Business Law - Unit 3 - Company decision-making

Question 1

What is the difference between the company’s directors and shareholders roles?

Answer 1

Company’s directors are involved in the day-to-day running of the company.

Company shareholders are involved in a limited number of decisions. They provide the money which allows the business to operate.

Question 2

What decisions do shareholders alone make?

Answer 2

Changing the articles of association of the company

Changing the name of the company

These are done by special resolution - 75% majority or over.

Directors can’t reverse the decision - they must ensure the correct paperwork is completed and that Companies House is notified.

Question 3

What decisions do shareholders make that give the company’s directors permission to enter into certain types of contract?

Answer 3

Buying property from a director

*Note: shareholders don’t have the power to enter into these contracts themselves - they are giving permission to the directors to enter into these contracts on behalf of the company.

Question 4

How do directors make collective decisions?

Answer 4

They make these in board meetings - these decisions are called board resolutions.

However, MA 5 gives directors the power to delegate powers as they see fit so employees would be able to make decisions as fit their job description.

Certain directors would also have specific areas of responsibility e.g. a HR director, a Finance director or Managing Director.

Question 5

According to MA 9, what type of notice to directors have to give when they call a board meeting?

Answer 5

Reasonable notice to other directors (this will depend on the facts).

Could be a few minutes if they all work at a small company in the same building. Could be much longer for a multi-national company.

Notice for board meeting DOESN’T need to be in writing but should include the time, date and place of the meeting.

The communication method (e.g. Zoom) should also be included if they’re not meeting in person.

Question 6

What is the quorum for board meetings?

Answer 6

According to MA 11, a quorum of 2 directors must be present at all times during a board meeting.

This means the minimum number of directors that have to be present for the meeting to be valid.

This makes the meeting quorate.

Question 7

According to MA 14, can a director count in the quorum/vote if the proposed decision of the board is concerned with an actual or proposed transaction in which the director is interested?

Answer 7

No (but this can be changed if the Articles of Association are amended).

Otherwise, if this was allowed, this runs the risk of directors voting with their personal interest in mind as opposed to the good of the company.

However, they can be counted in the quorum for the meeting and can vote on other resolutions in the meeting - just not one they have a proposed interest in.

Question 8

When a director has a personal interest in a proposed transaction, what must they do?

Answer 8

Declare the nature and extent of this interest to the board of directors. ** Note: unlike MA 14, this CANNOT be disapplied.

However, exception to this is in 3 instances:

1) If it cannot reasonably be regarded as likely to give rise to a conflict of interest.
2) If, or to the extent that, other directors are already aware of it.
3) If, or to the extent that, it concerns terms of a service contract that have been or are to be considered by a meeting of directors.

Best to declare just in case.

Question 9

What is the rule for voting at board meetings - how many votes are needed for a decision to be passed?

Answer 9

MA 7 states that board resolutions are passed by a simple majority - over half of those present must vote in favour for the board resolution to be passed.

Carried out by a show of hands and each director has one vote.

Chairman (if appointed) can have the casting vote which breaks a tie. Only needs to use if they are in favour of the decision because if there is a tie, the resolution won’t be passed.

Question 10

What other methods can be used as opposed to a board meeting for directors to make decisions?

Answer 10

Can be in writing or any other method that effectively communicates that all are in favour.

However, when using a written resolution, ALL directors must agree otherwise the resolution will not be passed.

So board meeting = simple majority for resolution to be passed
Written resolutions = unanimous for resolution to be passed

Question 11

What are the two types of shareholder resolution?

Answer 11

Ordinary resolutions and special resolutions. - Note: these terms are ONLY used for shareholder resolutions, not directors’ board meetings.

Question 12

How many votes are needed for an ordinary resolution to be passed?

Answer 12

If this takes place at a shareholders’ general meeting, over half the votes must be in favour to pass an ordinary resolution.

Question 13

How many votes are needed for a special resolution to be passed?

Answer 13

If this takes place at a shareholders’ general meeting, 75% or more of the votes cast must be in favour of the resolution.

Question 14

How are general meetings of shareholders called?

Answer 14

General meetings of shareholders are called by the board of directors passing a board resolution.

