7.6 Shareholders' Rights

Question 1

What is the power of a 5% share?

Answer 1

Shareholder may requisition a GM

Question 2

What is the power of a 5% share or more with voting rights?

Answer 2

Shareholder may circulate written resolutions or a written statement as to proposed resolution(s)

Question 3

What is the power of > 10% share?

Answer 3

Shareholder may refuse consent to short notice of a GM

Question 4

What is the power of any 2 voting members OR any member(s) holding at least 10% of the voting shares?

Answer 4

Shareholder can demand a poll vote

Question 5

What is the power of >25% share?

Answer 5

Shareholder can block a special resolution (negative control)

Question 6

What is the power of >50% share?

Answer 6

Shareholder can pass an ordinary resolution

Question 7

What is the power of a 50% share?

Answer 7

Shareholder can block an ordinary resolution

Question 8

What is the power of a 75% share?

Answer 8

Shareholder can pass a special resolution

Question 9

What is the power of a majority in number AND holding at least 90% of the voting shares?

Answer 9

Shareholder can consent to short notice of a GM

Question 10

What is the power of a 100% share?

Answer 10

Control of the company

Question 11

What is the statutory contract between shareholders and the company?

Answer 11

Contract formed once the investor subscribes for shares. Contract is based on the company’s articles of association, which form the company’s constitution.

Question 12

What is a shareholders’ agreement?

Answer 12

Private contract between shareholders. Does not have to be filed at Companies House and can remain confidential.

Question 13

What happens after shares are allotted (freshly issued) or when a stock transfer form is lodged with the company?

Answer 13

Shareholders are entitled to receive a share certificate from the company within 2 months of the allotment (if freshly issued) or lodging the stock transfer form with the company.

Question 14

What are the administrative procedures when registering a new shareholder?

Answer 14

• Update the register of members: Every company must keep a register of those who own shares in it. Only when a person or legal entity’s name is entered on the register do they become a shareholder.
• Update the register of persons with significant control: A company must update its PSC register within 14 days from the day it becomes aware of a change and notify Companies House within 28 days.

Question 15

What is a majority shareholder?

Answer 15

Own over 50% of voting rights in the company

Question 16

What is a minority shareholder?

Answer 16

Own less than 50% of company’s shares

Question 17

How do shareholders exercise their powers and take decisions on company matters?

Answer 17

Voting in general meetings allows shareholders to exercise their powers and take decisions on those matters delegated to them about how the company should be run.

They are entitled to notice of general (company) meetings. If insufficient notice is given or if the notice is not set out as required by the Companies Act, any business undertaken at the meeting will be invalid.

Question 18

What is voting by show of hands?

Answer 18

Each shareholder has one vote

Question 19

What is voting by poll?

Answer 19

Each shareholder has one vote for every share owned.
** Shareholders with at least 10% of the company’s shares have the right to demand a poll vote.

Question 20

What is voting by proxy?

Answer 20

Shareholders have the right to appoint a proxy, another person, to vote on their behalf:

Question 21

What is voting by written resolution?

Answer 21

Shareholders with at least 5% of the total voting rights in a company have the right to circulate a written statement among shareholders detailing their views on certain issues.

Question 22

What is the shareholder / director distinction?

Answer 22

Shareholders vote on specific matters delegated to them and exercise their power by voting on important decisions (company resolutions).

The day-to-day management of the company is undertaken by directors. Directors are subject to various statutory duties. If the directors breach their duties, shareholders may hold them accountable. If the shareholders are in the majority, their statutory rights such as removing the directors will enable them to do so. Minority shareholders have fewer options.

Question 23

What is meant by an aggrieved shareholder?

Answer 23

Shareholder may be unhappy that the company’s affairs are being conducted in a way that is prejudicial to their interests, or there was an act of omission by the directors or other shareholders which breaches the company’s constitution.

Question 24

What are the remedies for minority shareholders if they are unhappy with how directors are managing the company?

Answer 24

Remedies for minority shareholders:

1) Claim for unfair prejudice - personal claim

2) Bringing a derivative claim - claim brought on company’s behalf by shareholder

3) Petitioning for the company’s winding up on just and equitable grounds.

Question 25

What is an unfair prejudice claim?

Answer 25

Unfairness to shareholders which causes them prejudice due to a (non-trivial) breach of either the company’s constitution, law or an agreement between the shareholders as to how the company is being run.

Question 26

What are the grounds for unfair prejudice?

Answer 26

Must be both unfair and prejudicial. Complaint may be based on past, present or anticipated future events. Conduct may be unfair and prejudicial to all members or only some or one. - shares are transferred or allotted in bad faith; - dividends have been unreasonably withheld; - majority have awarded themselves excessive benefits; - company assets have been improperly transferred; - statutory pre-emption rights have not been followed; - minority shareholders are excluded from the management of the company when it had been agreed that they could participate.

Question 27

When will the court disallow unfair prejudice claims?

Answer 27

There is a binding agreement for arbitration to settle dispute between parties; Shareholder voluntarily severs links with company and cannot use unfair prejudice process to secure highest price for shares

Question 28

What is the remedy awarded for unfair prejudice?

Answer 28

**The petitioning shareholders’ shares can be purchased by other shareholders or by the company.** Buy back of shares required from the company as shareholder cannot sell shares to the public in a private limited company. Enables minority shareholder to realise their investment in a company being run in a manner with which they disagree with but cannot realistically influence.

Question 29

What is a derivative claim?

Answer 29

Shareholders bring a claim in the company’s name for a wrong committed against the company. A minority shareholder can bring a derivative claim for actions arising from an actual or proposed act or omission involving negligence, default, breach of duty, breach of trust by a director. NOTE: Shareholder brings the claim but any remedy or monies awarded will be awarded to the company itself. E.g) director has behaved dishonestly / director has prevented shareholders from bringing proceedings against them by the majority because the wrongdoing director controls the majority of votes.

Question 30

What are some reasons to refuse permission for bringing a derivative claim?

Answer 30

- Director acting in accordance with their duty to promote the success of the company would not seek to continue the claim; - The act was pre-authorised; - The act has been ratified by the company

Question 31

What principles need to be considered before a minority shareholder should bring a claim to court?

Answer 31

Proper claimant principle: Where both the company and its shareholders have a cause of action against the directors for loss stemming from the same facts, the company is the proper claimant to bring proceedings and not the shareholders. [Company has a separate legal personality] Internal management principle: Courts are reluctant to interfere in the internal management of a company. Irregularity principle: Shareholders are barred from commencing court proceedings in respect of an irregularity that can be remedied by ratification by a majority of members (over 50%).

Question 32

What is the remedy of a winding up petition on just and equitable grounds?

Answer 32

Shareholders can petition the court for a winding up of a company under the Insolvency Act on the grounds that it is just and equitable that the company is wound up. E.g.) management deadlock / inability to meet specified company objectives / justified loss of confidence in company management / shareholder has been excluded from company management where there was legitimate expectation that they would be involved