BLP WK 4

Question 1

What is the majority rule principle in shareholder decision-making?

Answer 1

The majority rule principle states that shareholder decisions typically follow the majority vote. This means that resolutions are passed if a certain majority of shareholders agree

Question 2

How can minority shareholders influence decisions when the majority rule applies?

Answer 2

Minority shareholders often have little influence unless they can join forces to reach or block the necessary majority for a resolution.

Question 3

What are Shareholders’ Agreements?

Answer 3

Shareholders’ Agreements are contracts that govern the relationship between shareholders. They can supplement the Articles of Association and provide additional rights to shareholders, potentially mitigating the challenges of being a minority shareholder.

Question 4

What is a key benefit of Shareholders’ Agreements over Articles of Association?

Answer 4

Shareholders’ Agreements offer more flexibility than Articles and can include provisions that protect minority shareholder interests, going beyond the basic rights outlined in the Articles.

Question 5

What is an example of a provision that might be included in a Shareholders’ Agreement to protect minority interests?

Answer 5

Shareholders’ Agreements can require unanimous voting for certain decisions, such as removing directors, effectively granting minority shareholders a veto power.

Question 6

Can a company contract out of a statutory power like the shareholder’s right to remove directors?

Answer 6

No, statutory powers cannot be entirely overridden by contracts. Even with a unanimity clause in a Shareholders’ Agreement, a director removal could still proceed under the Companies Act 2006, though a breach of contract claim might arise.

Question 7

How are Shareholders’ Agreements amended?

Answer 7

Amendments to a Shareholders’ Agreement require the unanimous consent of all shareholders, unlike Articles, which can be amended by a special resolution (75% approval). This unanimity requirement gives every shareholder, including minority shareholders, significant control over changes to the agreement.

Question 8

What are membership rights under s33 of the Companies Act 2006?

Answer 8

Membership rights are rights granted to shareholders based on the Articles of Association. These rights are enforceable under s33 CA 2006, but only within the context of a shareholder’s membership in the company.

Question 9

What is an example of a shareholder’s membership right?

Answer 9

The right to receive dividends once they are lawfully declared is an example of a membership right granted to shareholders based on the company’s Articles of Association.

Question 10

Can non-membership rights be enforced under s33 of the Companies Act 2006?

Answer 10

Non-membership rights, such as employment rights or rights related to a specific role outside of shareholding, are not enforceable under s33 CA 2006. This section focuses on protecting rights arising directly from the shareholder’s membership in the company.

Question 11

How are Articles of Association viewed in terms of their completeness as a contract?

Answer 11

Articles of Association are considered a complete contract in themselves. Courts are reluctant to imply terms into them that aren’t explicitly stated. Therefore, any rights not clearly defined in the Articles are unlikely to be upheld by the courts.

Question 12

Which legal framework governs the enforcement of Shareholders’ Agreements?

Answer 12

Shareholders’ Agreements are enforceable through contract law. This means that shareholders can bring direct legal actions against other shareholders who breach the terms of the agreement, unlike actions under s33 CA 2006, which are limited to the company-shareholder relationship.

Question 13

What is a key distinction between Articles of Association and Shareholders’ Agreements?

Answer 13

Articles of Association govern the relationship between the company and its shareholders as a statutory contract under s33 CA 2006, focusing on membership rights. Shareholders’ Agreements, on the other hand, deal with personal rights and obligations between shareholders and offer greater flexibility.

Question 14

If a Shareholders’ Agreement and a statutory right conflict, which prevails?

Answer 14

Statutory rights take precedence over conflicting provisions in a Shareholders’ Agreement. For instance, even if an agreement requires unanimity to remove a director, a shareholder can still initiate removal under statutory procedures, though a breach of contract claim might follow.

Question 15

Can shareholders force directors to include a resolution in a GM agenda?

Answer 15

No, directors are not obligated to include a resolution proposed by shareholders on the GM agenda, as established in Pedley v Inland Waterways Association Ltd. Shareholders may need to utilize other mechanisms, like a s303 request, to compel the board to call a GM.

Question 16

What shareholding percentage is required for shareholders to request a General Meeting (GM) under s303 CA 2006?

Answer 16

Shareholders holding at least 5% of the voting share capital are entitled to request a GM by submitting a formal request to the board, potentially including the text of their desired resolution.

