13. Internal Disputes

Question 1

what if SH wants to remove a director?

STEP ONE…

Answer 1

STEP ONE - SPECIAL NOTICE (req. 28 clear days between notice and GM)

• give notice of proposed removal resolution to the board

Board can:

• put RR on agenda of GM
• ignore request (Pedley v Inland Waterways)
• if board ignores, s.303 notice likely to be sereved

Question 2

if after special notice, board puts RR on agenda of GM…

Answer 2

Board must give SH notice of RR at the same time and manner as it gives notice of GM

(i. e. at least 14 clear days’ notice of RR)
- if this is not practicable (e.g. notice for GM already sent out) notice of RR may be given either by advertisement in newspaper or other mode allowed by articles at least 14 clear days before GM

Question 3

if after special notice, board ignores request (does not put RR on agenda)

Answer 3

• problem for SH
• Pedley allows directors to ignore proposed RR
• if not on agenda, it won’t be considered at GM
• SH will have to force directors to call GM (s.303)

Question 4

Pedley v Inland Waterways Association

Answer 4

Directors not bound to place RR on agenda

Question 5

SHAREHOLDERS’ POWER TO REQUIRE CALLING OF GM (s.303)

Answer 5

HOW?

• SH who together hold not less than 5% paid up voting SC
• serve request on company (board) requiring board to call GM

request must:

• state general nature of business (incl. the SR)
• include text of resolution
• cannot be vexatious, frivolous or defamatory

Question 6

What are directors’ obligations on receipt of s.303 request?

Answer 6

MUST:

ONE - call GM within 21 days from date they became subject to s.303 request to call GM

TWO - hold GM not more than 28 days after date of notice convening GM (from ONE)

Question 7

if directors fail to call GM/hold GM under s304(1)

Answer 7

SH can call GM themselves (s.305)

All SH who submitted s.303 request

OR

any SHs representing more than 50% of the voting rights of those who submitted s.303 request

GM must be held within 3m of date directors received s.202 request (likely they’ll do it asap though, so 14 clear days)

SH can recover reasonable expenses for doing so from company

Question 8

DIRECTOR’S RIGHTS TO PROTEST REMOVAL

Answer 8

1. if board receives notice that 1 or more member intends to propose RR, company must send copy of that notice to director immediatly
2. right to make representations in writing (if reasonable length) - setting out reasons why he should not be removed (should be circulated to members - if not, read out at GM)
3. right to be heard at GM (speak in his own defence) whether or not he is a SH

Question 9

DIRECTOR ENTITLED TO COMPENSATION?

Answer 9

S.168(5) CA 2006 – removal under s.168 does not deprive a person of any right they may have to compensation or damages payable by reason of termination of any appointment

(e.g. if service contract breached - damages or comp for breach of service contract)

NB. payment under service contract SEPERATE FROM additional payment for loss of office(req. SH approval)

Question 10

if D also SH?

Answer 10

1. check for Bushell v Faith clause (weighted voting rights - if yes, likely cannot pass OR)
2. transfer provisions dealing with D’s SHing in the company (e.g. require director to transfer shares to other SH)

Question 11

BUSHELL V FAITH CLAUSE

Answer 11

weighted voting rights at GM where s.168 is proposed

• gives more votes per share
• if it exists, SH unlikely to be able to pass OR
• common in smaller companies where D plays key role in setting up company so expect to be able to continue to run business

Question 12

Transfer provisions?

Answer 12

Governing the transfer of outgoing director’s shareholder in the company

• when D removed, SH and comp unlikely to want him to retain SH
• transfer provision in articles or SH agreement

Question 13

what docs to check?

Answer 13

SH agreement - is there one? is there a clause requiring unanimity for removing director?

articles - Bushell v Faith clause?

Question 14

derivative actions (s.260)

Answer 14

NEW STATUTORY DERIVATIVE CLAIM

• allows SH to bring claim on behalf of the company
• if actual or proposed act or omission involving negligence, default, breach of duty, breach of trust by D of company (s.260(3) grounds)
• includes breaches of general duties
• former, current, and shadow directors

Question 15

who can bring a derivative action?

Answer 15

member
on behalf of company
typically against director

Question 16

s.994 UNFAIR PREJUDICE

Answer 16

SH apply to court for order that company’s affairs are being conducted in a way unfairly prejudical to SH interests or his SH interests

• courts are specific and restrictive on what is unfair prejudice
• don’t want to intervene in internal affairs of companies
• includes: excessive remuneration of directors, failure to pay dividened
• if based on disagreement to comp policy = harder to bring

Question 17

s.122(1)g IA 1986 Action to wind up

Answer 17

SH can apply for company to be wound up because it is just and equitable to

Question 18

tools of SH to control board

Answer 18

Derivative Actions
Removal of a Director
Unfair Prejudice 
Threat of just and equitable winding up
Membership rights

Question 19

VACATION FROM OFFICE

Answer 19

Removal by SH is not the only way a director may leave his position. Other ways:

1. RESIGNATION BY NOTICE (if put pressure to do so by SH or personal reasons) - board usually pass BR to accept (not necessary though)
2. AUTOMATIC TERMINATION (MA 18)
3. RETIREMENT BY ROTATION (MA for PLC, every 3 years, and for listed companies, CGC rules to re-elect at regular intervals of no more than 3 years)

Question 20

DISQUALIFICATION (CDDA 1986)

Answer 20

court can make disqualification order against a person preventing them (unless they obtain leave of the court) to be a director,

• protect public from activities of director
• period = 2-15 years
• if unfit to be director, can’t be another comp’s director

Question 21

grounds for disqualification

Answer 21

• Conviction for indictable offences (s.2)
• Breaches of company legislation (s.3)
• Fraud in a winding up (s.4)
• Unfit conduct of directors of insolvent companies (s.6) – most common
• Fraudulent or wrongful trading (s.10)
• Breach of competition law (s.9A)
• Conviction of certain offences overseas (s.5A)

Question 22

COMPENSATION PAYMENTS FOR LOSS OF OFFICE

Answer 22

(not what he is entitled to under contract)

REQUIRES SH APPROVAL

• payment to director
• or person connected

EXCEPTIONS:

• does not exceed £200
• made in good faith for discharging legal ob, or damages, or settlement, or pension

if WOS - only holding company needs to do it

WRITTEN MEMO SETTING OUT PAYMENT MUST BE MADE AVALIABLE TO SH BEFORE OR IS PASSED

Question 23

MEANING OF ‘PAYMENT FOR LOSS OF OFFICE’

Answer 23

s. 215(1) – means payment made to a director or past director by way of:
- Compensation for loss of office as director of the company
- Compensation for loss or any other office or employment in connection with the management of the affairs of the company or its subsidiary undertakings while director
- Consideration for, or in connection with, retirement from the office of director
s. 215(2) – includes cash and non-cash benefits

Question 24

CONSEQUENCES OF BREACH (S.222) OF S.217

Answer 24

Recipient will hold the payment on trust for the company (s.222(1)(a))

Any directors who authorised the payment are jointly and severally liable to indemnify the company that made the payment from any resulting loss (s.222(1)(b))

Question 25

RATIFICATION OF DIRECTORS’ CONDUCT

Answer 25

S.239 - CAN FORGIVE negligent, breach of duty, breach of trust, default PERSONAL LIABILITY

• OR
• (Articles can make it SR)
• BUT any votes by director/person connected cannot be counted

WR - not sent to them
GM - disregard votes made in favour by director or connected person