NATIONAL LAW INSTITUTE UNIVERSITY

CORPORATE LAW

A Project On

SHAREHOLDERS RIGHT TO
PARTICIPATE IN THE MANAGEMENT
OF THE COMPANY

SUBMITTED TO:
SUBMITTED BY:

DR. KONDAIAH. J AKSHEY JOSE

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ASST.PROFESSOR 2013 B.A.LLB 39

Contents

Objective of The Study..............................................................................................................3

Introduction................................................................................................................................3

Shareholder Rights.....................................................................................................................4

Participate In General Meetings:................................................................4

Voting Right:...............................................................................................4

Postal Ballot:..............................................................................................5

Proxy:.........................................................................................................6

Appointment of Director............................................................................................................6

Institutional Shareholders.........................................................................................................7

Conclusion ..................................................................................................................................9

Bibliography..............................................................................................................................11

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OBJECTIVE OF THE STUDY

1. To examine the rights of the shareholders given by the company.

2. To examine how corporate governance is related to shareholders rights.
3. To examine the International Scenario of corporate governance related to shareholders rights.

INTRODUCTION

In the present world corporate governance has become a sensible measure for the long term success of the
company. There has been great interest in corporate governance because developing good corporate governance
is essential to restore economic vitality and fostering sustainable economic growth and development.

For shareholders, effective Corporate Governance structures have become important criteria for selecting the
companies in which they wish to invest when making positive investment decisions. As the investors are
interested in long term benefits therefore they have now started to analyse the corporate governance structure of
the companies. The investors have now started comparing the various companies that which company has
implemented the various recommendations regarding corporate governance as mentioned in various important
codes.

The important purpose of corporate governance is to safeguard the shareholders rights in the company and also to
pay special attention that there should be equal treatment with the shareholder of same category. Corporate
governance practices have emerged in free market economies as a set of structural arrangements with a aim of
developing a relationship between the management of companies and the interests of its shareholders.
Subsequently, corporate governance concerns extended to the interest of other stakeholders and eventually to
society at large. Therefore a sound corporate governance system requires that shareholders can actively
participate in, and exert influence on, corporate strategic decision-making. The two important principle of
corporate governance can be elucidate as:

The first principle:

The corporate governance practices should give the shareholders a real opportunity to exercise their rights
connected with their participation in the company.

The second principle:

The corporate governance practices should ensure equal treatment of shareholders who own the same number
of shares of the same type (category).

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The shareholders are the owner of the company and by virtue of this they have various rights and obligation in a
company. Some of the basic rights in the company are: ensuring adequate methods of ownership registration,
conveying or transferring shares, participating in the companys profits, obtaining information on a timely basis,
participating and voting in general shareholder meetings. Along with these there are various other rights of the
shareholder and one of the most important among all these is the right to take part in the management of the
company. The most important channel for shareholders to influence how the company has to run is to attend and
vote at the general assembly meetings.

Shareholder Rights

Participate In General Meetings:

The shareholders are involved in taking major decisions about the company. These decisions are basically
taken in the general meetings. These decisions are in form of resolution. Every year there is one meeting of
the members has been organized and this meeting is called as the Annual General Meeting. In addition to this
if there is any emergency or need to transact urgent business than an Extra Ordinary General Meeting is called.
The main purpose of the annual general meeting is that the ultimate control of the company is in hands of
shareholders. AGM gives them an opportunity to know about the working of the working of the company and
to make suggestion for the improvement and progress. They can even change the management if they are not
satisfied.

Voting Right:

Voting at the general meetings of companies is the most valuable and fundamental mechanism by which the
shareholders accept or reject the proposals of the board of directors as regards the structure, the strategy, the
ownership and the management of the corporation. Therefore shareholder voting is an integral part of the
governance structure of publicly held corporations.

Requiring shareholder consent for any fundamental change in corporate policy is a safeguard for the residual
risk-bearers of a corporation against ex post expropriation by the management. The right to vote assures the
shareholders that without their approval the basic terms of their investment cannot be altered. Also, vesting
voting rights in shareholders is the only feasible method to implement major improvements of corporate policy
that affect the terms of their investment.

