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Unit 2 - SHAREHOLDERS AND DIRECTORS

Shares- General Principles- Share Certificate and its Objects-
Transfer of Shares Restrictions on Transfer- Relationship between
Transferor and Transfers- Issues of Shares at Premium and
Discount, Shareholder- Who can be and who cannot be- Forfeiture
and Surrender of Shares- Lien on Shares, Share Capital- Kinds-
Alteration and Reduction of Share Capital. Directors- Position-
Appointment- Qualifications, Vacation of Office- Removal,
Resignation- Powers and Duties of Directors- Meeting, Registers,
Loans Remuneration of Directors- Managing Directors and Other
Managerial Personnel, Meetings- Kinds Procedure Voting.
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Shares: General Principles
Definition of Shares:
A share represents a unit of ownership interest in a company. It
gives the holder a proportionate claim on the profits, assets, and
voting rights.
Share Certificate:
A share certificate is a legal document issued by the company to a
shareholder, acknowledging their ownership of the shares. The
certificate includes details such as the company’s name, the
number of shares held, the shareholder's name, and other
essential information.
Objects of a Share Certificate:
• To serve as proof of ownership.
• To record the shareholder's name and the number of shares
they own.
• To establish rights and obligations regarding shares.
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Transfer of Shares:
Shares can be transferred by the existing shareholder (transferor)
to another person (transferee). The process involves executing a
share transfer form and getting it registered with the company.
Restrictions on Transfer:
1. Articles of Association: Companies may impose restrictions
on transfer through the articles of association, such as pre-
emption rights or requiring approval from the board of
directors.
2. Lock-in Periods: Some shares may have lock-in periods
preventing immediate transfer.
3. Compliance with Regulatory Framework: Certain
regulations, such as SEBI (Securities and Exchange Board of
India) rules, may also restrict share transfers.
Relationship between Transferor and Transferee:
• The transferor is the person who initially owns the shares and
decides to transfer them.
• The transferee is the person to whom the shares are
transferred. Once the shares are successfully transferred, the
transferee gains all rights associated with those shares.

Issue of Shares at Premium and Discount

• Issue of Shares at Premium:
Shares can be issued at a price higher than their nominal
value. The premium amount represents the extra value that
investors are willing to pay for those shares.
• Issue of Shares at Discount:
Shares can also be issued at a price lower than their nominal
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value, but this is generally restricted by law unless specified

conditions are met, such as insolvency or need for capital
infusion.

Shareholder - Who Can Be and Who Cannot Be

Who Can Be a Shareholder:
• Individuals
• Companies and other corporate bodies
• Foreign nationals (subject to legal restrictions and
regulations)
• Trustees
Who Cannot Be a Shareholder:
• Minors (unless represented by a guardian)
• Insolvent individuals
• Companies barred by law from holding shares in certain
sectors (e.g., banking, financial services)

Forfeiture and Surrender of Shares

Forfeiture of Shares:
If a shareholder fails to pay the due amount on shares, the
company has the right to forfeit those shares. The procedure
typically includes issuing a notice of default and then canceling
the shares if payment isn’t made within the prescribed time.
Surrender of Shares:
Surrender of shares refers to the voluntary giving up of shares by
the shareholder. This may happen if the shareholder wants to
withdraw from the company or divest themselves from holding
shares.
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Lien on Shares
Lien:
A lien on shares gives the company the right to retain shares until
certain dues or obligations (like unpaid calls) are settled. This is
typically imposed to secure payments.

Share Capital: Kinds, Alteration, and Reduction of Share

Capital
Kinds of Share Capital:
• Equity Share Capital: Shares that have voting rights and
represent ownership in the company.
• Preference Share Capital: Shares that have a higher claim
on assets and dividends over equity shares, usually without
voting rights.
Alteration of Share Capital:
Companies can alter their share capital in several ways:
1. Increase in Share Capital: This can be done by issuing new
shares or converting debt into equity.
2. Reduction of Share Capital: Companies can reduce capital
under specific circumstances like eliminating accumulated
losses or simplifying capital structure. This can be done by
court approval.

Directors: Position, Appointment, and Qualification

Position of Directors:
Directors are individuals appointed by shareholders to manage the
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company’s affairs. They act as agents for the company and have
fiduciary responsibilities towards it.
Appointment of Directors:
• Directors are appointed by shareholders during general
meetings.
• Appointment can be done through election at annual general
meetings (AGMs).
Qualifications:
• Directors must fulfill certain qualifications as prescribed by
the Companies Act. This includes a minimum age
requirement, not being disqualified due to past illegal
activities, and possessing skills that align with the company’s
business.

Vacation of Office and Removal of Directors

Vacation of Office:
A director’s office can be vacated due to:
• Resignation
• Disqualification under the law
• Death
• Expiry of term if not reappointed
Removal of Directors:
• Directors can be removed by the shareholders with special
notice and approval at a general meeting.
• Certain statutory rules and protections, such as the right to
a fair hearing, must be followed.

Powers and Duties of Directors

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Powers of Directors:
• Power to manage the business of the company.
• Power to borrow money.
• Power to issue shares.
• Power to convene meetings and approve resolutions.
Duties of Directors:
• Duty of care and skill in managing the company.
• Duty to avoid conflicts of interest.
• Duty to act in good faith for the company’s benefit.

Meetings, Registers, Loans, and Remuneration

Meetings:
• Directors’ meetings can be classified into board meetings,
committee meetings, and general meetings.
• The frequency, notice, and quorum requirements depend on
the company's articles and statutory laws.
Registers:
• Companies must maintain various registers like the register
of directors, register of members, and register of charges, as
required by law.
Loans to Directors:
• Loans to directors are subject to restrictions under company
law, especially regarding the type of loans, amount, and
purpose.
Remuneration of Directors:
• Directors may be paid a fixed salary, commission, sitting fees,
or other perks. The total remuneration must comply with
legal limits and company bylaws.
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Managing Directors and Other Managerial Personnel

Managing Directors:
• A managing director is a key executive appointed by the board
to manage the company’s day-to-day operations. They
usually have broad powers and responsibilities.
Other Managerial Personnel:
• These include company secretaries, chief financial officers,
and other key executives who assist directors in managing
the company’s affairs.

Meetings: Kinds, Procedure, and Voting

Kinds of Meetings:
• Board Meetings: Meetings held to discuss business
operations and management.
• General Meetings: Meetings of shareholders (AGMs, EGMs)
to make important decisions.
Procedure:
• Meetings must follow a proper agenda, notice period, quorum
requirements, and statutory compliance.
Voting:
• Voting can be conducted by show of hands, by poll,
electronically, etc. The type of voting depends on the meeting
and decision being made.