Business Flashcards
Incorporated and unincorporated businesses legal entities?
An incorporated business exists as a separate legal entity from its owners and managers, unlike an unincorporated business
Sole traders?
- A sole trader is someone who runs an unincorporated business on their own as a self- employed person.
- Operating as a sole trader does not mean that you work alone. A sole trader may have one
or more employees, but the sole trader is the person who owns the business, benefits from
the profits and bears any losses. Sole traders earn income from the money received from
customers or clients and keep all the profit, once they have paid their expenses. They pay
income tax as a self- employed person. - A sole trader is personally liable for all of the debts of the business. Unlimited liability
Personally liable?
This means that the sole trader’s business assets and personal assets are all treated the same for legal purposes.
unlimited liability.
de jure directors?
- Directors who are validly appointed may be referred to as de jure directors. These directors may be executive or non-executive.
Director’s role in the company
- Manage the company on a day to day basis – on an agency basis
- Certain actions can only be taken by directors if the shareholders have given authority
- Owe duties to the company
- Directors are agents of the company.
Shareholders’ role?
- Own the company
- Are able to control key decisions through shareholder resolutions eg to give directors authority to change the name of the company
- It is common for directors and shareholders to be the same people in a company.
- Directors’ authority to manage the company?
- CA 2006 reserves certain important decisions for shareholder approval, such as changing the company’s name (unless the articles provide otherwise), amending the articles of association, removing directors and so on.
- The board of a company with MA is usually free under a company’s articles to make decisions on behalf of the company on all other matters (MA 3).
- The directors can therefore act on behalf of the company to employ individuals (other than directors on long term service contracts) and decide what they will be paid, enter into contracts with customers and suppliers, buy and sell company property, raise funds by borrowing from banks and authorise the company’s assets to be used as security. The directors are also responsible for putting together company accounts and for supplying information to auditors. These are just a few examples of the decisions that directors are free to make without shareholder approval.
- MA 5 allows the Board of Directors to delegate a particular decision to one of the directors or a committee. For example, a HR Director might be delegated decision-making with regards to the HR decisions of a company.
categories of director?
- At law:
de jure;
de facto, and
shadow directors - In practice:
executive and
non executive directors - The company’s articles may also provide for alternate directors.
How many directors must a company have?
a private limited company must have at least one director and
a public limited company must have at least two directors.
- Although a company can be appointed as a director, every company must have at least one director who is a natural person (s 155(1) CA 2006) to ensure that for all companies, there will always be one individual in place to aid accountability.
Maximum number of directors?
- The CA 2006 does not prescribe a maximum number of directors and neither do the MA, but a company can put a maximum number of directors into its own articles.
Who can act as director?
- Under s 157 CA 2006 a person may not be appointed as a director unless they are at least 16 years old.
*Under MA 18, a person will cease to be a director if a bankruptcy order has been made
against them or a doctor gives a written opinion to the company stating that they have
become physically or mentally incapable of acting as a director, and may remain so for more than three months. - A person cannot take office as a director if they are disqualified from doing so. Please see
3.22.7 for more information on directors’ disqualification.
De facto director?
- A de facto director is someone who assumes to act as a director but has in fact not been validly appointed. The fiduciary duties and liabilities apply to de facto directors as they do to de jure directors.
Shadow directors?
- Sometimes a person (usually a shareholder) may try to exert influence over the board but without being appointed as a director, in an effort to avoid the duties imposed on directors under CA 2006 and the common law.
‘a person in accordance with whose directions or instructions the directors of the company are accustomed to act’
Executive directors?
- An executive director is a director who has been appointed to executive office. Such a director will generally spend the majority, if not all, of their working time on the business of the company and will be both an officer and an employee of his company.
Non-executive directors?
- A non-executive director is also an officer of the company but will not be an employee of the company. Non-executive directors do not take part in the day-to-day running of the company. Their role is generally to provide independent guidance and advice to the board and to protect the interests of shareholders.
Alternate directors?
- The office of director is a personal responsibility. However, some companies in their articles provide for alternate directors to take the place of a director where one or more directors are absent.
- An alternate director is usually either a fellow director of the company or someone who has been approved by a resolution of the board of directors. The alternate director has the voting powers of the absent director.
- The MA do not provide for the appointment of alternate directors and, since it is now possible to hold board meetings over the telephone and to pass board resolutions by means of written resolutions, the use of alternate directors is becoming quite rare.
- Whether or not the provisions of CA 2006 apply to alternate directors is a matter of construction, but it is thought that the duties of directors will apply equally to alternate directors.
- A public company secretary must have the requisite knowledge and experience, and one of the qualifications set out in s 273(2) CA 2006 (for example, the secretary may be a solicitor or a chartered accountant). The directors appoint the secretary and are required to check that the secretary qualifies under these provisions.
- Company secretary’s duties?
- A company secretary’s main duties are to keep the company books up-to-date, produce minutes of board and general meetings, and make sure that all necessary filings are made at Companies House. It is not a part of their role to take decisions on behalf of the company, which is the domain of either the directors or the shareholders.
When is a company secretary required?
a public company must have a company secretary but a private one does not
Companies with MA may appoint a director:
By an ordinary resolution of the shareholders - MA 17(1)(a)
By a decision of the directors - MA 17(1)(b)
Service contracts?
As executive directors are employees, they require service contracts
These are a a written contract of employment setting out the terms and conditions of employment including duties, remuneration package, notice provisions
Can members inspect service contracts?
o The Company has an obligation to keep its directors’ service contracts at its registered office for inspection by the members
Who determines the contents of a director’s service contract?
o The effect of Art 19 MA is that the terms of an individual director’s service contract, including remuneration, are for the board to determine. As a general rule, a director’s service agreement will only require the approval of a resolution of the board of directors.
When is shareholder approval required for the appointment of a director?
shareholder approval is required to enter into long-term service contracts under s 188 CA 2006.
Disclosure of identity of directors and secretary requirements?
o Every company must maintain a register of its directors (s 162(1) CA 2006) and secretary (s 275(1) CA 2006) and should keep these registers at its registered office.
o Each company must also notify the Registrar of Companies (ie Companies House) of changes relating to its directors (s 167 CA 2006) or secretary (s 276 CA 2006) using forms published by Companies House (eg AP01 for Appointment of Director).
o The particulars which must be registered in relation to directors are specified in ss 163(1) and 164 CA 2006 (and those for secretaries in ss 277(1) and 278(1) CA 2006).
o The information kept at Companies House is available for inspection by the public (s1085(1) CA 2006) and, in addition, the register kept at a company’s registered office must be open for inspection by any member of the company without charge and by any other person on payment of a fee (ss 162(5) and 275(5) CA 2006 for the register of directors and secretaries respectively).
Privacy for directors and secretary?
o Section 163(1) CA 2006 specifies that only a service address for a director needs to be included on the company’s register of directors (s 277(5) CA 2006 contains the same provision in relation to the address to be included on the company’s register of secretaries). This service address can either be the director’s residential address (if they are not concerned with the need for privacy) or could simply be the company’s registered office and will be the only address available to the public generally. Residential addresses that are already on the public register will not be removed automatically.
o Individual directors (but not secretaries) will still have to provide their residential address under s 165 CA 2006, but this information will be kept on a separate, secure register. This register is not open to public inspection.
What should be done if a new director is appointed?
When a new director is appointed, the company must notify Companies House within 14 days
of the appointment (s 167(1)(a) CA 2006), and this will be done by filing form AP01 (for the
appointment of an individual director), or form AP02 (for the appointment of a corporate
director). The company must also enter the director on its register of directors and register of directors’ residential addresses.
What Disclosure is required for annual accounts?
information relating to:
the directors’ salaries, bonus payments and pension entitlements; and
compensation paid to directors and past directors for loss of office.
o Section 412 CA 2006 also requires details to be disclosed of any payments made to, or receivable by, a person connected to such a director or a body corporate controlled by a director
o Section 413 CA 2006 relates to the disclosure of information on advances and credits given by a company to its directors and guarantees entered into by a company on behalf of its directors.
How can shareholders remove a director?
o Under s 168(1) CA 2006, a company (ie the shareholders) may by ordinary resolution remove a director before the expiration of their period of office.
Can the board remove a director?
o It is not possible for the Board to remove a director (unless the Articles specifically provide for this).
Other ways in which a director can leave office that do not include removal?
Resignation by notice
* A director may simply take the decision to resign from the board by tendering a letter of resignation. This procedure is provided for in MA 18(f). It is usual, although not obligatory, in these circumstances for the board to pass a board resolution accepting the letter of resignation.
Automatic termination
* Under MA 18 a person ceases to be a director as soon as:
o the director becomes disqualified from being a director;
o the director becomes the subject of an individual voluntary arrangement (or similar);
o the director becomes bankrupt, or
o a registered medical practitioner who is treating the director states in writing to the company that the director has become physically or mentally incapable of acting as a director and will remain so for more than three months.
Disqualification - Company Directors Disqualification Act 1986 (‘CDDA’)
* The CDDA is the key piece of legislation regarding disqualification of directors. Under this Act, the court may make a disqualification order against a person preventing them, unless they obtain leave of the court, to be a director, liquidator, receiver or in any other way directly or indirectly involved in the promotion, formation or management of a company. The purpose of such an order is to protect the public against the activities of such a director. Grounds for disqualification include fraudulent or wrongful trading or persistent breaches of company law.
* The period of disqualification is for a maximum of 15 years. If a director has been disqualified under the CDDA, it is a criminal offence to participate directly or indirectly in corporate management without leave of the court.
Retirement by rotation
* The model articles for public companies require retirement and reappointment of directors by the members every three years. In addition, all directors of listed companies are subject to annual re-election.
What should be filed at the Companies House when a director leaves office?
- When a director leaves office, the company must both update the company’s register of directors and also give notice to Companies House by filing form TM01 (Termination of appointment of director).
Who do directors owe their duties to?
directors’ duties are owed to the company and not to individual shareholders.
- The duties shift to the protection of the creditors in an insolvency.
- The general duties of directors ss 170 – 177 CA 2006
Duty to act within powers (s 171 CA 2006);
Duty to promote the success of the company for the benefit of the members as a whole (s 172 CA 2006);
Duty to exercise independent judgment (s 173 CA 2006);
Duty to exercise reasonable care, skill and diligence (s 174 CA 2006);
Duty to avoid conflicts of interest (s 175 CA 2006);
Duty not to accept benefits from third parties (s 176 CA 2006); and
Duty to declare any interest in a proposed transaction (s 177 CA 2006).
What does * Section 171 CA 2006: Duty to act within powers involve?
o This section effectively sets out 2 separate duties:
Duty to act within the company’s constitution
* The company’s constitution is defined in s 257 CA 2006 and includes everything set out in the company’s articles of association and decisions taken in accordance with the articles (ie shareholder resolutions). A director is in breach of this duty if they act without authority, eg commit the company to borrow more than the articles allow without prior shareholder approval.
Duty to exercise powers for the purposes for which they are conferred
* Directors must not use their powers for improper purposes (eg for personal gain).
What does * Section 172 CA 2006: Duty to promote the success of the company involve?
o Section 172 CA 2006 stipulates that a director must act in a way which they consider, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole.
o The Government has stated that ‘success’ should normally mean, for commercial companies, a ‘long-term increase in value’.
o In exercising this duty, a director is required to have regard to a range of non-exhaustive matters which are set out in s 172(1) CA 2006, including:
the likely long-term consequences of any decision
employees’ interests
the need to foster relationships with suppliers, customers and others
the impact of the company’s operations on the community and the environment
the desirability of the company’s maintaining a reputation for high standards of business conduct
the need to act fairly as between the members of a company
o Although many of these matters were not specifically provided for under the common law, many companies would routinely consider such matters, as a necessary part of good business practice following the concept of ‘enlightened shareholder value’. This is a term used to describe the ‘middle way’ between, on the one hand, running the company purely to maximise shareholders’ interests/profits and, on the other hand, a pluralist approach which involves acting in the interests of a wider group of stakeholders.
what should companies do to show that they are complying with Section 172 CA 2006: Duty to promote the success of the company?
ensuring board minutes clearly note that consideration has been given to the s 172 CA 2006 duty when taking board decisions
What does * Section 173 CA 2006: Duty to exercise independent judgment involve?
o This duty codifies the principle that directors must exercise their powers independently, and not fetter their discretion other than in accordance with s 173(2) which states the duty is not infringed by a director acting:
in accordance with an agreement entered into by the company that restricts the future exercise of discreation by its directors; or
in a way authorised by its constitution.
o They can rely on advice from others but must make their own judgments. Directors must be mindful of the individual nature of this duty when acting.
o They cannot blindly follow others’ views without considering the interests of the company.
What does Section 174 CA 2006: Duty to exercise reasonable care, skill and diligence involve?
o The level of care, skill and diligence which a director must exercise is assessed objectively and subjectively.
o The required level is the level of skill, care and diligence which would be exercised by a reasonably diligent person with:
the general knowledge, skill and experience that may reasonably be expected of someone in their role; and
the general knowledge, skill and experience of that director.
o The minimum standard expected of a director is that objectively expected of a director in that position. This standard may then be subjectively raised if the particular director has any special knowledge, skill and experience.
What is a long-term service contract?
- Long term contract is a guaranteed term of employment for longer than two years
- Company cannot get rid of the employee unless it falls into the limited circumstances
- Shareholder approval by ordinary resolution is required for any director’s service contract which is, or may be, for a guaranteed period in excess of two years (s 188(2)(a) CA 2006).