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In other words we can say that the voting is the only mechanism available with the shareholders for exercising
an external check on the board and the management. It is important to ensure that those votes are cast in a
manner that is most consistent with the long-term best economic interests of the companys shareholders.
Right to vote is one of the most effective tools for promoting good corporate governance. To maintain this
effective tool all shareholders should receive equitable treatment, including minority and foreign shareholders
and all shareholders should be able to obtain effective redress for violation of their rights. More specifically:

shares of the same class should have the same vote,

information on the voting right should be provided before the purchase of the share,

any changes in voting rights should be subject to shareholder vote,

custodians or nominees should cast votes as agreed upon with the beneficial owner of the shares,

company procedures should not make it unduly difficult or expensive to cast votes,

insider trading and abusive self-dealing should be prohibited, and

members of the board and management should be required to disclose any material interest in transactions
or matters affecting the corporation

Under the Indian Companies Act, all holders of equity shares as on the date of the Annual General Meeting are
entitled to vote. A members voting right are in proportion to his share of the paid up capital in the company. 1
In case of share issued with disproportionate voting right as permissible under Section 86, the voting right will
be as per the terms of the issue of the share.

Postal Ballot:

There is also a concept of postal ballot under the companies Act. The concept has been stated in the section
192A which has been brought in to force on 15 th June 2001. The main idea behind postal ballot is to confirm
the corporate democracy.2 This is like there are lakhs of shareholder spread all over the country and it is not

1 Section 47, Companies Act.

2 Datey V.S., Student Guide to Corporate Law, 198(Taxmann Allied Service, 5 th ed., 2002).

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possible for all of them to be present in the meeting. Therefore to remedy this situation this concept has been
brought in this the shareholder can vote by post without attending the general meeting.

Proxy:

If a shareholder of the company is unable to attend the meeting than he can appoint a proxy to attend the
meeting.3 Such another person may or may not be the member of the company. A proxy is basically one acting
for another. Proxy who has been appointed is entitled to attend the meeting and can vote on behalf of the
principal member. Proxy is acceptable in almost all part of the world for example in Austria, Belgium, France,
German and United Kingdom etc.

Along with this there is a new concept emerging and that is of Electronic sending of vote and some countries
have already adopted this concept. For example: Belgian law leaves it to the companies and their by-laws to
decide whether shareholders can vote by mail or in person. In France Voting by mail is permitted by the law.
Shareholders may also vote by fax, as long as they also mail the official ballot to the company.

Basically all these emerging concept of voting is to give effect to the voting right of the shareholder. Because
the only mechanism available with the shareholders for exercising an external check on the board and the
management is voting. Therefore it is important to ensure that all the votes have been casted properly.

Appointment of Director

The shareholders, who are the ultimate owner of the company are authorized only to take decision in respect of
major policy matter only to the extend specified in the Companies Act. As we know that there is a divorce
between the management and the ownership and therefore the shareholder cannot interfere in the day to day
management of the company.
For the same reason they appoint director to look over the company. Overall supervision and control of affairs
of the company is entrusted to director as appointed by the member. It is the duty of the directors to pool their
knowledge and experiences for the betterment of the company. Shareholder has right to appoint the directors
and to remove them as well.

3 Section 105, Indian Companies Act.

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Institutional Shareholders

In the present time many countries of the world have institutional investors who are making up a significant
percentage of the total investment population. In the USA, for example, institutional investors, including
pension funds, hold around 50% of all listed stock.4 In India also Institutional shareholders have acquired large
stakes in the equity share capital of listed companies.
The institutional investors are now in the process of becoming majority shareholders in many listed companies
and own shares largely on behalf of the retail investors. They thus have a special responsibility given the
weightage of their votes and have a bigger role to play in corporate governance as retail investors look upon
them for positive use of their voting rights.5

In the recent years the focus of the institutional investors has been changing from that of trading to longer-
term ownership of shares, which has an implication on participation in the management of the companies in
which they invest. Now the institutional shareholders are focusing more on the long-term relationship with the
companies by retaining the ownership of the shares. The paradigm shift of institutional investors towards long
term ownership of the shares is having a major influence on corporate governance in the sense that
institutional investors require a greater level of accountability and transparency, and have the back-office
resources to ensure that they can play an effective role as concerned and active shareholders.6

In this regard it is very pertinent to the OECD 7 principles of Corporate Governance. An important extract from
OECD Principles of Corporate Governance:
Controlling shareholders, which may be individuals, family holdings, bloc alliances, or other corporations
acting through a holding company or cross shareholdings, can significantly influence corporate behavior. As
owners of equity, institutional investors are increasingly demanding a voice in corporate governance

4 http://www.commerce.gov.bh/downloads/c_governance/Book1Inside.pdf. <as visited on

25/09/2003.>

5 Report of the Kumar Mangalam Committee on Corporate Governance - Recommendations Relating to Shareholder Cf.
http://in.geocities.com/kstability/inbank/corpgovern/shareholders.html <as visited on 26/09/2003>.

