Company Law: Becoming A Member And Understanding Your Rights

Becoming a member of a company is a crucial step in maintaining its shares and transactions. In this context, a member refers to someone who has agreed to join the company by entering their name in the 'Register of Members' and is typically a shareholder. The process of becoming a member varies depending on the jurisdiction, but there are some general steps and requirements. Firstly, an agreement to become a member is necessary, along with the entry of the individual's name in the company's register. The person should be legally competent to enter into a contract with the company and satisfy the requirements of the applicable contract act. The specific number of members required to form a company differs according to the type of company, with private and public companies having different minimum requirements. The modes of acquiring membership include subscribing to the company's memorandum, application and allotment of shares, transfer of shares, transmission of shares, and through estoppel. It is important to note that members have certain rights and liabilities associated with their position in the company.

Subscribing to the company memorandum

The memorandum of association is a crucial document for the formation and functioning of a company. It outlines the company's scope of activities, intended business activities, liability of members, powers of the board and members, and its relationship with the outside world. The memorandum is a legally binding document that defines the limitations of the company's powers, and any act beyond it is considered ultra vires.

To subscribe to the company memorandum and become a member, an individual must:

• Sign the memorandum, expressing their wish to form a company and agreeing to become a member.
• In the case of a company with share capital, each subscriber must agree to take at least one share.
• The memorandum must be in the prescribed form and authenticated by each subscriber.
• Along with the memorandum, an application for company registration must be delivered to the registrar, including the company's proposed name, the location of its registered office, whether the liability of members is limited, and whether it is a private or public company.
• The application must also include a statement of capital and initial shareholdings, a statement of guarantee (if the company is limited by guarantee), and a statement of the company's proposed officers.
• The subscribers to the memorandum incur a contractual obligation to subscribe to the number of shares provided against their names.
• By subscribing to the memorandum, individuals declare their desire to incorporate a company for a lawful purpose, as covered in the objects clause of the memorandum.

It is important to note that the subscribers to the memorandum are deemed to have agreed to become members of the company upon its registration. Their names shall be entered as members in the company's register of members.

Understanding Membership

A member of a company is someone who has agreed to become a part of the company by entering their name into the 'Register of Members'. They hold shares of the company and are considered the 'Beneficial owner in the record of depository'. To acquire membership, an individual must present an agreement to become a member and have their name entered in the register.

Modes of Acquiring Membership

In addition to subscribing to the company memorandum, there are other ways to acquire membership in a company:

• Agreement in Writing: An individual becomes a member when they agree in writing and have their name entered in the register of members.
• Holding Shares: If an individual's name is entered as a beneficial owner in the records of the depository and they hold equity share capital, they need not apply in writing to become a member.
• Transmission of Shares: Upon the death of a shareholder, their legal heir or representative can acquire their shares and become a member.
• Through Estoppel: If an individual allows the registration of their name on the register of the company without sufficient cause, they will be declared a member and liable as such.
• Allotment of Shares: A person can apply for shares, and upon allocation, become a member of the company.

Written agreement

A written agreement is a crucial aspect of becoming a member of a company. This agreement serves as a contract between the individual and the company, outlining the rights and responsibilities of both parties. Here are some key details about the written agreement component:

Components of the Written Agreement:

• Offer and Acceptance: The written agreement typically involves an offer of membership by the company and acceptance by the individual. This can be in the form of a signed document or a written submission.
• Terms and Conditions: The agreement should outline the terms and conditions of membership, including any rights, responsibilities, and obligations. This may include details such as voting rights, distribution of profits and losses, and decision-making processes.
• Share Allocation: The written agreement often includes details about the allocation of shares to the new member. It specifies the number of shares the individual is subscribing to or purchasing and the associated responsibilities, such as payment obligations.
• Membership Register: The agreement should confirm the addition of the individual's name to the company's membership register. This register serves as official recognition of the individual's membership and is a crucial step in the process.
• Compliance with Laws: The written agreement should ensure compliance with relevant laws and regulations, such as the Indian Contract Act of 1872 or specific company laws in the applicable jurisdiction.

