Page 140 - DCOM106_COMPANY_LAW

Unit 9: Share and Share Capital

9.7 Voting Rights Notes

Voting Rights of Preference Shareholders

The preference shareholders will vote only on matters directly relating to preference shares.
Section 87 (2) mentions the following matters which relate to preference shares and preference
shareholders can vote on them: (i) any resolution for winding up of the company; (ii) any
resolution for the reduction or repayment of share capital; (iii) any resolution at any meeting, if
dividend on cumulative preference shares remains unpaid for at least two years. Holders of
non-cumulative preference shares shall have a right to vote on all resolutions, if their dividends
are in arrear for the two financial years during a period of six years ending with the financial
year preceding the meeting. [s.87(2)].

9.8 Rights Shares

The existing members of the company have a right to be offered shares, when the company
wants to increase its subscribed capital. Such shares are known as “rights shares” but they are
not issued free of charge.

Section 81 provides that where at any time after the expiration of two years from the date of
incorporation of the company, or after one year from the date of the first allotment of shares,
whichever is earlier, a public company limited by shares issues further shares within the limits
of the authorised capital, its directors must first offer these shares to the existing holders of
equity shares in proportion, as nearly as circumstances admit, to the capital paid up on their
shares at the time of the further issue. The company must give notice to each of the equity
shareholders, giving him the option to buy the shares offered to him by the company. The
shareholders must be informed of the number of shares he has the option to buy. He must be
given at least fifteen days to decide whether he would exercise his option or not. If the shareholder
does not inform the company of his decision, he shall be deemed to have declined the offer.
Unless the articles of the company otherwise provide, the directors must state in the notice of
offer the fact that the shareholder has also the right to renounce the offer, in whole or part, in
favour of some other person who need not be member of the company. If the shareholder
declines or, is deemed to have declined or, if the person in whose favour the renunciation is
made declines to buy the shares, the company’s directors may dispose of those shares in such
manner as they may think fit.

Task DJA Co. Ltd., is holding 40% of total equity shares in MR Co. Ltd. MR Co. Ltd.
(incorporated on 1.1.2003) decided to raise the paid-up equity share capital by issuing
further shares and also decided not to offer any shares to DJA Co. Ltd., on the ground that
it was already holding a high percentage of shares in MR Co. Ltd. Articles of MR Co. Ltd.,
provides that the new shares be offered to the existing shareholders of the company.
On 1.3.2006. new shares are issued to all the shareholders excepting DJA Co. Ltd. Examine
the validity of decision of Board of directors of MR Co. Ltd., of not offering any further
shares to DJA Co. Ltd.
Exception: However, the company may, by special resolution in general meeting, decide that
the directors need not offer the shares in the further issue to the existing equity shareholders
and, that they may dispose of them in any manner whatsoever. But where it has been possible to
muster ordinary majority only, the directors may not offer the shares to the existing equity
shareholders, if permission is obtained from the Central Government. Further, s.81 does not

LOVELY PROFESSIONAL UNIVERSITY 135