Unit 4 Shareholders

Question 1

Decisions shareholders can make

Answer 1

2 categories:

1. Decisions which the shareholders alone make. E.g. changing the articles of association of the company and changing the name of the company, both of which are special resolutions.
2. Decisions which give the directors permission to enter into certain types of contract which carry particular risks for the company, or where the directors could potentially use their position as a director to benefit personally from the contract.

Question 2

Becoming a shareholder - first shareholder

Answer 2

Two people who sign the memorandum of association as subscribers automatically become the first shareholders of the company, and must be entered on the company’s register of members.

Question 3

Becoming a shareholder - new shareholders

Answer 3

Once the company is up and running, a person or a company can become a new shareholder in 2 ways:

1. Obtain shares from an existing shareholder
2. Company may allot new shares

Question 4

Register of members

Answer 4

Every company must keep a register of members or keep the information on the central register at Companies House.

A company must enter the new shareholder on the register of members or reflect an existing shareholder’s increased number of shares as soon as practicable within 2 months.

Question 5

PSC register

Answer 5

Register of persons with significant control (own more than 25% of shares or voting rights)

Must keep one even if no PSCs to put on it.

Shareholders can apply to have name/address made private.

Question 6

Shareholders’ rights - articles of association

Answer 6

Company’s constitution is a statutory contract between each shareholder and the company, and between each shareholder and every other shareholder.

Can get a remedy under breach of contract.

Question 7

Shareholders’ rights - shareholders agreements

Answer 7

Optional.

Will bind all of the parties to the agreement and provide a remedy if one of its terms is breached.

Does not have to be at companies house.

Question 8

Types of share - ordinary share

Answer 8

Give the shareholders the right to attend and vote at general meetings. Entitled to receive dividends.

Sometimes companies will have different types of ordinary shareholder e.g ordinary A shares and ordinary B shares, which have been created so that the shareholders can be treated differently in certain circumstances (set out in articles of association)

Question 9

Types of share - preference shares

Answer 9

Receive enhanced rights. e.g. guarantee right to dividend over ordinary.

Cumulative/ non- cumulative - the preference shareholder has to be paid any missed dividends from previous financial years as well as the current financial year’s dividend, as long as there are profits available to pay the dividends.

Participating - further right to receive profits or assets, in addition to their other preference share rights. As an example, if the ordinary shareholders receive a dividend over a specified amount, this could give the participating preference shareholder the right to an additional payment, over and above their usual entitlement.

Question 10

Protection of minority shareholders - Unfair prejudice petitions

Answer 10

Allows any shareholder to apply to the court for an order for a remedy where they feel that they have been unfairly prejudiced as a shareholder.

Potential grounds:
* awarding excessive pay to directors
* diverting opportunities to a competing business in which the majority shareholder holds an interest
etc.

Courts use objective test. Can make any order suitable.

Question 11

Protection of minority shareholders - Derivative claims

Answer 11

Instigated by a shareholder for a wrong done to a company which has arisen from an act or omission of a director.

May only be brought in from an actual or proposed act or omission involving negligence, default, breach of duty or breach of trust by a director (s 260(3)).

Once issued, first stage is for the shareholder to apply to the court for permission to continue the claim. Then there’s a full hearing.

Section 263(2) which the court must, at the hearing stage, refuse permission to continue:
* where the court is satisfied that a person acting in accordance with s 172 CA 2006 would not seek to continue the claim. In effect, this means that the court will not allow an individual who is not promoting the success of the company to continue the claim.
* where the cause of action arises from an act or omission that has not yet occurred, but which has already been authorised by the company; or
* when the act or omission has already occurred and was authorised before it occurred or has been ratified by the company since it occurred.

Following the hearing, the court may grant permission to the shareholder to continue the claim on terms the court thinks fit, or adjourn the proceedings. Only at this stage will the court give directions for the trial.

The legal costs of making an application to continue a derivative claim are met by the applicant shareholder if permission to continue is refused. If permission to continue is granted, the company will meet all of the legal costs of the claim, as well as the other party’s legal costs if the claim is unsuccessful.

Question 12

Shareholders’ resolutions - ordinary resolution

Answer 12

To pass - over half of the votes cast at a shareholders’ general meeting must be in favour of the resolution

Question 13

Shareholders’ resolutions - special resolution

Answer 13

To pass - 75% or more of votes cast at a shareholders’ general meeting must be in favour of the resolution.

Question 14

How to pass shareholders’ resolutions

Answer 14

2 ways:
1. General meeting
2. Written resolution

Question 15

How to pass shareholders’ resolutions - general meeting

Answer 15

General meetings are called by the board of directors by passing a board resolution.
They will call a general meeting when they want the shareholders to pass a shareholders’ resolution.

The notice requirements must have been complied with and the quorum must be met.

Question 16

How to pass shareholders’ resolutions - general meeting - contents

Answer 16

The directors must give notice to every shareholder and every director. It must be given in hard copy/electronic form/website or a combo of these.