When does Section 175 (duty to avoid conflicts of interest) not arise?
where the conflict arises in relation to a transaction with the company
What duties apply to proposed transactions?
- Section 177 CA 2006 relates to the duty on directors to declare a direct or indirect interest in a proposed transaction. The duty to avoid a conflict of interests does not apply to interests in proposed transactions (s 175(3)).
What does Section 175 CA 2006: Duty to avoid conflicts of interest involve?
o This duty requires a director to ‘avoid a situation in which they have, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company.’
o This is quite widely drafted and is said to apply ‘in particular to the exploitation of any property, information or opportunity’. It is no excuse for the director to say that the opportunity is not one which the company could have exploited itself.
o The duty is not infringed ‘if the situation cannot reasonably be regarded as likely to give rise to a conflict of interest_’_ or if the conflict arises:
in relation to a transaction with the company (eg a transaction between the director and the company) (s 175(3) CA 2006); or
in relation to a matter which has been authorised by the directors (s 175(4)(b) CA 2006).
What does * Section 176 CA 2006: Duty not to accept benefits from third parties involve?
o This is the second of the three duties aimed at conflicts of interest. Under this section, a director must not accept a benefit from a third party which is conferred by reason of them being a director, or by reason of them doing (or not doing) anything as a director.
o However, note that the duty is not breached if the acceptance of the benefit cannot reasonably be regarded as likely to give rise to a conflict of interest (s 176(4) CA 2006).
o Note that, unlike the duty in s 175 CA 2006, the other directors cannot authorise an arrangement under this section. There is no provision allowing them to do so. It would be possible for the shareholders to approve a director’s proposed action in advance or for ratification under s 239.
what does Section 177 CA 2006: Duty to declare an interest in a proposed transaction involve?
Any director who is interested in a proposed transaction with the company must declare the nature and extent of their interest to the other directors. This covers indirect interests, as well as direct interests.
o In addition to the duty under s 177 CA 2006 to disclose interests in proposed transactions entered into by the company, directors are also required to disclose interests in existing transactions or arrangements entered into by the company (s 182 CA 2006.
- Procedural Matters relating to s 177 CA 2006?
- Note that s 177 CA 2006 applies equally to ‘indirect interests’. An indirect interest is not always easy to identify. Where a director has some interest whether through a spouse or another relative or through a company in which they are a member, the director is likely to be deemed to have an indirect interest. The director does not have to be party to the transaction for s 177 CA 2006 to apply.
- A director must declare their interest in a proposed transaction before the transaction is entered (s 177(4) CA 2006, subject to anything different expressed in the articles).
- The declaration can be at a Board Meeting (s 177(2)(a) CA 2006) or in writing in advance of the Board Meeting (s 177(2)(b)(i) CA 2006). It is also possible for directors to give a one-off general notice of their interest (s 177(2)(b)(ii) CA 2006). Best practice suggests that an interested director will declare that interest at BM1.
- If a director discloses an interest to the other directors by way of written notice rather than in a meeting of the directors, then the notice must be sent to all directors either electronically (if agreed) or in paper form (s 184 CA 2006).
- Under s 185, a director can give general notice to the effect that they are always to be considered interested in any transaction or arrangement with a specified party. This will be if a director has an interest in a specified body corporate or firm (s 185(2)(a) CA 2006) or is connected to a specified person (s 185(2)(b) CA 2006).
- When does a director NOT need to make a declaration pursuant to s 177 CA 2006?
o Sections 177(5) and (6) CA 2006 set out when a director is not required to make a declaration; namely when:
the director is not aware of the interest or transaction or arrangement in question (a director is treated as being aware of the interest or transaction/arrangement if it is a matter of which they ought reasonably to have been aware);
the interest cannot reasonably be regarded as likely to give rise to a conflict of interest or the other directors know about or ought to have known about the conflict of interest; or
if the conflict arises because it concerns their service contract and their service contract has been or will be considered by the board, or a committee of the board, of directors.
o In practice, directors are likely to continue to declare their interests even if the other directors know or ought to have known about any conflict. This can easily be documented in the board minutes and avoids the need to rely on an exception that may or may not apply.
- Section 177 CA 2006 and MA 14
o MA 14 specifies that a director who is interested in a transaction or arrangement with the company cannot vote on or count in the quorum for board resolutions in respect of that transaction or arrangement.
o This could cause difficulties in small companies. However, MA 14(2) and (3) allow the conflicted director to count in the quorum and vote if:
the company disapplies MA 14(1) by ordinary resolution;
the director’s interest cannot reasonably be regarded as likely to give rise to a conflict of interest; or
the director’s conflict arises from a permitted cause (defined in MA 14(4)).
o An alternative, and more permanent, measure would be to remove MA 14 under s 21 CA 2006 and replace it with an article expressly permitting a director interested in a transaction or arrangement with the company to vote and count in a quorum on board resolutions to approve the transaction or arrangement.
- Remedies for breach of directors’ duties
o Under s 178 CA 2006, the consequences of a breach of directors’ duties are the same as for breach of the corresponding common law or equitable principles. With the exception of the duty to exercise reasonable care, skill and diligence (s 174 CA 2006), the statutory duties are enforceable in the same way as fiduciary duties owed by directors to their company.
The potential
remedies for breaches of ss 171– 173 and 175– 177 are:
*an account of profits;
*equitable compensation for the loss suffered by the company;
*rescission of any contract entered into as a direct or indirect result of the breach;
*an injunction, to prevent further breaches/ a continuing breach;
*restoration of property transferred as a result of the breach of duty.
Breach of s 174 is akin to negligence and so the remedy for breach of the duty to exercise
reasonable care, skill and diligence is common law damages assessed in the same way as
damages for negligence.
- Ratification for breach of duty?
o The shareholders can, by ordinary resolution, subject to anything in the company’s articles requiring a higher majority or unanimity, under s 239(2) CA 2006, ratify (ie approve after the breach) the following conduct of directors:
negligence;
default;
breach of duty; and
breach of trust.
o If a director holds shares in the company, then any votes to ratify their breach which attach to shares held by them or any person connected with them (eg their spouse, children, parents or a company which they control – see ss 252 and 253 CA 2006) will be disregarded under s 239(4) CA 2006.
o Unlawful acts can never be ratified (eg declaring a dividend when no distributable profits are available) and shareholders cannot ratify a director’s breach of fiduciary duty in insolvency situations since directors owe their duties to creditors, not shareholders, once the company is insolvent.
What is a guranteed term in a long-term service contract (this has a guranteed term of 2 years)?
- The guaranteed term is the period during which the contract is to continue other than at the instance of the company where the company either cannot terminate the contract or can only terminate in specific circumstances (s 188(3)).
The guaranteed term applies to either:
a period during which the contract is to continue other than at the instance of the company (ie a contractual term of more than two years or where the director is in control of how long the contract continues) (s 188(3)(a)(i) CA 2006), and
during this time the company either cannot terminate the contract or can only terminate in specific circumstances (s 188(3)(a)(ii) CA 2006).
OR the period of notice to be given by the company (s 188(3)(b) CA 2006).
What happens to a long-term service contract if shareholder approval is not obtained?
- In the absence of approval the term will be void and the contract deemed to terminate on reasonable notice (s 189).
Service contract survives but the service term is void!!!!
When is shreholder approval not needed for long-term service contracts?
- Under s 188(6)(b) approval is not required by the members of any company which is a wholly owned subsidiary of another company
- when the company is owned by one shareholder it is exempt from obtaining approval
What ahppens is the long-term service contract is for a director of a holding company?
- If the director is also a director of any holding company, the shareholders of the holding company will also need to give approval (s 188(2)(b)).
three types of transaction between the company and its directors (or people connected to them) which are regulated by CA 2006 and which require the approval of the company’s shareholders, in order for the transaction to be valid. The particular types of transaction are:
Directors’ long-term service contracts (ss 188 – 189 CA 2006)
Substantial property transactions (ss 190 – 196 CA 2006)
Loans, quasi-loans and credit transactions (ss 197 – 214 CA 2006)
o Disclosure of Interest – s 177 CA 2006 for long-term service contracts?
Under s 177(6)(c) CA 2006, a director is not required to disclose their interest in the service contract. However, it is likely to remain the practice that directors will continue to make the declaration of interest under s 177(1) CA 2006 so that it is documented in the board minutes.
In addition, the director will not be permitted to vote or count in the quorum on any board resolution relating to the contract (Model Articles 14(1)).
- Members’ inspection rights of all directors’ service contracts - s 228 CA 2006?
o A company must keep a copy of all directors’ service contracts (or, where the contracts are not in writing, memoranda of their terms) at the company’s registered office or a place specified in regulations made under s 1136 CA 2006 for a period of at least one year from the date of termination or expiry of the contract for members to inspect. This obligation applies regardless of the length of any service contract and whether or not it is terminable within 12 months. Under s 229 CA 2006 members have the right to inspect without charge or to request a copy on payment of a fee.
- Section 188 CA 2006: Procedural Issues - long-term service contracts?
o Where the ordinary resolution is to be passed at a General Meeting, s188(5)(b) CA 2006 sets out that a memorandum setting out the proposed contract must be made available for inspection by members of the company both:
at the company’s registered office for not less than 15 days ending with the date of the meeting; and
at the meeting itself.
o A minimum of 15 days’ notice of the GM held to approve the contract will therefore have to be given to shareholders (even if the short notice procedure is followed) unless the written resolution procedure is used. You can see that this will impact on the speed with which the decision to approve the service contract or not can be made. There is no such 15-day requirement for a written resolution.
o Where the written resolution procedure is being followed pursuant to s 188(5)(a) CA 2006, the memorandum setting out the proposed contract must be sent or submitted to every eligible member at or before the time at which the proposed resolution is sent or submitted to the member.
When must shareholder approval be given for substantial property transactions?
- Shareholder approval must be given either before the transaction is entered into, or after, provided that the transaction is made conditional on approval being obtained.
- ‘Substantial non-cash asset’?
means an asset other than cash where the value is either: over £5,000 and equates to more than 10% of the company’s net asset value; or over £100,000.
o If the company is only recently incorporated and no accounts have yet been prepared, then the net asset value is taken to be the amount of the company’s called up share capital.
What happens for approval for substantial property transactions if there is a holding company?
- If the transaction is between a company and a director of the company’s holding company or a person connected to a director of the holding company, the holding company will also need to approve the transaction by OR (s 190(2)).
- Approval is not required by the members of any company which is a wholly-owned subsidiary of another company (s 190(4)(b)).
- Substantial property transactions?
o Section 190 CA 2006 governs an acquisition or disposal by a director/holding company director (or connected person) of a substantial non-cash asset to or from the company.
o These types of transaction are permitted but again require shareholder approval by ordinary resolution.
o Shareholder approval must be given either before the transaction is entered into, or after, provided that the transaction is made conditional on approval being obtained.
- Connected persons for substantial property transactions?
o The definition of ‘persons connected with a director’ is set out in ss 252–254 CA 2006. The definition is complex and where you suspect that a connected person may be involved, you should always check the details of the legislation. However, in summary, the key categories of connected persons are:
o Members of the director’s family: spouse or civil partner, parents, children or step-children (s 253(2)). Note that brothers, sisters, grandparents, grandchildren, uncles and aunts are NOT connected persons under CA 2006.
Close relatives!!!!
o Bodies corporate ie companies in which the director (and others connected with them) holds 20% or more of the shares (s 254).
o A business partner of the director or those connected with them (s 252(2)(d)).
o Trustees of a trust the beneficiaries of which include the director or those connected with them (s 252(2)(c)).
- Remedies (s 195 CA 2006) for when a substantial property transaction is entered into without shareholder approval?
o Where a SPT is entered into without shareholder approval, under s 195(2) CA 2006 the transaction is voidable at the instance of the company unless:
restitution is no longer possible,
the company has been indemnified for the loss or damage suffered by it, or
rights acquired in good faith by third party would be affected by the avoidance.
o The directors involved (and those so connected under s 195(4) CA 2006) are liable to account to the company for any profits made and to indemnify the company for any loss incurred s 195(3) CA 2006.
o Section 196 CA 2006 allows for the arrangement to be affirmed by the shareholders of the company and the holding company (where relevant) by ordinary resolution within a reasonable period. If the transaction is affirmed, the arrangement may no longer be avoided under s 195 CA 2006.
- Defences (s 195 CA 2006) for entering into a substantial property transaction without shareholder approval?
o If the SPT is between a company and a person connected with a director, and the director concerned shows that they took all reasonable steps to ensure the company’s compliance with s 190 CA 2006, the director will not be liable under s 195(6) CA 2006.
o There is also a defence under s 195(7) CA 2006 for any connected person (if relevant) and any director who authorised the transaction who can show they had no knowledge of the circumstances constituting the contravention.
Would a director need to disclose their interest in a substantial property transaction?
o Under s 177(1) CA 2006 a director would need to disclose the nature and extent of their interest to the board.
o Under the exception in s177(6)(b) CA 2006, it is arguable that an interested director need not formally to declare an interest if the other directors are already aware of it. However, it is likely to remain the practice that directors will continue to make the declaration so that it is documented in the board minutes.
o Under MA 14(1), any interested directors will not be permitted to vote on the board resolutions to approve the contract and authorise a signatory. They cannot count in the quorum for board resolutions regarding the contract either.
- Approach to Loans and related transactions with directors?
