05. shareholders

Question 1

what are the rights available to shareholders?

Answer 1

• Membership rights – enforcement under s 33 CA 2006
• Shareholders’ agreements
• Shareholders’ rights under CA 2006

Question 2

what are the remedies available to shareholders?

Answer 2

• The removal of directors under s 168 CA 2006
• Derivative actions under s 260 CA 2006
• Unfair prejudice actions under s 994 CA 2006
• Just and equitable winding up under s 122 Insolvency Act 1986 (IA 1986)

Question 3

where can a membership rights be found?

Answer 3

in the Articles (as described in s33 CA 2006)

Question 4

what can a member do if their membership rights under the Articles are infringed?

Answer 4

sue for damages under s33 CA 2006

Question 5

what are some examples of shareholders’ membership rights?

Answer 5

• Right to a dividend once it has been lawfully declared;
• Right to share in surplus capital on a winding up;
• Right to vote at meetings; and
• Right to receive notice of GMs and AGMs.

Question 6

In order to protect themselves, members should ensure that any of their rights which are not membership rights are
set out where?

Answer 6

not in the Articles, in a separate contract (such as a shareholders’ agreement)

Question 7

what is a shareholders’ agreement?

Answer 7

a contract between some or all of the shareholders

Question 8

why might a shareholders’ agreement be desirable?

Answer 8

• extension of the Articles
• can include provisions which are not legally permitted in the Articles (as they are subject to CA 2006)
• can be kept private (unless they are explicitly referred to in the Articles)
• minorities have a right of veto due to unanimity for changes to shareholders’ agreements (whereas amendments to Articles only require 75% approval)

BUT provisions should not restrict a company from exercising its statutory powers

Question 9

what are some examples of provisions included in a shareholders’ agreement?

Answer 9

• Unanimous voting over certain matters, eg removing a director;
• Quorum for GMs;
• Dividend policy;
• Allotment of new shares; and
• New and departing shareholders

Question 10

how can a member enforce a shareholders’ agreement?

Answer 10

against the other shareholders under general contract law principles

e.g., breach of contract, injunction etc.

Question 11

Summary of shareholders’ rights under CA 2006

Answer 11

Question 12

Summary of removal of a director by shareholders - BOARD THAT CO-OPERATES WITH S 303 CA 2006

Answer 12

Question 13

Summary of removal of a director by shareholders - BOARD THAT DOES NOT CO-OPERATE WITH S 303

Answer 13

Question 14

can a director who is also a shareholder vote in a GM regarding his own removal?

Answer 14

yes

Question 15

What if the director is also a shareholder? Bushell v Faith clause in the Articles

Answer 15

may give a director, who is also a shareholder, weighted voting rights at a GM at which a s168 CA 2006 resolution is proposed

such weighted voting clauses are allowed because the requirement for an ordinary resolution is not being changed, but rather it is the way votes are amassed which is
altered, making it easier for the imperilled director to survive

Question 16

what should also be checked for provisions similar to a Bushell v Faith clause in the Articles?

Answer 16

shareholders’ agreement

Question 17

What if the director is also a shareholder? shareholders’ agreements

Answer 17

A shareholders’ agreement may provide that the unanimous consent of all shareholders is
required in order for a resolution to remove a director to be passed

Question 18

what are the limitations of having a shareholders’ agreement which provides that the unanimous consent of all shareholders is required to remove a director?

Answer 18

such a provision does not remove the statutory right of the majority
shareholders to remove a director under s 168 CA 2006.

This is because a company is bound to accept the vote of the shareholders even if this is in breach of the provisions of the shareholders’ agreement.

The director could then claim against the other shareholders for breach of the shareholder agreement or, if they know about the s168 proposed removal resolution in advance, they can apply for an injunction to prevent a breach of the terms of the shareholders’ agreement.

Question 19

Will the director be entitled to any compensation for loss of office?

Answer 19

the company may decide to pay compensation

Question 20

What is the procedure for obtaining compensation for loss of office?

Answer 20

Any payments must be approved by the shareholders + holding company (but not a wholly-owned subsidiary) by ordinary resolution unless:

(a) The payments do not exceed £200; or
(b) The payment is made in good faith:
(i) in discharge of an existing legal obligation;
(ii) by way of damages in respect of such an obligation;
(iii) in settlement or compromise of a claim in connection with termination of a person’s office or employment; or
(iv) by way of pension in respect of past services (s 220 CA 2006).

A memorandum re the payment must be available to shareholders for 15 days before the ordinary resolution is passed, ending with the date of the general meeting.

Question 21

Can the director avoid shareholder approval by the payment being made to a third party?

Answer 21

Not if the third party is a connected person, in which shareholder approval will also be required!

Question 22

what is the rule in Foss v Harbottle?

Answer 22

In situations where a wrong has been done to a company, the company is the proper
claimant.