Question 17

What are the board’s obligations upon receiving a valid s303 request for a GM?

Answer 17

When a valid s303 request is received, the board is legally required to call the GM within 21 days and ensure it takes place within 28 days of issuing the notice for the meeting.

Question 18

What can shareholders do if the board fails to act on a valid s303 request for a GM?

Answer 18

If the board doesn’t call the GM within the stipulated time, shareholders representing more than half the voting rights of those who submitted the s303 request are empowered to call the GM themselves under s305 CA 2006.

Question 19

What is the notice period required for a GM called by shareholders under s305?

Answer 19

When shareholders call a GM under s305, they must give at least 14 clear days’ notice, and the meeting should be held within 3 months of the initial s303 request.

Question 20

Can shareholders recover expenses from the company if they have to call a GM themselves?

Answer 20

Yes, shareholders are entitled to recover reasonable expenses from the company if they are forced to call a GM due to the board’s inaction. The company, in turn, can seek to reclaim these expenses from the directors who failed to act.

Question 21

What are the rights of a director facing a removal resolution under s 169 CA 2006?

Answer 21

A director who is the subject of a removal resolution must be informed promptly by the company. They have the right to submit written representations in their defence and to speak at the GM where the resolution will be voted on.

Question 22

What are Bushell v Faith clauses?

Answer 22

Bushell v Faith clauses are provisions in a company’s articles of association that grant weighted voting rights to directors who are also shareholders. These clauses can be used to make it difficult or impossible for a standard resolution to remove the director to pass.

Question 23

Can a director be removed despite a unanimity requirement for removal in a Shareholders’ Agreement?

Answer 23

Yes, the removal would still be valid under s168 CA 2006, as statutory rights cannot be overridden by contract. However, the director might have a claim for breach of contract against the other shareholders.

Question 24

What is the approval requirement for payments to a director for loss of office under s217 CA 2006?

Answer 24

Any payment made to a director for loss of office requires shareholder approval unless the director is part of a wholly owned subsidiary. The board must provide shareholders with 15 days’ notice of the proposed payment.

Question 25

What are the consequences of including a provision in a Shareholders’ Agreement that restricts the company’s statutory power?

Answer 25

If the Shareholders’ Agreement includes a provision that restricts the company’s statutory power and the company is a party to this Agreement, it could make the entire agreement void, unless that particular clause is severable.

Question 26

What are the key takeaways regarding the removal of directors?

Answer 26

Directors can be removed by an ordinary resolution (over 50% of votes) under s168 CA 2006, requiring a special notice period of 28 clear days to the board. Shareholders can compel a GM if the board doesn’t act, and directors can use various defenses, but compensation for loss of office needs shareholder approval.

Question 27

What is a derivative claim?

Answer 27

A derivative claim is a legal action brought by a shareholder on behalf of the company to seek a remedy for wrongs committed against the company, usually by directors.

Question 28

Who benefits from the remedy obtained in a successful derivative claim?

Answer 28

In a derivative claim, any remedy obtained goes to the company, not the individual shareholder who initiated the claim.

Question 29

What is the rule in Foss v Harbottle?

Answer 29

The rule in Foss v Harbottle emphasizes that if a wrong is done to a company, the company itself should sue, not individual shareholders. However, this rule has exceptions, leading to the development of the statutory derivative claim.

Question 30

What are the grounds for bringing a derivative claim under s260 CA 2006?

Answer 30

A shareholder can bring a derivative claim for breaches of duty, negligence, default, breach of trust, or breach of duty by a director, whether under statute or common law.

Question 31

Is it necessary for a director to have personally benefited from a breach for a derivative claim to be brought?

Answer 31

No, the director does not have to have personally gained from the breach for a derivative claim to be valid. The focus is on the wrong committed against the company.

Question 32

Can a derivative claim be brought against former directors?

Answer 32

Yes, a derivative claim can be brought against both current and former directors, as well as shadow directors, if their actions have harmed the company.

Question 33

Can third parties be included in a derivative claim?

Answer 33

Yes, third parties can be included in a derivative claim if there is evidence that they knowingly participated in or assisted a director in breaching their duties, causing harm to the company.

Question 34

Who can bring a derivative claim?

