Variation In Right Of Shareholder

Question 1

Variation in right of shareholder

Answer 1

Let’s break down the different classes and kinds of share capital, along with examples to help you understand.

Definition:
- The share capital of a company can be divided into different classes, or there may be just one class of shares. Within each class, all shares must have the same fixed nominal amount.

Example:
- Example 02: A company may have 500,000 ordinary shares, each with a nominal value of Rs. 10. All shares within this class must have the same nominal value and carry equal rights and privileges.

Requirement:
- A company with share capital must issue only fully paid shares, which can be of different kinds and classes as specified in its memorandum and articles.

Example:
- Example 03: A company limited by shares may have different kinds of share capital, such as ordinary shares and preference shares, and various classes within each kind, like Class A and Class B shares.

• A company can have more than one kind of share capital only if it has authorized capital for all those kinds specified in its memorandum.

1. Classes of Shares: Companies can have different classes of shares, each with the same nominal value within the class.
   
   • Example: 500,000 ordinary shares at Rs. 10 each.
2. Kinds of Shares: Companies can issue different kinds of shares, such as ordinary and preference shares, with various classes under each kind.
   
   • Example: Ordinary shares (Class A, Class B) and preference shares (cumulative, non-cumulative).
3. Voting Rights: Ordinary shareholders typically have voting rights, while preference shareholders may have limited or no voting rights.
   
   • Example: Ordinary shares with one vote per share; preference shares with no voting rights.
4. Dividend Rights: Ordinary shareholders receive residual profits, while preference shareholders receive fixed, cumulative dividends.
   
   • Example: Preference shareholders get a fixed dividend before ordinary shareholders.
5. Winding Up: Ordinary shareholders get surplus assets after preference shareholders’ nominal value is returned.
   
   • Example: Preference shareholders get their nominal value back first in liquidation.

I hope this detailed explanation helps! If you have any more questions or need further clarification, feel free to ask.

Let’s break down the concepts of variation of shareholders’ rights and the right to challenge such variations in court, along with examples to help you understand.

Special Resolution:
- Requirement: Any variation in shareholders’ rights must be made by altering the articles of association through a special resolution.
- Example: If XYZ Ltd. wants to change the voting rights of a particular class of shares, it must pass a special resolution to alter its articles.

Restriction on Alteration:
- Majority Vote: If the alteration affects the substantive rights or liabilities of members or a class of members, it requires the approval of at least 3/4th of the affected members or class of members.
- Example: If XYZ Ltd. proposes to reduce the dividend rights of Class B shares, at least 75% of Class B shareholders must vote in favor of this change.

Criteria for Application to Court:
- Eligibility: Any member or members of the affected class representing at least 10% of the shareholding of that class who are aggrieved by the variation can apply to the court within 30 days of the resolution.
- Example: If 10% of Class B shareholders believe their rights have been unfairly altered, they can apply to the court to cancel the resolution.

Basis of Court Decision:
- Grounds for Nullification: The court can declare the resolution null and void if:
- The company withheld certain facts that, if known, would have influenced the members’ decision.
- The variation is prejudicial to the interests of the members.
- Example: If XYZ Ltd. did not disclose important financial information that would have affected the shareholders’ vote, the court might nullify the resolution.

Filing with Registrar:
- Requirement: The company must file a copy of the court order with the registrar within 15 days of receiving the order.
- Example: If the court cancels the resolution, XYZ Ltd. must submit the court’s order to the registrar within the specified timeframe.

1. Special Resolution: Variations in shareholders’ rights require a special resolution to alter the articles of association.
   
   • Example: Changing voting rights requires a special resolution.
2. Majority Vote: Alterations affecting substantive rights need approval from at least 3/4th of the affected members.
   
   • Example: Reducing dividend rights needs 75% approval from affected shareholders.
3. Right to Challenge: Aggrieved shareholders representing at least 10% of the affected class can challenge the variation in court within 30 days.
   
   • Example: 10% of Class B shareholders can apply to the court if they feel their rights are unfairly altered.
4. Court Decision: The court can nullify the resolution if the company withheld facts or if the variation is prejudicial.
   
   • Example: Non-disclosure of important information can lead to nullification.
5. Filing with Registrar: The company must file the court order with the registrar within 15 days.
   
   • Example: XYZ Ltd. must submit the court’s order promptly.

Feature | Ordinary Shares | Preference Shares |
|————-|———————|———————–|
| Voting Rights | Ordinary shareholders can vote at general meetings. Different classes may have different voting rights. | Preference shareholders usually cannot vote at general meetings or can vote only on certain issues as specified in the articles. |
| Dividend Rights | Entitled to residual profit after payment of preference dividends. | Entitled to a fixed and cumulative dividend, paid before ordinary shareholders. |
| Winding Up | Entitled to all surplus assets after returning the nominal value to preference shareholders. | Have a prior right to return of nominal value but no further participation in surplus. |
| Basis of Different Classes | Different classes based on voting rights, disproportionate rights to paid-up shares, or different entitlements to dividends, rights issues, and bonus shares. | Different classes based on accumulation or otherwise of dividends, redemption, or conversion into ordinary shares. |