BLP - Week 4 Shareholder rights and remedies, procedure for removing directors Flashcards
What are the key protections and remedies available to shareholders?
- Membership rights under Section 33 CA 2006 [Article rights]
- Shareholders’ agreements
- Director removal under Section 168 CA 2006
- Derivative actions under Section 260 CA 2006
- Unfair prejudice claims under Section 994 CA 2006
- Winding up under Section 122 of the Insolvency Act 1986
Examples of article rights
- Right to a declared dividend
- Right to share surplus on winding up
- Voting rights
- Right to receive notice of general meetings (GMs) and annual general meetings (AGMs)
What is the difference between shareholders’ agreements and Articles?
Shareholders’ agreements are private contracts between shareholders governing their rights and obligations. Articles regulate the relationship between the company and shareholders, enforceable under Section 33 CA 2006.
How can shareholders’ agreements protect minority shareholders?
- Shareholders’ agreement allows shareholders to enforce the terms against each other*.
- Reserved matters requiring unanimous consent. If unanimity isn’t met, the Companies Act (CA) still allows removal by a majority vote.
- Amendments require unanimous consent, unlike Articles which can be changed with a 75% vote.
*Some rights in a shareholders’ agreement may not be enforceable under s33 CA 2006 if they are not considered membership rights.
What are the key shareholder rights under CA 2006 based on shareholding?
- Any shareholder: receive notice of GM, vote (if voting shares), receive dividends, inspect records, bring derivative claims & unfair prejudice petitions.
- 5%: Require a GM, circulate written resolutions/statements.
- 10%: Demand a poll vote.
- 25%: Block a special resolution (requires 75%).
- 50%+: Pass/block an ordinary resolution.
- 75%: Pass a special resolution.
How can shareholders remove a director under CA 2006?
- By passing an ordinary resolution under Section 168 CA 2006 with special notice (28 clear days).
- Cannot be done via WR.
When must the Board notify the shareholders if they agree to include the removal resolution in the GM?
The Board must notify shareholders at least 14 clear days before the GM. If notice has already been sent, it can be given via newspaper advertisements or methods allowed by the Articles at least 14 days before the GM.
Why must the company notify all shareholders about a removal resolution, even if some shareholders already sent it to the Board?
Because not all shareholders may be aware of the resolution. Notice ensures all shareholders have a chance to vote on it.
Is the Board required to place a removal resolution on the GM agenda?
No.
Can the board remove a director?
No, unless permitted by the Articles.
What happens if the board refuses to include a removal resolution?
- Shareholders with 5%+ voting power can force a GM under Section 303 CA 2006.
What must a s 303 request include?
- The general nature of the business to be discussed.
- The exact text of the proposed resolution.
What can shareholders do if the Board fails to call a GM after receiving a valid s 303 request?
- If ignored, shareholders can call a GM themselves under Section 305 CA 2006, with costs reimbursed.
- s305 notice is a general one, not just limited to removal resolution.
What must directors do when they receive a valid s 303 request?
- Call a GM within 21 days of receiving the request.
- Schedule the GM to be held within 28 days of the notice calling the GM.
When can shareholders call a GM themselves under s 305?
If directors fail to call a GM, shareholders representing more than half of the voting rights in the s 303 request can call a GM on at least 14 clear days’ notice within 3 months.
What should shareholders do to speed up the process?
Submit the special notice to the board and serve notice under s 303 at the same time.
What are a director’s rights when facing removal?
- Immediate notice from the company
- Right to make written representations (circulated or read at GM)
- Right to speak at the GM, even if not a shareholder.
What is a Bushell v Faith clause?
- A clause giving a director (who is also a shareholder) weighted voting rights to prevent removal.
- It can also be used to protect other decisions that require shareholder approval, such as amending the articles of association.
Can a shareholders’ agreement prevent director removal?
No, statutory rights under Section 168 CA 2006 override agreements, but a breach may allow the removed director to sue for damages.
When is shareholder approval needed for compensation for loss of office?
OR required for compensation for loss of office, unless:
* Payment is below £200.
* Payment is in good faith (e.g., settlement, pension, or pre-existing obligation).
What is a derivative claim under Section 260 CA 2006?
A shareholder sues on behalf of the company for breaches of directors’ duties (e.g., under ss 170 - 177 CA 2006, negligence, breach of duty, default, or breach of trust).
Against whom can a derivative claim be brought?
- Directors
- Former directors
- Shadow directors
- Rare cases, third parties who knowingly assisted.
What are the stages of court approval for derivative claims?
Requires court approval:
* Stage 1: Shareholder must establish a prima facie case.
* Stage 2: Court considers shareholder motives, likelihood of company ratifying the act, and views of non-conflicted shareholders.
How have courts approached derivative claims?
Courts remain restrictive, often denying claims to prevent tactical litigation by minority shareholders.
What is an unfair prejudice action under Section 994 CA 2006?
A shareholder petition claiming the company is being managed in a way that unfairly prejudices their interests.
What are the grounds for unfair prejudice?
(a) The company has acted or is acting unfairly against some or all of its shareholders, including the person making the complaint, OR
(b) The company has done or plans to do something that is or would be unfairly harmful.
Test: reasonable bystander (objective) test.
Examples of unfair prejudice?
- Excessive director remuneration
- Directors’ transactions with related parties
- Unjustified non-payment of dividends.
Does negligence or mismanagement alone qualify as unfair prejudice?
No, unless it is serious and/or repeated mismanagement that negatively impacts the minority shareholder’s interests.
Can a shareholder claim unfair prejudice due to a policy disagreement or change in business direction?
No, policy disagreements alone do not warrant a claim.
Can a shareholder claim unfair prejudice if the company follows its Articles?
Generally, no. However, if strict legal powers in the Articles are used in an unfair manner, a claim may still arise based on equitable considerations.
Is bad faith required to prove unfair prejudice?
No. Unfairness can occur without ill intent.
How does unfair prejudice differ from derivative actions?
Unfair prejudice claims protect shareholder interests, while derivative actions protect the company’s interests.
What remedies are available for unfair prejudice?
Court has wide powers including:
* Orders regulating company management.
* Forcing actions or preventing misconduct.
* Most common: Requiring wrongdoers to buy out the petitioner’s shares at a fair price.
How do courts determine fair share valuation?
- Usually no minority discount (unless shares are purely an investment).
- Valuation date typically set at the time of the court order.
- Reasonable past offers can influence final valuation.
What is a just and equitable winding-up petition?
A shareholder request to dissolve the company under Section 122 Insolvency Act 1986, often overlapping with Section 994 CA 2006 petitions.
