Thursday, December 14

Shareholders Are Constituents of a Company

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Shareholders are Constituents of a Company



The Constituents of a Company are its shareholders because its promoters must subscribe to its shares in order to bring it into existence. The company has a memorandum of association which controls its business activity. For the management of its affairs it has its own articles of association and a board of directors. The assets of the Company are owned by it and not by its shareholders but the Company is constituted for the purpose of earning profits and the shareholders are not only entitled to a ratable distribution of its assets on its being wound up, but also indirectly control the management of the Company by appointing the directors. Thus, the shareholders have ultimate control over the management of the Company, though they do not directly manage its affairs. It is true that the directors derive their authority from the law, but as their own appointment rests with the shareholders, they are, in substance, the agents or delegates of the general body of the share‑holders.

What is of the vital importance, however, is that a Company is brought into existence and exists for the sole purpose of earning profits and gains and it earns them not for itself but for the benefit of the shareholders. To earn profits for its shareholders being the raison deter of the Company, a Company would be defeating the object of its own existence if Croesus‑like it filled its coffers with gold and did not distribute it as dividends to its shareholders. A company cannot enjoy its own income, the ultimate beneficiaries of the income being the shareholders themselves who, on the recommendation of the directors declare the dividends.


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