Membership, Concepts, Meaning, Definition, Objectives, Modes of Acquiring Membership, Termination of Membership and Member vs Shareholder

Membership in a company refers to the legal relationship between a person and the company, by which the person becomes entitled to enjoy the rights and is subject to the liabilities of a member. A member contributes to the capital of the company or acquires shares through transfer or transmission. Membership establishes a formal connection that allows participation in corporate governance, profit sharing, and decision-making processes.

Meaning of Membership

Membership means being a registered member of a company whose name is entered in the Register of Members. A person becomes a member by subscribing to the Memorandum of Association, by allotment of shares, by transfer or transmission of shares, or in any other manner provided under the Companies Act, 2013. Membership signifies ownership interest and recognition by the company.

Definition of Membership

According to Section 2(55) of the Companies Act, 2013, a member, in relation to a company, means:

• The subscriber to the Memorandum of Association, who is deemed to have agreed to become a member and whose name is entered in the Register of Members.

• Every other person who agrees in writing to become a member and whose name is entered in the Register of Members.

• Every person holding shares of the company and whose name is entered as a beneficial owner in the records of a depository.

Legal Significance of Membership

Membership gives a person legal recognition as a shareholder or stakeholder in the company. Only members can exercise voting rights, receive dividends, attend general meetings, and participate in winding up surplus. The legal relationship is contractual, governed by the Memorandum and Articles of Association. Membership is essential for enforcing rights and obligations under Company Law.

Objectives of Membership

• Establishing Legal Relationship with the Company

One of the primary objectives of membership is to establish a legal relationship between an individual and the company. Membership creates a contractual bond governed by the Memorandum and Articles of Association. This relationship enables the member to exercise statutory rights and accept obligations under the Companies Act, 2013. Without membership, a person cannot legally participate in company affairs or claim shareholder rights.

• Enabling Participation in Corporate Governance

Membership aims to enable members to participate in the management and governance of the company. Through voting rights and attendance at general meetings, members influence important decisions such as appointment of directors, approval of accounts, and policy changes. This objective ensures democratic functioning of the company and holds management accountable to those who contribute capital.

• Granting Ownership and Economic Interest

Another key objective of membership is to grant ownership interest in the company. Members are entitled to share in profits through dividends and in surplus assets on winding up. Membership reflects economic participation and risk-bearing capacity. This objective motivates individuals to invest in companies and contributes to capital formation and economic growth.

• Defining Rights and Liabilities

Membership clearly defines the rights and liabilities of individuals associated with the company. Rights such as voting, dividend entitlement, and inspection of records arise only after becoming a member. At the same time, membership determines liability, which is usually limited to unpaid share capital. This objective ensures clarity, legal certainty, and protection for both company and investors.

• Ensuring Regulatory and Statutory Compliance

Membership helps the company comply with statutory requirements under the Companies Act, 2013. Maintaining an accurate Register of Members ensures transparency and accountability. Regulatory authorities rely on membership records for compliance, audits, and investigations. This objective strengthens corporate discipline and ensures lawful functioning of companies.

• Facilitating Transfer and Succession of Ownership

Membership facilitates the smooth transfer and transmission of ownership of shares. When shares are transferred or transmitted, new members are registered, ensuring continuity in ownership. This objective supports liquidity of shares, investor confidence, and uninterrupted functioning of the company even in cases of death, insolvency, or succession.

• Protection of Investor Interests

An important objective of membership is the protection of investor interests. Only members can seek remedies against oppression, mismanagement, or fraud. Membership enables access to tribunals such as NCLT and ensures legal safeguards for minority shareholders. This objective promotes fairness, transparency, and ethical corporate conduct.

• Strengthening Corporate Stability and Continuity

Membership contributes to corporate stability and continuity by creating a stable body of owners. Even when members change, the company continues as a separate legal entity. This objective ensures perpetual succession, long-term planning, and sustainability of business operations, which is essential for investor confidence and economic development.

Modes of Acquiring Membership

• By Subscription to the Memorandum of Association

A person who subscribes to the Memorandum of Association at the time of incorporation automatically becomes a member of the company. Such subscribers agree to take the number of shares mentioned against their names and are entered in the Register of Members. Membership arises immediately upon incorporation, without the need for allotment. This mode applies mainly to companies limited by shares and establishes the initial ownership structure of the company.

