[The following post is contributed by Aditi Jhunjhunwala, Senior
Associate at Vinod Kothari & Co. She can be contacted at aditi@vinodkothari.com.
Associate at Vinod Kothari & Co. She can be contacted at aditi@vinodkothari.com.
This is a continuation of a previous post available here]
Shares: Personal right or property right
A
share is an item of property, and can be sold or transferred. Holding a share
makes the holder a member of the company, and entitles it to enforce the
provisions of the company’s constitution against the company and against other
members. The concept of transfer of voting rights without transfer of shares
has been contended in many cases and the courts have usually held affirmative
view on the same based on the argument that a right to vote cannot be a
personal right but is only a property right. The same has been discussed below
in light of available case law.
share is an item of property, and can be sold or transferred. Holding a share
makes the holder a member of the company, and entitles it to enforce the
provisions of the company’s constitution against the company and against other
members. The concept of transfer of voting rights without transfer of shares
has been contended in many cases and the courts have usually held affirmative
view on the same based on the argument that a right to vote cannot be a
personal right but is only a property right. The same has been discussed below
in light of available case law.
In E.D. Sassoon And Co. Ltd. v. K.A. Patch,
1922 it was argued that the right to vote is a right personal to the
shareholder, that it is, therefore, not transferable under Section 6 of the
Transfer of Property Act, 1882, and cannot be the subject of a trust under
Section 8 of the Indian Trusts Act. But the right to vote has no connection
with the personality of the shareholder. It is suggested that the company has a
right that the shareholder shall exercise his own personal judgment on matters
considered at meetings. That is not so. The company cannot inquire into a
shareholder’s motives or invalidate his vote on the ground that he has a
private interest: East Pant Du United
Lead Mining Company {Limited) v. Merryweather (1864) 2 H.& M. 254.
1922 it was argued that the right to vote is a right personal to the
shareholder, that it is, therefore, not transferable under Section 6 of the
Transfer of Property Act, 1882, and cannot be the subject of a trust under
Section 8 of the Indian Trusts Act. But the right to vote has no connection
with the personality of the shareholder. It is suggested that the company has a
right that the shareholder shall exercise his own personal judgment on matters
considered at meetings. That is not so. The company cannot inquire into a
shareholder’s motives or invalidate his vote on the ground that he has a
private interest: East Pant Du United
Lead Mining Company {Limited) v. Merryweather (1864) 2 H.& M. 254.
A
shareholder may bind himself by contract not to vote or to vote in a particular
way: Greenwell v. Porter [1902] 1 Ch.
530. If he can be so bound by contract, it follows that he can be bound by the
directions of his beneficiary. The truth is that the right to vote is a right
of property annexed to the shares and transferable or assignable with the share.
shareholder may bind himself by contract not to vote or to vote in a particular
way: Greenwell v. Porter [1902] 1 Ch.
530. If he can be so bound by contract, it follows that he can be bound by the
directions of his beneficiary. The truth is that the right to vote is a right
of property annexed to the shares and transferable or assignable with the share.
As
discussed in case of Mohini Mohan
Chakravartty (in Part 1 of this series),
it is held that shares are property rights and the pawnee of shares in a
company cannot be treated as the holder of shares nor is he entitled to receive
any dividend on the shares.
discussed in case of Mohini Mohan
Chakravartty (in Part 1 of this series),
it is held that shares are property rights and the pawnee of shares in a
company cannot be treated as the holder of shares nor is he entitled to receive
any dividend on the shares.
Possible Implications of transfer of voting
rights
Registration
of transfer of vote with the Company
In every
case of transfer of shares, the same has to be intimated to the Registrar and
Share Transfer Agent for the company to make suitable entry of the transferee’s
name in the Register of members. However, in case of a transfer of voting
right, there is no need at all of registering any detail with the company as
such an arrangement is a private arrangement between the parties and as held in
the cases above that the right to vote has nothing to do with the personality
of a shareholder.
case of transfer of shares, the same has to be intimated to the Registrar and
Share Transfer Agent for the company to make suitable entry of the transferee’s
name in the Register of members. However, in case of a transfer of voting
right, there is no need at all of registering any detail with the company as
such an arrangement is a private arrangement between the parties and as held in
the cases above that the right to vote has nothing to do with the personality
of a shareholder.
