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Flashcards in Shareholders Deck (53):

S33 CA 06

Shareholders can sue if their membership rights are infringed

Sue company and other SH

Membership rights include right to vote, receive dividend etc

(If not a membership right but want to be able to enforce, put it in SH agreement)


S260 CA 06

Derivative Actions
Shareholders can bring an action ON BEHALF OF THE COMPANY where Ds have breached their statutory duties

D does not have to have benefited personally from the breach

Under S260 can bring claim against Ds and 3P


Process for brining derivative action?

1) Get court's permission to continue claim
Member makes prima facie case

Permission must be refused if the action does not promote the success of the company

2) If not dismissed, court will consider particular criteria

Including view of members who have no personal interest in the claim

BUT; courts have adopted restrictive approach - expensive and uncertain and coming from co money


S994 CA 06

Unfair Prejudice

SH can bring a claim on the grounds that the company has acted in a way that is unfairly prejudicial to SH

(i.e. excessive pay to Ds - Maidment v Atwood)

SH suing on behalf of himself, not the company


Re Guidezone Ltd (2000)

What is unfairly prejudicial conduct?

Objective test - what the reasonable bystander would consider unfairly prejudicial


What is unfairly prejudicial conduct?

For negligence or inept management to pass must be serious and repeated

Disagreement over company policy is not enough

But do not need to show bad faith or conscious intent

Excessive remuneration (Maidment v Attwood)



Maidment v Attwood

Unfairly prejudicial conduct includes excessive remuneration to directors


Ebrahimi v Westbourne Galleries

Unfairly prejudicial conduct includes where the SH had a legitimate exception of continuing to be a director


S996 CA 06

If S994 action proved, court can grant an order as it sees fit


Most common remedy for unfairly prejudicial conduct under S996 CA 06?

Order purchase of petitioners shares

Value is controversial - encourage independent valuation, to ensure fair price


Shareholder Agreements

Companies act will prevail but will still be possible to sue for breach of contract

Can use SH to agree things outside the scope of the articles, as company cannot restrict its statutory powers in its articles

If the company is party to the SH agreement - can only sign up to some, non-restrictive provisions


Wrongful dismissal

Where employer in dismissing employee has breached the contract of employment i.e. did not give required notice or PILON. 6 year limitation period as contract claim.

Remedy - damages for breach of contract. Is duty to mitigate losses.


Unfair dismissal

Only employees can bring claim
Must have been employed for 2 years
Must show was dismissed

BOP on employer to show it was fair in reasoning and procedure (ACAS procedure)

Capability + conduct are 2 / 5 legit reasons for dismissal

3 month limitation period

Remedies - reinstatement, rengagement, compensation


1) basic award which is age x service years x pay

2) compensation - actual loss suffered

Get additional 25% if ACAS procedure was not followed


4 types of restrictive covenant?

1) Not disclose confidential information (implied)
2) Non-compete
3) Non-dealing
4) Non-solicit


Non-compete clause

Prevents employee from working for a competitor or setting up a competing company


Non-dealing clause

Prevents the employee having dealings with ex-employees AND customers



Prevents the employee from soliciting customers AND staff to join new business


When is a restrictive covenant enforceable?

General rule - restraints on trade (restricts employee from earning a living) are VOID and UNENFORCEABLE


Protect a legitimate interest of business (i.e. customer connections) AND

Must not go further than REASONABLY NECESSARY to protect those legitimate interests

Courts will enforce as minimum as can to protect business interests

Courts will not enforce if restraint on trade

If employer breaches agreement i.e. wrongful dismissal, contract repudiated and restrictive covenants cease to be live


Blue pencil test?

Courts will not rewrite a restrictive covenant to make it enforceable

May strike out the unenforceable part but the rest must make independent sense to be enforceable


Criteria for assessing reasonableness of restrictive covenants:

Geographical location
Needs & interest of business
Duties of employee
Interest business trying to protect

Is the clause drafted wider than necessary to protect the employer's business interests?


S217 CA 06

Need SH approval by ordinary resolution for payment made to a director for loss of office

Exception - if less than £200

Includes when the payment is made to a connected person - S215


Settlement Agreements

The general rule is that an employee's right to bring action cannot be excluded, unless the agreement fulfils requirements in S203 ERA

Should restate the restrictive covenants in a settlement agreement - more likely to be enforceable as this agreement negotiated

Restrict future claims that haven't arisen yet i.e. personal injury, pension rights

Include clause requiring buy-back of shares

Agree good reference and schedule


S203 ERA 1996

For a settlement agreement to be enforceable, the agreement must:

1) Be in writing
2) Refer to a specific claim or particular proceedings
3) Identify an independent advisor who the employee has received advice from
4) Advisor his prof. indemnity insurance
5) State S203 requirements are satisfied


Service Contracts

Must have a clause which states that if the D ceases to still be a D, agreement will continue (so no claim for wrongful dismissal)

Garden leave clause - company can reduce or withdraw duties, but continue to receive salary

Garden leave clause may be possible unenforceable if in a fast paced industry

PILON clause - important so that if terminate without notice, will not be in breach of contract so restrictive covenants will stay enforceable


How long is a restrictive covenant enforceable for?

