Business Flashcards
;When is a partnership formed? What act governs the relationship, how do they pay tax and what is the liability?
- When two or more people are carrying on a business with the view of a profit.
- The Partnership Act 1980 implies a partnership agreement that can be amended expressly
- The partners pay tax as self-employed individuals
- The partners have unlimited liability
- Partnerships, subject to separate partnership agreement, are entitled to equal participation in management and equal proft
- Quick and cost effective as no formalities to open
- Partnership can employ others
- Partnership will dissolve on death or bankruptcy of any partners
- Partnership is owned collectively by partners so cannot transfer without an agreement between the partners
- The partners individual interests cannot be transferred as this would dissolve the partnership
- BRIH: 100% on value of business and 50% on land , buildings or machinery owned if owned by owner for 2 years before death and used in course of business
- Can get pension relief on contributions to PRIVATE pensions (subjkect to annual and lifetime allowance)
What are limited partnerships when are they used and what are the conditions?
- Rarely used, usually for only some venture capitalists or investment fund
- Must have atleast one general partner with unlimited liability
- Can have a general partner whose liability is limited to his initial capital contribution but must satisfy the conditions:
(a) must not control or manage the LP
(b) must not have power to make binding decisions on behalf of the LP
(c) cannot take out capital contribution for as long as the LP is in business - Like LLPs, must register with the Registrar of Companies prior to trading
What can a company be limited by, what liability does a shareholder have, when does a company have a separate legal personality and when can the corporate veil be pierced?
- Shares or guarantees but we only look at shares - must be limited by shares to be PLC. Guarantee - this is usually no profits where they guarantee the debts up to a certain amount e.g £1mil
- Shareholder’s liability only amount paid for shares or amount agreed to pay for shares
- Separate personality when incorporated (allowed to use company to manage risk and limit liabilities) - Solaman v A Solaman
- Can only pierce the corporate veil when have an individual as an existing legal obligation and it uses its company to evade its obligation of frustrate enforcement. Can only deprive individual (by piercing the veil) of the benefit it would have gained from using the company’s separate legal personality.
When can a member be held to be liable beyond the cost of their shares?
1. piercing corporate veil;
2. statutory offences; or
3. the court imposing a liability in tort
How are companies run?
- Shareholders provide the money and make big decisions affecting (importnat ones) and make decisions at general meetings
- Directors run the company and make the decisions at board meetings
- Can be both but must have different hats on
- Company Act 2006 calls shareholders members
How can a company be a public limited company? Advantages? Disadvantages?
Must satisfy the conditions in CA2006:
1. State it is a PLC in its constitution
2. Use PLC in its name (or public limited co), or the welsh equivalent
3. Minimum allotted share capital of £50k (authorised minimum)
4. each alloted share must be paid up:
(a) at least a 1/4 of its nominal value; and
(b) ALL of its premium
* Cannot start a company as a PLC, only when reaches certain size, reputation etc
What are the other requirements:
1. Can have 1 member like ltd co but this is rare
2. Minimum of 2 directors (unlike ltd which can have 1)
3. Must have a company secretary
4. There is a requirement to have AGM (annual general meeting) - this is not a requirement of a ltd company
5. CANNOT pass written resolutions (unlike ltd company)
6. Cannot commence business until have a receipt of certificate from the Registrar stating the nominal value of the company’s allotted share capital is not less than the authorised minimum being £50k
Advantages and disadvantages:
* Can sell shares to the public and raise money quickly
* Can join a stock market (London Stock Exchange Main Market or Alternative Investment Market [AIM]
* Private Co can only sell to connected individuals or certain others such as specialist investors who know the risks
* PLCs are more regulated to protect the public
MUST BE LIMITED BY SHARES TO BE A PUBLIC COMPANY
PLCs can be listed or unlisted, CA 2006 does not distinguish between the two
What are LLPs, benefits etc
- Partnerships with limited liability
- Implied agreement - Limited Liability Partnership Regulations 2001 but the LLP is formed under the Limited Liability Partnership Act 2000
- Taxed as partnership, must register with HMRC as self employed
- To become one must be atleast 2 or more members carrying on a lawful business with the view of a profit
- Must file series of documents with the Registrar of Companies, and pay the required fee. Eventually once registered the Registrar will issue a cdertificate of incorporation and they will come into existence on that day
- Can pay for more expensive same day registration
Internationally, companies have a higher status!
