Restriction on Voting Rights: Section 106

A restriction on voting rights under section 106 of the Companies Act, 2013 is narrow by design. The articles may bar a member from voting on shares carrying unpaid calls, or shares over which the company has exercised a lien, and section 106(2) then forbids the company from prohibiting a member from voting on any other ground. Three other provisions of the Act reach the same result by different routes, and those are where a public-market reader is more likely to meet a disenfranchised holder.

What restriction on voting rights does section 106 permit?

A restriction on voting rights under section 106(1) needs two things together: an enabling provision in the articles, and one of the two stated grounds. The sub-section opens with "Notwithstanding anything contained in this Act", so where those conditions are met the bar operates despite the general voting right in section 47.

The two grounds are:

Section 106(2) then closes the list: a company shall not, except on the grounds specified in sub-section (1), prohibit any member from exercising his voting right on any other ground. The restriction is permissive for the company and exhaustive against it at the same time.

What is the default voting right the restriction cuts into?

Section 47(1) is the baseline. Subject to the provisions of section 43, section 50(2) and section 188(1), every member of a company limited by shares holding equity share capital has a right to vote on every resolution placed before the company, and his voting right on a poll is in proportion to his share in the paid-up equity share capital. Those cross-references were substituted for "provisions of section 43 and sub-section (2) of section 50" by the Companies (Amendment) Act, 2017 (Act 1 of 2018), section 11, with effect from 9 February 2018, which is how related-party abstention under section 188(1) entered the section.

Preference shareholders sit under section 47(2): they vote only on resolutions that directly affect the rights attached to their preference shares, and on any resolution for winding up or for the repayment or reduction of equity or preference share capital. The second proviso flips that where a class's dividend has not been paid for two years or more, and the class then has a right to vote on all resolutions placed before the company.

Where else the Act takes a vote away, or freezes the record behind it

Section 106 is not the only route to a shareholder who cannot vote, and the others are more visible from outside the company. The last of the four is not a restriction on voting at all, and is listed because it decides which holders the restrictions get applied to.

Undeclared beneficial interest, section 89(8). No right in relation to any share for which a declaration is required under section 89 but not made by the beneficial owner shall be enforceable by him or by any person claiming through him. The vote is not suspended by anyone's order; it is simply unenforceable. Section 89(9) preserves the company's obligation to pay dividend to its members, and that obligation stands discharged on payment.

Tribunal-ordered suspension, section 90(7) and 90(8). Where a person served with a notice under section 90(5) about significant beneficial ownership fails to give the information in time, or gives information that is not satisfactory, the company applies to the Tribunal within fifteen days of the expiry of the notice period for an order that the shares be subject to restrictions on transfer of interest, suspension of all rights attached to the shares, and such other matters as may be prescribed. Section 90(8) lets the Tribunal make that order, after hearing the parties, within sixty days of receipt of the application or such other period as may be prescribed.

Share capital paid up in advance, section 50(2). A company may, if its articles so authorise, accept from a member the whole or part of the amount remaining unpaid on his shares even though no part of that amount has been called up. Section 50(2) then withholds the vote that money would otherwise buy: a member of a company limited by shares is not entitled to any voting rights in respect of the amount paid under section 50(1) until that amount has been called up. It is one of the cross-references section 47(1) opens with.

Register closure, section 91. A closure removes nobody's vote. It freezes the register that decides who holds what on the day, and section 94(2) suspends the inspection right for as long as the register is closed. Closure of the register of members covers the forty-five day and thirty day limits on it.

What can a shareholder still do on a poll?

Section 106(3) is a right rather than a restriction, and it sits in the same section. On a poll taken at a meeting, a member entitled to more than one vote, or his proxy where allowed, or another person entitled to vote for him, need not use all his votes if he votes, and need not cast in the same way all the votes he uses. That is the statutory basis for split voting by an institution holding shares for several beneficiaries.

• What is a proxy under section 105 covers who may cast the vote, and the poll-only limit on a proxy.
• What is a significant beneficial owner covers the section 90 register behind the Tribunal route.
• How to track shareholder voting results is where the outcome of a poll becomes public.
• What is free float covers the holding categories a voting base is read against.

A restriction on voting rights is a governance mechanic, not a view on a company. Flock reports the filings themselves, each stamped with its date and linked back to the exchange or regulator that published it. What any of it means for you is your call to make.