CMA Intermediate · Business Laws and Ethics

Rights of Shareholders for CMA Intermediate Business Laws

Rights of shareholders covers what each class of shareholder can do in a company. Equity holders vote on every resolution, preference holders vote only in limited cases, and class rights can be varied only by the three-fourths consent or special resolution route in Section 48. Solve questions by identifying the class, then applying the section.

What this chapter covers

This chapter answers one question: what can a shareholder do, and what can the company do to a shareholder's rights? It starts with the two kinds of share capital in Section 43, equity and preference. It then moves to voting rights in Section 47, and to changing class rights in Section 48.

The chapter is short, but it is rule-heavy. Most questions turn on a few exact conditions: who may vote, on which resolutions, when a preference holder gets full voting rights, what fraction is needed to vary rights, and who may go to the Tribunal.

It connects to other parts of the paper on share capital. Section 62 (further issue, rights offer), Section 61 (alteration of share capital), Section 50 (unpaid capital accepted in advance) and Section 27 (variation of prospectus objects) sit close by. Questions often mix them with this chapter, so you should know how they differ.

The rules in this chapter are precise. The Section A MCQs can test a single condition, such as the fraction needed or the number of days. Short case questions on a preference dividend or a class variation ask for a reasoned answer. Because the rules are exact, a student who learns the exact conditions can answer MCQs and short case questions accurately with a short, well-structured answer.

Rights of Shareholders: topics in the order to study them

1Types of Shares and Rights AttachedStart here, because every later rule depends on knowing whether a holder is equity or preference and what each class carries.
2Voting Rights of Shareholders (Section 47)Study it second, because it applies the equity and preference split to voting, including the two-year unpaid dividend exception.
3Variation of Shareholders' Rights (Section 48)Study it last, because it needs both the idea of classes and the voting basics, and it adds the consent fractions and Tribunal route.

How to prepare Rights of Shareholders

Treat this chapter as a set of rules with exact conditions. Learn each rule, then practise applying it to short cases.

Read Section 43 and write the two kinds of share capital. Note that preference capital carries a preferential right to dividend and to repayment on winding up, and that equity capital means all capital that is not preference capital.
Learn Section 47 in two parts. Equity members vote on every resolution, but this is subject to Section 43, Section 50(2) and Section 188(1). For example, under Section 50(2) a member has no vote on the amount paid in advance until that amount is called up. The poll vote is in proportion to the member's share in the paid-up equity capital. Preference members vote only on resolutions that directly affect their preference rights, and on winding up or repayment or reduction of equity or preference capital.
Memorise the second proviso of Section 47(2): if the dividend on a class of preference shares has not been paid for two years or more, that class can vote on all resolutions.
Learn Section 48 as a flow. First check the pre-condition. Variation is allowed if the memorandum or articles provide for it. If they contain no such provision, it is allowed only if the terms of issue of that class do not prohibit it. Then it needs written consent of holders of at least three-fourths of the issued shares of that class, or a special resolution at a separate class meeting.
Add the safeguards. If the variation by one class affects another class, three-fourths of that other class must also consent. Dissenting holders who did not consent or vote in favour, and 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. The application can be made for them by one or more of their number appointed in writing. The variation does not take effect until the Tribunal confirms it.
Practise short case questions. For each, name the class, name the section, state the condition, apply it to the facts, and write a one-line conclusion.
Revise related sections (50, 61, 62 and 27) in one sitting so you can tell them apart in MCQs.

Common mistakes in Rights of Shareholders

Saying preference shareholders can never vote.
Fix: Write the limited matters under Section 47(2) and then add the two-year unpaid dividend exception where the facts mention dividend arrears.
Confusing the three-fourths of the class with three-fourths of all shareholders.
Fix: Always say three-fourths of the issued shares of that class, and state it is on the class and not the whole company.
Forgetting the Tribunal route and its time limit.
Fix: Finish every Section 48 answer with the Tribunal right of dissenting holders who together hold not less than ten per cent of the class, the twenty-one days limit, and that the variation needs Tribunal confirmation.
Mixing the equity voting basis with a head count.
Fix: State that the poll voting right is in proportion to the share in paid-up equity capital.
Skipping the pre-condition for variation.
Fix: First check whether the memorandum or articles provide for variation. Only if they contain no such provision, check that the terms of issue do not prohibit it. Then apply the consent rule.
Mixing Section 48 with Section 61 or Section 27.
Fix: Link each section to its subject: Section 48 to class rights, Section 61 to alteration of share capital, Section 27 to variation of prospectus terms or objects.

Last-day revision: Rights of Shareholders

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.

Rights of Shareholders practice questions

Rights of Shareholders in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Rights of Shareholders: frequently asked questions

Can preference shareholders vote at a general meeting?

Only in limited cases. They vote on resolutions that directly affect their preference rights, and on resolutions for winding up or for repayment or reduction of capital. If the dividend on their class is unpaid for two years or more, that class can vote on all resolutions.

What consent is needed to vary the rights of a class of shares?

Under Section 48, you need written consent of holders of at least three-fourths of the issued shares of that class, or a special resolution at a separate meeting of that class. This is allowed if the memorandum or articles provide for variation. If they contain no such provision, it is allowed only if the terms of issue of that class do not prohibit it.

Who can apply to the Tribunal against a variation of class rights?

Dissenting holders who did not consent or vote in favour, and who together hold not less than ten per cent of the issued shares of the class, can apply. One or more of them can apply on behalf of the others if appointed in writing. The application must be made within twenty-one days of the consent or resolution, and the variation has no effect until the Tribunal confirms it.

Is this chapter important for the MCQ section?

Yes. The rules contain exact conditions such as fractions, time limits and exceptions, which suit single-answer questions. Learn the conditions word for word and practise them as one-line facts.