary reasons why a company exists. Moreover, the rights of shareholders must be protected so that their interest is protected. When rights and duties are clearly demarcated, it is easier to aid and provide solutions in case of any conflict of interest.
Shareholders are granted specific rights mainly to ensure a sense of belonging toward the company. Rights such as attending meetings, voting etc are some of those. Another reason specific rights are granted is to ensure there is transparency for the shareholders and accountability on the part of the company. Rights such as the right to receive information, to participate in the decision-making process, and to receive profits and dividends as and when decided.
Shareholders are owners of a significant part of the company. Hence, they have a role to play as decision-makers. One such right that ensures this is carried out is the right to vote in meetings. Moreover, the Companies Act,2013 aims to reduce dictatorship by the company. It seeks to empower shareholders so that there is no sole ownership of the company. There exists diversity in decision-making due to this and it also prevents oppression and mismanagement.
In any company, there exist mainly two types of shareholders:
The first type is who holds major equity in the company. They are big influential investors who have a lot of investment as shares in the company.
The second type is those shareholders who have a minor part of the company. They do not have a big share, nor are they as influential as the majority of stakeholders.
Granting rights to the equity shareholders ensures power is balanced and it isn’t concentrated on either side. This helps the power dynamic and also ensures that all the interests of all shareholders are considered.
Compliance with laws
Shareholders in India find it essential to understand and be in compliance with the corporate laws, rules and regulations that are meant to protect their investments. They also ensure accountability on the part of the company, and this provides transparency to shareholders.
The main statute governing the rights, duties and legal obligations of shareholders is the Companies Act, 2013 and the Securities Exchange Board of India (SEBI). These laws and rules provide a wide framework for the responsibilities of shareholders in India.
Shareholders are held to strict laws and rules as they are part owners of a company. They must adhere to insider trading laws, filing not only timely but accurate reports. Rules about voting, and distribution of dividends are to be followed. Even at the time of liquidation of a company, any shareholder cannot burst into the place demanding profit. A company has rules that are followed concerning dividend distribution.
Navigating the challenges
At times, majority shareholders exercise certain behaviours that prevent minority shareholders from participating in the company's affairs to the full extent. To protect the interests of shareholders, the company needs to go through shareholder agreements and address any issue faced by any of the shareholders.
The company must also look into the shareholders' fiduciary duties and ensure that they are complied with. While it is impossible to protect your company from disputes entirely, it is surely possible to protect the company from their likelihood of happening.
Dividend distribution can be a challenge faced by shareholders where a company might be prejudiced towards minority shareholders. The company may prefer majority shareholders as they invest in the company in big numbers and hold a significant portion of the company’s ownership.
Another typical disagreement can happen amongst shareholders. Often the shareholders happen to butt heads over any trivial matter with the company management. These can lead to operational and financial problems within the company and its management. These issues can be breaching shareholder agreements, compensation of shareholders or even disputes concerning the direction in which the company is heading.
A company may decide, by a majority vote, to relocate the company to any other place. This can cause local shareholders to feel out of place. The company may dismiss an employee or may pivot from the business objects. These things are fairly common in small private companies or companies which are owned by a family.
Makers or Breakers of a company
The most crucial aspect of a company’s success or failure is shareholders. They are the major decision-makers in the activities of the business. Their votes provide a ground for the company to take action. Shareholders are providers of significant financial aid to the company.
While the implementation and management of decisions are in the hands of the company, shareholders have a major hand in guiding the strategy for the implementation of the decisions.
Shareholders play an important part in affecting the Board of Directors. The Board is in charge of monitoring the functioning of a firm and providing information to the shareholders. Some committees are affected by the shareholders like the financing committee, audit committee, personnel committee and many more.
There have been several notable cases through which we can observe how shareholders play an influence on the company. One such notable case is the Tata Group v. Cyrus Mistry, 2016. The removal of Cyrus Mistry sparked a huge issue, alleging lapses in corporate governance and mismanagement. Shareholders took sides, which led to major repercussions for the governance structure of Tata Group. The final verdict was ruled in the favour of Tata groups and dismissed an appellate court order that allowed Cyrus Mistry to be reinstated as group chairman.
Another case that happened in 2017 was the Infosys Leadership Transition. Infosys witnessed a transition in its leadership which followed a clash between the board of the company and its co-founders. Shareholders who were also co-founders raised certain concerns about corporate governance issues and the management style of the CEO at the time. This ultimately led to the CEO resigning and the Board highlighted the influence of shareholders on the topic of decision-making in the corporate sector.
In short, shareholders affect every part of the company, right from the initiation to its liquidation.
Conclusion
Rights and duties of equity ownership must be navigated carefully to ensure transparency, and accountability on the part of the company. Every shareholder plays a part in making or breaking a company. They are the majority funding partners and one decision by them can be fruitful for the company.
References
Observing Shareholder Influence on Stakeholder Interests, paper by M. Chandrakala and Ch. Raja Kamal.
Article “How Shareholders affect a business” by Kathy Zheng.
King and Jones- Shareholder Disputes and How to Avoid them
Minority Shareholders: Fighting for a fair share in India- Paper by Dhruv Thaker, ICSI
Tata Groups v. Cyrus Mistry
Infosys Leadership transition case.
This Article is written by Tanaya Moholkar, a final year law student of Yashwantrao Chavan Law College, Pune.
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Brief, curt and to-the-point article. Keep it up!
Very well articulated!
Informative!