The board will call a general meeting wither when:
- they want the shareholders to pass a shareholders’ resolution OR
- when the shareholders have requested that the board call a meeting.

Public companies have to hold a general meeting once a year - not the case for private companies.

Question 15

What are the notice requirements for calling a general meeting of shareholders?

Answer 15

Determined by the CA 2006.

The directors must give notice to every shareholder and every director and to the auditor if there is one.

Must be given in hard copy, electronic form or by means of a website or a combination of these means.

The notice must set out:
- The time, date and place of the meeting
- The general nature of the business to be dealt with.
- If a special resolution is proposed, the EXACT WORDING of the special resolution and
- Each shareholder’s right to appoint a proxy to attend on their behalf.

Question 16

What is the notice period for a general meeting?

Answer 16

14 clear days - this means the day that the notice is deemed received by the shareholders and the day that the general meeting is held is NOT COUNTED.

Should be 14 days clear of anything happening between the two.

However, if the notice of the general meeting is sent out by post or email - it is deemed received 48 hours after the notice was posted or emailed. This must be added on to the 14 days.

Question 17

What is the quorum and voting for a general meeting of shareholders?

Answer 17

Subject to the company’s articles, the quorum for a general meeting is 2 (except if the company only has 1 shareholder in which case it is 1).

Voting will be on a show of hands and each shareholder has one vote.

Generally, shareholders are not prevented from being counted in the quorum or voting if they have a personal interest in the matter - unlike directors.

Question 18

What are the 2 key shareholders’ resolutions where the votes of a shareholder with a personal interest in the matter are effectively not counted?

Answer 18

Note: they are free to vote BUT their vote will not be counted if this is what makes the difference as to whether the resolution is passed or not.

2 resolutions are:

• A resolution to buy back some or all of a shareholder’s shares because the shareholder in question could be voting in their own interest, not the company’s AND
• An ordinary resolution to ratify a director’s breach of duty where the director in question is also a shareholder.

Question 19

What is a poll vote?

Answer 19

A poll vote is where the shareholders vote in a general meeting on the basis of one vote for each share they own as opposed to one vote per person.

More shares = more votes - more power

A poll vote may be demanded by:
- The chair of the meeting
- The directors
- 2 or more persons having the right to vote on a resolution
- A person or persons representing not less than 1/10th of the total voting right of all the shareholders having the right to vote on the resolution.

Poll vote can be demanded before a general meeting, during the meeting, either before or after the voting takes place.

If the poll vote is called after the shareholder has already voted on a show of hands, the outcome of the poll vote will override the original vote.

Question 20

What is the rule for calling a general meeting on short notice?

Answer 20

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.

For public companies, this must be 95%.

Once the required percentage of shareholders have consented, the general meeting can be held straight away or at a later date.

Question 21

What is the procedure if shareholders want to use a written resolution instead of a general meeting?

Answer 21

A written resolution is only available for private companies, not public.

Instead of issuing a notice for a 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/special resolutions 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 it’s sent by post or email, each shareholder will receive their own copy to sign and return.

The written resolution must be circulated to every eligible member (those who are entitled to vote on the resolution as of the circulation date of the resolution).

Certain info must be included on the written resolution including:
- How to signify agreement and
- The deadline for returning the written resolution (the lapse date).

The lapse date is 28 days from circulation of the written resolution (including the circulation day). This means the lapse date is generally midnight of the 28th day following circulation.

If an eligible member signifies their agreement after the lapse date, their agreement will not be counted.

Question 22

When are written resolutions passed?

Answer 22

When the required majority of eligible members have signified agreement.

For written resolutions, each shareholder has one vote for each share they own.

This is different to the general meeting where it is one vote per shareholder - shows how you can get different results based on whether you choose a general meeting or a written resolution.

For an ordinary resolution, over half of the votes of all the company’s eligible members are needed to pass the resolution.

For a special resolution, 75% or more of all the votes of all the company’s eligible members are required in order to pass the resolution.

^ This also means that if someone doesn’t show up to a general meeting, their vote won’t be counted. However, if they don’t vote in a written resolution, then the resolution will likely not be passed as you need 50% of ALL THE COMPANY’S ELIGIBLE MEMBERS TO VOTE.

