W4

Question 1

What are the rights of shareholders under the Articles and Shareholder Agreements?

Answer 1

The rights of shareholders under the Articles and Shareholder Agreements include the ability to make decisions by majority rule, the right to remove a director, and the use of Shareholder Agreements to protect minority shareholders’ interests.

Question 2

How are shareholder decisions made?

Answer 2

Shareholder decisions are made by majority rule, with ordinary resolutions requiring the support of a simple majority and special resolutions requiring the support of 75% of the shareholders. This may pose challenges for minority shareholders.

Question 3

What remedies are available to shareholders if their membership rights are infringed?

Answer 3

Under Section 33 of the Companies Act 2006, shareholders can sue if their membership rights are infringed. The usual remedy for breach of Section 33 is damages. Additionally, shareholders can request that the board call a General Meeting under Section 303 of the Companies Act 2006.

Question 4

How do Shareholder Agreements protect minority shareholders?

Answer 4

Shareholder Agreements provide a simpler and more effective way of protecting minority shareholders’ interests. They can include provisions such as requiring unanimous consent for certain matters, like the removal of a director.

Question 5

What is the principle of majority rule in shareholder decisions?

Answer 5

The principle of majority rule means that a requisite majority of shareholders must vote in favor of a proposed resolution for it to be passed. This can limit the influence of minority shareholders unless they join forces with others.

Question 6

What protections or remedies are available to all shareholders, including minority shareholders?

Answer 6

All shareholders, including minority shareholders, have certain protections and remedies available to them. However, these can be costly and uncertain. Shareholders may choose to enter into Shareholder Agreements to minimize the impact of majority rule and establish how the company will be run.

Question 7

How can a Shareholder Agreement influence the decision-making process?

Answer 7

A Shareholder Agreement can influence the decision-making process by requiring unanimous consent for certain matters. For example, the agreement may stipulate that the removal of a director requires the unanimous consent of all shareholders.

Question 8

What rights do shareholders have under the Articles of a company?

Answer 8

The Articles of a company regulate the relationship between the members and the company. Shareholders have rights such as receiving notice of General Meetings, voting at meetings, receiving dividends, and inspecting minutes and company registers.

Question 9

What is the significance of Section 33 of the Companies Act 2006

Answer 9

Section 33 of the Companies Act 2006 states that the provisions of a company’s constitution bind the company and its members. Shareholders can sue under this section if their membership rights are infringed, with damages being the usual remedy.

Question 10

How can a Shareholder Agreement provide enforceability for provisions that are not membership rights?

Answer 10

A Shareholder Agreement provides a right of action that enables one member to enforce the provisions of the agreement directly against another member. Breach of the agreement can be enforced through general contract law principles or by seeking an injunction.

Question 11

What matters can be reserved in a Shareholder Agreement to protect minority shareholders?

Answer 11

Certain matters can be reserved in a Shareholder Agreement, requiring the consent of all shareholders or specific individual shareholders. For example, the agreement may stipulate that the unanimous consent of all shareholders is required to pass a resolution to remove a director.

Question 12

How can a Shareholder Agreement prevent changes to a company’s articles of association?

Answer 12

A Shareholder Agreement can prevent changes to a company’s articles of association by requiring the unanimous approval of all parties to the agreement. This gives minority shareholders a right of veto over proposed changes.

Question 13

What are the rights of shareholders with different shareholdings under the Companies Act 2006?

Answer 13

Shareholders have various rights under the Companies Act 2006, depending on their shareholdings. These rights include receiving notice of General Meetings, appointing a proxy, voting at General Meetings, receiving dividends, and bringing petitions for unfair prejudice or just and equitable winding up.

Question 14

Under what circumstances can a director be removed?

Answer 14

A director can be removed if the articles of association specifically provide for it or if a resolution to remove them is passed by the shareholders. Directors who are also shareholders are allowed to vote on the resolution to remove them.

Question 15

What is special notice and why is it required for a removal resolution?

Answer 15

Special notice is a requirement for shareholders proposing a removal resolution to give notice of that proposed resolution to the company at least 28 clear days before the general meeting where the resolution will be voted on. This notice ensures that all shareholders have sufficient time to consider and prepare for the removal resolution.

Question 16

What options does the board have when they receive notice of a proposed removal resolution?

