14. SH rights

Question 1

PROBLEM WITH SH DECISIONS

Answer 1

SH DECISIONS = MAJORITY RULE

Little minority SH can do to influence whether a resolution will be carried / how comp run day-to-day unless it joins forces with other SH to make up/block majority required

Question 2

SOLUTION for the problem of majority rule

Answer 2

• STATUTORY REMEDIES (costly to pursue, uncertain in terms of likelihood of success/kind of remedy to be granted, far from ideal)
• SHAREHOLDERS’ AGREEMENT (minimises effect of majority rule by setting out how company is to be run between SH and how SH will vote on certain matters - e.g. unanimous consent for substantial changes)

Question 3

“Membership Rights” - enforcement under s.33

WHAT IS IT?

Answer 3

Articles of association regulate relationship between members and each other and between members of the company (s.33)

under art.33

• members can SUE if MEMBERSHIP RIGHT IS INFRINGED
• usual remedy = damages
• rights are limited

Question 4

types of ‘membership rights’

Answer 4

• right to dividend once lawfully declared
• right to share in surplus cap on winding up
• right to vote at meetings
• right to receive notice of GM and AGM
• IF NOT MEMBERSHIP RIGHT, NOT enforceable under s.33

Question 5

Eley v Positive Government Security Life Assurance

Answer 5

Facts
- articles contained provision that P would be appointed company’s solicitor (not appointed but became SH)

Held:

• Right to be appointed as solicitor was NOT A MEMBERSHIP RIGHT
• cannot sue under eq. to s.33

Question 6

if not a membership right - how to enforce?

Answer 6

SET OUT ANY RIGHTS THAT ARE NOT MEMBERSHIP RIGHTS (e.g. personal rights) IN A SEPARATE CONTRACT (e.g. SH agreement, NOT articles)

Question 7

Derivative actions - authority?

Answer 7

past: common law
now: s.260 (but CL may still be followed by the court and Foss still relevant where SH seeks to enforce right vested in themselves rather than the company bc s.260 does not affect that line of authority)

Question 8

FOSS V HARBOTTLE

Answer 8

if wrong done to a company, COMPANY is the proper claimant (acting through board or majority SH) - member is NOT a proper claimant

• minority SH not allowed to sue company for wrong committed against company
• BUT over the years, court have recognised that there needed to be some circumstances where SH could bring a claim on company’s behalf (for justice) so there are exceptions to Foss v Harbottle rule

Question 9

Exceptions to Foss v Harbottle (that allow minority SH to bring an action)

Answer 9

• Majority exercises votes in a way to DEFRAUD minority SH
• Directors guilty of BREACH OF FIDUCIARY DUTY (and breach not ratified by majority)
• Company acts ULTRA VIRES or ILLEGALLY
• Company purported to pass OR where SR or some other special procedure is required (special procedures there to protect minority and Foss is not allowed to defeat this purpose)
• Company proposes to act on authority of resolution which is defective (inadequate notice)

Question 10

S.260 CLAIMS (DERIVATIVE CLAIMS)

Answer 10

S.260 = EXPRESS RIGHT for MEMBER to bring derivative claim in certain circumstances (on behalf of the comp)

• dir breaches statutory duties
• negligence, default, breach of duty, breach of trust by dir

NO NEED for director to have benefitted personally

Applies to current, former, and shadow directors

Can be brought against DIRECTOR or ANOTHER PERSON (3P can be defendants in narrow circumstances - e.g. 3P knew about breach)

Question 11

DERIVATIVE CLAIM PROCEDURE

Answer 11

1. MEMBER MUST OBTAIN PERMISSION OF THE COURT TO CONTINUE DERIVATIVE CLAIM (once CF issued)
   - onus on member to make out prima facie case
   - court MUST refuse in s.263(2) circumstances (not s.172)
   - court MAY refuse in s.262(3) circumstances (not good faith/ratified)
   - safeguard to counterbalance rights to bring claim
2. COURT WILL CONSIDER PARTICULAR CRITERIA (“PARTICULAR REGARD” as to view of members with no personal interest in matter)
   - harder for single member to bring proceedings against wishes of general body
   - safeguard against tactical litigation

Question 12

Unfair prejudice actions (s.994 CA 2006) - what is it?

