Voting rights is primarily rights available to shareholders of the company to conduct affairs of the company in the shareholders meetings. Contractually parties may agree on certain favourable rights to a set of investors/shareholders. The term ‘voting right’ is defined in Section 2(93) of The Companies Act 2013, as “Voting right” means the right of a member of a company to vote in any meeting of the company or by means of postal ballot. Generally, “voting rights” means “delegable right of a common stock (ordinary share) holder to take part in a firm’s decision-making process, by voting on matters of policy and to choose members of the board of directors”.
In simple words, affirmative rights are nothing but protective rights or veto rights granted to investors on certain matters pertaining to the company. Such rights create an obligation on part of the promoters and company to seek prior approval from the investors before taking decisions on certain matters identified and covered under affirmative rights granted to the investors. Such rights are considered to be the most burdensome by promoters and hence are the most negotiated terms in the any agreement. This is perhaps considered so because these may be negative covenants that govern and restrict the working of the company.
Affirmative voting rights give shareholders the power to approve or disapprove certain significant decisions that a company makes. Unless such shareholders approve of the stated matter, the decision cannot be implemented. These rights ensure that key shareholders have a say in important decisions that affect the company, which protects their interests.
Some examples of decisions that may require affirmative voting rights include:
- Amendment of the company’s charter or bylaws
- Issue of new shares
- Taking on significant debt above a prescribed thereshold (monetary limits may be set to allow operational flexibility)
- Approving annual budgets or business plans
- Corporate restructuring
- Major strategic decisions
- Amendments to the company’s capital structure
- Appointment or removal of key executives
To avoid an individual investor stalling decisions, affirmative voting rights are often granted to an “Investor Majority”. This is a group of investors who meet a certain shareholding or voting power threshold. While the above mentioned are matters that concern material aspects that may affect the core working of the company, certain investors may demand for affirmative rights over issues concerning the day to day working of the company as well.
It becomes essential for every promoter to ensure during negotiations that every instance listed in the affirmative rights do not prohibit the company from carrying out those activities but merely require the promoters to seek approval of the investors to carry out those activities.
There may be circumstances where investors wish to interfere and demand affirmative rights over matters concerning day to day affairs of the company. Such demands must not be acceded to by the promoters of the company. Promoters must ensure that the list of affirmative rights over matters do not contain any negative covenant concerning the day to day working of the company.
One may wonder if investors must be granted the affirmative rights. As a general practice, all investors or shareholders for that matter are concerned about their interests in the company. As a result, they require some assurance from the promoters to safeguard their interests. Affirmative right is one such way of safeguarding their interests/ investment in the company.
The investor control rights may be broadly divided into two categories, viz. governance and investment protection. Governance refers to mechanisms by which the company is run including board nomination, quorum rights at board and shareholder meetings and information and affirmative voting rights. Investment protection refers to a wide variety of mechanisms which offer protection against lowered shareholder value for the investor, sometimes at the expense of the company or other shareholders. These may be classified into anti-dilution rights, pre-emptive rights, and preferred payments upon liquidation of the investee company. These rights are encapsulated in an investment agreement or a shareholders’ agreement, which records the commercial and behavioural terms of arrangement between the investor, the company and, in the Indian context, the promoters. Further, because these rights are borne out of a contractual arrangement between the investor and the company/promoters, these rights are also subject to Indian contract law.
