5. Shareholders' rights and remedies

Question 1

What principle is applied to decisions reserved to shareholders?

Answer 1

Majority rule-a requisite majority of the shareholders must vote in favour of the proposed resolution in order for it to be passed.

Question 2

What do the Articles of a company regulate?

Answer 2

They regulate the relationship between the members and each other and between the members and the company.

Question 3

What can members do under s33 CA 2006 if their membership rights are infringed and what is the usual remedy?

Answer 3

Members can sue under s33 CA 2006 if their membership rights are infringed. The usual remedy for breach of s33 CA 2006 is damages.

Question 4

What are examples of membership rights that have been enforced under s33 CA 2006?

Answer 4

-right to a dividend
-right to share in surplus capital on a winding up
-right to vote
-right to receive notice of GMs and AGMs

Question 5

Are rights of members which are not membership rights enforceable (refer to the relevant case)?

Answer 5

No, as seen in the case of Eley v Positive Government Security Life Assurance Co Limited (1876). The court held that the C could not sue under the equivalent of s33 CA 2006 because the right to be appointed as the company’s solicitor was not a membership right.

Question 6

In order to protect members, how should they set out any of their rights which are not membership rights?

Answer 6

In a separate contract such as a shareholders’ agreement.

Question 7

What is a shareholders’ agreement?

Answer 7

A private contract between the shareholders which acts as a kind of extension to the Articles in terms of governing how the company is run and can contain provisions which the Articles do not permit.

Question 8

What provisions are likely to be included in a shareholders’ agreement?

Answer 8

-Unanimous voting over certain matters
-Quorum for GMs
-Dividend policy
-Allotment of new shares
-New and departing shareholders

Question 9

Outline the right of action/enforceability in the context of a shareholders’ agreement.

Answer 9

Shareholders’ Agreement provides a right of action which enables one member to enforce the provisions of the agreement directly against another member.
If a term is breached, it can be enforced in the usual way under general contract law principles.

Question 10

How can minority shareholders be protected via a shareholders’ agreement (provide an example)?

Answer 10

Certain matters can be reserved as requiring the consent of all shareholders and this protects minority shareholders eg may provide that the unanimous consent of all shareholders is required to pass a resolution to remove a director.

Question 11

Where a removal resolution is passed without the required unanimity outlined in a shareholders’ agreement, if a simple majority voted in favour, would the resolution still be valid?

Answer 11

Yes, but the director would then have a claim against the other shareholders for breach of the shareholders’ agreement (due to unanimity not being reached).

Question 12

How are amendments to a company’s Articles made?

Answer 12

By special resolution requiring 75% approval

Question 13

How may a minority shareholder obtain a veto in respect of amendments to a company’s Articles?

Answer 13

By entering into a Shareholders’ Agreement that requires the unanimous approval of all parties to the agreement.

Question 14

What are the rights of a shareholder with any shareholding under CA 2006?

Answer 14

-Receive notice of a GM (s 307)

-Appoint a proxy to attend a GM in their place (s 324)

-Vote at a GM (provided they hold voting shares) (s 284)

-Receive a dividend (if declared)

-Receive a copy of the company’s accounts (s 423)

-Inspect minutes and company registers (s 116)

-Ask the court to prevent a breach of directors’ duties

-Commence a derivative claim (s 260)

-Bring a petition for unfair prejudice (s994 )

-Bring a petition for just and equitable winding up (s122 Insolvency Act 1986)

Question 15

What are the rights of a shareholder with a shareholding of 5% or more under CA 2006?

Answer 15

-Require directors to call a General Meeting (s 303)

-Require the circulation of written statements regarding proposed resolutions to be considered at a GM (s 314)

-Circulate a written resolution (s 292)

Question 16

What is the right of a shareholder with a shareholding of 10% or more in relation to the MA?

Answer 16

Demand a poll vote (MA 44).

Question 17

What is the right of a shareholder with a shareholding of over 25% under CA 2006?

Answer 17

Block a special resolution (s283) as a special resolution is passed by 75% or more of the votes.

Question 18

What is the right of a shareholder with a shareholding of over 50% under CA 2006?

Answer 18

Pass or block an ordinary resolution (s282) as an ordinary resolution requires over 50% of the votes to pass.

