6. Companies: Members

Question 1

What are the two requirements for the payment of dividends?

Answer 1

1. must be paid from profits available for the purpose
2. Must not render a company insolvent

Question 2

What are profits available for the purpose?

Answer 2

essentially net profits
(accumulated realised profits less accumulated realised losses)

Question 3

How are preference shares different from ordinary shares?

Answer 3

Include right to receive dividends w/priority over ordinary shareholders.

Features include
- preferential right to receive
dividend/recover capital on insolvency.
- may exclude right to vote.
- may be cumulative: allowing unpaid dividend from previous year to carry forward to the following year.
- may be participating: entitling holder to both fixed dividend and ordinary dividend distribution.

Question 4

Two-step process for issuing of final dividends

Answer 4

1) Board recommends a final dividend amount (MA)
ANND
2) Declared in GM by O.R

Question 5

Even if profits are available, who must still recommend a dividend?

Answer 5

The board

Question 6

After the board recommend a dividend, how is it declared?

Answer 6

The recommendation is approved by the shareholders via O.R.

Question 7

Can the shareholders decline a dividend, or change the amount?

Answer 7

Shareholders can decline to approve the dividend or lower its amount.
BUT
cannot increase the amount.

Question 8

When is a dividend distributed unlawfully?

Answer 8

if it was paid out of funds other than distributable profits (ie. capital)

Question 9

In what circumstances will a shareholder be liable to repay an unlawful dividend?

Answer 9

If, when the distribution was made, they knew or had reasonable grounds to believe it was unlawful

Question 10

Who is personally liable if a dividend is declared unlawfully?

Answer 10

The directors

Question 11

What are preference shareholders’ voting rights typically limited to?

Answer 11

Decisions that affect their class rights

Question 12

When may a shareholder bring a derivative claim, and against whom is it brought?

Answer 12

Where they believes that a director has/is about to breach their duty and against whom the board of directors will not enforce the company’s rights to prevent/remedy the situation,

Question 13

Only who can bring a derivative action?

Answer 13

1. Shareholders
2. Those to whom shares were transferred through operation of law, e.g. inheritance

Question 14

Are shadow directors considered directors for the purpose of derivative claims?

Answer 14

Yes

Question 15

Can a shareholder assert a claim which arose before they became a shareholder?

Answer 15

Yes

Question 16

What must the court do if the shareholder does not show a prima facie case?

Answer 16

Dismiss the claim

Question 17

If the shareholder does show a prima facie case, the court must be satisfied of one of what two things at the second stage for them to dismiss the claim?

Answer 17

1. A person acting to promote the best interests of the company would not seek to continue the claim, or
2. The action was authorised by the company or authorisation would be likely

Question 18

Who receives any damages awarded in a derivative claim?

Answer 18

The company

Question 19

What can a shareholder, even a minority, do if they feel they are being unfairly prejudiced?

Answer 19

Petition the court for a remedy

Question 20

If a minority shareholder is successful in their petition, what is the most likely remedy?

Answer 20

The minority shareholder is bought out

Question 21

What must any shareholder be able to show to apply to have a company wound up?

Answer 21

1. The company is solvent, and
2. It is just and equitable to wind it up

Question 22

How long after a director leaves must their service contract be retained for inspection by the shareholders?

Answer 22

At least one year

Question 23

What is the default procedure to vary class rights?

Answer 23

Either:
- via consent in writing by at least 75% of members of class; or
- S.R passed at their own GM for members of that class.

note - other classes cannot vary each others’ rights.

Question 24

How can a member object to a variation of their class rights?

Answer 24

Own at least 15% of class’ rights + apply within 21 days of S.R to court.

• court = consider whether variation is unfairly prejudicial to shareholders in that class.

Question 25

Is shareholder approval required to distributed interim dividends?

Answer 25

No!

Question 26

At what point does membership take effect?

Answer 26

once member’s name is entered into company’s register of members

Question 27

When a final dividend is declared at GM, what kind of item on the balance sheet will it turn into?

Answer 27

debt payable by company to its shareholders.

Question 28

What rights do shareholders have where their shareholding is equal or over 5%

Answer 28

• require directors to call a GM (s.303)
• require a circulation of a written statement regarding a proposed resolution to be considered at GM (s.314)
• Circulate a written resolution (s.292)

Question 29

What rights do shareholders have where their shareholding is equal or over 10%

Answer 29

Demand a poll vote

Question 30

What rights do shareholders have where their shareholding is over 25%?

Answer 30

block a special resolution

Question 31

What rights do shareholders have where their shareholding is over 50%?

Answer 31

block an ordinary resolution

Question 32

How much shareholding must a shareholder have to bring an unfair prejudice claim or derivative claim?

Answer 32

No mimum amount

Question 33

Where shareholders call a general meeting (s.305), how much notice must be given to fellow shareholders?

Answer 33

14 clear days’ notice

Question 34

Where shareholders call a general meeting, within how long must the meeting be held following receipt by the board of a s.303 request?

Answer 34

3 month

Question 35

What effect does a Bushnell v Faith clause have, and when does it apply?

Answer 35

relevant to the removal of director by shareholders.
- gives director-shareholder weighted voting power in GM where resolution is proposed against their removal.

Question 36

Is shareholder approval required to compensate a director for loss of office?

Answer 36

If it falls outside their employment contract, an ordinary resolution must be passed w/ detailed memo available for inspection 15 days before GM.

• except if under £200 or made in good faith.

Question 37

What is a mandatory bar to approval for a derivative claim?

Answer 37

where any wrongdoing has been ratified by the company’s shareholders.

Question 38

What is a quasi-partnership, and in what context is it relevant?

Answer 38

Relevant in context of unfair prejudice claims.
- Where company is established based on mutual trust and confidence between its founding members can be a quasi-partnership.
- Expectation amongst each other that they will all have full involvement in its management.

Question 39

Under the Model Articles, are existing shareholders required to waive pre-emption rights on the transfer of shares?

Answer 39

No, MAs do not provide for this.

Question 40

What are the two conditions that must met for an amendment to the company’s Articles to be deemed valid?

Answer 40

1) pass by SR vote and
2) be in the best interest of the company.
* Proven if the a reasonable person would believe the amendment to be in the best interest of the company as a whole.

Question 41

What does the duomatic principle provide for in relation to shareholders’ decision-making?

Answer 41

A company’s shareholders can informally give approval through unanimous consent which legally binds the company without needing a shareholder resolution.

Question 42

What shareholder decisions require a special resolution?

Answer 42

• Amend Articles
• Change Name
• Re-register as a public company
• Reduce public company’s general meeting fro 21 days to 14 days
• Disapply pre-emption rights
• Reducing share capital (aka buyback of shares out of capital)
• Winding up (Cf. to appoint a liquidator only OR needed).