Answer 12

MEMBER can bring action on grounds that company is run in a way that he/she has suffered unfair prejudice (SUE ON BEHALF OF HIMSELF) - reasonable by-stander test (objective)

E.g.:

• granting excessive remuneration to directors
• directors’ dealing with associated persons
• non-payment of dividends

PROS:
C’s conduct is considered but no requirement C come with ‘clean hands’ + no need to show bad faith or conscience intent of company

CONS:
EXPENSIVE,
TIME-CONSUMING, COMPLICATED TO BRING

Question 13

not prejudicial conduct

Answer 13

• negligent or inept management of company

- disagreements as to company policy (e.g. change in direction of business)

Question 14

prejudicial conduct

Answer 14

• management amount to serious and/or repeated mismanagement which puts at risk value of minority SH’s interest
• breaches of articles of association
• excessive remuneration of directors
• legitimate expectation (in small private companies/quasi-partnerships)

Question 15

legitimate expectation?

Answer 15

SH may have legitimate expectation that they be involved in management of the company if small company/quasi-partnership

Prevention of involvement may equate to unfairly prejudicial conduct

(Re a Company No 00477, Ebraahimi v Westborne)

Question 16

what can court do in unfair prejudice?

Answer 16

• grant such order it thinks to provide relief

E.g.

• regulate future conduct
• req. comp to do/refrain from certain acts
• entitle minority SH to purchase majority SH (v. rare)

MOST COMMON REMEDY: PROVIDE FOR PURCHASE OF PETITIONER’S SHARES BY WRONGDOERS

• if one side willing to do this, court encourages parties to settle valuation out of court
• if SH doesn’t want maj to buy, s.994 may not suitable
• if maj SH doesn’t have funds, min SH shouldn’t request this order

Question 17

valuation of shares for unfair prejudice remedy

Answer 17

aim to set fair price, looking at all circumstances

• usually won’t impose discount on min SH in private company (because min SH forced to sell his shares) - but might if SH is viewed as investment or comp is operated on commercial lines
• if SH is small and doesn’t confer control - not taken into account
• valuation mechanism used in articles if fair?
• valuation date = date court order is made generally
• behaviour of C may be relevant

Question 18

4. Just and equitable winding up (s.122 IA 1986)

Answer 18

Very drastic = right for SH to apply to company to be wound up on grounds that it is just and equitable to do so

• Company’s life is effectively brought to an end by winding up
• Court has discretion to decide
• Common for s.122 IA 1986 and S.994 CA 2006 petition to be brought at same time

Question 19

OTHER PROVISIONS benefiting minority SH

Answer 19

• call GM (s.303)
• circulation of statements regarding proposed resolution to be considered at GM (s.314)
• force resolutions onto agenda of AGM (public companies) (s.338)
• require website publication of audit concern (quoted companies) - s.527
• apply for cancellation of SR approving payment of cap for redemption or purchase by private company of its shares (s.721)

Question 20

require directors to call GM

Answer 20

SH together holding not less than 5% of paid up voting share capital of the company can require a GM by serving request on company

Question 21

Require circulation of statements regarding proposed resolutions to be considered at GM

Answer 21

5% of total voting rights
OR not less than 100 members holding shares in the company with right to vote (on which paid up an average sum per member of not less than £100)

Question 22

Force resolutions onto agenda of AGM (public companies only)

Answer 22

5% of total voting rights
OR not less than 100 members holding shares in the company with right to vote (on which paid up an average sum per member of not less than £100)

Question 23

Require website publication of audit concern (quoted companies only)

Answer 23

5% of total voting rights
OR not less than 100 members with relevant right to vote and hold shares in the company (on which paid up an average sum per member of not less than £100)

Question 24

Apply to court for cancellation of SR approving any payment of capital for redemption or purchase by a private company of its shares

Answer 24

Any shareholder (other than the one who voted in favour of the resolution) can apply

Question 25

SH agreements to protect minorities - right of action/enforceability

Answer 25

SH agreement:
- providing right of action (enabling 1 member to enforce provisions of SH agreement directly against another - this cannot arise under articles)

• usual contract law (breach of contract)
• used to ensure enforceability of provisions that would not be regarded membership rights
• minimises effect of majority rule

Question 26

SH agreements to protect minorities - reserved matters in SH agreements

Answer 26

Certain matters can be reserved in a SHs’ agreement as matters requiring the consent of all SH (unanimous consent) or certain individual SH

e.g. amending articles, issuing new shares, appointing/removing directors

These provisions does not remove statutory right, company will be bound to accept vote of SH even if this is in breach of SH agreement

• Resolution would still be valid e.g. director still removed
• BUT director would have claim against other SH for breach of SH agreement
• threat of breach of SH agreement = minority sH able to influence whether resolution passed or not despite minority shareholding

Question 27

amending SH agreement

Answer 27

Changes to SH agreement = requires unanimous approval of all parties to agreement (gives minority veto)

Question 28

in general, remedies for minority SH . …

Answer 28

FAR FROM IDEAL
(even considering s.260)

SH agreement = beneficial