10 Sep 2010

Shareholders different from company: High Court

In a recent decision [Vodafone International Holdings B.V. v. Union of India], the Bombay High Court examined the law relating to the implication of share purchase of a company the relationship which emanates from such shareholding. The High Court, speaking in the context of the tax liability on account of transfer of shares, reflected upon the relevant aspects of company law wherein the holding of shares is an important constituent of the legally determinable relationship between the company and shareholder. 

The High Court observed as under'
68. Now, at the outset, it must be noted that under the general principles of law, a share as a chose in action comprises of an indivisible set of rights, not capable of being separately transferred at law. (Gore Browne on Companies). Under the Indian Law, the privilege of membership can be exercised only by a person whose name is entered in the Register of Members. In Balkrishna Gupta vs. Swadeshi Polytex Ltd., the Supreme Court held, while applying this principle that a receiver whose name is not entered in the Register of Members, cannot exercise any of the rights and privileges of membership unless in a proceeding to which the Company is a party an order to that effect has been passed. Several rights emanate from the holding of shares including principally (i) The right to vote at a general meeting; (ii) The right to requisition an extraordinary general meeting; (iii) The right to receive a notice of a general meeting; (iv) The right to appoint a proxy and inspect a Proxy  Register; (v) In the case of a body corporate which is a member of the Company, the right to attend a general meeting on its behalf; (vi) The right to receive dividend; and (vii) The right to require the Company to circulate its resolutions. These rights attach to and are inseparable from the ownership of shares. A Company recognizes as its members, persons whose names are borne on the Register of Members to whom dividend declared by a company is payable. As between the transferor and transferee certain equities may arise at law. Among them, is the right to claim the dividend declared and paid by the Company. These equities, however, as noted by the Supreme Court, “do not touch the Company, and no claim by the transferee whose name is not in the Register of Members can be made against the Company.” As between the shareholders in a Company, the right to vote belongs to a person legally entitled to the shares by reason of his presence on the Register of Members. Even an order of attachment does not deprive the holder of shares to the title to shares. 
69. Ownership of shares may in certain situations result in the assumption of an interest which has the character of a controlling interest in the management of the Company. The extent of shareholding which is sufficient to vest in the holder of shares an interest which assumes the character of a controlling interest may again vary from case to case. In C.I.T. vs. Messrs Jeewanlal Ltd., a Constitution Bench of the Supreme Court, while considering the ambit of the expression “controlling interest” under Section 2(21) of the Excess Profits Tax Act, defined the concept thus:
“In common parlance a person is said to have a “controlling interest” in a company when such a person acquires, by purchase or otherwise, the majority of the vote carrying shares in that company, for the control of the company resides in the voting powers of its shareholders. In this sense, the directors of a company may well be regarded as having “a controlling interest” in the company when they hold and are entered in the share register as holders of the majority of the shares which, under the Articles of Association of the company, carry the right to vote.” The Supreme Court emphasized the principle that when a shareholder, holding a majority of the shares, authorised an agent to vote for him, the agent acquired no interest, legal or beneficial, for the title to the shares continued to vest in the shareholder.
76. The position of law which has consistently held the field for over a hundred years in the U.K. and for well over five decades in India, is that the business of a corporation is not the business of its shareholders. The undertaking and the assets of a corporation are not the undertaking and assets of its shareholders. A corporation as an entity incorporated under legislation governing companies has a distinct juristic personality. A shareholder has during the subsistence of the corporate personality, no interest in the assets owned by the corporation. The right of the shareholder is to participate in the profits by receiving the dividend that may be declared by the corporation. A share represents an interest of a shareholder which is made up of various rights contained in the contract embodied in the Articles of Association. The right of a shareholder may assume the character of a controlling interest where the extent of the shareholding enables the shareholder to control the management. A controlling interest which a shareholder acquires is an incident of the holding of shares and has no separate or identifiable existence distinct from the shareholding. The extent of the power of the shareholder would depend upon the magnitude of the holding but the nature of the power is not altered by it. Shares and the rights which emanate from them, flow together and cannot be dissected. In the felicitous phrase of Lord Macmillan in Crossman, shares in a Joint Stock Company consist of a “congearies of rights and liabilities” which are a creature of the Companies’ Acts and the Memorandum and Articles of the particular company. The rights and liabilities appurtenant to a share may vary widely within the law, but they cannot exist independently of the inherent attributes with which a share has been created. Control and management is one facet of the holding of shares.

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