Types of Membership Acquisition:

• By Application and Allotment: When an individual applies for shares, they become a member upon the issuance of shares, receipt of a notice of allotment, and the entry of their name in the membership register.
• By Transfer of Shares: An individual can join the company by purchasing shares from an existing member. This transfer of shares is recorded in the company's records, and the buyer's name is added to the membership register.
• By Transmission of Shares: In the event of a member's death, their shares can be transferred to their legal representative or successor. The company registers this person as a member, or they may request the transfer of shares to another individual.
• By Estoppel: If an individual gives assent to being a member without a sufficient cause and allows their name to be registered, they are considered a member and liable as such.

It is important to note that the specific requirements and processes for becoming a member of a company may vary based on the jurisdiction and the company's governing laws. Therefore, it is always advisable to seek legal guidance when navigating company membership agreements.

Transfer of shares

Shares of a public company are generally freely transferable, while shares of a private company may be subject to restrictions outlined in the company's Articles of Association. In the case of a private company, the transfer of shares is often restricted to preserve the composition of shareholding. However, there should not be an absolute ban on the right to transfer shares.

To initiate the transfer of shares, a notice or request letter must be sent by the transferor to the company's directors, expressing their intention to transfer shares. This letter should include the name of the transferor, details of their shareholding, the number and type of shares to be transferred, and the total consideration for the transfer.

The transfer deed, typically in the prescribed form (Form SH-4), must be obtained and endorsed by the prescribed authority. The transfer deed should be duly stamped, with the present stamp duty rate being 25 paise for every one hundred rupees of the share value. The transfer deed must be signed by the transferor and the transferee, with their signatures, names, and addresses as approval for the transfer.

Along with the transfer deed, the relevant share/debenture certificate or allotment letter must be attached and sent to the company. If the application is for partly paid shares, the company must notify the transferee of the amount due, and a no-objection certificate from the transferee is required within two weeks of receiving this notice.

Upon receipt of the duly completed transfer documents, the company will approve the transfer and update its Register of Members. The company will then issue new share certificates to the transferee, typically within one month from the date of receipt of the transfer deed.

It is important to note that the process of transferring shares may vary depending on the jurisdiction and specific company laws and regulations.

Transmission of shares

The process of transmission is initiated by the legal heir(s) or receiver of the deceased. It is important to note that no transfer deed is involved in the transmission of shares, and there is no adequate consideration involved in this process. The original liability of the shares continues to exist, and no stamp duty is payable.

Documents Required for Transmission of Shares:

The transmission of shares requires the submission of specific documents to the company. These documents vary depending on whether the shares are held in a Demat account or physical form.

For shares held in a Demat account, the survivor or legal heir needs to submit:

• Transmission Request Form (TRF)
• Affidavit on a stamped paper for claiming the legal heir of the beneficial owner
• Notarized copy of the death certificate
• Indemnity deed indemnifying the depository and Depository Participants (DP)
• No Objection Certificate (NOC) from legal heirs
• Family settlement deed executed by all legal heirs of the deceased beneficial owner

If the value of the shares exceeds a certain threshold, the Depository Participants (DP) may require additional documents, such as a succession certificate.

For shares held in physical form, the share transfer agent may request the following documents:

• Transmission Request Form (TRF)
• Notarized copy of the death certificate
• Original share certificates
• Succession certificate
• Probate or letter of administration, preferably notarized

Steps for Transmission of Shares:

The basic steps for transmission of shares are outlined below:

• Application by Survivor or Legal Heir: The survivor or legal heir of the deceased shareholder submits an application for transmission of shares, providing a death certificate and any other required documents.
• Review and Verification of Documents: The company reviews and verifies the submitted documents. If the documents are in order, the company may approve the transmission request. If the documents are not satisfactory, the company may refuse the request and communicate this decision to the concerned person within a specified timeframe.
• No Share Transfer Deed Required: In the case of transmission of shares, execution of a transfer deed is not necessary. Valid documents, such as those listed above, are sufficient for the share transmission process.
• Liability on Shares: The liability of the shares continues to be subject to the original liabilities. If there was any lien on the shares for any sums due, the lien remains, despite any changes in the value of the shares.
• No Payment of Stamp Duty: As the transmission of shares occurs by operation of law, there is no requirement to pay stamp duty or consideration.
• Issue of Share Certificates: Once the share transfer procedure is completed, new share certificates must be issued within a specified timeframe, unless prohibited by law or a court order.