Intimation
to SEBI under Takeover Code
As
discussed in Part 1 of this series, the Takeover Code has made it mandatory for
the promoters and their persons acting in concert to make all disclosures
relating to any “encumbrances” created by them on their securities. The term
encumbrance not only includes pledge or lien but other similar transactions
also. Therefore, any encumbrance resulting in transfer of voting rights will
attract the Takeover Code under Regulation 31.
discussed in Part 1 of this series, the Takeover Code has made it mandatory for
the promoters and their persons acting in concert to make all disclosures
relating to any “encumbrances” created by them on their securities. The term
encumbrance not only includes pledge or lien but other similar transactions
also. Therefore, any encumbrance resulting in transfer of voting rights will
attract the Takeover Code under Regulation 31.
Relevance of such transfer
For
a small shareholder whose shareholding is barely between 0.01% – 5%, all what
would probably matter to him would be the economic benefit on such shares as
the only purpose of such investment might have been additional income. Such
shareholders might not even care to exercise their right to vote in any matter
connected with the company. Therefore, usually such small shareholders would
not be averse to transferring the voting rights to someone for whom the voting
rights are of great significance by creating a block of voting rights for them
as they cannot direct the overall control of the company and must accept the
will of the majority. Such transfers therefore happen to secure the vote of the
group in the shareholders meeting to pass special resolutions to achieve
fundamental changes in the constitution and the structure and working of the
company.
a small shareholder whose shareholding is barely between 0.01% – 5%, all what
would probably matter to him would be the economic benefit on such shares as
the only purpose of such investment might have been additional income. Such
shareholders might not even care to exercise their right to vote in any matter
connected with the company. Therefore, usually such small shareholders would
not be averse to transferring the voting rights to someone for whom the voting
rights are of great significance by creating a block of voting rights for them
as they cannot direct the overall control of the company and must accept the
will of the majority. Such transfers therefore happen to secure the vote of the
group in the shareholders meeting to pass special resolutions to achieve
fundamental changes in the constitution and the structure and working of the
company.
How to
transfer voting rights?
The
transfer of voting rights need not and cannot be done vide a transfer deed. The
transferee shall execute a power of attorney in favour of the transferor so as
to transfer the specific interest in the shares. The power of attorney shall
specify that the transferor will exercise the rights to vote in place of the
actual holder of the shares. The Act does recognise the validity of a power of
attorney. As discussed above that power of attorney is a recognised instrument
for transfer of voting rights in shares as held in Cousins v. International Bricks (discussed in Part 1 of this
series).
transfer of voting rights need not and cannot be done vide a transfer deed. The
transferee shall execute a power of attorney in favour of the transferor so as
to transfer the specific interest in the shares. The power of attorney shall
specify that the transferor will exercise the rights to vote in place of the
actual holder of the shares. The Act does recognise the validity of a power of
attorney. As discussed above that power of attorney is a recognised instrument
for transfer of voting rights in shares as held in Cousins v. International Bricks (discussed in Part 1 of this
series).
However,
such transfer should be for a consideration. Hence, an agreement to sell the
voting rights should be duly executed alongwith the power of attorney for a
specific consideration. The agreement validates the power so granted under the
power of attorney. Sure enough, there will be a provision as to when will and
what circumstances the right would be revoked.
such transfer should be for a consideration. Hence, an agreement to sell the
voting rights should be duly executed alongwith the power of attorney for a
specific consideration. The agreement validates the power so granted under the
power of attorney. Sure enough, there will be a provision as to when will and
what circumstances the right would be revoked.
Analysis
Though the concept has been a topic of argument, it can be
concluded that if not explicit, such a concept does exist as in case of pledge
or a voting trust. Hence, it cannot be contended that the voting rights cannot
be transferred exclusively without transfer of shares. From the above
discussion, it is very apparent that law recognises such a mechanism and
accordingly has also devised regulations for appropriate disclosures as and
where necessary. Such transfers are usually in order to exercise voting rights
to influence decisions by creating a block of votes as in case of voting trusts
or personal arrangements through agreements.
concluded that if not explicit, such a concept does exist as in case of pledge
or a voting trust. Hence, it cannot be contended that the voting rights cannot
be transferred exclusively without transfer of shares. From the above
discussion, it is very apparent that law recognises such a mechanism and
accordingly has also devised regulations for appropriate disclosures as and
where necessary. Such transfers are usually in order to exercise voting rights
to influence decisions by creating a block of votes as in case of voting trusts
or personal arrangements through agreements.
(Concluded)
– Aditi Jhunjhunwala