Shareholder rights and duties Flashcards
Membership rights under the articles? s33 CA?
Articles of a company regulate the relationship between the members and each other, they act as a contract. Effect of this provision is that members can sue if their membership rights are infringed. Usual remedy is damages.
Membership rights include but not limited to:
- Right to dividend once it has lawfully been declared
- Right to share in surplus capital
- Right to vote at meetings
- Right to receive notice of GMS
Shareholder agreements?
- Act as a kind of extension to the articles – depends on what they need. Likely to include
- Unanimous voting over certain matters
- Quorum for GMS
- Dividend policy
- Allotment of new shares
- New and departing shareholder s
Use of shareholder agreements in protecting minorities
Rights of action/enforceability – a shareholder agreement provides a right of action which enables one member o enforce the provision of the shareholders agreement directly against another. If breached it can be enforced in usual way under general contract law principles. But it does mean that the company could do something not compliant with the agreement but then that shareholder would have a claim against other shareholders.
Shareholder rights?
Any shareholder can
- Receive notice of a GM
- Appoint a proxy to attend a GM in their place
- Vote at a GM
- Receive a dividend
- Receive a copy of company’s accounts
- Inspect minutes and company’s registers
- Ask the court to prevent a breach of directors’ duties
- Commence a derivative claim
- Bring a petition for unfair prejudice
- Bring a petition for just and equitable winding up
5% or more
- Require a direct to call a GM
- Require the circulation of written statements regarding proposed resolutions
- Circulate a written resolution
10% or more
- Demand a poll vote
Over 25%
- Block a special resolution
Over 50%
- 5 pass or block ordinary resolution
Removal of directors?
Under s168 by ordinary resolution can remove a director.
28 clear days’ notice required - special notice shareholders proposing a removal resolution must give at least that time before general meeting at which the removal resolution will be voted on by shareholders.
Two options:
Option 1:
- Place the removal resolution on the agenda of GM
- Give shareholders notice of that removal resolution at same time and in same manner as notice of GM
- If not possible then notice may be given by advertisement in a newspaper or any other mode allowed by company’s article
Option 2
- Board does NOT place removal resolution on agenda of GM
- In this case shareholders may need to force directors to call a GM in accordance with s303 notice
Shareholders power to require calling of general meeting
- Under s303 shareholders holding not less than 5% of paid out voting share capital can serve a request on the company (the board). This is a general power but can be used in the removal resolution.
Directors’ obligation on receipt of a s303 request
- S303 the directors MUST call a gm
- WITHIN 21 days from the date on which they become subject to the s303 request
- To be held on a date not more than 28 days after the date of notice convening the GM.
Timeline for removal of directors?
IF DIRECTORS COMPLY WITH S303 NOTICE
Day 1 - Unhappy shareholders serve notice under s303 and special notice of removal resolution - day 22 (latest) board has 21 days to decide whether or not to call a GM - Day 50 Latest if board decides to call a GM it has to be within 28 days from date of calling it.
IF DIRECTORS DO NOT
Day 1 - Unhappy shareholders serve notice under s303 and special notice of removal resolution - day 22 (latest) board has 21 days to decide whether or not to call a GM ON DAY 23 BOARD LOSES CONTROL OF THE PROCESS - Day 38 IF BOARD DOES NOT CALL A GM - from day 23 unhappy shareholders can call GM on normal notice of 14 days.
Directors right to protest removal? and What if also a shareholder?
Directors’ rights to protest removal
- Company must immediately send a copy of notice to the director concerns s169
- Director then has right to make representations in writing provided those are of a reasonable length, they should be circulated to the members. If not circulated then read out at relevant GM.
What if the director is also a shareholder
Bushell v faith clause
- May give weighted voting rights at GM mean shareholders are unable to pass an ordinary resolution to remove director concerned.
Shareholders agreement
- A SH agreement may also provide that unanimous consent of all shareholders is required for a resolution to remove a director to be passed.
