Rights of Shareholders: formula sheet

Key formulas

Two kinds of share capital (Section 43)

Share capital = Equity share capital + Preference share capital

Applies to a company limited by shares. Equity = all share capital that is not preference.

Test for preference share capital

Preferential right to (a) dividend at a fixed amount or rate AND (b) repayment of capital on winding up or repayment of capital

Participation in extra dividend or surplus does not take away the preference character.

Equity voting (Section 47(1))

Equity member: right to vote on every resolution; poll vote in proportion to share in paid-up equity share capital

Subject to Sections 43, 50(2) and 188(1).

Preference voting (Section 47(2))

Vote only on resolutions that directly affect rights of those preference shares, or winding up, or repayment/reduction of equity or preference capital

If dividend on a class is unpaid for two years or more, that class can vote on all resolutions.

Redemption of preference shares (Section 55)

No irredeemable preference shares; redeemable within 20 years (longer for infrastructure projects as prescribed); must be fully paid

Redeem only out of divisible profits or proceeds of a fresh issue; if out of profits, transfer an equal sum to Capital Redemption Reserve.

Sweat equity (Section 54)

Special resolution + class already issued; ranks pari passu with other equity shares

The resolution must specify number of shares, current market price, consideration and class of directors or employees.

Equity voting right

Every equity member may vote on every resolution; poll votes ∝ share in paid-up equity share capital

Section 47(1). Subject to Sections 43, 50(2) and 188(1).

Equity member's share of poll votes

Member's poll votes ÷ total equity poll votes = Paid-up equity held by member ÷ Total paid-up equity capital

Use paid-up amount, not just the number of shares, when shares are partly paid or have different face values.

Preference voting right (general)

Vote only on (a) resolutions directly affecting rights of the preference shares, (b) winding up, (c) repayment or reduction of equity or preference share capital

Section 47(2). Poll votes are in proportion to paid-up preference capital.

Proportion proviso

Equity voting rights : Preference voting rights = Paid-up equity capital : Paid-up preference capital

First proviso to Section 47(2).

Default exception

Preference dividend unpaid for 2 years or more → that class votes on all resolutions

Second proviso to Section 47(2). Applies to the class whose dividend is unpaid.

Consent route

Written consent of holders of ≥ 3/4 of the issued shares of that class

Measured on issued shares of the class, not on the votes cast at a meeting.

Resolution route

Special resolution at a separate meeting of holders of that class

A special resolution needs votes in favour at least three times the votes against. Only holders of that class vote.

Condition for variation

Allowed if (a) the memorandum or articles provide for it, or (b) if they are silent, the terms of issue do not prohibit it

Check this condition first in any case study.

Effect on another class

If another class is affected, ≥ 3/4 consent of that class is also needed

The same Section 48 procedure applies to the other class.

Dissenters' right

Holders of ≥ 10% of the issued shares of the class who did not consent or vote in favour may apply to the Tribunal

Apply within 21 days of the consent or resolution. Variation has no effect until the Tribunal confirms it. An application may be made on their behalf by one or more persons appointed in writing.

Quick revision

• Section 43: share capital of a company limited by shares is equity or preference.
• Preference capital has a preferential right to dividend and to repayment of capital on winding up.
• Section 47(1): equity members vote on every resolution, subject to Section 43, Section 50(2) and Section 188(1); poll vote is in proportion to paid-up equity capital.
• Section 50(2): no voting right on the amount paid in advance until that amount is called up. This is a qualification to the equity voting rule.
• Preference members vote only on resolutions directly affecting their preference rights, winding up, or repayment or reduction of capital.
• If preference dividend is unpaid for two years or more, that class votes on all resolutions.
• Section 48: variation needs three-fourths written consent of the class or a special resolution at a separate class meeting.
• Pre-condition: variation is allowed if the memorandum or articles provide for it. If they have no such provision, it is allowed only if the terms of issue do not prohibit it.
• If another class is affected, three-fourths of that other class must also consent.
• Dissenting holders who together hold not less than ten per cent of the issued shares of the class may apply to the Tribunal within twenty-one days. One or more of them can apply for the rest if appointed in writing.
• The variation has no effect until the Tribunal confirms it; its decision binds the shareholders.
• The company files the Tribunal's order with the Registrar within thirty days of the order.

Common mistakes

• Saying preference shareholders can never vote. Fix: State Section 47(2): they vote on resolutions directly affecting their rights, winding up, and repayment or reduction of capital, and on all resolutions if dividend is unpaid for two years or more.
• Treating a participating preference share as equity. Fix: Section 43 Explanation (iii): capital stays preference even if it participates in dividend or in surplus on winding up.
• Saying preference shareholders have no voting right at all. Fix: Remember Section 47(2) gives a limited right, plus a full right when dividend is unpaid for two years or more.
• Applying the two-year default rule to all preference classes together. Fix: The proviso refers to a class of preference shares whose dividend is unpaid. Apply it to that class.
• Writing 20% as the dissent threshold for Tribunal application. Fix: Remember that the threshold is 10% of the issued shares of the class who did not consent or vote in favour.
• Counting all shareholders of the company instead of the affected class. Fix: Both the three-fourths consent and the class meeting involve only holders of the class concerned.

Exam tips

• Write the section number with each rule: 43 for kinds, 47 for voting, 48 for variation, 54 for sweat equity, 55 for redemption.
• For difference questions, use a two-column comparison on dividend, capital repayment, voting, redemption and risk.
• In MCQs, look for the exceptions: two years of unpaid dividend, participating preference, and fully paid condition for redemption.
• In written answers, define first, then give rights, then the exception. This pattern earns step marks.
• If a question asks about changing class rights, link to Section 48 and note the three-fourths consent.
• In a case study, underline the class of shares, the resolution type and the dividend history. These three facts decide the answer.
• Quote Section 47(1) for equity and Section 47(2) with its two provisos for preference. Examiners look for the section reference.
• For a difference between equity and preference voting, write a two-column answer: scope of vote, basis on a poll, effect of dividend default.