A “shareholder” denotes a person who holds or owns the shares. On the other hand, a “member” denotes a person whose name appears on the Register of Members. For all practical purposes the words “shareholder” and “member” are used interchangeably because in the normal course a shareholder will also be a member and a member will also be a shareholder. But if looked at from a closer angle, we may come across a few exceptional cases where a shareholder may not necessarily be a member and a member may not necessarily be a shareholder.
For example, companies limited by guarantee or unlimited companies having no share capital will have only members but no shareholders. Contrarily, a holder of a share warrant is a shareholder but not a member as his name is removed from the register of members immediately after the issue of such share warrant. Similarly, a transferee or the legal representative of the deceased may be a shareholder but he may not be member until he gets his name entered in the register of members. On the other hand, the transferor or the deceased person is a member so long as his name is on the register of members whereas he cannot be termed a shareholder.
Methods to attain membership :
A person may become a member in a company in any of the following ways:
(1) By allotment :
Ordinarily a person becomes a member of the company by applying for the shares in writing and securing the allotment thereof directly from the company.
(2) By subscribing to the memorandum :
Section 41 of the Act provides that—”The subscribers of the memorandum of a company shall be deemed to have agreed to become members of the company, and on its registration shall be entered as members in its register of members.” Thus, the signatories to the memorandum become members of the company, simply by reason of their having signed the memorandum. Neither application form nor allotment of shares is necessary for becoming a member in their case. Even entry in the register of members is not necessary to confer upon them the rights and liabilities of membership (Official Liquidator vs. Suleman Bhai).
(3) By agreeing to purchase qualification shares :
As per the provisions of Section 266(2), all such persons who have signed an undertaking to take and pay for their qualification shares, for acting as a director of the company and delivered it to the Registrar, are also in the same position as subscribers to the memorandum. As such they are also deemed to have become members automatically on the registration of the company.
It must, however, be noted that this method of becoming a member is only possible in public companies having a share capital because Section 266 does not apply to: (a) a company not having a share capital; (b) a private company; or (c) a company which was a private company before becoming a public company [Sec. 266(5)].
(4) By transfer :
A person may also become a member of the company by purchasing shares in the open market and then getting them registered in his name.
(5) By transmission or succession :
A person may become a shareholder by transmission of shares through death , lunacy or insolvency of a member. Transmission is different from transfer. It is an involuntary transfer. It takes place by operation of law, to a person who is entitled under the law to succeed to the estate of the deceased or lunatic automatically and does not require an instrument of transfer.
(6) By principle of estoppel :
If a person’s name is improperly placed on the register of members and he knows and assents to it, that is, agrees in writing to become member or attends company meetings or/and accepts dividend, he shall be deemed to be a member (In Re. M.F.R.D. Cruz). Under the principle of estoppel if a person holds himself out being in a position of membership which is not true, he will then be estopped from denying that he is a member.
It is important to note that such a person whose name has been wrongly entered in the Register of Members, does not become liable as a member unless either he agrees in writing to become a member of the company or he has in fact accepted the position and acted as a member. A person cannot be deemed to have become a member by means of ‘estoppel’ simply because his name is entered wrongly in the ‘Register’.
It should be observed that in first, fourth and fifth cases mentioned above, a person does not become a member in the strict sense of the term unless his name is entered in the Register of Members. During the time lag he is a shareholder only.