Answer 16

When the board receives notice of a proposed removal resolution, they can either place the resolution on the agenda of a general meeting or decide not to place it on the agenda. If they choose to place it on the agenda, they must give shareholders notice of the resolution at least 14 clear days before the meeting.

Question 17

What happens if the board refuses to call a general meeting after receiving a special notice for a removal resolution?

Answer 17

If the board refuses to call a general meeting after receiving a special notice for a removal resolution, shareholders together holding not less than 5% of the paid-up voting share capital of the company can serve a request on the board to call a general meeting. If the board still refuses, the shareholders can call the general meeting themselves.

Question 18

What rights does a director who is also a shareholder have in protecting themselves from a removal resolution?

Answer 18

A director who is also a shareholder may have weighted voting rights at a general meeting if there is a Bushell v Faith clause in the articles of association. Additionally, a shareholders’ agreement may require unanimous consent for a resolution to remove a director. However, these provisions do not override the statutory right of majority shareholders to remove a director under section 168 of the Companies Act 2006.

Question 19

What obligations do directors have when they receive a request to call a general meeting?

Answer 19

When directors receive a request to call a general meeting, they must call the meeting within 21 days and hold it on a date not more than 28 days after the notice convening the meeting. Failure to comply with this requirement allows the shareholders who submitted the request to call the meeting themselves.

Question 20

What happens if a director is removed through a resolution that breaches a shareholders’ agreement?

Answer 20

If a director is removed through a resolution that breaches a shareholders’ agreement, the resolution is still valid and the director will be removed from office. However, the director may have a claim for breach of the shareholders’ agreement against the shareholders who voted for the resolution.

Question 21

Can a director who is being removed be entitled to compensation for loss of office?

Answer 21

A director who is being removed may be entitled to compensation for loss of office, but any payment by the company must be approved by the holding company. However, no approval is required from the shareholders of a wholly-owned subsidiary.

Question 22

What is the purpose of special notice in the context of a removal resolution?

Answer 22

Special notice is required for shareholders proposing a removal resolution to give notice of that proposed resolution to the company at least 28 clear days before the general meeting where the resolution will be voted on. This notice ensures that all shareholders have sufficient time to consider and prepare for the removal resolution.

Question 23

What are the options available to the board when they receive notice of a proposed removal resolution?

Answer 23

When the board receives notice of a proposed removal resolution, they can either place the resolution on the agenda of a general meeting or decide not to place it on the agenda. If they choose to place it on the agenda, they must give shareholders notice of the resolution at least 14 clear days before the meeting.

Question 24

Under what circumstances will payments made to a person connected to a director be treated as a payment to the director?

Answer 24

Under s 215(3) CA 2006, payments made to a person connected to a director, or made to any person at their direction, or for the benefit of a director or a connected person, will be treated as a payment to the director and will require shareholder approval.

Question 25

What is the requirement for making a payment to a director in connection with the transfer of the whole or part of the undertaking or property of a company?

Answer 25

According to s 218 CA 2006, any payment for loss of office made by any person to a director in connection with the transfer of the whole or part of the undertaking or property of a company (for example, on a share or business sale of the company) requires shareholder approval.

Question 26

What is a derivative claim and who can bring it?

Answer 26

A derivative claim is one where a shareholder brings an action on behalf of the company against directors (and third parties) who have breached their duties. It may be brought by a shareholder in respect of a cause of action arising from an actual or proposed act or omission involving negligence, default, breach of duty, or breach of trust by a director of the company.

Question 27

What is the purpose of court approval in a derivative claim?

Answer 27

In a derivative claim, court approval is required to continue the claim. The court must consider factors such as whether the member is acting in good faith and whether the act or omission that gave rise to the cause of action would likely be ratified by the company. This requirement serves as a safeguard against tactical litigation by disgruntled shareholders.

Question 28

What is the difference between a derivative claim and an unfair prejudice claim?

Answer 28

A derivative claim is brought by a shareholder on behalf of the company in respect of a cause of action arising from a breach of duty by a director. An unfair prejudice claim, on the other hand, is brought by a shareholder against the company, alleging that the company is being run in a manner that unfairly prejudices their interests.

Question 29

What are some examples of conduct that may be considered unfairly prejudicial to the interests of members?

Answer 29

Examples of conduct that may be held to be unfairly prejudicial to the interests of members include the granting of excessive remuneration to directors, directors dealing with associated persons, and non-payment of dividends.

Question 30

What is the statutory right to bring a derivative claim under s 260 CA 2006?