Question 19

What is the right of a shareholder with a shareholding of over 75% under CA 2006?

Answer 19

Pass a special resolution (s283) as a special resolution is passed by 75% or more of the votes.

Question 20

How may a company remove a director before the expiration of their period of office?

Answer 20

By ordinary resolution under s168(1) CA 2006.

Question 21

What type of notice is required of a removal resolution under CA 2006?

Answer 21

Under s168(2), special notice is required of a removal resolution (28 clear days before the GM).

Question 22

Is it possible for a company to use a written resolution to remove a director?

Answer 22

No, as per s288(2)(a) CA 2006.

Question 23

If the board places the removal resolution on the agenda of a GM, how should they give notice of that removal resolution?

Answer 23

It should give the shareholders notice of that removal resolution at the same time and in the same manner as it gives notice of the GM (s312(2) CA 2006), meaning the board will need to give shareholders’ at least 14 days clear notice of the removal resolution.

Question 24

If the board does not place the removal resolution on the agenda of a GM, what can the shareholders do?

Answer 24

If the removal resolution is not placed on the agenda, it will not be considered at the GM and the shareholders may need to force the directors to call a GM in accordance with s303 CA 2006.

Question 25

What shareholders can serve a s303 CA 2006 request on the company to hold a GM?

Answer 25

Under s303, shareholders together holding not less than 5% of the paid up voting share capital of the company can serve a request on the company.

Question 26

What must directors do when they receive a s303 CA 2006 request?

Answer 26

Under s304(1) CA 2006, when a s303 request is received, the directors must call the GM:

-within 21 days from the date on which they become subject to the s303 request

-to be hold on a date not more than 28 days after the date of the notice convening

Question 27

If the directors fail to call a GM under s304(1) CA 2006, what happens?

Answer 27

All of the shareholders who submitted the s303 request or any of them representing more than one half of the voting rights of those who submitted that s303 request, can call a GM themselves pursuant to s305 CA 2006.

Question 28

If the shareholders have to call a GM themselves pursuant to s305 CA 2006, what is the time period for holding the GM?

Answer 28

Must be called on normal notice (14 clear days) and held within 3 months of the s303 request.

Question 29

In order for the unhappy shareholders to ensure the resolution to remove a director is heard as soon as possible, what should they do?

Answer 29

Submit a s303 request requiring the directors to call a GM at the same time as sending their s312 CA 2006 special notice to the board.

Question 30

If a company receives notice that one or more members intends to propose a removal resolution, what must the company do?

Answer 30

Immediately send a copy of the notice to the director concerned (s691(1) CA 2006).

Question 31

What are a director’s rights to protest removal?

Answer 31

-Right to make representations in writing provided those representations are of a reasonable length (s169(3) CA 2006)

-Right to be heard and speak in their defence at the GM (s169(2) CA 2006)

Question 32

What is a Bushell v Faith clause?

Answer 32

A clause in the Articles of association which may give a director, who is also a shareholder, weighted voting rights at a GM at which a removal resolution is proposed.

Question 33

What is the effect of a Bushell v Faith clause?

Answer 33

It likely means that the shareholders are unable to pass an ordinary resolution to remove the director concerned.

Question 34

Outline how any compensation payments to a director for loss of office must be approved, including any relevant exceptions.

Answer 34

By way of ordinary resolution by the company’s shareholders (s217 CA 2006) unless;

-the payment does not exceed £200 (s221 CA 2006)

-the payment is made in good faith

Question 35

How long must a memorandum setting out particulars of compensation for loss of office to a director be made available for?

Answer 35

Must be made available to shareholders for 15 days before the ordinary resolution is passed, ending with the date of the GM (s217(3) CA 2006).

Question 36

What is a derivative claim?

Answer 36

A derivative claim is one where the shareholder’s right of action is not one which is personal to that shareholder but instead it is one which is derived from the company’s right of action, which the company has not exercised.

Question 37

What is the rule in Foss v Harbottle (1843)?

Answer 37

A minority shareholder is not allowed to sue for a wrong committed against a company of which they are a member, even if the company is refusing to take action.

Question 38

What is the statutory exception to the rule in Foss v Harbottle (1843) under CA 2006?