Step 1: Identify the type of company entering into the transaction
* Public limited company
* Private company associated with a plc
* Private company not associated with a plc
Step 2: Identify the type of transaction
* Loan
* Quasi loans
* Credit transactions
* Security or guarantee for above
* TO
* Director of company
* Director of holdco
* Person connected to director of company
* Person connected to director of holdco
Step 3: Is shareholder approval required? – situations where share holder approval would be required
* Private co not associated + Loans or Security/Guarantee for loan + Director of company or Director of holdco
* Plc or Private co associated with plc + Loans or Quasi loans or Credit transactions or Security/Guarantee for above + Director of company or person connected or Director of holdco or person connected
Step 4: Which company needs to obtain shareholder approval?
* The company if the transaction is between the company and one of its directors or person connected to one of its directors.
* The company and the holdco if the transaction is between the company and a director of its holdco or person connected to a director of its holdco.
Step 5: Are there any available exceptions?
* Wholly-owned subsidiary
* Holding Company
* Minor and business transactions
* Loans and quasi loans up to £10,000
* Credit transactions up to £15,000
Loans shareholder approval?
o Company loans to directors, holding company directors and connected persons, although permitted, may also be subject to the requirement of shareholder approval by ordinary resolution.
Restriction to loans applies to which transactions?
o The restrictions set out in this part of CA 2006 apply to four different types of transaction:
Loans
Quasi-loans
Credit Transactions
Guarantees or the provision of security for any of the above
what are loans?
where the company lends money
Quasi-loans?
quasi-loan would be where a company agreed to pay off an outstanding account owed by a director to a third party on the understanding that the director would later reimburse the company
Credit Transactions?
A credit transaction includes any transaction entered into between the company and the director where the company provides goods or services on a credit basis which will be paid for at a later date. Only the company and the director will be parties to this arrangement; and
* Something the company buys in its normal course of business and it is paid back over time
Loans, guarantees or security for directors approval?
o No company may make loans to its directors or to directors of its holding company or give guarantees or enter into security in connection with loans to such directors, without the transaction first being approved by the shareholders by ordinary resolution. If the company in question is a private company that is not associated with a public company, these are the only transactions for which shareholder approval is required under the CA 2006 loan provisions.
o Public companies and private companies associated with public companies (s 198 – 202): Quasi loans, credit transactions and connected persons?
o These companies also require shareholder approval for:
Loans to a person connected to a director of the company or a director of its holding company (s 200);
Quasi-loans (s 198) to, or credit transactions (s 201) with their directors and directors of a holding company or persons connected with such directors; and
Guarantees or security in respect of any such loans, quasi-loans or credit transactions with their directors and directors of a holding company or persons connected with such directors (s 197, 198, 200, 201).
- Guarantees or security (s 197)?
o A guarantee or security is where the company provides a guarantee or gives security in relation to a loan provided to one of its directors by a third party
- Exceptions (s 204 – 209 CA 2006) for the requirement of shareholder approval for loans and other transactions?
Section 204: Expenditure on company business (up to a maximum of £50,000);
Section 205: Loans for defending proceedings brought against a director;
Section 206: Loans for defending regulatory actions or investigations;
Section 207: Minor and business transactions – loans or quasi-loans of up to £10,000 and credit transactions up to £15,000 do not require shareholder approval;
Section 208: Intra group transactions, and
Section 209: Money lending companies (where the loan is made in the ordinary course of the business of the company).
- Remedies (s 213 CA 2006) for loans and other transactions made without shareholder approval?
o If shareholder approval is not obtained and no exceptions apply, the consequences are set out in s 213 CA 2006. These are very similar to the consequences for breach of s 190 CA 2006, set out earlier. In relation to the transaction, the consequences are set out in s 213(2) CA 2006: the arrangement is voidable at the instance of the company unless:
restitution is no longer possible,
the company has been indemnified for the loss or damage suffered by it, or
rights acquired in good faith by a third party would be affected by the avoidance.
o The directors involved (and those so connected under s 213(4) CA 2006) are liable to account to the company for any profits made and to indemnify the company for any loss incurred (s 213(3) CA 2006).
o Section 214 CA 2006 allows for the arrangement to be affirmed by the shareholders of the company and the holding company (where relevant) by ordinary resolution within a reasonable period. If it is affirmed, the arrangement may no longer be avoided under s 213 CA 2006.
Defences (s 213 CA 2006) for loans and other transactions made without shareholder approval?
o If a transaction contravenes ss 200, 201 or 203 CA 2006 and is entered into with a person connected with a director, that director will not be liable if they took all reasonable steps to ensure the company complied with those sections (s 213(6) CA 2006).
o There is also a defence under s 213(7) CA 2006 for any connected person (if relevant) and any director that authorised the transaction who can show they had no knowledge of the circumstances constituting the contravention.
Holding comoany for loans and other transactions made?
o As with s 190 CA 2006, if the transaction is between a company and a director of the company’s holding company or a person connected to a director of the holding company, the holding company will also need to approve the transaction by OR.
* Wholly-owned subsidiary Exemption
o As with both ss 188 and 190 CA 2006 approval is not required by the members of any company which is a wholly-owned subsidiary of another company.
- Minor and business transactions?
o Loans and quasi loans up to £10,000
o credit transactions up to £15,000
- Disclosures under s 177 CA 2006 for loans and other transactions?
o Again, under s 177(1) a director would need to disclose the nature and extent of their interest to the board if they were interested in any of the transactions caught by ss 197-202 CA 2006.
o Pursuant to s 177(6)(b) CA 2006, it is arguable that an interested director need not formally declare an interest if the other directors are already aware of it. However, it is likely to remain the practice that directors will continue to make the declaration so that it is documented in the board minutes. In addition, it will not always be obvious to the rest of the Board if the director has an indirect interest in a transaction, so directors should be advised to act cautiously.
o Under MA14(1), any interested directors will not permitted to vote on the board resolutions to approve the transaction and authorise a signatory because it is “a… transaction…with the company in which [they] are interested”. They cannot count in the quorum for board resolutions regarding the contract either.
*Procedural issues for obtaining shareholder approval for loans and other transactions?
o Where the ordinary resolution is to be passed at a General Meeting, a memorandum setting out the proposed transaction must be made available for inspection by members of the company both:
at the company’s registered office for not less than 15 days ending with the date of the meeting; and
at the meeting itself.
o A minimum of 15 days’ notice of the general meeting held to approve the transaction will therefore have to be given to shareholders (even if the short notice procedure is followed) unless the written resolution procedure is used. You can see that this will impact on the speed with which the decision to approve the transaction or not can be made.
o Where the written resolution procedure is being followed, a memorandum setting out the proposed transaction must be sent or submitted to every eligible member at or before the time at which the proposed resolution is sent or submitted to the member.
What do the Articles act as?
- The Articles of a company regulate the relationship between the members and each other and between the members and the company. They act as a contract.
- Examples of membership rights that have been enforced under s33 CA 2006(or the corresponding section of CA 1985):
- right to a dividend once it has been lawfully declared;
- right to share in surplus capital on a winding up;
- right to vote at meetings; and
- right to receive notice of GMs and AGMs.
- Rights of members which are not membership rights are not enforceable under s 33.
in Eley v Positive Government Security Life Assurance Co Limited the company’s articles contained a provision that the plaintiff would be appointed as the company’s solicitor. He was never appointed as such although he did become a member. The court held that the plaintiff could not sue under the equivalent of s 33 CA 2006 as the right to be appointed as the company’s solicitor was not a membership right.
What should shareholders do if they have rights that are not membership rights?
company’s Articles are deemed to be a complete contract and the court will not imply any terms into them whether to create business efficacy or otherwise. In order to protect members, it is important, therefore, that any of their rights which are not membership rights are set out in a separate contract (such as a shareholders’ agreement) and not in the Articles.
- Shareholders Agreements?
The Shareholders’ Agreement acts as a kind of extension to the Articles in terms of governing how the company is run and can contain provisions that the law does not permit the Articles to contain. The specific provisions in the Shareholders’ Agreement will depend upon the reason why the parties are entering into the business venture but are likely to include provisions relating to:
Unanimous voting over certain matters eg removing a director;
Quorum for GMs;
Dividend policy;
Allotment of new shares, and
New and departing shareholders.
Rights under shareholder agreements?
- A Shareholders’ Agreement provides a right of action which enables one member to enforce the provisions of the Shareholders’ Agreement directly against another, whereas under the Articles this right of action may not arise. Because of the difficulties shareholders can encounter in enforcing the provisions of the articles under s 33 CA 2006, a Shareholders’ Agreement can be used to ensure the enforceability of provisions that would not be regarded as membership rights.
- If a term of a Shareholders’ Agreement is breached it can be enforced in the usual way under general contract law principles. A shareholder will be able to claim for breach of contract, or alternatively could apply to the court for an injunction to prevent a breach of the terms of the agreement. A Shareholders’ Agreement can also prevent the need for s 994 petitions (unfair prejudice), although it obviously cannot stop a disgruntled shareholder from bringing such a petition.
- Reserved matters in shareholders’ agreements?
- Certain matters can be reserved in a Shareholders’ Agreement as matters requiring the consent of all shareholders or certain individual shareholders and this protects minority shareholders. For example, a Shareholders’ Agreement may provide that the unanimous consent of all shareholders is required to pass a resolution to remove a director. This does not remove the right of the shareholders to remove a director under s 168 CA 2006, as a company is bound to accept the vote of a shareholder even if this is in breach of the provisions of the Shareholders’ Agreement.
- Where a removal resolution is passed without the required unanimity, provided a simple majority voted in favour (in accordance with CA 2006), the resolution would still be valid, and the director would be removed from office. The director would then have a claim against the other shareholders for breach of the Shareholders’ Agreement. The threat of a breach of contract claim effectively means that the minority shareholder is able to influence whether or not the resolution is passed.
- Amendments to shareholders’ agreements
require the unanimous approval of all parties to the agreement. This would consequently give a minority party a right of veto to any proposed changes.
rights of shareholders with different shareholdings under CA 2006:
- Any shareholder
- Receive notice of a GM (s 307)
- Appoint a proxy to attend a GM in their place (s 324)
- Vote at a GM (provided they hold voting shares) (s 284)
- Receive a dividend (if declared)
- Receive a copy of the company’s accounts (s 423)
- Inspect minutes and company registers (s 116)
- Ask the court to prevent a breach of directors’ duties
- Commence a derivative claim (s 260 - see later)
- Bring a petition for unfair prejudice (s 994 - see later)
- Bring a petition for just and equitable winding up (s 122 Insolvency Act 1986 - see later)
- 5% or more
- Require directors to call a General Meeting (s 303)
- Require the circulation of written statements regarding proposed resolutions to be considered at a GM (s 314)
- Circulate a written resolution (s 292)
- 10% or more
- Demand a poll vote (MA 44)
- Over 25%
- Block a special resolution (s 283) (note that a special resolution is passed by 75% or more of the votes)
- Over 50%
- Pass or block an ordinary resolution (s 282) (note that an ordinary resolution requires over 50% of the votes to pass, therefore a shareholder with exactly 50% of the shares can block an ordinary resolution but cannot pass the ordinary resolution alone)
- 75%
- Pass a special resolution (s 283) (note that a special resolution is passed by 75% or more of the votes)
- 90%
- General meeting can be held at short notice (would also need a majority in number of shareholders)
This is 95% for public companies
What is the special notice required for a removal resolution?
- Shareholders proposing a removal resolution must give notice of that proposed removal resolution to the company (ie to the board of directors) at least 28 clear days before the General Meeting (‘GM’) at which the removal resolution will be voted on by shareholders
the board receives notice of the proposed removal resolution, two courses of action are open to it:
Option 1
* The board may place the removal resolution on the agenda of a GM
Option 2
* The board may decide NOT to place the removal resolution on the agenda of a GM
What happens when Board places the removal resolution on the agenda of a GM?
- If the board does decide to place the removal resolution on the agenda of a general meeting, it should give the shareholders notice of that removal resolution at the same time and in the same manner as it gives notice of the general meeting (s 312(2) CA 2006). This means that the board will need to give shareholders at least 14 clear days’ notice of the removal resolution under ss 307(1) and 360(1) and (2) CA 2006.
- If that is not practical (eg because notice of the general meeting has already been sent out), notice of the removal resolution may be given either by advertisement in a newspaper or any other mode allowed by the company’s Articles at least 14 clear days before the GM(ss 312(3) and 360(1) and (2) CA 2006).
- Why does the board need to give shareholders notice of the removal resolution when it was the shareholders who sent the removal resolution to the board in the first place?
- Only some of the shareholders (the ‘unhappy shareholders’) will have sent the proposed removal resolution to the board. The company’s other shareholders may have no knowledge of the fact that the unhappy shareholders have proposed a removal resolution. Therefore, if the board decides to put the removal resolution on the agenda of a general meeting, it needs to give notice to all shareholders (including the unhappy shareholders) of the fact that a general meeting will be held and that, at that general meeting, all shareholders will have the opportunity to vote on a removal resolution.
What happens when the Board does NOT place the removal resolution on the agenda of a GM?
- Alternatively, the board may decide not to place the removal resolution on the agenda of a general meeting. Directors are not bound to place the removal resolution on the agenda for consideration at a forthcoming general meeting (Pedley v Inland Waterways Association Ltd). In practice, this creates a problem for shareholders as directors may choose simply to ignore the proposed removal resolution.
- If the removal resolution is not placed on the agenda, it will not be considered at the general meeting. In this case, the shareholders may need to force the directors to call a general meeting in accordance with s 303 CA 2006.
