Business law IV Members and Decision making

Question 1

Review the qualification for being a person with significant control (4)

Answer 1

A shareholder of a company may be classed as a person with significant control if

Directly or indirectly hold >25% of the shares in the company

Directly or indirectly hold >25% of the voting rights in the company

Directly or indirectly hold the right to appoint or remove a majority of the board of directors of the company; or

Have the right to exercise, or actually exercise, significant influence or control over the company

Question 2

Rights of shareholder

Answer 2

To receive a dividend

the right to vote on decisions taken by the company

in certain case influence over some company’s decisions

Question 3

Meaning of profit for the purposes of Companies Act and its importance

Answer 3

It is accumulated realised profits less accumulated realised losses. Dividend can only be paid out of profits.

For example, A company makes a realised profit in year 1 of $2,000 but has realised losses of $3,000. Hence no dividend is payable in year 1. If in year 2 the company makes a profit of $3,000 and there are realised losses of $1,000, a dividend could be payable of $1,000, as the accumulated losses in year 2 would be $2,000.

Question 4

Preferential share rights to the distribution of dividend

Answer 4

They are paid ahead of ordinary shareholders

Preferential shares can carry the right to a cumulative fixed % dividend. This means that if there are no profits available for the purpose, the dividend will roll over to the next financial year.

In case of insolvency, the preferential shareholder will receive a return of capital in priority to the ordinary shareholders, if there is any.

Question 5

The procedure of declaring and distributing a dividend

Answer 5

Directors will recommend how much dividend should be paid.

A shareholder will have to approve the dividend by ordinary resolution (simple majority)

The shareholders can declare a smaller amount or no dividend, but cannot call for an amount greater than what is recommended.

Question 6

Definition of unlawful dividend and consequences

Answer 6

An unlawful dividend is a dividend payable other than out of profits available for the purpose. If at the time of the distribution a shareholder knows or has reasonable grounds for believing that the distribution has been declared unlawfully, the shareholder is liable to repay it.

Director may be liable if they have unlawfully recommended a dividend.

Question 7

Voting rights for a preferential shareholder.

Answer 7

Preferential shareholders normally do not have voting rights unless for decisions that affect their class rights.

Question 8

Meaning of derivative claims and in what case it can be raised

Answer 8

A claim can be brought on behalf of the company by a shareholder against a director if the shareholder believes a director has or is about to breach a duty, and the board is not likely to assert the company’s rights to prevent or remedy the action. Such a claim is called a derivative claim.

Question 9

The procedure of bringing a derivative claim

Answer 9

only a shareholder or a person to whom shares were transferred by operation of law may bring a derivative claim

claim brought is not limited to against director but other persons

The claimant must make a prima facie case. if not dismissed, the court will consider if the defendant had the best interests of the company in mind and the action in the breach was authorised,

in addition, the claimant has to have acted in good faith, the importance of the subject matter and the claim on behalf of the company is truly necessary

The claim can be retrospective: a shareholder can assert a claim that arose before the shareholder became a shareholder

Question 10

Rules on costs incurred personally in a derivative claim

Answer 10

Damages awarded from a derivative claim will belong to the company. However, at common law, the court could require the company to indemnify the shareholder who brings a derivative claim.

Question 11

Derivative claim brought by minority shareholders on the basis of unfair prejudice

(4)

Answer 11

If a shareholder feels that the company affairs are being conducted in a manner that is unfairly prejudicial, they can petition the court for a remedy for the following reason:

shareholder’s Exclusion of management of a quasi-partnership company;
Directors exercising their powers for an improper purpose;
Directors awarding themselves excessive remuneration;
Non-payment of dividend

a common remedy is an order to purchase minority shareholders’ shares.

Question 12

Derivative claim brought by minority shareholder on the basis of the winding up of the company

Answer 12

Any shareholder can apply to have the company wound up if it can be shown it is just and equitable to do so. However, this can only be successful in the most extreme case since it will adversely affect other shareholders’ value as well.

Question 13

The general procedure to call a meeting

5% 21 28 50%

Answer 13

it is usually the directors who call a meeting.

Shareholders who hold at least 5% of the paid-up voting capital can require the director to call a meeting

within 21 days of receipt of the notice, the director must call a meeting. within 28days of the call, the meeting must take place.

if that fails, shareholders with accumulative 50% of voting rights can call the meeting themselves and the company must reimburse the costs for doing so

Question 14

Who can call a meeting?

4

Answer 14

the directors

the shareholders holding >50% of shares if directors fail to call/hold a meeting on notice

Auditor if he is resigning and wants to give a reason for his resignation

Court if it is impracticable for the company to call it (in cases of deadlock between shareholders)

Question 15

the time period that must be given if a meeting is called

the time period that must be given if a meeting is called to consider a resolution to remove a director

Answer 15

14 clear days. Deemed service will begin from the second business day if delivered other than by hand delivery.

28 days

Question 16

If the meeting is held anyway even though the formalities for notice have not been met, what are the possible consequences?

Answer 16

a member who is unhappy with the action taken can seek to have the action declared invalid

Question 17

Rules on agreeing to hold a meeting at short notice

90

Answer 17

A meeting may be held on shorter notice if agreed by a majority in number of the shareholders, collectively owning more than 90% of shares (95% for non-traded public companies)

Question 18

How many shareholders need to assent to the convention of a general meeting on short notice?

A company with four equal shareholders

A company with three shareholders, with one shareholder holding 90% of the shares.

Answer 18

1) all the shareholders to meet 90% of total shareholding and majority in number
2) the 90% shareholder and another shareholder to meet the shareholding and majority in number

Question 19

The statutory quorum required for a shareholder meeting

Answer 19

The quorum required for a shareholder meeting is 2 (unless the company is a single-member company) members (or proxies of two members. but a single shareholder who attends a general shareholders’ meeting and who is also a proxy for another shareholder cannot be himself be quorate)

Question 20

Issues that must be addressed and become effective by special resolution

deadline for filing a special resolution to the Companies House

Answer 20

Alternation to the articles
a reduction in the company share capital
the winding-up of the company
change of name

must be filed within 15 days

Question 21

Method of voting to pass a resolution

5 10

Answer 21

the default method is by a show of hands

However, it is open to five shareholders or more, or shareholders with more than 10% of the voting rights or 10% of the paid-up capital of the company to demand a poll instead(one share one vote).

Question 22

How much time before a written resolution will lapse if not enough shareholders have expressed assent?

Answer 22

28 days including the circulation date unless provided otherwise.

Question 23

If some directors are themselves members, can they pass a resolution in a single meeting?

first bd then sm

Answer 23

No. They must pass director’s resolutions in a board meeting and members’ resolutions in a general shareholder’s meeting or by written resolution.

Question 24

Meaning of de minimis

Define substantial property transaction

Answer 24

de minimis means trivial. legal matters that are de minimis will not be granted any attention from the court.

if a director buys or sells the property to the company for less than $5,000, the transaction is considered de minimis and does not need shareholder’s approval.

for transactions exceeding $100,000, >5000 for non-cash, or 10% of more of the net asset value of the company, it is automatically considered an SPT and will need a resolution from a general meeting.