Once A King, Always A King? No

Once A King, Always A King? No

Preference shareholders, by virtue of their position, enjoy a number of benefits. The primary benefit is that whenever the company decides to pay dividends, the preference shareholders will be the first to be paid. They do not enjoy normal voting rights like ordinary shareholders. The reason being that they are already in a relatively secure position. Also, this is a trade-off made so that they get an assured income.

Section 43 of the Companies Act, 2013 provides that on the winding up of the company, the amount paid up on preference shares must be paid back before anything is paid to the ordinary shareholders. Even on winding up they have a preference and are unlikely to be wiped out hence they should not be unnecessarily given voting rights if dividend is not paid for 2 years.

The devil is 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. Although the voting right provision might seem to be an exceedingly useful lens,its limitations and disadvantages must not be overlooked.

The second proviso to Section 47(2) is very ambiguous. It does not clarify the meaning of 'two years' (whether consecutively or any two years). Clause (2) of Section 47 also provides that the Preference shareholders shall have a right to vote on those resolutions which affects the rights directly attached. Such an exposition of the section would lead to more rounds of litigation to comprehend the meaning of rights directly attached to its preference shares and those that are ancillary.

A moralistic way to approach this would be that, the Ordinary Shareholders are the true representatives of the company and hence their position cannot be undermined.If the preference shareholders are given equal status in terms of voting, the purpose of classification would be defeated. 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.

Preference shareholders get paid first, hence the name 'preference'. Thus, the phrase 'Once a King, always a King' doesn't hold good for us.So, if they are getting priority in the payment of dividend, it would not be fair if they have the same voting rights in the very important decisions of the company. Finally,preference shares are issued by companies to ensure that the ownership is not diluted. Voting provisions may place the preference shareholders in a position to extort control from the ordinary shareholders.

Providing voting rights to the Preference shareholders would be perilous in times of corporate battles between the Board and the Shareholders. In Tata's case, the ensuing corporate battle between Ratan Tata group and Cyrus Mistry's group is very evident. Tata Sons has sought shareholder's approval to amend its AOA to give voting rights to the holders of company's preference shares if it didn't pay dividend for two years or more. This would also dilute the hold of the ordinary shareholders. The said amendment is a part of its bigger move to make it a board-controlled company in which most of the decisions taken will no longer need shareholder's approval. Preference shares may gain an edge and be at par with the ordinary shares and would give them an equal seat at the table. Mr. Tata who has majority of the preference shares, if given voting rights would defeat most of Mr. Mistry's resolutions because of their tussle. Thus, these can be used by them to their personal advantage.

The preference shareholders are only accorded preferential treatment for the purpose of payment of dividends in consideration of their contribution to the capital. The use of voting provisions for preferential shareholders, involves a problem 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.

To extend such preferential treatment to the voting rights would be in effect changing the corporate vistas. 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 15jgls-djain@jgu.edu.in