- Shareholders’ power to require calling of general meeting
- In this situation, the unhappy shareholders may have the ability to require the directors to call a GM and, if the directors refuse to do this, the unhappy shareholders may be able to call the GM themselves. Under s 303(1) CA 2006, shareholders together holding not less than 5% of the paid up voting share capital of the company can serve a request on the company ie the board. The request will require the board to call a GM (a “s 303 request”).
- A s 303 request must state the general nature of the business which the shareholders wish to be dealt with at the GM and may include the text of the resolution they want proposed at the GM (here, to consider a removal resolution pursuant to s 168 CA 2006).
Note that the power of shareholders to require the board to call a GM is a general power: it is not limited to circumstances in which they wish to consider a removal resolution.
- What are directors’ obligations on receipt of a s 303 request?
- Under s 304(1) CA 2006, when the directors receive a s 303 request, they must call the GM:
a) within 21 days from the date on which they become subject to the s 303 request to call the GM; and
b) to be held on a date not more than 28 days after the date of the notice convening (ie calling) the GM. - If the directors fail to call a GM under s 304(1) CA 2006, all of the shareholders who submitted the s 303 request or any of them representing more than one half of the voting rights of those who submitted that s 303 request, can call a GM themselves pursuant to s 305 CA 2006.
- If the shareholders call the GM themselves then that GM must be called on no fewer than 14 clear days’ notice (s 305(4) CA 2006) and held within 3 months of the date that the directors received the s 303 request (s 305(3) CA 2006). These timings are summarised in the diagram below. Note that under s 305(6) CA 2006, if the shareholders are forced to call the GM themselves, they can recover their reasonable expenses for doing so from the company.
- Effect of s 303 notice
- Unhappy shareholders give special notice to the Board AND serve notice under s 303
Board has 21 days to decide whether to call a GM - If the board decides to call a GM, it has to be held within 28 days from date of calling it
- If the board decides not to call GM: Shareholders can call GM on normal notice. GM must be held within 3 months of s 303 request
What can shareholders do to ensure their removal resolution is heard as soon as possible?
*** For the unhappy shareholders to ensure the resolution to remove a director is heard as soon as possible, they will submit a s 303 request requiring the directors to call a GM at the same time as sending their s 312 CA 2006 special notice to the board.
* By sending these two notices to the board at the same time, shareholders will comply with s 312 CA 2006 (which is a standalone requirement that needs to be satisfied) and also ensure that:
* the directors either call a GM with an agenda which includes the resolution to remove the director under s 303 CA 2006; or
* the shareholders can step in and call the GM under s 305 CA 2006 themselves.
**
- Timeline where the Board does co-operate with s 303 Notice
- DAY 1
Unhappy shareholders serve notice under s 303
NB – assuming they have already served special notice - DAY 22 (latest)
Board has 21 days to decide whether to call a GM - DAY 50 (latest)
If the board decides to call a GM, it has to be held within 28 days from date of calling it
- Timeline where the Board does NOT co-operate with s 303 Notice
- DAY 1
Unhappy shareholders serve notice under s 303
NB – assuming they have already served special notice - DAY 22 (latest)
Board has 21 days to decide whether to call a GM
Board loses control of the process on Day 23. - DAY 38
If the board decides not to call GM: from DAY 23 the unhappy shareholders can call GM on normal notice (14 clear days).
[GM must be held within 3 months of s 303 request]
- Director’s rights to protest removal?
If a company receives notice that one or more members intends to propose a removal resolution, the company must immediately send a copy of the notice to the director concerned (s 169(1) CA 2006). Note that even if the Board decides not to put the removal resolution on the agenda of a GM, it is obliged to send the special notice to the director concerned.
The director then has the right to make representations in writing provided those representations are of a reasonable length (s 169(3) CA 2006). These representations will, for example, set out the reasons why the director feels they should not be removed. These representations should, unless they are received too late for the company to do so, be circulated to the members of the company. If the representations are not circulated, they should be read out at the GM (s 169(4) CA 2006).
In any event, the director concerned has a right to be heard ie to speak in their defence at the GM, whether or not they are a shareholder (s 169(2) CA).
What rights does a director who is subject to a removal resolurtion have when they are also a shareholder?
. Bushell v Faith clauses
* Always check the articles to see if there is a Bushell v Faith clause.
A Bushell v Faith clause in the articles of association may give a director, who is also a shareholder, weighted voting rights at a GM at which a s 168 CA 2006 resolution is proposed. This is likely to mean that shareholders are unable to pass an ordinary resolution to remove the director concerned.
* Way of securing a director
* Can be put in with a special resolution
This type of clause is often found in the articles of association of smaller companies where the directors have played a key role in setting up the company and have an expectation that they will be able to continue to be involved in the running of the business. Any shareholders’ agreement should also be checked for similar provisions.
The articles should also be checked in order to determine whether there are any transfer provisions which may govern the transfer of the outgoing director’s shareholding in the company. If a director is to be removed, the company and the shareholders are unlikely to want them to retain their shareholding, so transfer provisions are usually found in a company’s articles of association and/or in any shareholders’ agreement. These transfer provisions would, for example, require the director to transfer their shares to the other shareholders if they are removed as a director.
- Shareholders’ Agreements - can sue for breach of contract
- Will the director be entitled to any compensation for loss of office?
- Any such payment by a company to a director of its holding company must also be approved by that company. However, no approval is required under s 217 CA 2006 from the shareholders of a wholly-owned subsidiary (s 217(4) CA 2006).
- Directors cannot avoid these provisions by the payment being made to a third party rather than directly to the director themselves - under s 215(3) CA 2006 payments made to a person connected to a director, or made to any person at their direction, or for the benefit of, a director or a connected person, will be treated as a payment to the director and will also require shareholder approval.
- A memorandum setting out particulars of the payment must be made available to shareholders for 15 days before the ordinary resolution is passed, ending with the date of the general meeting (s 217(3) CA 2006).
- The legislation also includes provisions requiring shareholder approval for:
* any payment for loss of office made by any person to a director in connection with the transfer of the whole or part of the undertaking or property of a company (for example, on a share or business sale of the company) (s 218 CA 2006); and
* any payment for loss of office made by any person to a director in connection with a transfer of shares in the company, or one of its subsidiaries, resulting from a takeover bid (s 219 CA 2006).
What are Derivative claims?
Any member has the statutory right to bring a derivative claim under s 260 CA 2006 on behalf of the company against directors (and third parties) who have breached their duties.
When may someone bring a derivative claim?
A derivative claim may be brought by a shareholder on behalf of the company in respect of a cause of action arising from an actual or proposed act or omission involving negligence, default, breach of duty or breach of trust by a director of the company.
- Who may bring a derivative claim?
- Derivative claims brought under s 260 CA 2006 must be brought by a member. However, pursuant to s 260(4) CA 2006 it is immaterial whether the cause of action arose before or after the person bringing the claim became a member of the company.
- A member may, therefore, bring a claim in respect of events that occurred before they became a member of the company. This underlines the fact that the cause of action is vested in the company, rather than the member.
- By contrast, a former member cannot bring a claim even in relation to events which occurred when they were a member.
Stages of a derivative claim?
- STAGE 1 - permission hearing
Court decides if there exists a prima facie case - Is there an arguable case on the face of it?
No prima facie case: - Dismiss claim: either absolute grounds (s 263(2)) or factors in s 263(3) - SH to consider other options…
A prima facie case exists: - Allows case to proceed to STAGE 2
- STAGE 2
Detailed consideration of criteria, including evidence from other members. Case then proceeds to trial. - Want more evidence
The court must have “particular regard” to any evidence it has before it as to the views of the members who have no “personal interest, direct or indirect, in the matter” – s 263(4) CA 2006
Unfair prejudice claim?
- Any shareholder can bring an unfair prejudice claim under s 994 CA 2006 on the grounds that the running of the company has unfairly prejudiced them.
Who can bring an unfair prejudice claim?
A claim under s 994 CA 2006 is a personal action brought by the shareholder against the company.
Examples of conduct that may be held to be unfairly prejudicial to the interests of members include:
* the granting of excessive remuneration to directors;
* directors’ dealing with associated persons; and
* non-payment of dividends.
Note that under s 994 CA 2006 the shareholder sues for themselves, whereas unders 260 CA 2006 (derivative actions) the shareholder sues on behalf of the company in respect of the company’s loss.
A member of a company may apply to the court by petition for an order for unfair prejudice….on the ground:
- (a) that the company’s affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of members generally or of some part of its members (including at least that shareholder), or
- (b) that an actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial.
- If the shareholder can show that the company’s affairs are being conducted in a manner unfairly prejudicial to their interests, or that some act or omission of the company has unfairly prejudiced them, in terms of the reasonable bystander (objective) test – (Re Guidezone Limited), the court will decide what remedy is appropriate in the circumstances.
Key principles of unfair prejudice?
The meaning of unfairly prejudicial conduct has been developed through case law and you should note the following principles:
* * Negligent or inept management of a company – this will not amount to unfairly prejudicial conduct unless that conduct amounts to serious and/or repeated mismanagement which puts at risk the value of the minority shareholder’s interest;
* * Disagreements as to company policy - such as a change in direction of the business, will also not afford grounds for a petition under s 994 CA 2006;
* * Bad faith – there is no need to show either bad faith or conscious intent for the conduct to be unfair;
* * Breaches of the articles of association – see Lord Hoffmann in O’Neill v Philips:“a member of a company will not ordinarily be entitled to complain of unfairness unless there has been some breach of the terms on which he agreed that the affairs of the company should be conducted… [However,] there will be cases in which equitable considerations make it unfair for those conducting the affairs to rely upon their strict legal powers”;
* * Claimant’s conduct – although the conduct of the claimant may be relevant in deciding whether the prejudice was unfair, there is no overriding requirement that the claimant come to court with “clean hands;
* * Excessive remuneration –the courts will take a wide view of the prejudice that may be suffered by a minority shareholder;
o E.g. they give lots of money to directors and leave little to shareholders
* * Legitimate expectation – in terms of certain small private companies (which are often referred to as quasi-partnerships – they are effectively partnerships), case law has established that shareholders may have a legitimate expectation that they be involved in the management of the company, and the prevention of such involvement may equate to unfairly prejudicial conduct.
* It is unfairly prejudicial to not pay dividens
- Unfair Prejudice - Remedies
- Section 996(2) CA 2005 sets out a list of particular types of order that may be made. These include orders regulating the future conduct of the company’s affairs and requiring the company to do or refrain from doing certain acts.
- The most made order is to provide for the purchase of the petitioner’s shares by the wrongdoer(s) (only rarely does this result in an order entitling the minority shareholder(s) to purchase the shares of the majority shareholder(s)).
- The value at which such shares are to be purchased is a fundamental issue and usually a matter which is argued.
- Unfair prejudice – s994 CA 2006 Commercial Points
- In practice, where one side is willing to buy out the shares held by the other and the dispute centres around the valuation of those shares, the court will encourage the parties to settle out of court by means of a binding third-party valuation of the shares. If the petitioner objects to such an out of court settlement, the court will usually require them to give reasons for their objection.
- Section 994 petitions are likely to be expensive, time-consuming and complicated to bring. Since the court has discretion to make such order as it thinks fit, such petitions also bring with them a great deal of uncertainty for the petitioner.
- Generally, a negotiated settlement will, therefore, be the preferred option.
- Just and equitable winding up Section 122 Insolvency Act 1986 - shareholder remedy?
- The final, and most drastic, remedy available to any shareholder is the right to bring a petition to the court for the company to be wound up (liquidated) on the grounds that it is just and equitable to do so.
It is commonly made at the same time as an unfair prejudice claim.
Shares (and the rights attaching to them) can broadly be categorised into six groups:
- ordinary shares;
- preference shares;
- participating preference shares;
- deferred shares;
- redeemable shares; and
- convertible shares.
‘share capital’?
money raised by the issue of shares
- When does a shareholder acquire full legal title to new shares that the company has issued to the shareholder?
- When their name is entered into the company’s register of members.
- What is capital?
- The general term ‘capital’ is used to refer to the funds available to run the business of a company.
what are shares?
- A share is often described as a ‘bundle of rights’.
- By investing in the share capital of any company, the investor becomes a part owner of the company and will often have voting rights in shareholder meetings. In the case of a private company, most investors make a long-term investment and will only usually get their investment back on a sale of their stake, a sale of the company itself, on a flotation, or when the company is wound up (provided sufficient funds are available).
- The incentives for investing would be the receipt of income (by way of dividend) and a capital gain (by way of the growth in the value of the company, and therefore the individual shares), although neither are guaranteed.
- No entitlement on shareholder to insist on a dividend but you if one is paid you have rights in relation to have much how the dividend you recieve
- Different classes of shares may carry different rights and entitlements. All rights and entitlements in relation to shares of all classes are set out in the Articles. It is imperative to check these.
- Nominal or par value
- Section 542(1) CA 2006 provides that the shares in a limited company having a share capital must have a fixed nominal value. Section 542(2) CA 2006 provides that any allotment of a share that does not have a fixed nominal value is void. The nominal or par value of a share is the minimum subscription price for that share.
- It represents a unit of ownership rather than the actual value of the share. Common nominal values for ordinary shares are 1p, 5p or £1.
- Section 580 CA 2006 provides that a share may not be allotted/issued by a company at a discount to its nominal value.
- Premium
excess over nominal value is known as the ‘premium’. The market value will often be much higher than the nominal value of the share.
issued share capital
- The amount of shares in issue at any time is known as issued share capital\
A company’s ISC is made up of:
* shares purchased by the first members of the company, known as the ‘subscriber shares’; and
* further shares issued after the company has been incorporated, to new or existing shareholders. New shares can be issued at any time provided that the correct procedures are followed.
