Shareholders

Question 1

How can a company raise money?

Answer 1

Equity finance (share capital)
- An investment by shareholders through the purchase of shares in the company

Debt finance (debt capital)
- The borrowing of funds

Question 2

What types of shares are there?

Answer 2

• Ordinary shares (equity)
• Preference shares
• Deferred shares (management/founders)

Question 3

What is a share?

Answer 3

A ‘thing in action’. Its value to the shareholder depends on the particular contractual rights derived through owning the share.

Question 4

What are shareholders two primary rights?

Answer 4

To a dividend - subject to the type of share; subject to a dividend being declared at General Meeting
(Wood v Odessa Waterworks Co)

To vote - subject to the class of share; rights vary within a type of share and between classes of share; votes exercised at General Meeting
(Pender v Lushington)

Question 5

What are the other rights of shareholders?

Answer 5

Right to repayment of investment following winding up (subject to funds) and a right to participate in any undistributed profit

Rights afforded as a matter of law by the CA 2006 e.g rights to remove directors, appoint auditors etc subject to voting rights

Question 6

What is the case of Wood v Odessa Waterworks Co [1889]?

Answer 6

Odessa used a dividend sum to pay for contruction works instead of paying said dividend to shareholders.

A meeting was called to pay out dividends by debenture bonds (a means which was not allowed by the company’s articles of association)

Shareholder opposed this (claimant) and it was held that the articles of association constitute a contract between shareholders and the company and each other, the majority shareholders could not bind the minority to accept dividend payments in a means other than cash

Question 7

What is the case of Pender v Lushington [1877]?

Answer 7

Company articles specified one vote for every 10 shares to the shareholders. The chairman refused Pender’s votes. Pender’s resolution was lost.

Held that Pender’s company member right to vote may not be interfered with, it is a right of property

Question 8

What types of meetings take place?

Answer 8

• Directors board meeting
• Meetings of the shareholders (Company)
• Meetings of the creditors
• Meetings of the debenture holders
• Statutory meetings
• Annual general meetings
• Extra-ordinary general meetings
• Class meetings

Question 9

What are the company meetings?

Answer 9

• Statutory
• AGM
• Extra ordinary general
• Class

Question 10

What are annual general meetings?

Answer 10

Shareholders have a right to attend, mandatory for PLCs.

Must involve:

• Production of accounts
• Directors reports,
• Appointment of auditors and directors,
• Declaration of dividend

Resolutions can be put into meeting if requisitioned by the holders of at least 5% of the voting rights or at least 100 members with at least £10,000 paid up share capital

Question 11

What are extraordinary general meetings?

Answer 11

Can be requisitioned by directors, members holding at least 10% paid up capital with voting rights, the court

Question 12

What are board meetings?

Answer 12

Meetings can be convened by the Board of Directors, by order of the court or by requisition of the members (subject to their percentage of shares or votes)

Question 13

What types of resolution exist?

Answer 13

• Ordinary (simple majority)
• Special (not less than 75%)
• Written (excludes the removal of director or auditor before term of office)

Question 14

How does voting take place?

Answer 14

• Show of hands – one shareholder, one vote

- By poll – one vote per share

Question 15

What is a quorum?

Answer 15

Unless articles otherwise provide or there is only one member, two members constitute a quorum

Minimum number that must be present for the meeting to be valid

Question 16

What are claims by the company?

Answer 16

Company can bring claim against an errant director if it can show it has suffered some loss.

If the director has made some personal profit, they can be required to surrender the gain the company.

A contract entered into by a director in breach of duty will be void, company can ratify the agreement

Question 17

What can the company also seek?

Answer 17

• An injunction to stop the director carrying out or continuing the breach
• Damages by way of compensation where the director has been negligent
• Restoration of the company property
• The rescission of a contract in which the director has an undisclosed interest

Question 18

What are shareholder claims?

Answer 18

A company’s directors and secretary owe duties to the company as a whole rather than to individual shareholders.

Only a company can complain of a breach - restricts shareholders from claiming directly against a company, its directors or its members for loss arising through conduct, breach of duty or maladministration.

Question 19

What are the shareholder remedies?

Answer 19

• Personal or Representative Action (S.33 CA 2006)
• The Statutory Derivative Claim (s.260 CA 2006)
• The Unfair Prejudice Remedy (s.994 CA 2006)
• A Petition to Wind Up the Company (s.122 Insolvency Act 1986)

Question 20

What is a derivative claim?

Answer 20

With permission of the court, shareholders can bring a claim in the name of the company. This is initiated and run by shareholders but brought in the company’s name to recover the company’s loss.

Any sum recovered goes to the company - board’s decision whether this benefit is passed onto shareholders by way of dividend

Question 21

What is the case of Wallersteiner v Moir (no 2) [1975] concerning a derivative claim?