• By Allotment of Shares

Membership may be acquired through the allotment of shares by the company. When an applicant applies for shares and the company allots them, a binding contract is formed. The applicant becomes a member once their name is entered in the Register of Members. This is the most common mode of acquiring membership in public and private companies, subject to compliance with the Companies Act, 2013.

• By Transfer of Shares

A person can acquire membership through the transfer of shares from an existing member. The transfer must be executed in accordance with legal procedures and approved by the company. Membership is acquired only when the transferee’s name is entered in the Register of Members. This mode promotes liquidity of shares and allows investors to freely buy and sell ownership interests.

• By Transmission of Shares

Transmission of shares occurs by operation of law, usually in cases of death, insolvency, or succession of a shareholder. The legal representative or official assignee becomes entitled to the shares. Upon submission of valid documents and registration by the company, the transferee becomes a member. Unlike transfer, transmission does not involve a voluntary act or consideration.

• By Estoppel

Membership may arise by estoppel when a person allows their name to appear in the Register of Members or holds themselves out as a member. If third parties rely on this representation, the person cannot deny membership. This mode protects third parties and upholds the principle of fairness. However, estoppel does not apply if the entry was made without the person’s knowledge or consent.

• By Qualification Shares

Certain persons, such as directors, may be required to hold qualification shares as prescribed in the Articles of Association. Upon acquiring such shares and registration in the Register of Members, they become members. This mode ensures that directors have a financial stake in the company, aligning management decisions with shareholder interests and promoting responsible governance.

• By Agreement or Contract

A person may become a member through a valid agreement or contract with the company, such as conversion of debentures into shares or employee stock option schemes (ESOPs). Membership arises once shares are issued and the person’s name is entered in the Register of Members. This mode supports capital restructuring and employee participation in ownership.

• By Operation of Law or Court Order

Membership can also be acquired through legal or court intervention, such as amalgamation, reconstruction, or orders passed by tribunals like NCLT. In such cases, the company must register the person as a member in compliance with the court’s directions. This mode ensures lawful continuity and protection of stakeholder rights during corporate restructuring.

Termination of Membership

• By Transfer of Shares

Membership is terminated when a member voluntarily transfers their shares to another person. Once the transfer is approved and the transferee’s name is entered in the Register of Members, the transferor ceases to be a member. However, liability may continue for unpaid calls existing at the time of transfer. This mode allows shareholders to exit the company while ensuring continuity of ownership.

• By Transmission of Shares

Membership terminates by transmission when shares pass to another person by operation of law, such as on the death or insolvency of a member. Upon registration of the legal representative or assignee, the original member or their estate ceases to hold membership. Transmission ensures legal succession without voluntary action and maintains the uninterrupted existence of the company.

• By Forfeiture of Shares

Forfeiture of shares leads to termination of membership when a member fails to pay calls or installments due on shares. The company, after following due procedure and issuing notice, may forfeit the shares. Once forfeited, the member’s name is removed from the Register of Members. However, liability for unpaid amounts up to the date of forfeiture may continue.

• By Surrender of Shares

Membership may terminate through surrender of shares when a shareholder voluntarily returns shares to the company. This is allowed only if permitted by the Articles of Association and is usually accepted to avoid forfeiture. On surrender, the member ceases to be part of the company. The surrendered shares are treated as cancelled or reissued as per law.

• By Redemption of Preference Shares

In the case of redeemable preference shares, membership terminates when the company redeems such shares in accordance with statutory provisions. On redemption, the preference shareholder ceases to be a member. This mode is lawful only if redemption is made out of profits or fresh issue of shares, ensuring protection of creditors’ interests.

• By Buy-Back of Shares

Membership terminates when a company buys back its own shares under Section 68 of the Companies Act, 2013. Once shares are bought back and cancelled, the shareholder ceases to be a member. Buy-back helps companies restructure capital and provides exit opportunities to investors while complying with legal safeguards.

• By Winding Up of the Company

Membership automatically terminates upon the winding up and dissolution of the company. Once the company ceases to exist, all memberships come to an end. However, members may still be liable as contributories during the winding-up process. This mode signifies the final cessation of the corporate entity and its legal relationships.

• By Court or Tribunal Order

Membership may be terminated by an order of a court or tribunal, such as in cases of rectification of the Register of Members, amalgamation, or oppression and mismanagement. If a person’s name is removed under lawful orders, membership ends. This mode ensures justice, compliance, and correction of wrongful entries in company records.

Member vs Shareholder