Friday, November 1, 2013

Transfer of Voting Rights, Without Transfer of Shares: Part 2

[The following post is contributed by Aditi Jhunjhunwala, Senior Associate at Vinod Kothari & Co. She can be contacted at aditi@vinodkothari.com.

This is a continuation of a previous post available here]

Shares: Personal right or property right


A share is an item of property, and can be sold or transferred. Holding a share makes the holder a member of the company, and entitles it to enforce the provisions of the company's constitution against the company and against other members. The concept of transfer of voting rights without transfer of shares has been contended in many cases and the courts have usually held affirmative view on the same based on the argument that a right to vote cannot be a personal right but is only a property right. The same has been discussed below in light of available case law.

In E.D. Sassoon And Co. Ltd. v. K.A. Patch, 1922 it was argued that the right to vote is a right personal to the shareholder, that it is, therefore, not transferable under Section 6 of the Transfer of Property Act, 1882, and cannot be the subject of a trust under Section 8 of the Indian Trusts Act. But the right to vote has no connection with the personality of the shareholder. It is suggested that the company has a right that the shareholder shall exercise his own personal judgment on matters considered at meetings. That is not so. The company cannot inquire into a shareholder's motives or invalidate his vote on the ground that he has a private interest: East Pant Du United Lead Mining Company {Limited) v. Merryweather (1864) 2 H.& M. 254.

A shareholder may bind himself by contract not to vote or to vote in a particular way: Greenwell v. Porter [1902] 1 Ch. 530. If he can be so bound by contract, it follows that he can be bound by the directions of his beneficiary. The truth is that the right to vote is a right of property annexed to the shares and transferable or assignable with the share.

As discussed in case of Mohini Mohan Chakravartty (in Part 1 of this series), it is held that shares are property rights and the pawnee of shares in a company cannot be treated as the holder of shares nor is he entitled to receive any dividend on the shares.

Possible Implications of transfer of voting rights


Registration of transfer of vote with the Company


In every case of transfer of shares, the same has to be intimated to the Registrar and Share Transfer Agent for the company to make suitable entry of the transferee’s name in the Register of members. However, in case of a transfer of voting right, there is no need at all of registering any detail with the company as such an arrangement is a private arrangement between the parties and as held in the cases above that the right to vote has nothing to do with the personality of a shareholder.

Intimation to SEBI under Takeover Code


As discussed in Part 1 of this series, the Takeover Code has made it mandatory for the promoters and their persons acting in concert to make all disclosures relating to any “encumbrances” created by them on their securities. The term encumbrance not only includes pledge or lien but other similar transactions also. Therefore, any encumbrance resulting in transfer of voting rights will attract the Takeover Code under Regulation 31.

Relevance of such transfer


For a small shareholder whose shareholding is barely between 0.01% - 5%, all what would probably matter to him would be the economic benefit on such shares as the only purpose of such investment might have been additional income. Such shareholders might not even care to exercise their right to vote in any matter connected with the company. Therefore, usually such small shareholders would not be averse to transferring the voting rights to someone for whom the voting rights are of great significance by creating a block of voting rights for them as they cannot direct the overall control of the company and must accept the will of the majority. Such transfers therefore happen to secure the vote of the group in the shareholders meeting to pass special resolutions to achieve fundamental changes in the constitution and the structure and working of the company.

How to transfer voting rights?


The transfer of voting rights need not and cannot be done vide a transfer deed. The transferee shall execute a power of attorney in favour of the transferor so as to transfer the specific interest in the shares. The power of attorney shall specify that the transferor will exercise the rights to vote in place of the actual holder of the shares. The Act does recognise the validity of a power of attorney. As discussed above that power of attorney is a recognised instrument for transfer of voting rights in shares as held in Cousins v. International Bricks (discussed in Part 1 of this series).

However, such transfer should be for a consideration. Hence, an agreement to sell the voting rights should be duly executed alongwith the power of attorney for a specific consideration. The agreement validates the power so granted under the power of attorney. Sure enough, there will be a provision as to when will and what circumstances the right would be revoked.

Analysis


Though the concept has been a topic of argument, it can be concluded that if not explicit, such a concept does exist as in case of pledge or a voting trust. Hence, it cannot be contended that the voting rights cannot be transferred exclusively without transfer of shares. From the above discussion, it is very apparent that law recognises such a mechanism and accordingly has also devised regulations for appropriate disclosures as and where necessary. Such transfers are usually in order to exercise voting rights to influence decisions by creating a block of votes as in case of voting trusts or personal arrangements through agreements.

(Concluded)

- Aditi Jhunjhunwala

3 comments:

Anonymous said...

I still did not get how come a pledge will lead to transfer of voting rights. doesn't the companies Act bestow voting rights only on members and as the pledgee is not a member how can he exercise voting rights? and can they contractually agree upon something which is not allowed by the law?

Sarayu said...

Thank you for the post.
Just came across an article which touches upon the aspect of transfer of voting rights, and argues that the creation of a market wherein investors can buy and sell votes separately from shares would facilitate certain hostile takeovers and also improve the market's efficiency for corporate control.
(Douglas H. Blair et. al, Unbundling the Voting Rights and Profit Claims of Common Shares, Vol. 97(2), Journal of Political Economy (1989).

Umakanth Varottil said...

@Anonymous. The default position is that the voting rights will be available with the member, who in the case of a pledge will be the pledgor. However, the terms of the pledge could always provide that the pledgor would exercise the voting rights in accordance with the instructions of the pledgee. Alternatively, and more likely, the pledgor may give a power of attorney to the pledgee to exercise these rights. In that sense, a pledge may not automatically result in a transfer of voting rights, but that may be accomplished contractually.