Answer 30

Section 260 CA 2006 allows shareholders to bring a derivative claim where directors have breached their statutory duties. It provides a wider range of circumstances in which a derivative claim may be brought compared to the previous common law rules.

Question 31

Who can a derivative claim be brought against?

Answer 31

A derivative claim may be brought against a director or another person (or both). However, a cause of action will only arise in respect of the actions or omissions of a director. Third parties may be defendants to the derivative claim in certain circumstances, such as when they are involved in a contract entered into in breach of the director's duties and had knowledge of the breach.

Question 32

What is the two-stage process for bringing a derivative claim under s 260 CA 2006?

Answer 32

The two-stage process for bringing a derivative claim involves obtaining permission from the court to continue the claim at the first stage. The member must make out a prima facie case to obtain permission. If the application is not dismissed at the first stage, the court will consider the claim at the second stage, taking into account particular criteria and evidence from other members.

Question 33

What are the key principles related to unfairly prejudicial conduct in company law?

Answer 33

The key principles related to unfairly prejudicial conduct in company law include: negligent or inept management of a company, disagreements as to company policy, bad faith, breaches of the articles of association, equitable considerations, excessive remuneration, and legitimate expectation.

Question 34

What is the meaning of unfairly prejudicial conduct in company law?

Answer 34

Unfairly prejudicial conduct refers to conduct that puts at risk the value of the minority shareholder's interest. It can include negligent or inept management, disagreements as to company policy, bad faith, breaches of the articles of association, excessive remuneration, and prevention of involvement in the management of the company.

Question 35

What remedies are available for unfair prejudice in company law?

Answer 35

Under section 996(1) of the Companies Act 2006, the court has the power to grant such order as it thinks fit to provide relief. Section 996(2) sets out a list of particular types of orders that may be made, including regulating the future conduct of the company's affairs and requiring the purchase of the petitioner's shares by the wrongdoer(s).

Question 36

What are the valuation principles in relation to unfair prejudice cases?

Answer 36

In unfair prejudice cases, the court has a wide discretion in relation to valuation matters. Shareholders should first attempt to use a valuation mechanism set out in the articles of association, if any. If there is no fair method, a court valuation will be necessary. The court generally does not impose a discount on the value of a minority shareholding in a private company, unless it is viewed as an investment or the company is operated along more commercial lines.

Question 37

What is the preferred option for resolving unfair prejudice cases?

Answer 37

A negotiated settlement is generally the preferred option for resolving unfair prejudice cases. Section 994 petitions can be expensive, time-consuming, and complicated to bring, and they bring uncertainty for the petitioner. Therefore, parties are encouraged to settle out of court through a binding third-party valuation of the shares

Question 38

What is the just and equitable winding up remedy in company law?

Answer 38

The just and equitable winding up remedy allows a disgruntled shareholder to apply for the company to be liquidated on the grounds that it is just and equitable to do so. This is a drastic solution as it effectively brings the company's life to an end. The court has discretion to decide whether winding up is just and equitable.

Question 39

What is the overlap between section 122 of the Insolvency Act 1986 and section 994 of the Companies Act 2006?

Answer 39

There is a degree of overlap between section 122 of the Insolvency Act 1986 and section 994 of the Companies Act 2006. It is common for a petition under both sections to be made at the same time in cases where winding up is sought on the grounds that it is just and equitable.

Question 40

What factors may be considered in determining the valuation of shares in unfair prejudice cases?

Answer 40

In determining the valuation of shares in unfair prejudice cases, the court will consider all the circumstances of the case. Shareholders should first attempt to use a fair valuation mechanism set out in the articles of association. If there is no fair method, a court valuation will be necessary. The court generally does not impose a discount on the value of a minority shareholding in a private company, unless it is viewed as an investment or the company is operated along more commercial lines.

Question 41

What role does the conduct of the claimant play in unfair prejudice cases?

Answer 41

Although the conduct of the claimant may be relevant in deciding whether the prejudice was unfair, there is no overriding requirement that the claimant come to court with clean hands. The court will consider all the circumstances of the case in determining whether unfair prejudice has occurred.

Question 42

What are the grounds for bringing a petition for just and equitable winding up?

Answer 42

A shareholder can bring a petition for just and equitable winding up on the grounds that it is just and equitable to do so. This right arises under section 122(1)(g) of the Insolvency Act 1986. Winding up effectively brings the company's life to an end.