- Good if need to raise capital: members can provide capital or LLP can borrow in its own right
- Members are automatically entitled to equal participation and profit share, subject to there being an LLP agreement
- Costly and takes time to establish, ongoing disclosure and filing requirements
- LLP can employ others
- Stat procedure needed to open and close
- LLP will be unaffected the the bankruptcy or death of a partner
- LLP is an asset of the LLP, CANNOT be freely transferred and only the LLP can do this (separate legal personality)
- Members can transfer their interest but must consider restrictions in LLP agreement
- BRIH: 100% on value of business and 50% on land , buildings or machinery owned if owned by owner for 2 years before death and used in course of business
- Can get pension relief on contributions to PRIVATE pensions (subjkect to annual and lifetime allowance)
- can get a floating charge over all its assets (companies can too)
What to consider for which business medium to use?
- If want to limit personal risk then LLP or business more appropriate
- If want to carry on business cost effectively and quickly then sole p or partnerships
- If the only risk is professional negligence claim, such as a lawyer, and have PI insurance then risk is not such an issue (this is why so many law firms can be a partnership)
Sole traders: continuity, transferability, business relief for inheritance tax and pension relief?
- Sole proprietorship ends on death or bankruptcy
- The business is an asset of the owner so can transfer freely
- BRIH: 100% on value of business and 50% on land , buildings or machinery owned if owned by owner for 2 years before death and used in course of business
- Can get pension relief on contributions to PRIVATE pensions (subjkect to annual and lifetime allowance)
Private company limited by shares: ownership/management, funding, continuity, transferability, tax, profits, business relief for inheritance tax and pension relief
- unlike LLPs, members have NO auto right to participate in management or for dividends. Anything to the contrary must be stated in the articles of association or a shareholder’s agreement
- Costly and time consuming to establish, ongoing disclosure and filing requirements
- Members are automatically entitled to be directions subject to alternative agreement (think, AoA or SH agreement)
- Can employ others
- Unaffected by death of member or bankruptcy
- Cannot transfer as separate legal personality, company owns itself so must transfer itself
- Can transfer shares subject to restrictions in the articles
- Members can give capital for shares, company can borrow money in its own right or can raise money through selling shares but not to the public
- Co pays corp tax on profit, members taxed personally on dividends subject to dividend allowance
- Co pays corp tax on chargeable gains, members pay CGT if sell shares
- BRIH: 100% on value of business (but cannot be on stock exchange)and 50% on land , buildings or machinery owned if owned by owner for 2 years before death and used in course of business
4. Can get pension relief on PRIVATE and companypension contributions (subjkect to annual and lifetime allowance)
What are the legislative offences which mean members or directors can be asked to contribute to the assets of a company in liquidation?
Only apply when wound up! Brought by liquidator or administrator
Fraudulent trading
director will be liable for fraudulent trading if, in the course of the company being wound
up, it appears that the company’s business has been carried on with:
(a)** intent to defraud** creditors of the company or creditors of any other person; or
(b) for any fraudulent purpose.
Need intend to defraud which is hard so usually use wrongful trading.
Wrongful trading:
Co gone into insolvent liquidation and a director of the company knew or ought to have known there was no reasonable prospect of avoiding liquidation.
However, a Court will not make an order if it can be shown that the director took every step with the view of minimising the loss to the companies creditors
Transactions defraud creditors
Can happen in 2 ways:
1. Person makes a gift to another person for no consideration; or
2. Transaction for consideration of significantly less value.
Need to do with intent to put assets beyond the reach of a person making or may make a claim or to prejudice their interests in making a claim.
- discretion of court
- hard to show intent so usually last resort
- no time limit so usually used as last resort
How can liability in tort be imposed on members or officers of a company for activities carried out by or through the company?
Duty of care - parent companies
In the case of Chandler v Cape a parent company, through its conduct, assumed a duty of care for the health and safety of the employees of its subsiduary company. It breached this duty of care and therefore was liable for damages.
Negligent misstatement - officers of co
Members, directors and employees can be held personally liable for negligent mistatement made against a claimant who transacted with the company if the following conditions are met:
- There was a reasonable reliance on the claimant on an assumption of personal responsibility by the employee, director etc
- The extent of the personal responsibility created a special relationship between the claimant and the employee, director etc
What do you need to know about board meetings?