Question 23

What percentage is needed for the shareholders to request a written resolution?

Answer 23

A shareholder/shareholders who have 5% or more of the voting rights in the company are entitled to require the company to circulate a written resolution.

This can be reduced to lower than 5% but CANNOT be increased to more than 5%.

The shareholders who have asked the company to circulate a written resolution can ask the company to circulate with it a statement of up to 1000 words on the subject matter of the resolution.

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 must pay the company’s expenses in complying with the request.

Question 24

What percentage is needed for the shareholders to request a general meeting?

Answer 24

The shareholders can require the directors to call a general meeting.

The directors are required to call the general meeting once they’ve received requests to do so from shareholders representing at least 5% of such paid up capital of the company as carries the right of voting at general meetings.

The request must state the general nature of the business to be dealt with at the general meeting.

If the shareholders exercise this right, the directors must call it within 21 days of the request. The NOTICE PERIOD should should not exceed 28 days.

This means the time from the shareholders requesting the board to call a general meeting and the general meeting itself is 7 weeks maximum.

Question 25

What are the penalties for not filing the necessary documents at Companies House?

Answer 25

A fine for the company and all of its officers.

Additionally, under ECCTA, the Registrar of Companies now has the power to query filings, reject filings and/or request further evidence and to remove material from the register more swiftly than before.

It has also been a criminal offence for quite some time to provide, knowingly or recklessly, misleading, false or deceptive information to Companies House - and this has been expanded under ECCTA.

This now also applies where any person provides misleading, false or deceptive information without reasonable excuse - this is a new aggravated offence under ECCTA.

Question 26

What documents must b filed at Companies House?

Answer 26

Some ordinary resolutions and ALL special resolutions must be filed at Companies House.

Companies House has also produced forms which companies must fill in and send to the Registrar of Companies.

Question 27

What are the internal documents that companies must keep up to date?

Answer 27

The registrar of members
The registrar of directors

These registers (known as statutory books) can be kept at the company’s registered office or a Single Alternative Inspection Location.

A Sail Address is notified to Companies House on form AD02 while movement of company records to the SAIL address is filed on AD03. 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 and minutes of every general meeting. These must be kept, along with an outcome of any written resolutions, at the company’s registered office/SAIL address for 10 years.

Instead of keeping statutory books at the company’s registered office/SAIL, these can be kept at Companies House instead.

Question 28

What must solicitors remind their clients of?

Answer 28

That they need to file certain documents at Companies House, maintain the necessary registers, draft minutes and keep them for 10 years at the company’s registered office.

Failure to do this is a criminal offence which results in a fine for the company and every officer in default.

Question 29

What are the companies’ annual responsibilities?

Answer 29

Every company must keep adequate accounting records - to fail to do so is an offence.

Directors are responsible to ensure that accounts are produced for each financial year - this must give a true and fair view of the state of affairs at the company.

Additionally, the directors of every company (excluding private companies which are deemed small/micro-entities), must prepare a directors’ report for each financial year to accompany the accounts.

Small company = a balance sheet 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.

Micro-entity = a balance sheet of not more than £316,000, a turnover of not more than £632,000 and no more than 10 employees in a particular financial year.

It is the directors’ responsibility to circulate the accounts, director’s 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.

Question 30

What are the time limits for filing accounts?

Answer 30

The company accounts and, unless it is a small or micro-entity, the directors’ report must be filed each financial year at CH.

Time limit = 9 months from the end of accounting reference period (for private company)
And 6 months from the end of accounting reference period for (public company)

Newly incorporated companies have the option of filing the accounts and report 3 months after the end of the company’s first accounting reference period instead.

Question 31

When must a company’s confirmation statement be filed?

Answer 31

Must be filed on CS01 within 14 days of the company’s confirmation date (anniversary of its incorporation)

This is to make sure that the info at Companies House, particularly regarding directors, shareholders and persons with significant control, is correct and up-to-date.

Criminal offence to file the confirmation statement late or not at all.

Question 32

Who are the company’s officers?

Answer 32

Company directors, company secretary and auditor.

Question 33

What is the role of the company secretary?