Answer 21

Mr Moir - minority shareholder applied for money to continue a claim against Dr Wallersteiner for fraud

Mr Moir circulated a letter detailing the fraud and Dr Wallersteiner sued for libel

Mr Moir counterclaimed for £500,000 to be repaid. In the first judgement, the court of appeal held that the libel action would be struck out for deliveraye delay and awarded damages to Mr Moir but allowed Dr W to defend fraud.

Mr Moir applied for more funds

Held - Mr Moir could be indemnified by the company for his costs. “The company itself is the one person to sue for damages such is the rule in Foss v Harbottle 1843

Question 22

What is the effect of a company’s constitution s.33?

Answer 22

1) The provisions of a company’s constitution bind the company and its members to the same extent as if there were covenants on the part of the company and of each member to observe those provisions
2) Money payable by a member tot he company under its constitution is a debt due from him to the company

Question 23

What is the rule in Foss v Harbottle [1843]?

Answer 23

The majority has the power to control and manage the company within the power in the articles. A company’s policies are decided by the majority – the irregularity principle
- Depending on the measure to be adopted this may be 51% or 75%

If a wrong is done to a company only the company may sue for redress - the proper claimant principle

A member is taken to have agreed to the terms - the internal management principle

Question 24

What are the exceptions to the rule in Foss v Harbottle [1843]?

Answer 24

• The personal rights of a shareholder have been infringed: Pender v Lushington 1877
• Actions which are ultra vires or otherwise require a special resolution which was not obtained
• Where there has been a fraud on the minority: Clemens v Clemens Bros Ltd 1976, Cook v Deeks 1916

Question 25

What is the case of Foss v Harbottle 1843?

Answer 25

Two members of the Victoria Park Co brought an action against the company's 5 directors on fraud Held - the board of directors should be the ones to call a general meeting to make a claim in this instance and not the claimant

Question 26

Why should the board of directors made the claim and not the two shareholders in Foss v Harbottle 1843?

Answer 26

1) The majority has the power to control and manage the company within the powers of the articles. A company's policies are decided by the majority - irregularity principle 2) If a wrong is done to a company, only the company may sue for redress - proper claimant' principle 3) A member is taken to have agreed to the terms in the articles - the internal management principle

Question 27

What is the case of Clemens v Clemens Bros LTD [1976]?

Answer 27

To have a right to vote, shareholders must act in good faith otherwise majority rule may not exist One shareholder held 55% of shares and used voting rights to issue new shares, this was not proportional on existing shareholding and pushed minority from 45% to 25% The court held that this issue of new shares was not needed and reversed the resolution

Question 28

What is the case of Cook v Deeks [1916]?

Answer 28

- Toronto construction co had 4 directors, 3 wanted to exclude the claimant from business - Each held 1/4 of the company's shares - 3 took a contract in their own names and passed a resolution declaring the company had no interest in the contract - Claimant argued that the contract did belong to the company and the resolution ratifying their actions should not be valid because the 3 directors used their votes to carry it - Held - 3 director's breached their duty of loyalty and the shareholder ratification was a fraud on the claimant as a minority shareholder The profits made on the contractual opportunity were held on trust for the claimant

Question 29

What is S.260 (1) part 11 CA 2006?

Answer 29

“A claim brought by a member in respect of a cause of action vested in the company, seeking relief on behalf of the company” These rules apply to a director's breach of duties and to a director's negligence or other failure causing loss to a company No need to show the director has benefitted personally, and both present and past directors may be pursued Shareholders can use the procedure to pre-empt an anticipated act or omission, as well as to claim for shortcomings in the past

Question 30

How does S.260 (1) CA 2006 work?

Answer 30

- A dissatisfied shareholder must issue claim in the name of the company and request the court's permission to take it forward - A successful shareholder will be allowed to pursue the claim - An unsuccessful shareholder risks paying the other parties' costs and an order restraining further action

Question 31

What is a statutory derivative claim S.260 (3) CA 2006?

Answer 31

A derivative claim may be brought only in respect of a an actual or proposed act or omission involving negligence, default, breach of duty or breach of trust by a director of a company The cause of action may be against the director or another person or both Permission to pursue a claim only granted if it is a prima facie case

Question 32

How is it established if a case is prima facie in terms of S.260 (3) CA 2006?

Answer 32

- It is in the best interest of the company to pursue the matter through the courts; or does the shareholder have their own agenda/ulterior motives? - Would a director acting in accordance with the duty to promote the success of the company continue to claim? If the decision is that a hypothetical director would drop the claim, the case must be dismissed

Question 33

What other factors are taken into account to establish f a case is prima facie in terms of S.260 (3) CA 2006?

