Preference shareholders are entitled to number of benefits as opposed to ordinary shareholders due to their position in the company. The foremost benefit being that they will be paid first when the company makes a decision of the payment of dividends. They are not entitled to voting rights, which is enjoyed by the ordinary shareholders because the preference shareholders are not in a perilous position. In fact, this is a bargain made in return of an assured income
Section 43 of the Companies throws light on one of the privilege of the preference shareholders. It provides that on winding up of the company preference, the amount paid up on preference shares must be paid back before anything is paid to the ordinary shareholders. Thus, the first preference is to be given to the preference shareholders as regards the payment of shares. It could be seen that they are given preference even on the winding up of the company and their chances of being wiped out is extremely low, therefore they should not be given voting rights if dividend is not paid for 2 years.
The trouble lies in the details of the Companies Act, 2013. Section 47(2) gives the same voting rights to the Preference shareholders as to the ordinary shareholders. The provisions of voting rights are extremely useful and it is necessary that its limitations and disadvantages are given due treatment.
The second proviso to Section 47(2) is equivocal. It offers no clarification as regards the meaning of ‘two years’ (whether consecutively or any two years). Clause (2) of Section 47 delineates that preference shareholders shall have a right to vote on those resolutions which affects the rights directly attached. This rights granted by this section to preference shareholders would definitely require the interpretation of whether the rights are directly attached to the preference shares or they are ancillary to it. Thus increasing the rounds of litigation.
One way of looking at this is that the ordinary shareholders are the true representatives of the company and hence their position should be shown deference. The giving of equal treatment to the preference shareholders as regards voting rights would defeat the purpose of classification. Giving additional voting rights would be prejudicial to the interests of the class of the preference shareholders who have been duly paid dividend and thereby not given voting rights, especially when the ordinary shareholders have also not been paid the dividend.Alikes should be treated alike.
The preference shareholders are called so because they get paid first, they preferred over the ordinary shareholders. Thus, the phrase ‘Once aKing, always a King’ doesn’t hold good for the preference shareholders.Therefore, if they are prioritized in the payment of dividend, it would not be just if they have the same voting rights in the decision making of the company. Finally, the purpose of issuance of preference shares is to ensure that ownership is not diluted. Voting provisions will enable the preference shareholders to extort control from the ordinary shareholders.
Providing voting rights to the Preference shareholders would sometimes have disastrous consequences when the corporate battles between the Board and the Shareholders arise. The corporate battles involving two group of shareholders where one group seeks to amend the AOA so that the preference shareholders may be entitled to voting rights if dividends are not paid for two or more years, would be fatal. Such types of amendments would show that the company is sought to be controlled by board, so that shareholders’ approval would lose its force. Preference shareholders may thus gain an upper hand and would be at par with the ordinary shareholders. The group possessing majority of preference shares, if given voting voting rights would defeat the resolution of other groups owing to their animosity. Thus, such rights can be used to further their causes and for their advantage.
The preference shareholders are given preferential treatment in the payment of dividend only in consideration of their contribution to the capital.The use of voting provisions for preferential shareholders, brings into limelight the larger and important issue of balancing the freedom to vote against the safeguards necessary to protect the interests of ordinary shareholders that is beneficial to the company as a whole. The picture of the corporate affairs would be dramatically affected, if the preferential treatment were extended to voting rights. Hence, such voting rights should be discouraged.
This article has been authored by Disha Jain, a 5th year student in Jindal Global Law School. She may be reached at firstname.lastname@example.org