Answer 33

Private companies are not required to have a company secretary but public companies are.

They deal with the legal administrative requirements.

Can have a corporate company secretary - who will act through a human being authorised by the company appointed as corporate secretary.

Do not need specific qualifications.

In smaller companies, could also be a director. In this case, they would get no remuneration.

Company secretary is responsible for writing up the board minutes and minutes of general meetings.

If a company doesn’t have a company director, these activities can be performed by directors or someone authorised by them.

Will normally have apparent authority to enter into contracts of an administrative nature but not trading contracts.

First company secretary will often be named on the IN01 form.

Any company secretary appointed after incorporation will be appointed by board resolution.

Question 34

How can a company secretary be removed from officer?

Answer 34

Can resign from their position or be removed from office by board resolution.

• 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 appointment.
• Every company that has a company secretary must keep a register of secretaries with certain specified particulars.

Private companies can elect to not keep their own register of secretaries and instead ensure that the info is filed and kept up to date on the central register.

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. The register of secretaries will then need to be amended to reflect the fact that the secretary has left office.

The company must notify the Registrar of Companies within 14 days of any change in the particulars of company secretary kept in the register of secretaries on form CH03 (for human) or CH04 (for a corporate secretary). Again, the register of secretaries will need to be amended accordingly.

Question 35

What is an auditor’s role?

Answer 35

An accountant whose main duty is to prepare a report on the company’s annual account to be sent to shareholders.

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. - Ensuring that shareholders are not being misled or defrauded by 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 dealings/fraud.

Private companies have to appoint auditors to review. Small companies do not & companies who do not trade.

If the company must have an auditor, this must be someone who is qualified and independent.

Question 36

How is an auditor appointed?

Answer 36

The directors of a private company usually appoint the company’s first auditor and after this, shareholders have the power to appoint the auditor through ordinary resolution.

An auditor of a private company is usually deemed to be reappointed automatically each year.

Exceptions to this is where the auditor was appointed by the directors or where the company’s articles of association require the auditors to be reappointed every year.

Question 37

What is the auditor’s liability?

Answer 37

Auditors do not owe a duty of care either to the shareholders or potential new shareholders when conducting the annual audit.

However, they can be sued for negligence by the company - if they knowingly or recklessly include false or deceptive material. The second is if they omit certain statements from the report that are required.

Question 38

How can you remove an auditor?

Answer 38

Can be removed from being an auditor at any time by ordinary resolution.

Shareholders must give special notice to the company of the proposal to remove the auditor.

Whether they are removed or resigned, the auditor must deliver a statement to the company explaining the circumstances connecting with ceasing to hold office.

• Useful where the auditor suspects unethical behaviour by the company and makes questional behaviour public.

Question 39

How do you become a shareholder?

Answer 39

The first 2 people who sign the memorandum of association as subscribers automatically become the first shareholders and must be entered on the company’s register of members.

A person can become a new shareholder in one of 2 ways:
1) Buying some of the shares of an existing shareholder
2) Receiving some of the shares of an existing shareholder by gift.
3) Receiving the shares by way of transmission when a shareholder dies or becomes bankrupt and elects to become a shareholder rather than transferring the shares to a third party.

Alternatively, a company may allot new shares.

Question 40

Who must keep a register of members?

Answer 40

EVERY company must keep a register of members.

ECCTA - is going to mean companies can’t keep this information on the register at Companies House (though this hasn’t happened yet).

All shareholders have the right to have their name on the register of members and a company must register the transfer as soon as is practicable.

As a long stop, within 2 months of the transfer being lodged with the company.

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 or at a max, within 2 months.

If the company has elected to keep this info at Companies House, it must notify the registrar of the share register as soon as practicable or within 2 months.

If the company only has one member, that must be entered on the register of members.

Criminal offence if the register of members is incomplete or incorrect - including where they haven’t mentioned its a 1 member company.

Where the company keeps its register of members at its registered office or SAIL, it must be available for inspection by shareholders free of charge and to anyone else for a fee.

Failure to allow someone to inspect the register is a criminal offence.

Question 41

What is a share certificate and when must it be issued?