The notice must set out:
1) The time, date and place of the meeting
2) The general nature of the business to be dealt with at the meeting
3) The exact wording of the special resolution if there is one
4) Each shareholders’ right to appoint a proxy to attend on their behalf

Question 17

How to pass shareholders’ resolutions - general meeting - notice period

Answer 17

Minimum is 14 clear days.

Clear days = the day that notice is deemed received by the shareholders and the day of the general meeting itself are not counted for the purposes of the notice.

If sent by post or email - deemed received 48 hours after the notice was posted or emailed. So add 48 hours onto 14 days.

Question 18

How to pass shareholders’ resolutions - general meeting - quorum

Answer 18

Quorum of a general meeting is 2 unless only one shareholder then 1.

Question 19

How to pass shareholders’ resolutions - Quorum and voting - personal interests

Answer 19

Unlike board meetings shareholders are not prevented from counting in the quorum or voting if they have a personal interest in the matter.

2 resolutions where the votes of a shareholder with a personal interest are not counted:
1) A resolution to buy back some or all of a shareholder’s shares
2) An ordinary resolution to ratify a director’s breach of duty where the director in question is also a shareholder

Question 20

How to pass shareholders’ resolutions - poll votes

Answer 20

Where the shareholders vote in a general meeting on the basis of one vote for each share that they own, instead of the usual one vote per person.

May be demanded by:
(a) the chair of the meeting;
(b) the directors;
(c) two or more persons having the right to vote on the resolution; or
(d) a person or persons representing not less than one tenth of the total voting rights of all the shareholders having the right to vote on the resolution.

It can be demanded before a general meeting or during the meeting either before or after voting on a show of hands. If after the poll vote will override.

Question 21

How to pass shareholders’ resolutions - general meeting - short notice

Answer 21

For a general meeting to be validly held on short notice:
- A majority in number of the company’s shareholders
- Who between them hold 90% or more of the company’s voting shares must consent (95% for public companies)

Question 22

How to pass shareholders’ resolutions - written resolutions

Answer 22

Alternative to a general meeting. The written resolution must be circulated to every eligible member.

It must include:
- how to signify agreement
- the deadline for returning the written resolution - lapse date (usually 28 days unless stated otherwise in articles)

Question 23

When the shareholders take matters into their own hands - Shareholders’ request to circulate a written resolution

Answer 23

Shareholder(s) who have 5% or more of the voting rights in the company are entitled to require the company to circulate a written resolution.

The company must then circulate a copy of the resolution to all eligible shareholders within 21 days.

Question 24

When the shareholders take matters into their own hands - Requisitioning a general meeting

Answer 24

The shareholders can require the directors to call a general meeting.
The directors are required to do this when they have received requests to do so from shareholders representing at least 5% of voting rights at GM. They must then call it within 21 days.
Notice must be no more than 28 days.

Question 25

Voting rights at general meetings

Answer 25

1. Right to send a proxy to a general meeting on their behalf
2. Right to a poll vote
3. Right to receive notice of general meetings
4. Right to requisition a general meeting
5. Right to apply to the court to call a general meeting, if for some reason it is not possible for one to be held otherwise (s 306 CA 2006). An example would be where the other shareholders are refusing to attend a general meeting and so it is not possible to hold a meeting which is quorate.
6. Right for a shareholder or shareholders with 5% or more of the voting rights in the company (or 100 or more shareholders with the right to vote, as long as they have paid up an average of £100 or more on their shares) to require the circulation of a written statement of up to a thousand words with respect to any resolution or business to be dealt with at a general meeting.
7. Right for shareholders holding 5% or more of the company’s shares to require the company to circulate a written resolution and accompanying statement.

Question 26

Other rights (non-voting)

Answer 26

1. Right to receive dividends, as long as there are profits available for the purpose (s 830 CA 2006) and as long as the directors have made a recommendation as to its amount (MA 30(2)) and this has been approved by the shareholders.
2. Right to apply to the court for the company to be wound up, on the grounds that it is just and equitable to do so (s 122(g) Insolvency Act 1986 (‘IA 1986’)) – for example, because the management is in deadlock and there is no way of resolving the situation other than winding up the company.
3. Right to remove a director by ordinary resolution
4. Right to remove an auditor by ordinary resolution
5. Right to inspect, without charge:
   * the company’s minutes of general meetings and all shareholders’ resolutions passed otherwise than at general meetings;
   * all of the company’s statutory registers (see, eg, s 116(1) CA 2006);
   * directors’ service contracts and any directors’ indemnities; and
   * any contracts relating to the company’s purchase of its own shares.
6. Right to receive a copy of the company’s annual accounts and reports.
7. Right to seek an injunction under s 40(4) of the CA 2006 to restrain the company from doing something prohibited by its constitution.

Question 27

Types of shareholders

Answer 27

• Corporate shareholders and groups of companies
• Public companies
• Single member companies
  There must be a statement to this effect on the register of members (s 123 CA2006). Similarly, if the number of shareholders increases from one, there must be a statement stating that the company has ceased to have only one member, and the date on which that event occurred. It is an offence to breach s 123.
• Joint shareholders
  2 or more individuals hold shares jointly.
  The register of members needs to record both names but only one address (s 113(5) CA 2006). Breach of this section is an offence.