Member in a Company
In modern business practices, companies operate as separate legal entities with distinct rights and obligations under Company Law. A company does not act on its own; it functions through its members, who contribute capital, exercise control, and participate in the company’s management and decision-making. Membership in a company is therefore crucial, as it establishes a legal relationship between the individual and the company. Becoming a member is governed by statutory provisions under the Companies Act, 2013, and relevant rules, ensuring clarity, legality, and transparency in corporate governance. This essay explores the procedures to become a member of a company, with suitable examples to enhance understanding.
Who Can Become a Member?
Before understanding the procedures, it is essential to identify who can become a member of a company. Under the Companies Act, 2013, any person who subscribes to the Memorandum of Association (MOA) of the company or agrees to become a member by agreeing to the terms of the Articles of Association (AOA) can be admitted as a member. Members can be individuals, corporate entities, or even other companies. However, some restrictions apply: minors, insolvent individuals, or persons disqualified by law cannot be admitted as members.
For instance, if Mr. Ramesh, an individual with no legal disqualifications, subscribes to the shares of a private limited company at the time of incorporation, he becomes a founding member. Conversely, a person declared insolvent cannot lawfully acquire membership.
Modes of Becoming a Member
Membership in a company can be acquired through different modes depending on whether it is at the time of incorporation or during the company’s ongoing operations.
Membership at the Time of Incorporation
At the time of incorporation, individuals who subscribe to the Memorandum of Association automatically become members. The MOA, being the foundational document of the company, requires at least two subscribers in a private company and at least seven in a public company, as per Section 3 of the Companies Act, 2013.
Example: Ms. Priya and Mr. Arjun subscribe to the MOA of a private limited company called “Tech Solutions Pvt. Ltd.” Upon filing the incorporation documents with the Registrar of Companies (ROC), both individuals are automatically considered members and hold the first shares of the company.
Membership by Allotment of Shares
A person can also become a member after incorporation by applying for and being allotted shares in the company. This requires the company’s board to approve the allotment and record the individual in the register of members.
Procedure:
- Application for shares: An interested individual submits a formal application indicating the number and type of shares desired.
- Board approval: The company’s board of directors reviews and approves the allotment.
- Allotment letter: The company issues a share allotment letter confirming the number of shares allotted.
- Entry in register: The individual’s details are entered in the register of members maintained under Section 88 of the Companies Act, 2013.
Example: Mr. Ajay applies for 100 shares in “Innovate Solutions Ltd.” After the board approves his application and issues an allotment letter, his name is entered in the company’s register of members. He becomes a lawful member with rights to vote and participate in company decisions.
Membership by Transfer of Shares
Existing members can transfer their shares to another person, who then becomes a member. The process involves complying with the provisions of the Articles of Association and obtaining board approval.
Procedure:
- Execution of transfer deed: The seller executes a share transfer deed specifying the number of shares and the transferee’s details.
- Board approval: The board approves the transfer as per AOA and legal requirements.
- Update of register: The transferee’s name is entered in the register of members, and the transferor’s name is removed or adjusted accordingly.
Example: Mr. Sanjay decides to sell 50 of his shares to Ms. Neha in “Global Traders Ltd.” After submitting the transfer deed and receiving board approval, Ms. Neha’s name is recorded in the register of members, making her a rightful member.
Membership by Transmission of Shares
In cases of inheritance or operation of law, membership can be acquired without a formal transfer. This usually occurs when a shareholder dies or becomes insolvent, and the shares pass to legal heirs or trustees.
Procedure:
- Submission of legal proof: The legal heir submits necessary legal documents, such as a succession certificate or probate.
- Board review: The board examines the documents and approves the transmission.
- Update of register: The legal heir’s name is entered in the register of members.
Example: Mr. Rohan, a shareholder in “City Enterprises Ltd.,” passes away. His daughter, having obtained a succession certificate, submits the same to the company. After approval, she is entered as a member, inheriting her father’s rights.
Rights and Duties of Members
Becoming a member is not merely a formal status. Members gain significant rights, including the right to vote in general meetings, receive dividends, inspect company records, and participate in profit distribution. Simultaneously, they must comply with duties, such as paying the share subscription amount and adhering to the company’s Articles of Association.
Example: When Ms. Neha became a member of “Global Traders Ltd.,” she obtained the right to vote at the AGM, receive dividends proportionate to her shares, and attend shareholders’ meetings. However, she must also pay for her shares and abide by company policies.
Practical Considerations
While the legal framework is clear, practical compliance ensures smooth membership procedures:
- Proper documentation: Every allotment, transfer, or transmission must be documented to avoid disputes.
- Board resolution: Approval by the board is mandatory for allotment and transfer.
- Register of members: Maintaining an up-to-date register is a statutory requirement and protects the legal rights of members.
- Adherence to Articles of Association: A company’s AOA may provide specific conditions for membership, which must be followed strictly.
For example, a startup issuing preferential shares must ensure that the AOA explicitly allows such allotment. Failure to comply may result in legal challenges and disputes over membership rights.
Mnemonic to Remember the Procedures
“I Ate Ten Tasty Sandwiches”
- I – Incorporation (becoming a member at the time of incorporation)
- Ate – Allotment (membership through share allotment)
- Ten – Transfer (membership through transfer of shares)
- Tasty – Transmission (membership by operation of law or inheritance)
- Sandwiches – Statutory compliance (register of members, AOA adherence, board approvals)
This simple mnemonic captures the four main modes of acquiring membership and the importance of legal compliance, making it easy to recall.
About Lawgnan
Becoming a member of a company is a crucial step toward participating in ownership, decision-making, and profit sharing. Whether you are starting a new venture, investing in a startup, or acquiring shares in an established company, understanding the proper legal procedures ensures a smooth and lawful process. Visit lawgana.in today to access detailed guides, templates, and expert insights on company membership and corporate compliance. Stay informed about your rights, duties, and statutory obligations as a member. Don’t leave your membership to chance—empower yourself with knowledge and ensure your position in the company is legally secure.
