Promoter and shareholder are important in a business. Now know the difference between a Promoter and a Shareholder agreement.
In a business, promoters and shareholders play big roles. Promoters and Shareholders, they make decisions that benefit the business, its owners, and its employees. In addition, they have distinct responsibilities and obligations. One person might be able to fulfill both roles in a small business. Larger companies may structure ownership differently to suit their needs. Here’s what the difference between Promoters and Shareholders.
a) Promoters Meaning: Founders who initiate a company, arrange resources, and oversee its establishment before transferring control.
b) Shareholders Meaning: Individuals or entities owning company shares, with ownership rights, voting power, and potential dividend earnings.
Promoters
A promoter is a person who is involved in the business and has a stake in its success. This may be someone who owns part of the company or an investor who has put money into the company’s equity.
In addition to owning shares, promoters also have other responsibilities in the business. They are committed to serving the interests of the Shareholder Contract, and they contribute their time, effort, and expertise to making sure that company goals are achieved.
Promoters have voting rights within the company, but they do not control major decision-making like hiring or firing employees. It is a very broad term that cannot be grouped into one legal definition.
The term Promoter is defined in Section 2 (69) of the Act to mean:
- A person is named as the promoter in the prospectus or the company’s annual returns.
- A person who has direct or indirect control over the company’s affairs, whether as a shareholder agreement, director, or otherwise.
- A person who advises or instructs the board of directors removal of a company.
In other words, if a company secretary or a legal counsel is giving advice to the company in their professional capacity, they are not considered promoters. In Indian Corporate Law, the term ‘promoter’ is inclusive, not exhaustive. In a broad sense, it includes anyone who had a personal hand in its organization and establishment.
Types of Promoters and Shareholders
The jurisprudence of Promoters is not clearly defined. There are a bunch of types of promoters, but they may overlap.
The types of promoters are as follows:
- Professional Promoters: Normally, a promoter is someone who does the promotion of a company and then transfers it entirely to the shareholder agreement of the company once it has been established. Promoter systems like this are prevalent in developed economies, but they have not developed enough in developing nations.
- Occasional Promoters: Promoters who aren’t directly involved in the business. They take a promotion with one company and then return to their original profession. If a lawyer floats a company, he shall be an occasional promoter. Most people become occasional promoters for personal reasons.
- Financial Promoters: Financial institutions in the corporate world play a financial role in promoting and financing companies when the economic climate is favorable.
- Managing Agents: Promoters can also be managing agents of a company. These persons manage floating companies once they are established. Indian managing agencies are no longer used.
Legal Position
Promoters do not have a defined legal status within a company. They are not considered trustees or agents of the company. However, promoters do have a pre-existing relationship with the company even before its incorporation. As fiduciaries, they have a responsibility to act in good faith when representing or dealing with the company. The law does not outline any specific obligations or liabilities for promoters, but their fiduciary relationship with the company implies certain duties.
Promoters form the company and bring it into existence. In accordance with the law, they must make sure that the company receives maximum benefits. While acting on behalf of the company, they may not reap any secret benefits for themself. All money they receive on behalf of the company must be deposited with the company.
While performing their duties for the company, they are legally required to exercise due diligence and care. They will be personally liable for any contracts they enter into for the company’s establishment until the company has verified the contracts once it is incorporated and legally exists. When a promoter’s statement is found to be untrue, they can be punished by having to compensate the aggrieved party.
Shareholder
A shareholder is someone who owns a share of the company. The company’s owners are usually promoters, but they may also be shareholder agreement. In most cases, shares of a company come in one of two forms: common and preferred. The latter has higher voting rights than common stock, which means it can take some time for a promoter to accumulate enough shares to become the majority owner.
Shareholders have three primary obligations:
- To approve new directors.
- To elect a board of directors.
- To approve major capital expenditures.
It is defined in section 2(84) of the Act that the term ‘share’ encompasses the share capital of a company and includes stock. Consequently, any individual who holds the shares shall be a shareholder.
A shareholder’s role in a company is very important, and their functions are very wide. Therefore, it becomes imperative that the same is categorically defined in the law.
Rights of Shareholders
As shareholders, you have wide powers in relation to the management of the company, including the ability to make changes and alterations.
Here is a list of the rights you have as a shareholder:
- They must approve any change to the company’s AOA or MOA. Any change to the company’s AOA or MOA must be approved by a resolution passed at a general meeting attended by all shareholders. A special majority of 75 percent of shareholder agreement may also be required for major amendments
- Shareholders holding more than 10 percent of the paid-up capital of a company may request the board of directors to call an extraordinary general meeting. This meeting must be called within 21 days of receiving such a request
- Each company is required to hold an Annual General Meeting (hereafter referred to as the ‘AGM’) Shareholders have the right to receive notice of the annual general meeting, attend the meeting, and vote for or against any resolution passed at the meeting
- In a private corporation, however, this right may be restricted by the AOA of the company. They may, however, transfer their shares like movable property
- Dividends are distributed according to the profits the company makes
- Minority shareholders are afforded special protection in cases of oppression or mismanagement by the majority shareholders
- Under Sections 397 and 398 of the Act, the Company Law Tribunal protects the interests of the public in general and minority shareholders in particular.
Difference Between a Promoters and Shareholders
It is difficult to differentiate between a Promoters and Shareholders agreement in a company, mainly because there are no grounds for differentiation. These two positions hold significant decision-making power in a company, but they are unrelated. Promoters are those who come up with the idea for a specific business, complete the formalities to begin the business, and incorporate the company. Their significance can be traced back to the fact that they play a critical role in establishing the company. The company was established before it existed. At the time of incorporation, the promoters sign the Memorandum of Association. Shareholders are the ones who buy the company’s shares and invest their money.
On the other hand, the term shareholder is very specific and refers to any person who invests his or her capital in the business. Shareholders can buy shares of a company for which they pay money to the company. The company can use the money to raise capital. A person who subscribes to the company’s shares becomes a shareholder, regardless of when the shares were acquired. Shares can be bought on a primary or secondary market, which has no bearing on his position as a shareholder. As such, promoters and shareholders have very different approaches.
Conclusion
The promoter is the individual who owns the company. He or she is the one who has the ultimate say over what is going to happen in the company. The shareholder agreement is the individual who invests in and owns shares of a company. Hope this blog regarding the Difference Between Promoters and Shareholders was helpful. Vakilsearch can assist you with company incorporations and other legal advice. As you know, legal is now simple.