- Does not remove statutory right of majority to remove a director – the resolution will be valid but director would have a claim against the other shareholders for breach of agreement- if they know could apply to court for an injunction to prevent a breach of the terms of the shareholder agreement
Will director be entitled to any compensation for loss of office?
- Any such payments must be approved by company’s shareholder by way of ordinary resolution s217 unless payment does not exceed
- - £200
- Payment is made in good faith – discharge of an existing legal obligation, by way of damages in respect of such an obligation, in settlement or compromise of a claim in connection with termination of a person’s office or employment.
Payment under a director’s service contract need to be distinguished from payments s217
A memorandum setting out particulars of the payment must be made available to shareholders for 15 days before the ordinary resolution is passed, ending with the date of the general meeting (s 217(3) CA 2006).
Derivative claims?
Initiated by a member of a company on behalf of the company in an action vested in the company.
Breach of duty by director is needed – the claim is brought against the director or another person. As such can be a third party in lieu of a shadow director or in addition to director.
Only a member can bring a claim – underline the fact that the cause of action vested in the company rather than the members
Stages of a derivative claim?
Stage 1 – requirement for court approval
- Must obtain permission of the court – onus is on member to make out a prima facie case
- Certain situations where permission must be refused by the court – these include where the court is satisfied that a person acting in accordance with s172 would not seek to continue the claim
- Court will take into consideration whether member is acting in good faith, whether the act is likely to be ratified
Stage 2 –
- If stage continue – court will then consider particular criteria
- Must have particular regard to any evidence as to views of members who have no personal interest, direct or indirect in matter’ to make it harder for s ingle disgruntled shareholder to bring proceedings against wished of general body of shareholders
- If then approved – proceeds to trial
Unfair prejudice and equitable winding up?
A member of a company may apply to the court by petition for an order […] on the ground:
(a) that the company’s affairs are being or have been conducted in a manner that is unfairly
prejudicial to the interests of members generally or of some part of its members (including at
least that shareholder), or
(b) that an actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial. If the shareholder can show that the company’s affairs
- Reasonable bystander objective test
Key principles
- Negligence or inept management – will NOT amount to unfairly prejudicial conduct unless its serious or puts at risk value of minority shareholders
- Disagreement as to company policy – is NOT
- Bad faith – no need to show bad faith for it be unfair
- Breaches of article
- Claimant conduct – may be relevant NO overriding requirement that the claimant come to court with clean hands
- Excessive remuneration – court WILL take a wide view in regards to minority shareholders
- Legitimate expectations
Remedies
- Under s996 court has power to grant such as it thinks is needed
- Most common is purchase of petitioner’s shares
o Valuation principles apply – valuation mechanism set out in articles provided its fair. If not the court valuations.
Generally, a negotiated settlement will therefore be a preferred option.
The court has a wide discretion in relation to valuation matters and its aim is to set a fair price.
The following principles apply to valuations generally, although the court will look at all the
circumstances of the case:
* Shareholders should first attempt to use a valuation mechanism set out in the Articles (if any)
provided that it is fair. However, if there is no fair method then a court valuation will be
necessary.
* The courts will generally not impose a discount on the value of a minority shareholding in a
private company, on the basis that the minority shareholder is being forced to sell their shares
because of the unfairly prejudicial conduct of the majority shareholder. This is particularly the
case where the company has been controlled and operated by all the shareholders playing
major roles (a quasi-partnership). However, the court may order a discount to be applied if the
shareholding is viewed as an investment or the company is operated along more commercial
lines.
* As a general rule the valuation date is that on which the court order was made in respect of
the sale of the shares.
Just and equitable winding up?
he right for a disgruntled shareholder to apply for the company to be wound up on the grounds
that it is just and equitable to do so arises under s 122(1)(g) Insolvency Act 1986 (IA 1986).
When a company is wound up its life is effectively brought to an end. This is therefore a rather
drastic solution for a disgruntled shareholder. In such cases the court has discretion to decide
whether it is just and equitable for winding up to take place.
As there is a degree of overlap between the sections, it is common for a s 122 IA 1986 and a s 994
CA 2006 petition to be made at the same time.