- Allotted Shares
shares are only issued and form part of a company’s issued share capital once the shareholder has actually been registered as such in the company’s register of members, and their title has become complete. Section 112(2) CA 2006 confirms that full legal title to shares is only achieved once a person’s name is entered in the company’s register of members.
‘paid-up share capital’
The amount of nominal capital paid
- Called-up share capital
The amount outstanding can be demanded by the company at any time. Once demanded, the payment has been ‘called’. It is increasingly rare for shareholders not to pay the full nominal value of their shares on issue.
- Treasury shares
- These are shares that have been bought back by the company itself and are held by the company ‘in treasury’. Treasury shares are issued shares being held by the company in its own name, and the company can subsequently sell those shares out of treasury.
- Note that although such a sale of shares is a transfer, not an issue, of shares, s 561 CA 2006 pre-emption rights (see s 560(3) CA 2006) and s 573 CA 2006 disapplication of pre-emption rights will apply.
- The company can also choose to cancel treasury shares at any time or transfer them to an employee share scheme.
- The rights attached to a class of shares are determined in
the company’s Articles.
Different classes of shares?
- Ordinary shares
- Redeemable shares
- Preference shares
- Non-voting shares
- Employees’ shares
- Cumulative shares
- Convertible shares
- Deferred shares
- Ordinary shares
- Ordinary shares the most common form of share and are the default position: if a company’s shares are issued without differentiation, they will be ordinary shares.
- Ordinary shares carry a right to vote in general meetings, a right to a dividend if one is declared and a right to a portion of any surplus assets of the company on a winding-up. A company may have more than one class of ordinary share, with differing rights, and perhaps differing nominal values.
- Ordinary shares are defined in s 560(1) CA 2006 as “shares other than shares that as respects dividends and capital carry a right to participate only up to a specified amount in a distribution”. This negative definition illustrates the point that ordinary shares are the default position and are shares that have an unlimited right to participate in dividends and in surplus capital when a company is wound up. These shareholders receive a fraction of the dividend and capital in accordance with their shareholding.
- Although ordinary shareholders receive dividends after preference shareholders, one advantage of ordinary shares is that the entitlement of ordinary shareholders to a dividend is unrestricted.
- Preference shares
- A preference share may give the holder a ‘preference’ as to payment of dividend or to return of capital on a winding up of the company, or both. This means the payment will rank as higher priority than any equivalent payment to ordinary shareholders.
- If there is a preference as to dividend, this will be paid before the other shareholders receive anything.
- Preference shares are normally non-voting although it is important to check the rights set out in the Articles since it is possible to issue preference shares with voting rights.
- Cumulative preference shares
- It is presumed that a preference share is ‘cumulative’ unless otherwise stated. This means that if a dividend is not declared for a particular year, the right to the preferred amount on the share is carried forward and will be paid, together with other dividends due, when there are available profits. If this accumulation is not desired, then the share must be expressed to be non-cumulative.
- Participating preference shares
Participating’ preference shareholders may participate, together with the holders of ordinary shares, (1) in surplus profits available for distribution after they have received their own fixed preferred dividend; and/or (2) in surplus assets of the company on a winding up. As with preference shares, participating preference shares are almost always issued with a fixed dividend and can be cumulative if stated as such in the articles of association. Participating preference shares with these characteristics are generally called ‘fixed rate participating cumulative preference shares’.
- Deferred shares
- These carry no voting rights and no ordinary dividend but are sometimes entitled to a share of surplus profits after other dividends have been paid (presuming there is a surplus); more usually ‘deferred’ shares carry no rights at all and are used in specific circumstances where ‘worthless’ shares are required.
- Redeemable shares
- Redeemable shares are shares which are issued with the intention that the company will, or may wish to, at some time in the future, buy them back and cancel them.
- Convertible shares
- Such shares will usually carry an option to ‘convert’ into a different class of share according to stipulated criteria.
- Variation of class rights
- If an attempt is made to alter the Articles of a company such that existing class rights are varied, the resolution in question will not be effective unless varied in accordance with provisions in the company’s Articles for the variation of those rights or, where Articles don’t contain such provisions, by consent in writing of holders of at least 75% of the issued shares of that class or by means of a special resolution passed at a separate general meeting of holders of that class (s 630 CA 2006).
- Shareholders holding 15% of the relevant shares may (provided they did not vote in favour of the variation) apply to court within 21 days of the resolution to have a variation cancelled (s 633(2) CA 2006). Following such application, the variation will not take effect unless and until it is confirmed by the court. The court will not confirm the variation if it feels that the variation unfairly prejudices the shareholders of the class in question.
Shareholders may receive a return on their investment in two ways:
- By receipt of dividends (income receipts), and
- An increase in the capital value of the shares.
When are dividends payable?
- Dividends are only payable by a company if it has sufficient distributable profits (s 830(1) CA 2006).
- ‘Distributable profits’ means
the company’s accumulated realised profits less its accumulated realised losses
- There are two types of dividend:
- 1.Final dividends – Final dividends are recommended by the directors and declared by the company by an ordinary resolution of the shareholders following the financial year end.
- 2.Interim dividends - The articles of a company normally give the directors the power to decide to pay interim dividends if the company has sufficient distributable profits (MA 30 allows this). Interim dividends can be paid without the need for an ordinary resolution of the shareholders. Interim dividends are often paid where the company has realised an investment.
- When issuing shares, a company needs to follow a 5-step procedure.
- Step 1 – check whether there is a cap on the amount of shares that can be issued by the company. Cap
- Step 2 – check whether company directors need authority to allot the shares. Authority
- Step 3 – are the shares equity securities? Disapply
- You will be able to work this out by looking at the dividend and capital payout on the shares. If both are capped, the share is not an equity security and therefore pre-emption rights are not relevant. If the shares are equity securities, consider whether the company needs to disapply pre-emption rights.
- Step 4 – is the company creating a new class of share? If so, the Articles will need to be amended to incorporate the new class rights. Class
- Step 5 – Board will resolve to allot the shares. This step will always be required, regardless of the other steps. Allot
* CADCA
- What is the difference between allotting and transferring shares?
- An allotment of shares is a contract between the company and a new/existing shareholder under which the company agrees to issue new shares in return for the purchaser paying the subscription price.
- A transfer is a contract to sell existing shares in the company between an existing shareholder and the purchaser. The company is not a party to the contract on a transfer of shares (with the exception of a sale out of treasury of treasury shares).
restriction on private companies offering shares to the public?
- Under s 755 CA 2006 a private company limited by shares is prohibited from offering its shares to the public. As a result, private companies are essentially restricted to offering their shares to targeted investors only and not to the public indiscriminately.
- The expression ‘offer to the public’ (as defined in s 756 CA 2006) covers offers to ‘any section of the public’ but excludes offers which are intended only for the person receiving them and offers which are a ‘private concern’ of the persons making and receiving them. This latter exclusion covers offers made to existing shareholders, employees of the company and certain family members of those persons, and offers of shares to be held under an employee’s share scheme. These excluded offers will not fall foul of the s 755 restriction.
- This restriction must be considered carefully when a private company is proposing to allot shares.
requirement for a prospectus when a company offers shares?
- Every time that a company offers shares you will need to consider whether it is required to publish a prospectus to would-be investors. A prospectus is an explanatory circular giving investors details about the company and about the investment itself on which to base their investment decision. A prospectus should contain all the information necessary to enable investors to make an informed assessment of the financial status of the company and the rights attaching to the shares (s 87A(2) FSMA), and preparing a prospectus is therefore an expensive and time-consuming process.
* In an offer of shares by a private company, it will usually be the case that a prospectus will not be required. However, you will need to consider the rules each time.
- Transmission of shares
an automatic process in the event of death or bankruptcy of a shareholder as follows:
- If a shareholder dies, their shares will automatically pass to their personal representatives.
- If a shareholder is made bankrupt, their shares automatically vest in their trustee in bankruptcy.
How can shares be transferred?
- Shares may be transferred from an existing shareholder to a new shareholder by way of sale or gift.
- Shareholders are free to transfer their shares subject to any restrictions in the Articles (s 544(1) CA 2006).
- It is therefore important to check the Articles for any restrictions on transfer.
- The two most common forms of restriction are:
- Directors’ power to refuse to register
- Article 26(5) MA states: “The directors may refuse to register the transfer of a share, and if they do so, the instrument of transfer must be returned to the transferee with the notice of refusal unless they suspect that the proposed transfer may be fraudulent”.
- Under s 771 CA 2006, a company must give reasons if it refuses to register a transfer.
- Pre-emption clauses (rights of first refusal)
- Here we are looking at pre-emption rights on a transfer of shares (which should not be confused with pre-emption rights on allotment under s 561 CA 2006). Such rights are usually set out in the articles. CA 2006 and MA do not contain any pre-emption rights on transfer, so they must be specially inserted into the Articles of any company wishing to establish them. Pre-emption rights on transfer will often require that a shareholder wishing to sell shares must offer them to the other existing shareholders before being able to offer them to an outsider.
- Method of transfer
- Instrument of transfer
- A transfer of shares is made by way of a stock transfer form, which has to be signed by the transferor and submitted, with the share certificate, to the new shareholder (s770 CA 2006).
- Legal and equitable ownership
- Beneficial title to the shares passes on the execution of the stock transfer form. Legal title passes on the registration of the member as the owner of those shares in the register of members by the company (s 112 CA 2006). The company will also send the shareholder a new share certificate in this name within two months (s 776 CA 2006).
- Stamp duty
- The stock transfer form must be stamped before the new owner can be registered as the holder of those shares. Stamp duty is currently payable at 0.5% of the consideration rounded up to the nearest £5. No stamp duty is payable where the consideration is £1000 or less; but where the consideration is more than £1000, a minimum fee of £5 is payable.
What should be considered in STEP 1: Any cap on the number of shares that may be issued?
- Was the company created 2009/later or before?
- Old companies had to have a cap – authorised share capital
- Newer companies do not have a cap unless the articles have a cap
- If newer then do not need to do anything
- Before issuing new shares, you must check the company’s Articles for any cap or limit on the number of shares that may be issued. If this is to be exceeded, the cap must be removed, or the limit increased.
- How can the cap on the number of shares be removed?
ordinary resolution - * For companies incorporated under CA 1985
Special resolution for * Companies incorporated under CA 200
What needs to be considered in STEP 2: Do the company’s directors need authority to allot?
- Directors need this authority
- Automatic authority if you are a private company with one class of shares (unless prohibited in Articles)
- Otherwise have to get approval for this authority via ordinary resolution
- Directors are responsible for the actual allotment of shares to a shareholder and they must resolve by board resolution to make an allotment. However, they may need to have the prior authority of the shareholders to be able to do this.
- What does a ‘pre-emption right’ mean?
- It means the ‘right of first refusal’. New shares should be offered pro rata to existing shareholders before any new investor.
- This is because, when a company allots shares to new shareholders, there is an effect on the proportionate ownership of the company held by the existing shareholders. Their ownership is diluted, and therefore their entitlement to dividends and voting power is also diluted.
- Due to the potential dilution, s 561 CA 2006 contains pre-emption rights, which give protection to existing shareholders.
- Where pre-emption rights apply, the most usual approach is for the company to request the existing shareholders to disapply these pre-emption rights by special resolution.
To what type of shares are pre-emption rights relevant?
- To equity securities
- The exception to this is a share that has a fixed/capped dividend and fixed right to capital
Ways to disapply pre-emption rights?
- Section 569 CA 2006 provides for disapplication of pre-emption rights for private companies with only one class of share by special resolution. Such a disapplication presupposes the directors’ authority to allot the shares derives froms 550 CA 2006 and therefore can apply for so long as the company has in issue, and allots, shares of only one class.
- Specific disapplication of pre-emption rights: It is possible, although uncommon, for a company to disapply pre-emption rights in relation to a specific allotment of shares (eg in relation to shares being issued to a particular person or as consideration for a specific purpose) by passing a special resolution under s 571 CA 2006 (rather than s 570 CA 2006). The procedure for specific disapplication is more cumbersome than that for a general disapplication. Directors will need to provide the company’s shareholders with a written statement explaining (i) the reasons for the specific disapplication, and (ii) the amount to be paid to the company pursuant to the allotment along with justification for the amount, under s 571(6) CA 2006. A specific disapplication under s 571 attaches to a particular, pre-existing s 551 authority.
- Private companies – exclusion of pre-emption rights in Articles (s 567 CA 2006): Private companies can exclude statutory pre-emption rights permanently, by way of a provision in their Articles. However, companies rarely exclude pre-emption rights on a permanent basis because this would give existing shareholders no protection from dilution (there is no such provision in MA). In practice, only subsidiary companies commonly exclude statutory pre-emption provisions in their Articles.
- Private companies with one class of share – disapplication in Articles (s 569 CA 2006): provides for disapplication of pre-emption rights for private companies with only one class of share under the Articles. This is also unusual in practice because it leaves existing shareholdings with no protection from dilution.
What is considered in STEP 4: Must new class rights be created for the shares?
- When issuing new shares, a company may also wish to create a new class of shares, such as preference shares.
- Will need a special resolution to amend Articles to cater for these new rights
What is considered in * STEP 5: Directors must pass a board resolution to allot the shares?