- “Reasonable notice” must be given - need not be in writing. Depends for every company. MA.
2.Quorum is 2. Director not counted if proposed decision is concerned with an actual or proposed transaction with the company that the DIRECTOR IS INTERESTED IN. MA.
3.If the director has a personal interest in propose transaction, must declare the nature and extent to the board - this cannot be excluded as its the CA. Exceptions below:- cannot reasonably be argued as likely to give rise to a condlict
- other directors are aware
- concerns terms of a service contract that have been or are to be considered by the board
- Board resolutions passed by simple majority of those present. Chair gets a casting vote in the event of a tie.
- Can pass written resolutions rather than call board meeting (any method - no prescribed form) BUT MUST ALL VOTE UNANIMOUSLY
Rules on general meeting notice?
- Must be given to all members, directors and auditors if have them. Must be given in hard copy, electric form or website. Notice must set out:
1. Time and date
2. NAture of the nusiness to discuss
3. If a special res is propsoed, a copy of the proposed special res
4. State the SH’s right to appoint a proxy. - Minimum 14 days CLEAR notice must be given. Date deemed received does not count, date of meeting does not count. If notice sent by post or email deemed received date is 48 HOURS AFTER POSTED OR EMAILED. If handed to them then its just the same day.
- Quorum is 2 subject to articles - can’t be less than this. Shareholders not prevented from being counter if interested in matter. Only not counter if:
1. REsolution to buy back SH’s shares (could be voting in their own interests)
2. Ordinary resolution to ratify directors breach (where the director is also the SH)
How to pass an ordinary or special res? Who can demand a poll vote?
In a general meeting:
1. Ordinary res passed by over half of the votes at a general meeting
2. Special res - 75% of the votes at a general meeting
Poll vote can be demanded by:
(a) the chair of the meeting;
(b) the directors;
(c) two or more persons having the right to vote on the resolution; or
(d) a person or persons representing not less than one tenth of the total voting rights of all the shareholders having the right to vote on the resolution.
Requirements for GM to be held on short notice?
A majority of the number of company shareholders, who together hold 90% of voting shares must content. For public companies, must be 95%.
Requirements for a written resolution?
- Sent to every eligible member entitled to vote, as at the circulation date
- Include following info: how to signify agreement and the deadline for returning the t solution (lapse date)
- In absence of info to the contrary,
Lapse date is 28th day follow circulation regardless of method of circulation (unlike notice of GMs). Expires on midnight 28th day. Doesn’t matter what day they received
How can the shareholders demand a general meeting / written res
Written res:
- usually board res for GM or written res
- shareholders with 5% or more of voting power than require a written res to be circulated
- can be reduced by articles but not increased
- can request a statement on resolution up to a thousand words on the subject matter
- company must circulated the written red and statement in 21 days of request
- shareholders who requested must pay company’s expenses
GM:
- SH with 5% of PAID UP CAPITAL of voting rights can request GM. Request must state general nature of the meeting
- 21 days for directors to call the GM
- notice of GM must be 14 clear days minimum but must also be no more than 28 days if in response to SH’s request
- total is therefore 7 weeks from request
Companies responsibility to keep records and issue yearly accounts?
Records
Companies must keep board minutes for every board meeting and minutes of every GM, record of written resolutions at registered office or SAIL. Can elect to keep these at central register at CH. must keep for 10 years
Accounts
- directors responsibility to ensure accounts produced for each financial year and are a true and fair view of the state of affairs of the company
- directors must prepare a directors report to accompany accounts unless:
(A) micro-entity: balance sheet of no more than 316k, turnover of no more than 632k and no more than 10 employees in one financial year; or
(B) small company: balance sheet 5.1 mil, turnover 10.2 mil and 50 employees in one financial year. - directors circulate accounts, directors report and auditors report (if have one) to every SH, debenture holder and anyone entitled to receive notice of GMs
- Ltd cos publish accounts 9 months after accounting reference period, a PLCs 6 months after
- newly incorporated companies can do it 3 months after account ref period ended
- confirmation statement due 14 days from anniversary of incorporation date
Who needs an auditor, who hires them, what if they resign
- small companies exempt
- dormant companies can file an abbreviated accounts and are exempt from audit
- auditor must be sufficiently qualified (certified or chartered accountant) and independent
- first directors usually appoint auditor first but then an ordinary res by SH appoints after
- ordinary res to dismiss auditor and need SPECIAL NOTICE (later on this is described)
- auditor can resign in writing
- regardless of reasons for auditor leaving it must send company written statement of reasons
Why have a SH agreement
- SH can only take action against company for matters directly related to their rights as a member e.g voting rights
- under SH agreement can take action for any breach against other signatories
- SH agreements cannot restrict the ways in which SH can vote in board meetings if they are also a director (can’t be in breach of directors duties)
Common SH clauses:
- Bushell v Faith clauses: weighted voting rights when voting if director should be removed from office of that director is also a SH
- non compete clauses
- restrictions of transferring shares
When is a company a subsidiary and a holding a holding ?
