Module 5: Company and Its Members and Shareholders (Lecture 1)
A shareholder is anyone who owns shares; a member is the person whose name is
entered in the company’s register of members (legal/registered owner). In practice
the terms are mostly used interchangeably, but the legal consequences (who gets
dividends, who can inspect registers, who can vote in company proceedings, who
can sue under certain statutory remedies) flow from membership/registration, not
mere beneficial ownership.
The ‘members’ or ‘shareholders’ of a company are the persons who collectively
constitute the company as a corporate entity. In Hindustan Investment Corporation
Vs Commissioner of Income Tax, W. B(1995) 25 [Link].57, It was held that the
terms ‘member’, Shareholder, and ‘Holder of a share’ are used interchangeably.
They are synonyms in the case of a company limited by Shares a company limited
by guarantee, and having a share capital, but in the case of an unlimited company or
a company limited by guarantee, a member may not be a shareholder for such a
company may not have a share capital.
Hindustan Investment Corporation Ltd v. Commissioner of Income Tax, West
Bengal (1955) 25 Comp Cas 57 (Cal)
Fact: Hindustan Investment Corporation Ltd. was an investment company holding
shares in various other companies to earn dividend income. The company had
transferred certain shares to other persons. However, the names of the transferees
had not yet been entered in the register of members of the respective companies.
The companies in which Hindustan Investment Corporation held shares declared
dividends on those shares during the accounting year. The dividends were still
received by Hindustan Investment Corporation Ltd. As its name continued in the
register, though the company claimed it was only holding those shares on behalf of
the transferees. The Income Tax Department assessed the dividend as income of
Hindustan Investment Corporation Ltd. The assessee company (Hindustan
Investment Corp.) contended that since the beneficial ownership had been
transferred, it was not the real owner and therefore not liable to be taxed on those
dividends.
Issue: Is the “registered shareholder” or the “beneficial owner” entitled to
dividend income and liable to be taxed on it?
Rule/Legal Principle:
Under company law, the member is the legal owner of the shares and is entitled to
dividends. The beneficial owner (the person who has purchased the shares but whose
name has not yet been registered) has no right against the company until registration
is complete. Therefore, the legal title to shares and the right to receive dividends
remain with the registered member, not the beneficial owner.
Judgement:
The assessee company was the registered holder of the shares at the time when the
dividends were declared and paid. The fact that it had sold or transferred the shares
to others but not completed the registration did not change its status as shareholder
vis-à-vis the company paying the dividend. Therefore, it was entitled to receive the
dividend and was liable to pay income tax on such dividend income.
Who Can become a Member:
According to Section 11 of the Indian Contract Act, 1872, a person is competent to
contract if they are of the age of majority, of sound mind, and not disqualified by
any law to which they are subject. Since becoming a member of a company involves
entering into a contractual relationship by subscribing to the memorandum or
purchasing shares, only those who are legally competent to contract can become
members. Thus, an adult who is of sound mind and legally capable of entering
contracts may become a shareholder.
Modes of Acquiring Membership:
As per Section 2(55) of Companies Act of 2013, member in relation to a company
means:
1. The subscribers to the memorandum of a company who shall be deemed to
have agreed to become members of the company, and on its registration, shall
be entered as members in its register of members,
2. Every other person who agrees in writing to become a member of a company
and whose name is entered in its register of members shall, be a member of
the company,
3. Every person holding shares of a company and whose name is entered as a
beneficial owner in the records of a depository shall be deemed to be a
member of the concerned company.
Therefore, before acquiring membership, two important elements are essential, and
they are, a) Agreement to become a member, and b) entry of name of such person in
register of members of the company. And in addition to above two terms, a person
has to have the legal capacity of entering into a contract with company, and the same
can be identified by looking into Section 11 of Indian Contract Act of 1972.
(A) Membership by Subscription: Membership by subscription refers to the
mode of becoming a company member by signing the Memorandum of
Association at the time of incorporation. According to Section 2(55) of the
Companies Act, 2013, every subscriber to the memorandum is deemed to
have agreed to become a member of the company, and upon registration, their
names are automatically entered into the company’s register of members.
Such members are called original members or founding subscribers, and their
membership arises not from allotment of shares but by virtue of their signature
on the memorandum, creating a contractual relationship with the company.
In the case of Alexander v. Automatic Telephone Co. (1900) 2 Ch. 56, the
company’s memorandum had been signed by several persons, including
Alexander, who later claimed that he never intended to become a shareholder.
The issue before the court was whether a person who signs the memorandum
can deny his status as a shareholder after the company is incorporated. The
court held that by signing the memorandum, Alexander had signified his
consent to become a member of the company, and upon registration, he
became a shareholder automatically.
In Official Liquidator vs Suleman Bhai, A.I.R(1955) M.B. 166, Subscribed
to the company memorandum for 200 shares but he actually took 20 shares.
It was held, he was liable in the winding up of the company for all the 200
shares as he became a member by the very fact of subscription.