Max 1 year

Exception - confidentiality, or during acquisition where promise will not set up a competing business for 2 / 3 years


S168 CA 06

Shareholders can remove director before expiry of service contract by ordinary resolution

Special notice is required, to inform board of proposed removal resolution


S312 CA 06

Special notice is 28 clear days


S360 CA 06

Clear days means excluding day of notice and day of meeting - X number of FULL days


What options does the board have when receiving S168 notice?

1) Agree, call GM and put removal resolution on the agenda. If do so, must give 14 days clear notice to SH of the GM.

2) Ignore - Board is not bound to put it on the agenda (Pedley v Inland Waterways)


If the board ignores the S168 notice, what can the shareholders do?

S303, SH who together hold at lease 5% of paid up share capital can force the board to call a GM

S304 - on receipt of such notice, the board must call a GM to be held within 28 days


What if after receiving S303 notice, the board still does not call a GM?

Under S305, the SH themselves can call a GM, which must be held within 3 months


S169 CA 06

A director has a right to request removal.

Have the right to make representations that are sent to SH before meeting.

If not enough time, has the right to make representations at the meeting


Does S168 deprive the removed director the right to receive damages?

S168(5) - No.

Still entitled to damages for breach of service contract, breach of shareholder agreement tc.


What about if the director who the shareholders want to remove, is also a shareholder?

Need to check articles to see if there is a Bushell v Faith clause, which gives a director who is also a shareholder weighted voting rights at a GM where a removal resolution is on the agenda. This means the SH may be unable to pass the OR.


Can a written resolution be used to remove a director?

No - S288(2)(a)


What is the definition of convene?

To CALL the meeting, not to hold the meeting


S239 CA 06

Shareholders can ratify directors conduct of negligence, breach etc.



definition of 'connected persons'


Doctrine of maintenance of share capital - S658

Capital is liability owed to SH
Capital money for creditors if default
Co not usually allowed to return capital to SH
> this is why SH sell their shares to get return on investment
Any payments i.e. dividends to SH must be made out of profits (S830(1))



Can only declare dividends from profits


A30 MA

declare final dividend by OR
(interim dividends are D choice alone, not SH)


General rule for companies buying back and/or redeeming shares:

Both public and private companies can buy-back or redeem shares (provided authorised in articles) from distributable profits and/or proceeds from a fresh issue of shares. However, ONLY private companies can fund a buy-back or redemption from capital, and is stringent procedure to do so


To redeem shares from profits (easiest), must ensure:

1) Issuing redeemable shares not restricted in articles
2) Non-redeemable shares are in issue (need SR to create redeemable shares)
3) Shares to be redeemed are fully paid up
4) Terms of redemption is set out in articles
4) Redeemed shares are then treated as cancelled
5) Must notify C.H. within 1 month, along with statement of capital

Accounts must not be more than 3 months old


To redeem shares from capital, must ensure:

As above but must adhere to capital rules i.e.:

Need director statement on liquidity of company
Need auditors report
Need SR approving payment from capital
Need advert in newspaper
Must wait 5 weeks for creditors to object before purchase can occur


Can redeemable shares be purchased as well as redeemed?

Yes but obviously different procedure followed


To buy-back shares from profits, must ensure:

S694 - need OR to approve contract of purchase. Contract must be available to SH 15 days before GM, and at the GM itself, so need 15 days notice.

Selling SH can vote in the OR but their vote is ineffective if that vote then carries the resolution


What is different about the procedure when a buy-back is approved by written resolution?

The contract must be sent with the written res

The selling SH cannot vote in the written res


Rules for redeeming and/or buying-back shares from capital:

Only PRIVATE companies can do this - is a criminal offence for public company to use capital
Purchase from capital must not be restricted in articles
Must use distributable profits first
Need written statement of solvency from D
Need copy of auditors report
> D statement and report must be finalised 7 days before GM
SR to approve payment from capital
Notice in gazette and another np 7 days after SR - 5 weeks for creditors to object
Purchase takes place between 5-7 weeks


Things to remember re buy-back/redemption:

If buy-back - purchase via contract - OR and 15 days notice of GM for inspection

If redemption - no contract as terms of redemption in articles

If capital - SR to approve payment from capital

ALWAYS check articles to ensure buy-back/redemption allowed

Capital -ensure accounts no more than 3 months old

Profit - ensure figures verified by accountant



PMM for redemption/buy-back?

Notify C.H by sending return and send statement of capital within 28 days of purchase
Amend register of members
Cancel / re issue share certificates
Send SR to registrar within 15 days of passing (S30)
Keep a copy of contract for 10 years


Benefit of putting shares in treasury when buy-back?

Shares in treasury do not carry voting rights so SH shareholdings remain the same - no changes so someone gets negative holding etc.

Changing back from treasury > ordinary shares needs SH approval.


If shareholder is also a director, do any of the directors duties apply?

Yes, must disclose interest under S177.


How is balance sheet affected by buy-back/redemption?

1) Share capital is reduced by ORIGINAL VALUE of shares cancelled, and then increase capital redemption reserve by same.
2) Profit is reduced by amount it cost to buy-back, and shareholder funds with also decrease by this amount
3) Net assets will be reduced by amount it cost to buy back - net assets should balance with bottom