- The directors will resolve by board resolution to allot new shares on behalf of the company. Any requirements for shareholder resolutions must be dealt with in a general meeting before the board meeting is held at which the new shares are allotted. A general meeting will not be needed in advance of the board meeting if:
- has no limit in its constitution on the number of shares which can be issued by the company; and
- does not require directors’ authorisation because the company is a private company with only one class of shares and there is no restriction in the company’s Articles – s 550 CA 2006) or has already given the directors authority to allot shares; and
- is issuing the shares to existing shareholders in proportion to their existing shareholdings and follows the procedure in s 562 CA 2006 or has already disapplied s 561 CA 2006 or is a private company and has taken advantage of s 567 CA 2006; and
- has the relevant class rights in its Articles.
- Administrative requirements on allotment
- Copies of resolutions to be sent to Companies House within 15 days (s 29, s 30(1), s 26(1))
- Includes ordinary resolution
- *CA 1985 companies: need to file any ordinary resolution removing the cap on authorised share capital and any ordinary resolution allowing the company to use s 550 CA 2006 if passed
- *Any s 551 ordinary resolution granting the directors authority to allot if passed
- *All special resolutions regarding the disapplication of pre-emption rights and/or amending articles if passed
- *Amended Articles must also be sent to Companies House if a new class of shares has been created and the Articles amended
- Return of allotment (Form SH01) and statement of capital within one month
- If the persons with significant control have changed as a result of allotment, the relevant forms (PSC01, PSC02, PSC04, PSC07)
- Updating company registers
- Update register of members within two months of the allotment.
- Update PSC register if necessary
- Share certificates
- Share certificates must be prepared and sent to new shareholders within two months of the allotment.
prohibitions on a company providing financial assistance for the purchase of its own shares apply only to?
public companies (and private companies offering assistance for the purchase of shares in a public holding company) - ss 678 - 679.
- Other plcs involved do not matter
* If target is public it cannot give financial assistance
* If target is private but has a public subsidiary the subsidiary cant give financial assistance – must be the target’s subsidiary company
o Otherwise companies can give financial assistance!!!!!!!!!!
- To which transactions are the rules on financial assistance applicable?
- Acquisition or sale of shares
- Financial assistance is relevant when there is an acquisition (or proposed acquisition) of shares.
- A share sale involves an acquisition by way of a share transfer. When a share sale is contemplated, therefore, the funding arrangements should be examined carefully to see if they fall foul of the financial assistance prohibitions.
- Issue of shares
- Financial assistance is also relevant on an issue of shares by a company to an investor, since that equally amounts to an acquisition of shares by the investor.
- What does giving financial assistance mean?
- Financial assistance given by way of gift (s 677(1)(a) CA 2006).
- Financial assistance given by way of guarantee, security or indemnity, release or waiver (s 677(1)(b) CA 2006).
- Financial assistance given by way of loan or similar agreement (s 677(1)(c) CA 2006).
- Any other financial assistance given by a company where the net assets of the company are reduced to a material extent by the giving of the financial assistance or the company has no net assets (s 677(1)(d) CA 2006).
- Note that the last of these provides a “catch-all” for any type of transaction not expressly listed in the preceding sub-sections, if it materially reduces a company’s net assets or if the company has no net assets.
- Note also that, because of the wording of s 677 CA 2006 (“financial assistance means… financial assistance given by way of…”), it is not enough that a transaction is of the type listed above – it must also actually constitute financial assistance. In other words:
assistance must be being given; and
the assistance must be financial in nature. - It has been held that these terms should be given their ordinary meaning, bearing in mind the commercial realities of the transaction eg actions which merely “smooth the path to the acquisition“ (such as the payment, by a subsidiary of the target, of due diligence fees incurred by the buyer) have been held to amount to financial assistance.
- Financial assistance is covered by the rules whether it is direct (eg a loan given to the buyer of shares) or indirect (eg a guarantee given to a bank in relation to a loan made by the bank to a buyer of shares).
- Financial assistance is also covered by the rules whether it is given before or at the same time as the acquisition (s 678(1) and s 679(1) CA 2006), or afterthe acquisition (s 678(3) and s 679(3) CA 2006).
- Finally, to fall within the statutory provisions, the financial assistance must be being given for the purpose of the acquisition (or, if given after the acquisition, for the purpose of reducing or discharging a liability incurred for the purpose of the acquisition), ie the company giving the assistance must have intended to facilitate the acquisition.
- What are the consequences of carrying out prohibited financial assistance?
- Under s 680 CA 2006, breach of s 678 or s 679 CA 2006is an offence which can lead to penalties for:
- the company (a fine) and
- the officers of the company (fine/imprisonment).
- In addition to the criminal penalties, under case law the transaction amounting to prohibited financial assistance (eg the loan made the buyer) would be void and the wider transaction (eg the share acquisition itself) may be void as well.
- Doctrine of maintenance of capital?
- It is a fundamental and long-established concept of company law that the share capital of a company is seen as a permanent fund available to its creditors. Companies are not permitted to return capital to shareholders other than in limited circumstances.
- However, companies may buyback their own shares (or redeem redeemable shares) provided they meet the conditions in CA 2006.
How may a buyback of shares be funded?
- A buyback of shares may be funded out of distributable profits, the proceeds of a fresh issue of shares or (for private companies only and only to the extent that there are no profits / proceeds of a fresh issue available), out of capital.
- Consequences of the principle of maintenance of share capital
- The principle of maintenance of share capital has a number of important consequences, in particular:
- Dividends may only be paid out of distributable profits, not capital (s 830(1)), and
- Companies generally must not purchase their own shares.
Exceptions to the doctrine of maintenance?
- A company may buyback its own shares (or redeem redeemable shares) provided it follows the procedures set out in CA 2006, and
- A company may purchase its own shares where a court order is made for this following a successful shareholder petition for unfair prejudice.
- There are two types of situation when a company can effectively buy its own shares:
- redemption of redeemable shares; and
- purchase of own shares (‘buyback’).
Why may a company buyback its shares?
in a private company) a shareholder may want to leave and cannot find a buyer for their shares. Shareholders in private companies are prohibited from offering their shares to the public.
When does Buyback of shares take place?
- A buyback of shares takes place when a company purchases its own shares from an existing shareholder.
- A company may decide to purchase shares from a shareholder when there is no other buyer available.
- Generally, the kind of companies that you are looking at on this module will be making ‘off-market’ purchases of own shares ie the purchase of own shares will take place otherwise than on a ‘recognised investment exchange’. In this case, the company will need a contract setting out the terms of the purchase and this contract will need to be approved by the shareholders by an ordinary resolution.
- Where a company uses capital to fund the buyback there is a lot more regulation and procedure.
- There are three ways in which a company may fund a buyback of its own shares. The company may use:
- Distributable profits;
- Proceeds of a fresh issue of shares made for the purpose of financing the buyback; or
- Capital.
How is the use of capital to fund a buyback is strictly regulated?
- The option to use capital is only available to private companies. A public company can never use capital to purchase its own shares;
- Any redemption or purchase out of capital must comply with the restrictions in ss 709 - 723 CA 2006 inclusive; and
- Companies must first use any money available either in the form of distributable profits or the proceeds of a fresh issue of shares to fund the purchase before using capital.
- A company may purchase its shares out of distributable profits or the proceeds of a fresh issue of shares for the purpose of the purchase provided:
- The purchase of own shares is not restricted or prohibited in the company’s Articles (s 690(1)(b));The shares being purchased by the company are fully paid up (s 691(1)); and
- Following the purchase, the company must continue to have issued shares other than redeemable and treasury shares.
Procedure for company to purchase its shares out of distributable profits?
- a contract to purchase own shares is required (s 694(1)); and the terms of the contract need to be approved by ordinary resolution (s 694(2)).
- The contract must be available for inspection at the company’s registered office for a period of 15 days before the GM and also at the GM. If a written resolution is used, a copy of the contract must be sent together with the copy of any written resolution (s 696(2)).
- Procedure for the buyback of shares out of profits / proceeds of a fresh issue
- Initial steps
- Check there is no limit in Articles on s 690 power to buyback shares
- Prepare accounts to check there are sufficient distributable profits
- Confirm shares are fully paid
- Board Meeting
- BR to approve the draft contract
- BR to call a GM and approve form of notice / propose a WR
- Contract to be made available to shareholders:
- If GM: contract must be available for inspection at the company’s registered office for at least 15 days prior to and at GM
- If WR: circulate contract with WR
- GM / WR
- Shareholders pass OR to approve contract.
- Holders of shares being bought are not eligible to vote.
- Board Meeting
- BR to enter into the contract
- BR to appoint a director(s) to sign the contract
- Post meeting matters
- File return, notice of cancellation & statement of capital within 28 days
- Keep copy of contract for 10 years
- Cancel shares, update register of members (and PSC register if applicable)
Procedure for Buyback of shares out of capital?
The following conditions apply in addition to those set out above in relation to the buyback of shares out of profits or the proceeds of a fresh issue:
* The purchase of own shares out of capital is not restricted or prohibited in the company’s Articles;
* Check that the accounts were prepared no more than three months before the directors’ statement;
* Check if the company has any distributable profits available. If so, those profits (or funds from a fresh issue of shares for the purpose) must be used to fund the buyback before capital can be used (s 710);
* A directors’ statement of solvency must be prepared together with an auditors’ report (s 714);
* A special resolution to approve payment out of capital must be passed within a week after the directors sign the written statement of solvency (s 716).
- Buyback out of capital - directors’ statement of solvency and auditors’ report
- The directors’ statement of solvency must be made no earlier than one week before the GM. The statement confirms that the company is solvent and able to pay its debts as they fall due and that it will remain solvent for a period of 12 months after the buyback (s 714).
- The directors need to be careful when making this statement, since if the company does become insolvent and is wound up within one year, they may be required to contribute to the assets of the company and may face criminal sanctions if they had no reasonable grounds for making the statement of solvency.
- An auditors’ report must be annexed to the written statement of solvency confirming that the auditors are not aware of anything to indicate that the directors’ opinion is not reasonable (s 714).
- A copy of the directors’ statement and auditors’ report must be made available to members (sent with the written resolution or available for inspection at the GM).
- Buyback out of capital – notification requirements
- Within seven days of the passing of the special resolution approving the payment out of capital, under s 719 CA 2006 the company must give notice to its creditors by:
- Publishing a notice in the Gazette. The notice must state:
- that the company has approved a payment out of capital for the purpose of purchasing its own shares;
- where the directors’ statement and auditors’ report are available for inspection; and
- that any creditor of the company may, at any time within the five weeks immediately following the date of the resolution, apply to the court under s 721 CA 2006 for an order preventing the payment.
- Publishing a notice in the same form as the Gazette notice in an appropriate national newspaper, or give notice in writing to each of its creditors, and
- Filing copies of the directors’ statement and auditors’ report at Companies House. This is so that any interested creditor may inspect these.
- Buyback out of capital - timing
- The share purchase can take place no earlier than five weeks, and no later than seven weeks, after the date of the special resolution (s 723 CA 2006).
- Only have a two week window to do the transaction
- 5 week period so creditors can object
- This period cannot be reduced even if the special resolution is passed unanimously – the five week delay is designed to enable shareholders and/or creditors of the company to object to the payment out of capital by lodging an application at court for cancellation of the resolution (s 721 CA 2006).
- The seven week longstop period is intended to ensure that the view formed by the directors in their statutory declaration as to the solvency of the company is still likely to be accurate at the time the share purchase is made.
- Within 28 days of the date on which the shares that are bought back are delivered to the company, the company must send a return to Companies House under s 707(1) CA 2006 and a notice of cancellation under s 708(1) CA 2006, together with a statement of capital (s 708(2) CA 2006).
- Procedure for the buyback of shares out of capital
- Initial steps
- Check there is no limit in Articles on s 690 power to buyback shares or s 709 power to use capital to fund the buyback
- No earlier than three months before the directors prepare the statement of solvency, prepare accounts to ascertain available profits
- Confirm shares are fully paid
- Board Meeting
- BR to approve the directors’ statement of solvency (‘DSS’) and the auditors’ report (‘AR’)
- BR to approve the draft contract
- BR to call a GM and approve form of notice / propose a WR
- Contract to be made available to shareholders:
- If GM: contract must be available for inspection at company’s registered office for at least 15 days prior to and at GM
- If WR: circulate contract with WR
- DSS and AR must be signed no earlier than one week before the GM or the passing of the WR
- WR
- Circulate WR with contract, DSS and AR.
- SR to approve payment out of capital and OR to approve contract.
- Holders of shares being bought back are not eligible to vote.
- ALTERNATIVELY GM
- Shareholders pass OR to approve contract.
- Shareholders pass SR to approve payment out of capital.
- Holders of shares being bought are not eligible to vote.
- Contract, DSS and AR must be available at the meeting.
- Following GM / WR
- Within 7 days: place notices in Gazette and national newspaper and file DSS and AR at Companies House.
- Within 15 days: file SR at Companies House.
- For five weeks after date of SR: creditors and shareholders have right to object. Copies of DSS and AR must be available for inspection at company’s registered office.
- Board Meeting
- BR to enter into the contract.
- BR to appoint a director(s) to sign the contract.
- Payment out of capital must take place between 5-7 weeks after SR passed.
- Post meeting matters
- File return, notice of cancellation & statement of capital within 28 days.
- Keep copy of contract for 10 years.
- Cancel shares, update register of members (and PSC register if applicable).
- Redemption of redeemable shares?
- Redeemable shares effectively give the holder temporary membership in the company. They are issued to be redeemed on the occurrence of certain circumstances (for example by providing for redemption on a fixed date and at a fixed price) or may be redeemed at the option of the issuing company or the shareholder.