- One company holds the MAJORITY (i.e over 50%) of voting rights in another
- Other company is a member with the right to appoint and remove majority of its board
- Other company is a member and controls alone (pursuant to member agreement drafted) the right to control the majority of voting rights
- Company is a subsidiary of a company that is a subsidiary of another
- Wholly owned subsidiary of it has no members accept that of another company
What is a promoter?
- Promoter: set up the company and liable for contracts (e.g business premises) pre cert of corp (even if for business benefit), business idea, produce the corporation docs and become first member. Sometimes a solicitor sets up the company but they won’t be considered a promoter! Contracting party can waive personal liability of the promoter but very very unusual. More academic.
- Best to draft contract and sign on incorporation, for business premises agree a novation or assignment, so the promoter is liable until the company is incorporated and then the contract will be discharged and replace with identical one. OR can purchase a shelf company.
- Promoter owe duty of good faith, duties of disclosure and not making a secret profit
What to include on memo of association and application for incorp
- Memorandum of association used to be the external rule book and Articles of association used by internal rule book. Now with the CA 2006 memo is dormant, simply as the first subscribers names on it and sent along with the application form (IN01) to Registrar of Companies to register the limited company. Application must:
o State the proposed name
o If limited by shares or guarantees (shares usually for profit, guarantees for profit)
o Will the company be private or public, most start as private but can start as public
o Issue statement of shareholding or capital
o State proposed officers, directors and secretaries
o Statement of initial significant control
o Statement of intended address (must be in UK), can give notice to the Registrar for a change in registered address. This notice must be filed in 14 days of the change taking place!
o Statement of type of company and intended principle business activities
o Copy of proposed articles of association in single documents in numbered paragraph. Unless choosing Model Articles with no amendments, then no copy. Or if amendments just need to submit amended. If bespoke, issue the bespoke - Must sign the statement of compliance!
- Fee is attached and form submitted with the application
- Sometimes members will have a shareholders agreement (only bind those who sign!) Confidential and DOES NOT NEED TO BE FILED AT CH!
Limitations on company names?
- Limitations on companies name:
o Cannot be offensive or constitute a criminal offence
o Must have public limited co or ‘plc’ (or the Welsh equivalents)
o Must have limited or ‘ltd (or the Welsh equivalents)
o Charities by guarantee may not need limited
o Can’t have same name as other company
o Can’t have name that connects you with a government body or public authority unless approved by the secretary of state e.g “England, chartered, royal, national”
o Approval is required for sensitive or restricted words “board, charity, fund, insurance, trust”
o If name chosen specifically to make someone think its an existing business the personal responsible could be liable for the tort of passing off to the existing company (but they will need to prove their loss!)
How does a company change its name?
- Companies can change their name by:
o The means provided in the articles of association – a notice will be give to the Registrar along with a statement confirming it has been done in accordance with the articles!
o A special resolution can be passed in a general meeting (75%) OR the members representing NOT LESS THAN 75% of the total voting rights agreeing to a written resolution. Co give notice of change of name, by resolution, to the Registrar. Copy of the SPECIAL RESOLUTION must be given with the notice
o Passing a special resolution to change the name conditional on a specific event happening, must give notice of change of name by conditional resolution to the Registrar, copy of the special resolution and confirm satisfaction of the conditional resolution
o CH must be notified in 15 DAYS OF the RESOLUTION
o Registrar will issue a certificate of incorporation on change of name, new name effective from cert of incor - Webcheck on CH, it can show you if there are any similar names. Also check the tradesmark register!!
Where does a companies name need to be displayed?