Answer 41

All shareholders have the right to receive a share certificate - prima facie evidence of the holder’s title to the shares.

Companies must issue share certificates within 2 months of the allotment of shares or within 2 months of a transfer of shares being lodged with the company.

Question 42

What about the PSC register? What is it and what details must be kept?

Answer 42

Persons with significant control.

As well as disclosing info about persons with significant control in the IN01, all private and non-traded public companies must keep a PSC register.

This enables third parties to understand who holds power.

Any shareholder who owns more than 25% of the shares or who controls more than 25% of the voting rights in the company must appear on the PSC register.

This applies to shareholders that are individuals and companies.

Companies MUST keep a PSC register even if there is no-one on it as there are no shareholders with significant control.

People with significant control can choose to keep their address and name private so all that appears publicly is the number of shares they have.

Private companies can keep PSC register at Companies House instead.

Forms that need to be completed:
PSC01 - Must be completed by any individual who is to appear on the PSC register for the first time.

PSC02 - must be completed by any legal entity who is to appear on the PSC register for the first time.

Any shareholders who already appear on the PSC register but whose details change must complete 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 PSC07.

The deadline for filing the forms is 14 days from the date the company made the change in its PSC register.

Question 43

What rights do shareholders have?

Answer 43

The company’s constitution is a statutory contract between the shareholder and the company and between each shareholder and the other shareholders.

The company constitution gives a remedy for a breach of contract if one or more shareholders - or the company itself - doesn’t abide by the terms of the constitution.

It is the articles of association which provide these terms.

This allows shareholders to take action against other shareholders when their membership rights have been infringed.

A shareholder’s membership rights include their voting rights and their rights to share in the company profits by receiving dividends.

Question 44

What are shareholders agreements?

Answer 44

While shareholders have rights under the articles of association, they can always enter into a shareholder’s agreement as well.

This will bind all of the parties to the agreement and provide a remedy if one of its terms are breaches.

Only binds shareholders who’ve entered into the agreement whereas AoA bind every shareholder, present and future.

Advantage of entering into a shareholders’ agreement is privacy and protection of minority shareholders as this agreement will be private (unlike the AoA which are public).

Provisions for minority shareholders can be included in the agreement e.g. a clause saying that the shareholders who are party to the shareholders agreement must not vote in favour of changing the company’s articles unless all of the parties to the SA are in agreement.

However, can’t restrict shareholders from voting in a particular way if they are also a director as this could conflict with their director’s duties.

Question 45

What are shareholders’ voting rights?

Answer 45

Their primary way of exercising control is through voting at general meetings - show of hands with each shareholder having one vote.

Also have other rights including:
1) Right to send a proxy to a general meeting on their behalf.
2) Right to a poll vote
3) Right to receive notice of general meetings
4) Right to requisition of a general meeting
5) Right to apply to the court to call a general meeting if, for some reason, it’s not possible to hold one otherwise
6) Right for a shareholder or shareholders with 5% or more of the voting rights in the company to require the circulation of a written statement of up to 1000 thousand words with respect to any resolution or business to be dealt with at at a general meeting.
7) Right for shareholders holding 5% or more of the company’s shares to require the company to circulate a written resolution and accompanying statement.

Question 46

What other rights do shareholders have?

Answer 46

1) Right to receive dividends, as long as there are profits available for the purpose and as long as the directors have made a recommendation as to its amount and this has been approved by the shareholders.
2) Right to apply to the court for the company to be wound up on grounds it is just and equitable to do so.
3) Right to remove a director by ordinary resolution.
4) Right to remove an auditor by ordinary resolution.
5) Right to inspect, WITHOUT CHARGE, the company’s minutes of general meetings and all the shareholders’ resolutions passed otherwise than at general meetings.
- All of the company’s statutory registers.
- Directors’ service contracts and any directors’ indemnities and
- Any contracts relating to the company’s purchase of its own shares.
6) Right to receive a copy of the company’s annual accounts and reports.
7) Right to seek an injunction under s40(4) of the CA 2006 to restrain the company from doing something prohibited by its constitution.

Question 47

What is a corporate shareholder and what are the rules around it?

Answer 47

A corporate shareholder may authorise a person to act as its representative at any company meeting.