- All details of the redemption, including date of redemption and the price to be paid at that date, will either be in the Articles or determined by the directors.
- As a result, a contract is not required to redeem shares, irrespective of the source of funding used. This is because the terms of the redemption have already been set out in the company’s Articles (or determined by the directors) prior to the shares being allotted.
- Where a company uses capital to fund the redemption there is a lot more regulation and procedure. The procedure is very similar to the buyback of shares out of capital.
What powers can directors use to run the compnay?
The directors’ power to run the company is contained in MA 3. Directors exercise their powers
by passing board resolutions at board meetings. Alternatively, under MA 7 and MA 8, they
can exercise their powers unanimously without a meeting, as long as they indicate to each
other that they share a common view on the matter. This could be a resolution in writing, or
could be as informal as a text message from each director indicating their agreement to a
resolution or course of action.
Can directors delegate their powers?
Under MA 5, the directors may delegate any of their powers as they think fit.
Chairperson?
The directors may appoint a director to chair board meetings (MA12(1)), and can do so
by passing a board resolution.
The chair of the board will
run the company’s board meetings. The only additional power the chair has by virtue of their
appointment as chair is a casting vote at board meetings (MA13). This means that if a vote is
a tie, the chair can use their casting vote to ensure that the resolution is passed by a simple
majority. If the chair does not want the resolution to be passed, they will not need to use their
casting vote, because a tie means that there is no majority in favour of the resolution and it
will not be passed.
If the board of directors does have a chair, this person will also chair general meetings, if they
are present and willing to do so (MA39(1)).
The chair of a publicly traded company has a more important role than the chair of a private
company. In a public company, unlike in a private company, the chair of the board acts as a
figurehead in dealings with shareholders and anyone outside the company.
Sole directors?
The Model Articles provide that the quorum for directors’ meetings is two (MA11). In
companies with only one director, the director can still validly take company decisions
because MA7(2) allows them to make decisions without calling a board meeting.
Actual authority - directors?
Actual authority arises where a director has consent from the other directors to act in a
certain way, for example to spend money. It can be express actual authority or implied actual
authority to enter into the contract. The authority may be set out in the director’s service
contract, or it may have been given following a discussion between the board of directors.
This is express actual authority. Implied actual authority arises where the board has not
expressly permitted the director to act in a certain way, but the director has acted that way
in the past and the board has not tried to stop the director or told them that they are not
authorised to act in that way.
Apparent authority - directors?
Apparent authority is where the director acts without the company’s prior consent, whether
express or implied, but still binds the company to the contract. Effectively the company
is estopped from denying the director’s authority. Apparent authority is based on a
representation, by the company to the third party, by words or conduct, that the director is
acting with the company’s authority. It is important to note that it is not the director’s actions
which are significant for the purposes of ascertaining whether apparent authority exists; it
is the company’s actions or omissions which must be considered. The general theme of the
recent case law on apparent authority centres around a director or other employee of the
company having apparent authority in the absence of information from the company to correct
this impression.
What happens if a director does not have apparent or actual authority?
If a director does not have actual or apparent authority, the director is personally liable to the
third party and the company is not a party to the contract or liable to the third party.
What notifications should companies file at Companies House.
- Companies must keep a register of directors, containing required particulars, under s
162(1) and (2). The particulars are set out in ss 163– 164 and include the director’s date
of birth and address (for individuals) and the company’s registered office. The register
of directors must be available for inspection without charge by shareholders, or by other
individuals following payment of a fee, at the company’s registered office (s 1136). It is a
criminal offence not to keep the register of directors or to breach the requirement to keep
the register open to inspection (s 162). Note that the company can elect not to keep a
register of directors at its registered office, and instead keep it on the central register at
Companies House (s 167A and B). - Companies must keep a register of directors’ residential addresses, for individual
directors only (s 165(1)). The register of residential addresses is not open to inspection.
However, as with the register of directors, the register of residential addresses can be
kept on the central register at Companies House instead (s 167A). - Companies House forms CH01 and CH02 are used to notify a change in particulars for
natural persons and corporate directors. - Forms AP01 (for human directors) and AP02 (for corporate directors) are used to notify
Companies House of the appointment of a director, and they must be filed within 14 days
of the appointment. (s 167). Forms TM01 (for human directors) and TM02 (for corporate
directors) are used to notify Companies House of the resignation or removal from office of
a director. These must be filed at Companies House within 14 days of the resignation or
removal from office (s 167).
Notice of board meetings?
When a director calls a board meeting, they must give notice to the other directors.
Notice must be reasonable (Re Homer District Consolidated Gold Mines, ex parte Smith (1888)
39 Ch D 546). What is reasonable will depend on the facts
There is no need for the notice to be in writing, but the notice
must include the time, date and place of the meeting (MA 9(3)). If it is not intended that the
directors should meet in the same place, the notice must state the method of communication –
for example, Skype or an instant messaging service could be acceptable, as long as the
directors can each communicate to the others any information or opinions they have on any
particular item of the business of the meeting (MA 10(1)(b)).
Quorum at board meetings?
A quorum of two directors must be present at all times during a board meeting.
The quorum is the minimum number of directors who must be present in order for the meeting
to be valid.
Voting at board meetings?
Board resolutions are passed by a simple majority, which means that over half of those
present must vote in favour in order for the board resolution to be passed.
Voting is carried out by a show of hands and each director has one vote. If the board has
appointed one of its directors to act as chair of the board, that director will have a casting
vote (ie one extra vote) in the event of a tie. The chair will only need to use this casting vote if
they are in favour of the resolution, because if there is a tie, the resolution will not be passed.
Two types of shareholder resolutions?
There are two types of shareholders’
resolution: ordinary resolutions and special resolutions.
How many votes must be made for an ordinary resolution to be passed?
For an ordinary resolution to be passed, over half of the votes cast at a shareholders’
general meeting must be in favour of the resolution.
UNLESS IT IS WRITTEN
How many votes must be made for an special resolution to be passed?
For a special resolution to be passed, 75% or more of votes cast at a shareholders’ general
meeting must be in favour of the resolution
There are two ways of passing shareholders’ resolutions:
general meeting or by written
resolution
General meetings?
Shareholders’ meetings (other than annual general meetings, or AGMs) are called general
meetings. General meetings are called by the board of directors by passing a board
resolution (s 302 CA 2006). The board will call a general meeting when they want the
shareholders to pass a shareholders’ resolution, or sometimes when the shareholders have
requested that the board call a meeting in order that the shareholders can pass one or more
resolutions (see 2.5.2). Public companies must hold a general meeting every year but there is
no such requirement for private companies (s 336 CA 2006).
Companies formed under the CA 2006 will hold general meetings only, and not AGMs, unless
they decide to include a provision in their articles which requires or allows for an AGM. In this
book, the term general meeting refers to both general meetings and AGMs.
In order for a general meeting to be valid, the notice requirements under the CA 2006 must
have been complied with (s 301 CA 2006), and the quorum must be met.
Contents of the notice of general meeting?
The CA 2006 sets out various rules regarding the notice of a general meeting. Firstly, the
directors must give notice to every shareholder and every director (s 310), and to the auditor
if there is one (s 502). It must be given in hard copy, in electronic form, or by means of a
website, or a combination of these means (s 308). The notice must set out, pursuant to s 311(1)
and (2):
*
the time, date and place of the meeting (s 311(1));
*
the general nature of the business to be dealt with at the meeting (s 311(2));
*
if a special resolution is proposed, the exact wording of the special resolution (s 283(6)
(a)); and
*
each shareholder’s right to appoint a proxy to attend on their behalf (s 325). A proxy is a
replacement who will vote in accordance with the absent shareholder’s wishes.
Notice period for general meeting?
The minimum notice required for a general meeting is 14 clear days.
What are clear days?
What ‘clear’ means is that the day that notice is deemed received by the shareholders and
the day of the general meeting itself are not counted for the purposes of the notice. Only
the days between these two dates are counted in calculating the notice period. This means
that there will be 14 days which are ‘clear’ of anything happening between the day notice
is deemed received and the day of the meeting itself.
There are two key shareholders’ resolutions where the votes of a shareholder
with a personal interest in the matter are effectively not counted. What are these resolutions?
*
a resolution to buy back some or all of a shareholder’s shares (see 4.6), because the
shareholder in question could be voting in their own interests, not the company’s, when
voting; and
*
an ordinary resolution to ratify a director’s breach of duty under s 239 CA 2006, where the
director in question is also a shareholder (see 3.19), because they would almost certainly
vote in favour of ratifying their breach of duty as a director.
Poll votes?
A poll vote is where the shareholders vote in a general meeting on the basis of one vote
for each share that they own, instead of the usual one vote per person.
Under MA 44(2), a poll vote may 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.
(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.
When can a poll vote be demanded for?
The poll vote can be demanded before a general meeting, or during the meeting, either
before voting takes place, or after the shareholders have already voted on a show of hands.
If a poll vote is called after the shareholders have already voted on a show of hands, the
outcome of the poll vote, if different from the vote on a show of hands, will override the vote
on a show of hands.
For a general meeting to be validly held on short notice:
*
a majority in number of the company’s shareholders;
*
who between them hold 90% or more of the company’s voting shares
must consent.
This percentage is increased to 95% for public companies.
Once the requisite percentage of shareholders has consented, the general meeting can be
held straight away, although it may be held at a later date, for example, seven days later
instead.
Written resolutions?
This is an alternative to a general meeting. Instead
of issuing a notice of general meeting, the board will instead hand out, post or email a
written resolution or place the resolution on a website. This document will set out the text of
the ordinary and/ or special resolution(s) which the board is proposing and the shareholder
will have to sign and return the written resolution if they would like to vote in favour of it. If the
written resolution is sent out by post or email, each shareholder will receive their own copy to
sign and return.
Written resolution procedure?
The written resolution must be circulated to every eligible member (s 291(2) CA 2006).
‘Eligible member’ means the shareholders who are entitled to vote on the resolution as at the
circulation date of the resolution (s 289).
Section 291(4) of the CA 2006 sets out certain information which must be included on the
written resolution, which is:
*
how to signify agreement; and
*
the deadline for returning the written resolution, otherwise known as the lapse date.
Unless the articles state otherwise, the lapse date is 28 days from circulation of the written
resolution (s 297 CA 2006). Unlike with the notice of general meeting, the method of circulation
of the written resolution is irrelevant for the purposes of calculating the lapse date. The lapse
date is the 28th day following circulation of the written resolution, whether it is handed to the
shareholders, posted or circulated by email. The deadline is generally interpreted as meaning
midnight of the 28th day following circulation of the written resolution. If an eligible member
signifies their agreement after the lapse date, their agreement will not be counted.
When are written resolutions passed?
Written resolutions are passed when the required majority of eligible members have
signified agreement to the resolution.
with
written resolutions each shareholder has one vote for each share that they own (ss 282(2)
and 283(2) CA 2006). This means that whether a resolution is passed or not can sometimes
depend on whether it was proposed as a written resolution or a resolution at a general
meeting. This is because when voting at general meetings, each shareholder has one vote
per person and only the votes of those who attend the meeting are taken into account. The
position with written resolutions is different: for an ordinary resolution, over half of the votes
of all of the company’s eligible members are needed to pass the resolution. For special
resolutions, 75% or more of all of the votes of all of the company’s eligible members are
required in order to pass the resolution.
Shareholders’ request for the company to circulate a written resolution?
A shareholder or shareholders who have 5% or more of the voting rights in the company are
entitled to require the company to circulate a written resolution. he company’s articles can reduce this percentage below 5% but
cannot increase it to more than 5 per cent.
The shareholders who have asked the company to circulate a written resolution can require
the company to circulate with it a statement of up to a thousand words on the subject matter
of the resolution (s 292(3)). The company must then circulate a copy of the resolution and
any accompanying statement to all eligible shareholders, within 21 days of the shareholders’
request. The shareholders who requested the circulation of the resolution must pay the
company’s expenses in complying with the request (s 294 CA 2006).
What happens if Companies do to notify Registrar of Companies when certain decisions are made?
The CA 2006 requires companies
to notify the Registrar of Companies when certain decisions are made. The penalty for failing
to comply with the notification requirements in the CA 2006 is a fine for the company and all of its officers.
numerous internal documents that companies must keep up to date?
he register of members (see 2.7.2) and register of directors (see 3.16). The registers (known
as statutory books) can be kept at the company’s registered office or a Single Alternative
Inspection Location (SAIL). A SAIL address is notified to Companies House on form AD02, while
movement of company records to the SAIL address is notified on form AD03. A form AD04 is
used to notify Companies House of company records moving from the SAIL address back to
the registered office.
Companies must also keep board minutes for every board meeting which takes place (s
248 CA 2006), and minutes of every general meeting (s 355 CA 2006). Companies must
keep these, along with a record of the outcome of any written resolutions, at the company’s
registered office (or SAIL) for ten years.
As an alternative to keeping statutory books at the company’s registered office or SAIL,
companies can elect to keep these records on the central register at Companies House
instead.
Companies’ annual responsibilities
Every company must keep adequate accounting records (s 386(1) CA 2006). What is adequate
is set out in s 386. Failure to do so is an offence under s 387 CA 2006.
It is the directors’ responsibility to ensure that accounts are produced for each financial year
(s 394 CA 2006). The accounts must give a true and fair view of the state of affairs at the
company as at the end of the financial year (s 393(1) and s 396(2) CA 2006).
