Shareholders: Meaning, Types, Rights and Everything you need to know


meaning of shareholders. who may become a shareholder, types of shareholders, rights of shareholders, how to become a shareholder, how to cease to be a shareholder

what is a share in company law?

Share means a percentage of an interest owned by a person in a company. The interest owned gives certain rights to the owner as stipulated in Articles of Association and it has a nominal value.

Farewell J, in the case of Borland’s Trustee v. Steel Bros. (1901) 1 Ch 279 defines a share as the interest of a shareholder in the company is measured by a sum of money for the purpose of liability in the first place and of interest in the second place, but also consists of a series of mutual covenants entered into by all shareholders.

Meaning of shareholder

A shareholder is a person, company, or institution which owns more than one share of a company’s stock. In law, a person cannot own less than 1 share. A shareholder is also referred to as a stockholder or a member of a company.

Technically shareholders are the people who own a company and they are rewarded through dividends and other incentives.

Share versus Stock

The stock simply means a consolidated number of shares Example a company may decide that every ten shares shall be converted to constitute one stock so that instead of members buying shares they buy stock each one of which represents ten shares.

Who can become a shareholder?

Anyone competent to enter into a contract can become a shareholder of a company. That includes a person of sound mind, majority age. Etc. There is no prohibition for a minor to become a shareholder of a company; the only restriction is he/she can only act through a parent or guardian until attaining the age of majority.

How to become a shareholder of a company?

The person may become a shareholder through the following ways

  1. By subscribing to the MEMART
  2. By application and allotment
  3. By transfer of shares
  4. By transmission of shares

By subscribing to the MEMART

A person subscribed to the MEMART becomes a shareholder in respect of the amount stated by him during the incorporation of the company. This kind of shareholder is generally the founder of the company.

By application and allotment

This is when a person applies to buy a certain amount of share to the company in IPO or secondary offering

By transfer of shares

This is when a person owning a share in a company decided to sell them. The transferor and the transferee will execute the deed of transfer of share together with the share certificate.

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See also: Share Certificate Template

Those documents will be lodged in the company registry for registration. When the transfer of share has duly registered the name of the transferee will be entered in the shareholder’s registrar in the place of that of the transferor.

By transmission of shares

Here a person becomes a shareholder as a result of the death or bankruptcy of a previous shareholder.  The common form of shareholders through transmission is Inheritance.

For example, a son may become a shareholder by inheriting the shares of his late father.

For the transmission of shares to become effective, there must be a written application to that effect.

Cessation of shareholders

A person may cease to become a shareholder or a member of a company through the following ways.

  1. By transfer of shares, here the transferor ceases to become a member, and his name is removed from the shareholder’s register as a result of transferring his shares to another person.
  2. By surrendering his shares to the company. This happens when a person voluntarily decides to return all of his shares to the company.
  3. By forfeit of his share by the company as a result of non-payment of called up shares
  4. By death or bankrupt until the transmission is registered. Here the deceased ceases to be a shareholder and his entire share is taken by his/her heirs
  5. Also, you can cease to be a shareholder when the company decided to take its share back.
  6. By the court order with the effect of attaching and sell the shares for the satisfaction of the decree.

Rights of shareholders

Share must be attached with rights to its holder. Regardless of the types of shares a person holds, the shareholders must enjoy several rights concerning the company.

The basic rights of shareholders include, right to vote, right to receive a dividend, right to sue, Right to dispose of his shares and right to information

These rights are set and regulated by the Company law and the Articles of association of a company.

Right to vote

Every shareholder of a company, holding equity shares with voting rights will have votes in proportion to his share in the paid-up equity capital of the company.

A shareholder exercises this right in meetings of the company and when he is absent he can vote through Proxy. (Proxy is a person who is appointed by an absentee shareholder to acts  on his behalf.)

Generally, a shareholder can vote concerning companies decision example, voluntary winding up, merge and acquisition, increase the share capital, selecting a director, etc.

Right to receive dividend

A dividend is an amount of money paid annually to shareholders from the company profit within that financial year.

Depends on the type of shareholders, a person is entitled to a dividend when the company has made a profit only and the dividend paid per share has been approved by the board of directors.

Right to dispose of shares

Generally, a share is a movable property capable of being disposed of in any suitable manner whatsoever. A shareholder has a right to dispose of his shares by selling/transfer, transmission, or surrender.

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This right must be exercised according to the company law and articles of association of a company regarding share dispositions.

Example when it comes to Transfer of shares shall not be lawful unless a proper instrument of transfer duly stamped and executed and signed by both the transferor and the transferee are delivered to the company.