Answer 33

- Is the shareholder acting in good faith in bringing the claim? - What are the views of other shareholders who have no personal interest in the claim? - Does the shareholder have other remedies available, such as a claim under a shareholders' agreement?

Question 34

How is S.260 (3) CA 2006 summarised?

Answer 34

- Shareholder must have a prima facie case - The success of the company remains paramount - The shareholder must be acting in good faith - The views of other shareholders will be taken into account, and an ordinary resolution in favour of the directors will trump all opposition - A shareholder without a good case will be at risk on costs, its own and the company’s

Question 35

What is dismissal?

Answer 35

The right of shareholders to remove a director by ordinary resolution. That right is enshrined in statute and cannot be taken away by a company's articles. This stands whether or not there has been a breach of duty The director's employment rights will be unaffected by the shareholder vote, the company will have to pay out for any notice period agreed under the director’s service contract

Question 36

What is shareholder ratification?

Answer 36

Even where a director’s breach of duty is clear, the shareholders can ratify it after the event by passing an ordinary resolution (a simple majority vote) Note however that in such a situation, the errant director if also a shareholder, cannot vote in their own favour; neither can their family or others connected with them

Question 37

What is excusing liability?

Answer 37

Director in breach of duty can be relived of liability if they can convince the court that they acted honestly and reasonably in all the circumstances. This might happen where a director acted in good faith on the advice of a lawyer or other professional, but where the advice proved to be wrong.

Question 38

What is unfair prejudice s.994 CA 2006?

Answer 38

Rights of a member to petition the court for a remedy. on the ground that the company's affairs will be, have been, or are being, conducted in a manner that is unfairly prejudicial to its members or particular members

Question 39

How is unfair prejudice objectively established?

Answer 39

Prejudicial – in the sense of causing harm to the relevant interest Unfair – conduct may be unfair without being prejudicial or prejudicial without being unfair. Conduct must satisfy both of these tests

Question 40

What are some examples of prejudicial conduct?

Answer 40

- Non-payment of dividends or payment of low dividends - Exclusion from the management of a quasi-partnership company (Ebrahimi v Westbourne Galleries [1973]) - Serious mismanagement (contrast with simple mismanagement) - Improper transfer of assets - Payment of excessive remuneration

Question 41

What is the case of Ebrahimi v Westbourne Galleries [1973]?

Answer 41

Mr Ebrahimi and Mr Nazar owned 50% of the shares each Mr Nazar's son joined and was allocated 10% of the shares After a falling out, Mr Nazar and his son voted to remove Mr Ebrahimi as a director and he petitioned for relief Held that parties bound by contractual agreements in a company can also rely on a preexisting situation for equitable purposes The Lords believed that because the company was so similar in its operation as it was when it was in partnership, they created what is now known as a quasi-partnership

Question 42

Why was there deemed to be a quasi partnership in Ebrahimi v Westbourne Galleries [1973]?

Answer 42

- Close personal relationship - Inequitable for Mr Nazar and his son to use their rights to force Mr Ebrahimi out of the company - Deemed equitable to wind up the company

Question 43

What factors were identified in Ebrahimi v Westbourne Galleries [1973] to consider when determining a quasi partnership?

Answer 43

- Association formed on the basis of a close personal relationship involving mutual confidence - An agreement that all or some of the shareholders will be involved in the conduct of the business - Restrictions on the transfer of a members interest i.e disposal of shares

Question 44

What are the powers of the court?

Answer 44

To wind up the company To make any other order e.g (under s.996) - Regulate the conduct of a company's affairs Re Harmer 1958 - Order the company to refrain from doing an act or carry out an act required - Authorise civil proceedings to be brought by the company - Require the company not to alter its articles without leave of the court - Provide for the purchase of shares of specified members

Question 45

What is the case of Re Harmer [1958]?

Answer 45

Mr Harmer founded the stamp business and shares were given to his family He was appointed governing director and his two sons life directors He ran the business in an autocratic manner, not in the company's best interest and in disregard of the articles The court upheld the son's complaints and ordered the father to be employed of as a ‘senior stamp consultant’ with a salary of £2500 p/a but whilst he was appointed as ‘president for life’ he would have no power Court further ordered that the company were to buy out the father's shares

Question 46

What is a petition to wind up the company?

Answer 46

s.122 Insolvency Act 1986 provides for winding up where ‘the court is of the opinion that it is just and equitable that the company should be wound up’

Question 47

What are shareholder agreements?

Answer 47

Many companies (especially smaller ones) have shareholders’ agreements whereby it is agreed that certain proposals must go to the members for approval, what % is required and how disputes will be resolved These provisions differ from those in the Companies Acts but are binding because they are contractual between the members and the company.