Under s 415 CA 2006, the directors of every company (apart from private companies classed
as a small company or micro- entity under s 382(3) CA 2006 or s 384 CA 2006) must prepare a
directors’ report for each financial year to accompany the accounts. ‘Small company’ means a
company with a balance sheet total of not more than £5.1 million, a turnover of not more than £10.2 million, and no more than 50 employees in a particular financial year (s 382 CA 2006).
‘Micro- entity’ means a company with a balance sheet total of not more than £316,000, a
turnover of not more than £632,000, and no more than ten employees in a particular financial
year (s 384A CA 2006).
It is the directors’ responsibility to circulate the accounts, directors’ report and, if required, an
auditor’s report to every shareholder and debenture holder, and anyone else who is entitled
to receive notice of general meetings.
Every company must file its accounts and, unless it is a small company or micro- entity, the
directors’ report, for each financial year at Companies House (s 441 CA 2006). The time
limit for filing accounts and reports at Companies House is nine months from the end of
the accounting reference period for a private company (s 442(2) CA 2006), and six months
from the end of the accounting reference period for a public company. Newly incorporated
companies have the option of filing the accounts and report three months after the end of the
company’s first accounting reference period instead (s 442(3) CA 2006).
Every company must file a confirmation statement, on form CS01, within 14 days from the
company’s confirmation date, which is the anniversary of its incorporation (s 853A CA 2006). The
purpose of the confirmation statement is to make sure that the information held at Companies
House, particularly regarding directors, shareholders and persons with significant control, is
correct and up- to- date. It is a criminal offence to file the confirmation statement late, or not at all.
Company secretary apparent authority?
Company secretaries will normally have apparent authority to enter into contracts of an
administrative nature, but not trading contracts, for example, borrowing money. For an
explanation of apparent authority, see 3.12.
Appointment of company secrtetary?
The company’s first company secretary will often be the person named on the IN01 form. Any
company secretary appointed after incorporation will be appointed by board resolution. Often
the power to appoint a company secretary will be expressly stated in the company’s articles,
although there is no such power in the Model Articles for private companies because these
are more suited to small private companies that do not have a company secretary. However,
the directors can use their powers under MA 3 to appoint a company secretary.
Removing company secretary?
The company secretary can resign from their position, or the directors can remove the
company secretary from office by board resolution. Sometimes there will be a written contract
between the company and company secretary, which will set out the consequences of removal
from office, and this may include compensation for breach of contract. It may also give rise to
employment law claims.
There are a number of administrative and notification requirements set out in the CA 2006 with regard to company secretaries:
The company must notify the Registrar of Companies on form AP03 (for a human
secretary) or AP04 (for a corporate secretary) within 14 days of the appointment of a
company secretary (s 276(1)(a) CA 2006).
*
Every company that has a company secretary must keep a register of secretaries (s
275(1)) with certain specified particulars (s 275(2)), which are set out in s 277 (human
secretaries) and s 278 (corporate secretaries).
*
Section 279A of the CA 2006 permits private companies to elect not to keep their own
register of secretaries, and instead ensure that the information is filed and kept up- to- date
on the central register for the company at Companies House.
*
When a company secretary resigns or is removed from office, the company must notify the
Registrar of Companies within 14 days of their resignation or removal, on form TM02 (s
276(1)(a) CA 2006). The register of secretaries will then need to be amended to reflect the
fact that the company secretary has left office.
*
The company must notify the Registrar of Companies within 14 days of any change in
particulars of the company secretary kept in the register of secretaries (s 276(1)(b) CA
2006), on form CH03 (for a human secretary) and form CH04 (for a corporate secretary).
Again, the register of secretaries will need to be amended to reflect the changes.
Company’s auditor
The company’s auditor will be an accountant whose main duty is to prepare a report on the
company’s annual accounts, to be sent to its shareholders (s 495(1) CA 2006). The auditor’s
report must state whether, in the auditor’s opinion, the accounts have been prepared properly
and give a true and fair view of the company (s 495(3) CA 2006). Essentially, they must
ensure that the shareholders, whose money is invested in the company, are not defrauded or
misled by the directors. If the auditor’s report is qualified in any way, this is a warning to the
shareholders that there may have been some unethical business dealings, or even fraud.
The obligation for private companies to appoint auditors to review their accounts comes from
s 485 CA 2006. Small companies are exempt from the statutory audit requirements (s 477 CA
2006). See 2.5.5 for the definition of ‘small company’. Companies which do not trade, known
as dormant companies, are also permitted to file abbreviated accounts and are exempt from
audit (s 480 CA 2006).
If the company must have an auditor, the auditor must be someone who is qualified,
that is, a certified or chartered accountant, and independent, that is, not connected with
anyone involved in the company (ss 1212– 1215 CA 2006). Usually companies appoint a
firm of accountants to be the company’s auditor, meaning that any qualified member of the
accountancy firm can undertake the audit.
Appointment of auditor?
The directors of a private company usually appoint the company’s first auditor (s 485(3) CA
2006), and after that the shareholders also have the power to appoint the auditor, by ordinary
resolution (s 485(4) CA 2006). The terms upon which the auditor is to hold office, and the
auditor’s fee, are a matter of negotiation between the auditor and the company.
An auditor of a private company is usually deemed to be reappointed automatically each
year (s 487). The exceptions to this are set out in s 487 and include a situation where the
auditor was appointed by the directors, as the first auditor will have been, or when the
company’s articles of association require the auditors to be reappointed every year
Auditor’s liability?
Case law has established that auditors do not owe a duty of care either to the shareholders
or to potential new shareholders when conducting their annual audit. For liability to be
imposed, there would also have to be proximity between the relevant parties.
Auditors can be sued for negligence by the company they are auditing. There are two criminal
offences relating to auditors under s 507 CA 2006. The first is knowingly or recklessly including
misleading, false or deceptive material in the auditor’s report. The second is omitting certain
statements from the report which are required to be included by the CA 2006.
Removal of the auditor
The shareholders can remove the auditor from office at any time by ordinary resolution (s
510 CA 2006). The shareholders must give special notice to the company of the proposal to
remove the auditor (s 511 CA 2006). Special notice is explained at 3.14.1.
The auditor can resign at any time by notice in writing sent to the company’s registered office
(s 516 CA 2006).
The consequences of removal of the auditor will depend on the terms of the contract between
the company and the auditor. Whenever an auditor ceases to hold office, whether as a
result of removal or resignation, they must deliver a statement to the company explaining the
circumstances connected with ceasing to hold office (s 519 CA 2006). This can be useful in
situations where the auditor suspects unethical behaviour by the company and it is a way of
making questionable behaviour by the company public.
Ways you can become a shareholder?
Once the company is up and running, a person or a company can become a new shareholder
in one of two ways. Firstly, the new shareholder could obtain shares from an existing
shareholder, by:
*
buying some of the shares of an existing shareholder;
*
receiving some of the shares of an existing shareholder as a gift; or
*
receiving the shares by way of transmission when a shareholder dies or becomes
bankrupt, and electing to become a shareholder rather than transferring the shares to a
third party.
Alternatively, a company may allot new shares. This means creating new shares and selling
them to new or existing shareholders
Register of members?
Every company must keep a register of members (s 113 CA 2006). Alternatively, it may elect
to keep the information on the central register at Companies House instead (s 128B). All
shareholders have the right to have their name on the register of members (s 113 CA2006)
and a company must register the transfer (ie enter the new shareholder on the register
of members or reflect an existing shareholder’s increased number of shares) as soon
as practicable and, as a long stop, within two months of the transfer being lodged with
the company (s 771 CA 2006). When a company allots new shares, it must enter the new
shareholder on the register of members or reflect an existing shareholder’s increased number
of shares as soon as practicable and, as a long stop, within two months of the allotment (s
554 CA 2006). If the company has elected to keep the information at Companies House, it
must instead notify the registrar of the share registration as soon as practicable or, as a long
stop, within two months.
If the company has only one member, there must be a statement to that effect on the register
of members (s 123 CA 2006). It is a criminal offence if the register of members is incomplete
or incorrect (s 113), including where there is no reference to the fact that it is a one- member
company (s 123).
Where the company keeps its register of members at its registered office or SAIL, it must be
available for inspection to shareholders free of charge and to anyone else for a fee (s 116 CA
2006). Again, failure to allow someone to inspect the register under s 113 is a criminal offence
(s 118 CA 2006).
Share certificates
All shareholders have the right to receive a share certificate (s 769(1)(a) and s 776(1)
(a) CA2006). This is important because the share certificate is prima facie evidence of the
holder’s title to the shares (s 768 CA 06). Companies must issue share certificates within two
months of the allotment of shares (s 769 CA 2006) or within two months of a transfer of shares
being lodged with the company (s 776 CA 2006).
The PSC (persons with significant control) register
The purpose of the PSC register is to enable third parties to understand who
holds power in the company. Any shareholder who owns more than 25% of the shares or
controls more than 25% of the voting rights in the company must appear on the PSC register.
This applies not only to individual shareholders but also to shareholders which are ‘relevant
legal entities’ such as companies.
Companies must keep a PSC register even if there are no shareholders entered on it because
there are no shareholders with significant control. People with significant control, like directors,
can apply to keep their residential address private, so that it does not appear on the public
register at Companies House. They can also apply to have their name private, so all that
will appear on the register of persons with significant control is that there is a person with
significant control but that they have successfully applied to have their personal information
kept private. If their application is successful, the PSC register will state how many shares a
person has, but not their identity or address.
Under s 790 CA 2006, private companies can keep the information regarding persons with
significant control on the central register at Companies House instead.
There are a number of Companies House forms which must be completed when the
information on the PSC register changes. The most significant ones are:
*
Form PSC01 must be completed by any individual who is to appear on the PSC register
for the first time.
*
Form PSC02 must be completed by any relevant legal entity who is to appear on the PSC
register for the first time.
*
Any shareholder who already appears on the PSC register but whose details change must
complete form PSC04, and any relevant legal entity who already appears on the PSC
register but whose details change must complete form PSC05.
*
Anyone ceasing to be a person with significant control must complete form PSC07.
The deadline for filing the forms is 14 days from the date the company made the change in its
PSC register (s 790VA CA 2006).
non- compete clause
Common in shareholder agreements
preventing the shareholder from involvement in a business which
competes with the company.
Examples of matters which are commonly included in shareholders’ agreements are:
*
restrictions on transferring shares;
*
Bushell v Faith clauses (from Bushell v Faith [1970] AC 1099). They give shareholders
weighted voting rights (ie more votes than they would normally be entitled to) when the
resolution under consideration is a resolution to remove that shareholder from their office
as director; and
*
a non- compete clause, preventing the shareholder from involvement in a business which
competes with the company.
s well as being entitled to attend general meetings and vote,
shareholders have the following rights with regard to exercising their power to vote:
- Right to send a proxy to a general meeting on their behalf (see 2.3.2).
- Right to a poll vote (see 2.3.5).
- Right to receive notice of general meetings (see 2.3.2).
- Right to requisition a general meeting (see 2.5.2).
- Right to apply to the court to call a general meeting, if for some reason it is not possible
for one to be held otherwise (s 306 CA 2006). An example would be where the other
shareholders are refusing to attend a general meeting and so it is not possible to hold a
meeting which is quorate. - Right for a shareholder or shareholders with 5% or more of the voting rights in the
company (or 100 or more shareholders with the right to vote, as long as they have paid
up an average of £100 or more on their shares) to require the circulation of a written
statement of up to a thousand words with respect to any resolution or business to be
dealt with at a general meeting. - Right for shareholders holding 5% or more of the company’s shares to require the
company to circulate a written resolution and accompanying statement
Shareholders also have the following rights:
- Right to receive dividends, as long as there are profits available for the purpose (s 830
CA 2006) and as long as the directors have made a recommendation as to its amount
(MA 30(2)) and this has been approved by the shareholders. - Right to apply to the court for the company to be wound up, on the grounds that it is just
and equitable to do so (s 122(g) Insolvency Act 1986 (‘IA 1986’)) – for example, because
the management is in deadlock and there is no way of resolving the situation other than
winding up the company. - Right to remove a director by ordinary resolution (see 3.14.1).
- Right to remove an auditor by ordinary resolution (see 2.6.2.3).
- Right to inspect, without charge:
*
the company’s minutes of general meetings and all shareholders’ resolutions passed
otherwise than at general meetings;
*
all of the company’s statutory registers (see, eg, s 116(1) CA 2006);
*
directors’ service contracts and any directors’ indemnities; and
*
any contracts relating to the company’s purchase of its own shares. - Right to receive a copy of the company’s annual accounts and reports.
- Right to seek an injunction under s 40(4) of the CA 2006 to restrain the company from
doing something prohibited by its constitution
Single- member companies
here one
individual is both the sole director and the sole shareholder – a person running his or her
business through the medium of a company. If the company is a single- member company,
there must be a statement to this effect on the register of members (s 123 CA2006). Similarly,
if the number of shareholders increases from one, there must be a statement stating that the
company has ceased to have only one member, and the date on which that event occurred. It
is an offence to breach s 123.
Joint shareholders
Sometimes shares will be held by two or more individuals jointly. If this is the case, the register
of members needs to record both names but only one address (s 113(5) CA 2006). Breach of
this section is an offence.
Cumulative/ non- cumulative shares
if a preference share is described as cumulative, this means that
the preference shareholder has to be paid any missed dividends from previous financial years
as well as the current financial year’s dividend, as long as there are profits available to pay
the dividends. This right ranks before payment of dividends to ordinary shareholders in the
current financial year. Non- cumulative preference shares do not carry this right: if a dividend is
not paid in a particular year, the shareholder loses the right to that year’s dividend and does
not have the right to receive it in the future.