Right to sue

A shareholder has a right to sue the company in case of wrongful acts. This might happens when the company conducts its business in a manner that affects the shareholder’s rights.

Example when the company decided to reduce its share capital unreasonably, or when the company failed to conduct mandatory shareholders meetings.

Responsibility of shareholders

To enjoy his rights, a shareholder has to fulfill all of his responsibilities.

The shareholders’ responsibility includes; to attend shareholders’ meetings, paying all called up shares, and inform a company about any acts that may affect its interest, for example, transfer or surrender of its shares.

Types of shareholder

Generally, two common types of shareholders are common/ordinary shareholders and preference shareholders.

The major difference between common shareholders and Preference shareholders is that preference shareholders have priority both in payment of dividend as well as returns of capital but the restriction on voting while common shareholders enjoy dividend and return of capital after preference shareholders are paid but unrestricted in voting rights.

Common shareholders

These are alternatively now as equity shareholders.  These kinds of shareholders are termed to own the company when owning majority shares.

They not only take a great dividend when it is declared handsomely but also take the greater part of companies’ financial losses.

Rights/implications of common shareholders

They have the right to receive dividends after preference shareholders have been paid.

Right of capital return after preference shareholders, they will claim the pool of surplus assets in the solvent winding up after the return of capital to all other shareholders.

Ordinary shares will usually carry one vote per share

Preference shareholders

These are kinds of shareholders which as the name presupposes; Enjoy preferential rights in respect of a Dividend at a fixed amount or a fixed rate i.e he receives his dividend before common shareholders. They receive their dividends in fixed figures or percent

Have preferential right regarding payment of capital on winding up or otherwise. It means the amount paid on preference share must be paid back to preference shareholders before anything is paid to the equity shareholders.

They have vote restrictions. They are allowed to vote on the things which may directly affect their interests only.

Types of preference shares

Generally, preference shares can be

  1. Participating or non-participating
  2. Redeemable or non-redeemable
  3. Cumulative or non-cumulative
Cumulative or non-cumulative preference shares

A Non- cumulative entails that, In case no dividend is declared in any year because of the absence of profit, the holders of preference shares get nothing nor can they claim unpaid dividends in the subsequent year or years in respect of that year Redeemable or non-redeemable but a cumulative can claim for previous unpaid dividend in the subsequent year.

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Redeemable or non-redeemable preference shares

Redeemable Preference shares are preference shares, which have to be repaid by the company after the term for which the preference shares have been issued expires.

Irredeemable Preference shares mean preference shares need not be repaid by the company except on winding up of the company.

Participating or non-participating

Participating Preference shareholders are entitled to a preferential dividend at a fixed rate with the right to participate further in the profits either along with or after payment of a certain rate of dividend on equity shares.

A non-participating share is those that earn dividends at a fixed rate only once whether or not there is a surplus still available for distribution to the members.

Variation of shareholders rights

The rights, duties, and liabilities of all shareholders are clearly defined at the time of issue of the shares. Once the rights of shareholders are fixed, they cannot be altered unless the provisions of the Companies law for this purpose are complied with.

The rights attached to the shares of any class can be varied only with the consent of any specified proportion of the holders of the issued shares of that class or with the sanction of the special resolution passed at a separate meeting of the holders of issued shares of that class.

However, the following conditions also must be complied with: –

The variation of rights is allowed by the MEMART of the Company.

When MEMART is silent to that effect, such variation must not be prohibited by the terms of the issue of shares of that class.

conclusion

My task was to explain to you everything you need to know about shareholders. I hope you find this article useful.

The bottom line is;

  • Share is a percentage of an interest owned by a person in a company.
  • shareholders are persons who own shares in a company.
  • Anyone competent to into a contract can become a shareholder of a company
  • The person may become a shareholder through the following, subscribing to the MEMART, application, and allotment, transfer of shares, and transmission of shares.
  • A person may cease to become a shareholder or a member of a company by transfer of his shares, surrender, forfeiture, and court order.
  • The basic rights of shareholders include, right to vote, right to receive a dividend, right to sue, Right to dispose of his shares and the right to information
  • a shareholder is responsible To attend shareholders meetings, To pay all called up shares, and to inform a company about any acts that may affect its interest.
  • two common forms of shareholders are common/ordinary shareholders and preferred shareholders
  • Once the rights of shareholders are fixed, they cannot be altered unless the provisions of the Companies law for this purpose are complied with.

Isack Kimaro

Editor-in-chief and founder of sherianajamii.com. Holder of Bachelor of Laws (LL.B) from Mzumbe University and Post Graduate Diploma in Legal Practice from the Law school of Tanzania. Lawyer by profession and blogger by passion.

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