Additional Information:

• There is no time limit for transmission of shares. The survivor or legal heir can make an application for transmission at any time, even during the lock-in period of shares.
• A legal representative can directly transfer the shares of the deceased shareholder to a third party, as permitted under the relevant sections of the Companies Act.
• The person entitled to the shares, as the legal heir or representative, is entitled to dividends and other advantages. However, they can only attend General Meetings and vote after their name is registered as a member.
• If the person does not transfer the shares or elect to become a shareholder, the company can issue a notice to either register or transfer the shares. If the person does not comply within a certain period, the company may withhold dividend, bonus, or other payable amounts.

Sample Application for Transmission of Shares:

\[Date\]

The Board of Directors,

\[Company Name\]

\[Company Address\]

Subject: Transmission of \[number\] \[type\] shares held by Late \[Name of Deceased\]

Reference Number

I am writing to inform you of the death of my \[father/mother/relation], \[Name of Deceased], on \[Date of Death]. He/She was holding \[number\] \[type\] shares of \[share details\> in the company under Ledger Folio Number. Please find below the relevant details of the shares:

Share Certificate Number

Number of Shares

Ledger Folio Number

Distinctive Number From

Distinctive Number To

I hereby submit the following documents for transmission of the aforementioned shares in my name:

• Copy of the death certificate obtained from \[Issuing Authority\]
• Succession Certificate
• Original share certificate
• My Specimen signatures

Kindly consider and arrange for the transmission of the said shares in my favour.

\[Your Name\]

\[Your Address\]

\[Your Contact Information\]

Key Points to Remember:

• Transmission of shares typically occurs due to the sudden death of a director or shareholder, resulting in the transfer of ownership to their legal heirs or representative.
• The transmission process is governed by specific sections of the Companies Act and involves the submission of necessary documents to the company.
• The company reviews and verifies these documents before approving the transmission request and registering the shares in the name of the survivor or legal heir.
• The transmission of shares does not require a share transfer deed, stamp duty, or payment of consideration.
• The liability of the shares remains subject to the original liabilities, and any liens on the shares continue to subsist.
• New share certificates are issued after the transmission process is completed, unless prohibited by law or a court order.

Registering in depository records

To become a member of a company, a person must enter into an agreement to become a member and have their name entered in the company's register of members. Additionally, they must hold shares in the company and be registered as a beneficial owner in the depository records.

Depository records are maintained by a depository, which is an institution or organisation that holds investors' securities in electronic form. In India, there are two types of depositories: National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL). These depositories act as a link between the companies issuing shares and their shareholders.

To access the services of a depository, an investor must open a Demat account through a Depository Participant (DP), who is the agent or registered stockbroker of the depository. A DP facilitates the opening and maintenance of Demat accounts and acts as an intermediary between the depository and the investors.

To become a DP, an entity must register with either NSDL or CDSL and meet certain eligibility criteria. The registration process involves submitting an application, providing various documents, and meeting the infrastructure requirements. Once approved, the DP enters into an agreement with the respective depository and can then offer depository services to investors.

The functions of a DP include opening investor accounts, dematerialisation and rematerialisation of securities, transferring securities, settling trades, pledging and unpledging securities, and facilitating corporate actions such as transferring securities to Demat and bank accounts.

Therefore, to become a member of a company, an individual must enter into an agreement, have their name registered in the company's records, and hold shares registered in their name as a beneficial owner in the depository records through a DP.

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