- Company must display its registered name at its reg office and any other office it does business or keeps available for inspection company records
- Make sure it keeps its reg name on letters, notices, invoices, website etc
- Company letters, forms and website should contain the country it was registered in
- Where a single director is name they must all be named
- If a company does not comply with these naming requirements, It is a criminal offence (unless has a REASONABLE EXCUSE). All goes back to concept of being open that the company has limited liability
How to change a companies articles? What cannot articles do?
- SPECIAL RESOLUTION to change the articles!!! At least 75% of the shareholders:
o Charterhouse Capital 2015 – any change it the articles must be in the genuine interest of the company and not just the interest of some of the members
o Copy of the special resolution and the new or amended articles need to be sent to the Registrar in 15 days of the resolution - Change of articles takes effect from the date of the resolution EXCEPT when change is to do with the companies ‘objects’. Companies after CA deemed to have unlimited objects unless specified in articles. Companies formed before 1 Oct 2009 had objects incorporated into their articles
- The alteration of a companies articles cannot force a member to take shares or increase his liability to contribute to the companies share capital or to pay money to the company
- Although member can agree in writing to be bound
What is entrenchment and how does it work?
- Fail to comply with reporting actions, an offence of company and any officers in default
- CA 2006 allows companies to contain in articles provisions of ENTRENCHMENT. Some provs in articles may be amended or appeal only upon a specific procedure (even if more restrictive than for special resolutions.
- Need a SPECIAL RESOLUTION for entrenchment provision, special filing requirements:
o CH must be notified on CC01 (notice of restriction on companies articles) or CC02 (notice of removal of restriction on companies articles) within 15 days of any amendment taking effect;
o Copy of amended articles and members resolution must be filed with companies house;
o Statement of compliance confirming compliance with restrictions to change articles have been observed
What does co sec do, how to appoint, reporting requirements?
- Co sec appointed by directors, will have OSTENSIBLE (apparent) AUTHORITY to enter administration contracts on companies behalf
- But must have implied or actual to enter commercial contracts
- Private co need not have a sec but PLCs do
- Must keep a register of secretaries (names, addresses), available for inspection for any members at companies office for free
- Must in 14 days from person becoming (or ceasing) to be sec, or from 14 days of change in particulars on register:
o Notice to the Registrar with the date the change occurred
o If a new secretary appointed, include a statement that the secretary has consented to act in that capacity
What is an annual confirmation statement and when must it be filed?
- Annual confirmation statement (CS01) – file every year at CH confirm that all information at Ch is up to date (e.g register of significant control, statement of capital. Shareholder info etc)
- Must be filed even if no changes !
- Criminal liability to company and its officers if not filed
- Limited company needs to file annual accounts with the Registrar of Companies and a Company Tax Return with HMRC
What records must a company keep and where must they be kept?
- What company records must be kept:
o Register of members
o Register of directors
o Register of persons with significant control
o Register of secretaries
o Register of service contracts
o Register of indemnities - Must also keep records of:
o Resolutions
o Minutes of general meetings
o Contracts or memos relating to the purchase of own shares
o Documents relating to the redemption or purchase of own shares out of capital
o Register of debenture holders - More records:
o Reports to members of outcome of investigation by public company into interests in its shares
o Register of interests in shares disclosed to a public company
o Instruments creating charges
o Register of charges - Records should be held in the company’s registered office
- Private companies can elect to keep some of this info on the companies house register – if make this election then notify Registrar of any changes to their statutory registers
- A register of the directors dates of birth must be kept on a private register to protect their privacy
How can a private limited company execute a contract?
- Priv lim company can be executed by:
o 2 authorised signatories
o Director and witness
o Every director and secretary
o Affixing common seal (less common)
What is a share, what must it have, what is on a share certificate, when is SH legal owner?
- Share is an interest in the company measured by sum of money
- Shares are personal property and NOT real estate
- Each share must have a fixed nominal value
- Shares may be transferred in accordance with the companies articles
- Evidence of a SH’s title to the shares is a certificate under the common seal of the company (share certificate). The key info on share cert if:
o Name of SH
o Address of SH
o Number of shares held
o Class of shares - However, SH is not legally a member until their name is entered into the Register of Members (this is the legal proof)
Types of shares? Shareholders duties?