Answer 38

Section 260 CA 2006 allows shareholders to bring a derivative claim where directors have breached their statutory duties.

Question 39

How does S260 CA 2006 define a derivative claim?

Answer 39

It defines a derivative claim as one initiated by a member of the company, rather than by the company itself:

a) in respect of a cause of action vested in the company; and

b) seeking relief on behalf of the company

Question 40

When can a derivative claim be brought?

Answer 40

Section 260(3) provides that a claim may be brought only 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 41

Against whom can a derivative claim be brought?

Answer 41

Under s260(3), the cause of action may be brought against the director or another person (or both), including third parties who are shadow directors for example.

Question 42

Who may bring a derivative claim?

Answer 42

Derivative claims must be brought by a member. Pursuant to s260(4) CA 2006, it is immaterial whether the cause of action arose before or after the person bringing the claim became a member of the company.

Question 43

Can a former member bring a claim even in relation to events which occurred when they were a member?

Answer 43

No!

Question 44

What are the two stages for bringing a derivative claim?

Answer 44

Stage 1-court decides if there exists a prima facie case. If a prima facie case exists, the case can proceed to the next stage.

Stage 2-court allows case to proceed and carries out a detailed consideration of criteria, including evidence from other members. Case then proceeds to trial.

Question 45

Who is the remedy of a successful derivative claim granted to?

Answer 45

Any remedy granted is to the company, not to the shareholder bringing the claim.

Question 46

What type of action does Section 994 CA 2006 allow a member to bring?

Answer 46

An action on the grounds that the company is being run in such a manner that they have suffered unfair prejudice, or an actual or proposed act/omission would be so prejudicial (s994(1) CA 2006).

Question 47

What are some examples of conduct that may be held to be unfairly prejudicial to the interest of members?

Answer 47

-granting of excessive remuneration to directors

-directors’ dealing with associated persons

-non-payment of dividends

Question 48

Under s994 CA 2006 unfair prejudice actions, who do the shareholders sue for?

Answer 48

They sue for themselves, whereas under s260 CA 2006 (derivative actions) the shareholders sues on behalf of the company in respect of the company’s loss.

Question 49

What is the test for considering whether a company’s affairs are being conducted in a manner unfairly prejudicial to the interests of a shareholder?

Answer 49

Reasonable bystander (objective) test-Re Guidezone Limited (2001).

The petitioner must show that the company’s affairs are being or have been conducted in a manner which is unfairly prejudicial to the interests of its members generally or of some part of its members.

Question 50

Will negligent or inept management of a company amount to unfairly prejudicial conduct?

Answer 50

No, unless that conduct amounts to serious and/or repeated mismanagement which puts at risk the value of the shareholder’s interest.

Question 51

Will disagreements as to company policy amount to unfairly prejudicial conduct, and is there a need to show bad faith?

Answer 51

No, a change of direction in the business will not afford grounds for a petition under s994 CA 2006 and there is also no need to show bad faith for the conduct to be unfair.

Question 52

What remedies can the court grant in respect of an unfair prejudice action, and what is the most commonly made order?

Answer 52

Under s996(1) CA 2006, the court has the powers to grant such order as it thinks fit to provide relief.

The most commonly made order is to provide for the purchase of the petitioner’s shares by the wrongdoer.

Question 53

What principles apply to valuation when considering the value of a petitioner’s shares in a successful unfair prejudice action?

Answer 53

-Shareholders should first attempt to use a valuation mechanism set out in the Articles

-The courts will not generally not impose a discount on the value of a minority shareholder in a private company

-The valuation date is that on which the court order was made in respect of the sale shares

-The behaviour of the claimant/petitioner may be relevant

Question 54

Why are Section 994 CA 2006 unfair prejudice petitions not a suitable course of action in most case?

Answer 54

They are expensive, time-consuming and complicated to bring. They also bring a great deal of uncertainty for the petitioner therefore a negotiated settlement will usually be the preferred option.

Question 55

What is the final and most drastic remedy available to any shareholder under Section 122 Insolvency Act 1986?

Answer 55

The right to bring a petition to court for the company to be wound up (liquidated) on the grounds that it is just and equitable to do so.