Limited exceptions allow shareholders to bring a claim on the company’s behalf.

Question 23

what is a derivative claim (s260)?

Answer 23

A derivative claim is initiated by a member of a company, rather than by the company itself:

(a) 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/shadow director (+ common law duties not under CA 2006); and

(b) Seeking relief on behalf of the company.

Question 24

who is given a remedy under a derivative claim?

Answer 24

the company

Question 25

against whom can the **derivative claim** be brought?

Answer 25

- the director/shadow director - another person (common law rules - *knowing assistance*) - both the director/shadow director and another person (provided the cause of action is wrt a a breach by a director/shadow director)

Question 26

however, when must derivative claims against third parties be permitted?

Answer 26

only in narrow circumstances

Question 27

who may bring a **derivative claim**?

Answer 27

a shareholder

Question 28

when can must the cause of action have arisen for the shareholder to bring a derivative claim?

Answer 28

it is immaterial whether the cause of action arose before or after the person bringing the claim became a shareholder

Question 29

who cannot bring a derivative claim?

Answer 29

- non-members - former members

Question 30

what is STAGE 1 of the derivative claim?

Answer 30

the shareholder must obtain permission of the court to **continue** the claim (once the claim form has been issued) by making out a **prima facie** case

Question 31

at STAGE 1 of a derivative claim, on what grounds **must** a court refuse the claim (**s263(2)**)?

Answer 31

includes: when the court is satisfied that a person acting in according with s172 (*duty to promote success*) would not seek to continue the claim

Question 32

at STAGE 1 of a derivative claim, what factors must the court look at when deciding whether the let the claim continue (**s263(3)**)?

Answer 32

includes: - is the shareholder acting in good faith? - would the act or omission which gave rise to the cause of action be likely to be ratified by the company?

Question 33

what happens at STAGE TWO of the derivative claim (*if relevant*)

Answer 33

if the application is not dismissed based on **s263(2)** or **s263(3)**: the court must have **particular regard** to any evidence as to the views of members who have **'no personal interest, direct or indirect, in the matter' (s263(4))** (*safeguard against tactical litigation by disgruntled shareholders*)

Question 34

what type of approach have the courts generally adopted in giving permission to continue derivative claims?

Answer 34

a generally restrictive approach

Question 35

summary of court approvals for **derivative claims**

Answer 35

Question 36

what is an **unfair prejudice** action (**s994**)?

Answer 36

a member can bring an action on the grounds: (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**.

Question 37

what may or may not be considered unfairly prejudicial conduct?

Answer 37

✅The granting of excessive remuneration to directors; ✅Directors’ dealing with associated persons; and ✅Non-payment of dividends. ❌Negligent or inept management of a company unless ✅serious and/repeated mismanagement which puts at risk the value of the minority shareholder's interest. ❌disagreements on company policy ✅❌breaches of the Articles ✅❌legitimate expectation (more likely to be successful in small private companies)

Question 38

for unfair prejudice actions, does bad faith need to be shown?

Answer 38

no

Question 39

for unfair prejudice actions, does the claimant need to come with clean hands?

Answer 39

no, but conduct may be relevant

Question 40

what **remedies** are available in **unfair prejudice** actions?

Answer 40

- most commonly, the wrongdoer will be ordered to purchase a petitioner's shares (*although at what value is contentious*) - such order as it thinks fit (*e.g., orders regulating the future conduct of the company's affairs, requiring the company to do or refrain from certain acts*)

Question 41

why do courts often order a wrongdoer to purchase a petitioner's shares?

Answer 41

this is a mechanism to recover their investment in the company, without the difficulty of having to find an external investor to buy their shares

Question 42

how will a court **value** the shares to be purchased?

Answer 42

1. 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. 2. 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. 3. As a general rule the valuation date is that on which the court order was made in respect of the sale of the shares. 4. The behaviour of the petitioner may be relevant (*eg if they previously rejected a reasonable offer*). 5. In practice, where the dispute is around the valuation of the shares, the court will encourage the parties to settle out of court by means of a **binding third-party** valuation of the shares. If a petitioner then objects to such a settlement, the court will usualyl require reasons.

Question 43

why might s994 petitions not be the most suitable course of action (*and a negotiated settlement might be better*)?

Answer 43

- likely to be expensive, time-consuming and complicated to bring - discretionary orders by the court means there is **uncertainty** - if a shareholder wants to avoid a situation where the court makes a order for the purchase of their shares, s994 will likely to be suitable

Question 44

what is **just and equitable winding up** (**s122 IA**)?

Answer 44

a disgruntled shareholder can apply for the company to be wound up (liquidated) on the grounds that it is **just and equitable** to do sp

Question 45

what can the court order when it comes to **just and equitable winding up**?

Answer 45

the court has discretion to decide whether it is just and equitable for winding up to take place.

Question 46

which two petition might shareholders make the same time?

Answer 46

s122 IA and s994 CA