- Types of shares – company can have as many as they like with various conditions attached (will be in articles) but common types:
o Ordinary shares – no special rights
o Preferential shares – preferred dividends over other shares
o Cumulative preference shares – if not paid out this year will be carried over to a year of proft
o Redeemable shares – at option of company or SH, shares will be brought back by company - Can’t have just redeemable shares
- Shareholders have duty to pay for shares when called upon to do so
- Articles are a statutory contract that bind the members and company
- Company can enforce articles against members (e.g not paying up shares) and vice versa
Shareholder’s rights?
- Shareholders have a number of rights:
o Right (can’t be taken away) to remove directors
o Right (can’t be take away) to change articles
o Voting rights on issues that affect the whole company
o Receive notice of meetings and attend and vote meetings (or appoint a proxy to vote)
o SH right to transfer their shares subject to restrictions in articles- – articles allowed to restrict as they wish e.g to keep power in a family etc
o Directors have the power to refuse register of shares if partly paid and disapprove of SH (e.g don’t think have money to pay shares).
o If a company wants restrict who has power in a company, they will often have complex pre-emption provisions which means before a SH sells their shares they will have to offer to sell them to other shareholders
o When SH dies go to estate – company will except evidence of probate to establish rights or personal reps
o Rights to receive dividends, subject to declaration by directors – can only be paid out of profits ‘available for purpose’ i.e accumulated, realised profits. Directors need to be the one to approve, as they may want to use profits for other reasons (e.g interest on debenture). If a director illegally paid dividend, breach of fiduciary duty e.g may be liable to repay or account for profit. If member knows, or reasonable grounds, is liable to repay the dividend. Ignorance of law not defence!
o Bonus/salary income expense so set against taxable profits. Dividend paid out of after tax profits
o Right to receive annual accounts and reports of a private company in 9 months from the end of the account reference period (or earlier if filed earlier). Duty lies with the company who must send them to every member unless do not have current address
o Rights to share in the proceeds if the company liquidates, remaining assets after creditors have been paid (distribution of capital, then surplus capital).
o Statutory right to bring action against the directors
What needs to be on the register of members, who gets to see it, where must it be kept, when must it be updated?
- Register of members:
o Name, address of members
o Date became member and ceased to be member
o For companies with share capital, the register must include statement of shares held by each member and amount paid - If co has 1 member, then the register of members must state this!
- More than 50 members? Keep an index of members (unless the register dos anyway)
- Keep available the register of members at the registered address
- Notify Registrar where the register is kept (Sail location) and if it changes
- Must be available for inspection for general public or members (but public may need to pay fee whereas members must be free)
- Where a request is made, company must comply in 5 DAYS or apply to court to refuse if it believes its not for a PROPER PURPOSE. Notify the person.
- Keep register updated but do not need to immediately notify companies house of the changes (e.g transfer of ownership) as this should be reflected in the annual confirmation statement.
- Private company can keep register on companies house and doesn’t have to keep register of members (ceases if no longer a private company) or withdraws electrion
What needs to be on the register of PSC, who gets to see it, where must it be kept, when must it be updated?
- Register of people with significant control
- FCA regime (or companies with voting shares on overseas markets) excluded
- Significant control if:
o Holding (directly or indirectly) more than 25% of shares
o Holding (directly or indirectly) more than 25% of voting rights
o Holding (directly or indirectly) to remove or appoint majority of board
o Having right to exercise, or actually exercise, significant control or influence over the company
o Having right to exercise, or actually exercise, significant control or influence over a trust or firm with no legal personality which meets one of the above conditions - Companies must take steps to discover if anyone fulfils these conditions
- Name, address, date, which condition is met
- Record any changes in 14 DAYS OF CHANGE and must notify companies house IN A FURTHER 14 DAYS. Info is public on CH
Are the articles and special resolutions binding, what can be enforced aaginst the company by SHs? SH agreements?
- Effect of CA 2006
- Articles and spec res binds company and members (as a contract)
- Only membership rights can be enforced:
o Right to dividend
o Right to vote at meetings
o Right to share in surplus - Articles will only give rights to capacity as MEMBERS no other outside capacity (e.g right that a member will always get to be a director is NOT enforceable)
- Shareholder agreements:
o Can enforce all rights in shareholders against other signatories
o E.g certain matters can’t be carried out unless approved by minority shareholders
What are derivative claims?