6 Supra f.n 1

7 Organization of Economic Corporation & Development.

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This extract from the OECD principle reflect the growing interest of institutional shareholder to participate in
the management of the company by having longer term ownership of the shares in the company.

The Kumar Mangalam Committee Report on Corporate Governance has also made certain recommendations
with regard to the institutional shareholder as to8:
Take active interest in the composition of the Board of Director

Be vigilant

Regular and systematic contact at senior level for exchange of views on management, strategy,
performance and the quality of management.

Ensure that voting intentions are translated into practice Evaluate the corporate governance performance
of the company.

The above recommendations, principles & practices elsewhere in the world have indicated that institutional
shareholders because of their collective stake can sufficiently influence the policies of the company so as to
ensure that the company they have invested in compliance with the corporate governance code in order to
maximize shareholder value. At the same time the active participation of institutional investors can bring about
a greater scrutiny, accountability and transparency of companies. This makes it doubly important that
institutional shareholders take their role as investors seriously and act accordingly for the enhancement of
good corporate governance.

Conclusion

The shareholders are really the ultimate owner of the company. They bear all the risk of the business and stand
to gain the profits arising out of it. They have heavy risk on their shoulders because if the business will have
profit then they will also earn dividends but if the business will incur losses than their money which is
involved is also gone.

8 Supra f.n 2

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 Shareholder has various rights in the company. One of the important right among them is the right to
participate in the management of the company. Every shareholder has a right to take part in the management of
the company as by participating and voting in the annual general meeting either personally or through proxies.
Taking all the information about the management of the is also an important right as possessed by the
shareholder.

In the present scenario corporate governance is holding very important place in the corporate world. Every
company in the world is trying to incorporate the basic principles of corporate governance. One of the most
important principles of corporate governance which has been acknowledged all over the world is the
shareholder right to participate in the management of the company and to receive equal treatment.

Therefore it is very clear that for the better performance of the company there should be proper transparency
and shareholders should be well informed about the management of
the company and there should be proper participation on the part of the shareholders.

There are some suggestions with regard to the shareholder participation and the equitable
treatment of the shareholder in the company can be increased.

Separating ownership and management will help to reduce the conflicts between majority
Shareholders and minority shareholders.

Institutional shareholder can be encouraged by the Government policies as it will improve both the overall
quality of investors and companies in which to invest.
There are many ways for governments, institutions, companies and the press and other media to
communicate with the investment community to increase shareholder participation and confidence.
For publicly listed companies, the primary goal should be to share accurate and transparent company
information with the investment community and to ensure good performance for all shareholders in the
company.
There is a need to make laws in order to improve participation at shareholder meetings and through the
proxy voting process and are looking at allowing greater reliance on new technology for better corporate
governance.
Electronic communication techniques in the transmission of voting instructions should be encouraged.

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Bibliography

Articles Referred:

Kaizuka Masaaki, Corporate Governance in Asia OECD Principals and Beyond, Fourth Round Table on
Capital Market Reform in Asia09-10 April 2002.
Baums Theodor, Shareholder Representation and Proxy Voting in the European Union: A Comparative
Study, Paper, presented at the Conference on Comparative Corporate Governance Hamburg, May 15-17,
1997.
Muller Kaspar, Corporate Governance and Globalisation The Role and Responsibilities of Investors.
Duhamel Vincent, Shareholder Rights and the EquitableTreatment of Shareholders, The Fourth Asian
Roundtable on Corporate Governance, Mumbai, India, 11-12 November 2002.

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 Green Margarita, Protection of shareholder rights.
Nestor Stilpon, OECD Principles of Corporate Governance on Shareholder Rights and Equitable
Treatment: Their Relevance to the Russian Federation.

Book Sources:

Datey V.S., Student Guide to Corporate Law, (Taxmann Allied Service, 5th ed., 2002).

Web Sites:

http://www.iccwbo.org/CorpGov/shareholders.asp
http://www.oecd.org/dataoecd/54/18/1920683.pdf.
http://www.ellipson.com/files/debate/debate_summer_02e.pdf
http://www.ffhsj.com/cmemos/030917_workers_committee.pdf
http://in.geocities.com/kstability/inbank/corpgovern/shareholders.html

http://www.oecd.org/dataoecd/34/3/2077494.pdf.
http://www.oecd.org/dataoecd/49/12/2484854.pdf.
http://www.corp-gov.org/bd/db.php3?db_id=423&base_id=3
http://www.imf.org/external/pubs/ft/seminar/2000/invest/pdf/nestor.pdf.
http://www.commerce.gov.bh/downloads/c_governance/Book1Inside.pdf.

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