Answer 34

Any current member (shareholder) of the company can bring a derivative claim. It doesn’t matter if the issue arose before they became a shareholder, but former shareholders cannot bring a claim.

Question 35

What is the first stage of court approval in a derivative claim?

Answer 35

The shareholder must first present a prima facie case, showing sufficient evidence to proceed. If the court doesn’t find a prima facie case, the claim is dismissed.

Question 36

What happens in the second stage of court approval for a derivative claim?

Answer 36

If the court finds a prima facie case, it conducts a detailed examination of the evidence, considering the views of disinterested shareholders to protect against misuse of derivative claims.

Question 37

Why are derivative claims relatively uncommon in practice?

Answer 37

Despite being a statutory remedy, derivative claims are rare due to the restrictive approach of the courts, the high burden of proof on the claimant, the fact that the company receives the remedy, and the significant costs involved.

Question 38

What are the main points to remember about derivative claims?

Answer 38

Any member can bring a derivative claim on behalf of the company against directors or involved third parties for breaches of duty. The remedy benefits the company, and a two-stage court approval process is in place to prevent misuse. Despite being a valuable tool to protect company interests, derivative claims are difficult to pursue.

Question 39

What is ‘unfair prejudice’ under s994 CA 2006?

Answer 39

Unfair prejudice is a legal concept that allows a shareholder to petition the court for relief if the company’s affairs are being conducted in a way that unfairly harms their interests.

Question 40

What is a key difference between an unfair prejudice claim and a derivative claim?

Answer 40

An unfair prejudice claim is a personal claim brought by the shareholder to protect their own interests, while a derivative claim is brought on behalf of the company to remedy wrongs done to the company itself.

Question 41

What is an example of conduct that could be considered unfairly prejudicial to a shareholder?

Answer 41

Granting excessive remuneration to directors, especially in a way that disproportionately benefits majority shareholders, is an example of conduct that might be considered unfairly prejudicial to minority shareholders.

Question 42

What test is used to determine if conduct is unfairly prejudicial?

Answer 42

The courts apply the objective “reasonable bystander” test to assess unfair prejudice, as established in Re Guidezone Limited. This means that the conduct must be objectively unfair from the perspective of a reasonable observer.

Question 43

What is the significance of legitimate expectation in unfair prejudice claims?

Answer 43

In quasi-partnerships, where shareholders have a reasonable expectation to be involved in management, denying them this involvement might be deemed unfairly prejudicial. Legitimate expectation is a key consideration in these cases.

Question 44

What are the typical remedies ordered by the court in unfair prejudice claims?

Answer 44

The court often orders the wrongdoers, usually majority shareholders, to purchase the petitioner’s shares at a fair price. This provides the minority shareholder with an exit route from the company.

Question 45

Does the court apply a minority discount when valuing shares in unfair prejudice cases?

Answer 45

The court typically avoids applying a minority discount when valuing shares, particularly in quasi-partnerships, recognizing the inherent difficulties faced by minority shareholders in selling their shares.

Question 46

What is the preferred approach to resolving unfair prejudice disputes?

Answer 46

Out-of-court settlements are generally favored, often through third-party valuations, to avoid the cost and uncertainty of litigation. Unfair prejudice petitions are often a last resort.

Question 47

What is “just and equitable winding up” under s122 Insolvency Act 1986?

Answer 47

This remedy allows a shareholder to petition for the company to be wound up (liquidated) if the court deems it just and equitable. It is a drastic measure, effectively ending the company’s existence.

Question 48

When is a just and equitable winding up petition typically pursued?

Answer 48

This remedy is used in extreme cases where there’s a complete breakdown in trust or irreparable conflicts between shareholders, often in quasi-partnerships where one party feels unfairly excluded from management.

Question 49

What are the key points to remember about s994 CA 2006 and s122 Insolvency Act 1986 remedies?

Answer 49

These remedies protect minority shareholders, allowing them to claim unfair prejudice or petition for winding up. However, they are complex, costly, and usually pursued as a last resort when amicable solutions fail.

Question 50

What is a quasi-company or partnership?

Answer 50

A quasi-company, or quasi-partnership, is a small, private company typically formed by family or friends. Each member invests money and has a reasonable expectation of participating in management.