- Derivative claims can be brought by a shareholder on behalf of the company against the director (or another) for damage caused by negligence, default or breach of trust. Not a personal right, it is exercised on behalf of the company:
o Must first bring a prima facie case to proceed (can be penalised on costs if vexatious)
o If successful, compensation goes to the company but the derivative shareholder should be recovered costs (but costs met by company too) - Allows SH to bring action (usually the directors would) so if directors refusing then SH can bring a derivative claim
- Claimant is the company
- Defendant is usually director but can be another
- Useful as often the board won;y want to bring a claim against a fellow director
Court MUST refuse at permission stage if:
1. Court will not allow claim if individual brining claim is not trying to promote the success of the company
2. Where cause of action arises from act/omission that has not occurred yet but has been authorited by the company
3. act/omission has occured but has been ratified by the company
Court must also take into account:
1. Is the SH acting in good faith
2. wherther past or future action authorisied and if not would it be likely to be authorised
3. Has company not decided to pursue claim
4. Does cause of action give rise to action member could pursue in their own rigjt
The legal costs of making an application to continue a derivative claim are met by the
applicant shareholder if permission to continue is refused. If permission to continue is granted, the company will meet all of the legal costs of the claim, as well as the other party’s legal
costs if the claim is unsuccessful
What is an unfair prejudice claim?
- Unfair prejudice claims, if affairs of company carried it (or are going to be) in a manner “unfairly prejudicial” to interests to some or all of the member, any member who has been prejudiced can apply to Court for relief. No need to show bad faith or conscious intent to be unfair
- Objective test for what is ‘unfair prejudice’
- If Court is satisfied unfair prejudice has taken place it can make any order that it sees fit including:
o Order regulating companies future conduct of its affairs
o Order not making any changes to its articles without court’s permission
o Authorising civil proceedings on companies behalf
o Requiring company to refrain from doing or continuing act complained of
o Other SH’s who caused unfair prejudice to purchase share’s of prejudiced SH (or company buy back) - Company’s affairs considered unfairly prejudicial:
o Failure to pay dividends in favour of directors giving themselves bonuses
o Failure to lay accounts before shareholders
o Delaying holding general meetings
o Altering articles to exclude pre-emptive provisions or vary voting rights
o Other directors giving themselves excessive remuneration - SH can recover damages on his behalf rather than from the company
- Sec of state may apply to Court for an order for fraud on the minority and wrongdoer control instead of a winding up petition. Must have received inspector report (require docs and information)
- Can be wound up by court if court considers it ‘just and equitable’ to do so. Even if still solvent!!:
o Happened when a company is intended to be run as a partnership and there are grounds for dissolving a true partnership (e.g shareholder excluded from managing business, or there is a deadline between the shareholders)
o Conduct of company’s affair is oppressive to some shareholderds
o Company formed or run for an illegal purpose
o Rare
What is the principle of reflective loss?
- Principle of reflective loss – SH cannot bring a claim for deduction in value of shareholding caused to the company by a wrongdoer . This is to prevent double recovery. Does not apply to ordinary creditor.
Written resolutions, requisition general meeting and poll vote?
Written res:
- Most decisions in private company made by written resolution
- Resolution passed when majority is met (automatically)
- Articles may state conditions on members voting right
- SH’s who have 5% or mroe of voting righs in company are entitled to require a written res
- auto passed when over half votes of all eligible members (or 75% at least for special res)
- Can reduce below 5% in articles but not increase
- SH can remand written res and can require statement of up to 100 words on subject matter
- Must be done in 21 days of requesr
- SH must pay companies expenses
Requisition general meeting:
- SHs representing 5% of the PAID UP CAPITAL of company as carries the right of voting at GMs (bit different to written res)
- Directors must call it in 21 days
- Max 28 days notice (7 weeks total for meeting from request)
- Poll: 1 vote for 1 share rather than a vote per person – general meeting
- If member not available for meeting can get a proxy
- -Provision in article will be void if it states that a poll cannot be validly demanded by either:
o Any 5 or more members having the right to vote on the resolution; or
o The holders of NOT LESS THAN 10% of the voting rights of all the members having the right to vote on the resolution - Notice of company resolutions:
o Circulate a notice of intention to propose a resolution to its members
o If a company has an auditor they must send copies or notify them of the contents of all proposed resolutions
o Delivery any special resolutions to companies house in 15 days of passing