Often several companies will be linked together as some companies will own shares in the other company. One of the companies will be classed as a ‘subsiduary’ of the other. The one that has shares in it will be called the holding company.

This will be the case if:
1) The other company holds a majority of the voting rights in it or
2) That other company is a member of it and has the right to appoint or remove a majority of its board of directors or
3) That other company is a member of it and controls alone, pursuant to an agreement with other members, a majority of the voting rights in it or
4) It is a subsidiary of a company that is itself a subsidiary of that other company.

A company is a ‘wholly-owned subsidiary’ of another company if it has no members except that one and that other’s wholly owned subsidiaries or persons acting on behalf of that other or its wholly owned subsidiaries.

Question 48

What are single-member companies?

Answer 48

Single member companies only have one shareholder.

This is typically a company where one person is both a director and a shareholder.

If the company is a single-member company, there must be a statement to this effect on the register of members.

If the number of shareholders increases from one, there must be a statement that the company has ceased to have only one member and the date on which that occurred. Breach of this is an offence.

Question 49

What are joint shareholders?

Answer 49

Shares being held by two or more individuals jointly.

The register of members need to record both the names but only address. Breach of this section is an offence.

Question 50

What are the 2 different types of shares? Ordinary shares

Answer 50

Ordinary shares give the shareholders the right to attend and vote at general meetings. They are also entitled to receive dividends if they are declared, that is, if the directors recommend the payment and the shareholders approve it. The amount of dividend can vary depending on the company’s profits.

Can have different types of ordinary shareholders e.g. ordinary A shares and ordinary B shares which means that shareholders can be treated differently in certain circumstances. E.g. only issuing dividends to ordinary A shareholders.

The rights attaching to all the shares will be set out in the company’s articles of association and if they are not, all shares rank equally.

Question 51

What are the 2 different types of shares? Preference shares

Answer 51

Preference shareholders receive enhanced rights of some sort - above and beyond the ordinary shareholders. This is set out in the articles of association.

E.g they may have a guaranteed right to dividends whereas ordinary shareholders may only receive dividends if there are profits left over once the preferential shareholders are paid.

This is usually expressed as a percentage of the nominal value e.g. a 5% share. Then the holder will get a fixed dividend of 5p for each £1 share they own.

Preferential shareholders are usually people who want to invest in a company and are willing to forego voting rights to get greater financial returns. The ordinary shareholders are often willing to grant this if the preferential shareholders are not allowed to exert power by voting at general meeting.s.

Question 52

What is cumulative/non-cumulative in regards to a preference share?

Answer 52

If a preference share is 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 do this.

Non-cumulative preference shares don’t carry this right - if a dividend is not paid in a particular year, the shareholder loses the right to that year’s dividend and doesn’t have the right to receive it in the future.

Question 53

What is a participating shareholders?

Answer 53

Participating shareholders have the right to receive profits or assets, in addition to their other preference share rights.

Question 54

What are some of the legal mechanisms that exist to protect minority shareholders?

Answer 54

Unfair prejudice actions - This allows any shareholder to apply to the court for an order of a remedy where they feel they have been unfairly prejudiced as a shareholder.

This is on the basis that:
1) The company’s affairs have been conducted in a manner that is unfairly prejudicial to the interests of the members generally or some part of its members or
2) An actual or proposed act or omission of the company is/would be prejudicial.

Would cause harm to one or more shareholders and should also be unfair e.g. diverting opportunities to a competing business in which the majority shareholders holds an interest, awarding excessive pay to directors or excluding a shareholder from the management of the company when the shareholders’ negotiations led the shareholders to believe they would participate in the management.

If the court believes the unfair prejudice has occurred, may make an order that the other shareholders must buy back the shares on the unfairly prejudiced shareholder or an order for the company to buy back the shares.

Other remedies could include a restriction on the company altering its articles of association without the leave or the court and an order that the unfairly prejudiced shareholder has permission to bring a derivative action.

Question 55

What type of test is the one used for figuring out whether a shareholder has been unfairly prejudiced?

Answer 55

An objective test - the court will ask whether a hypothetical bystander would believe the act or omission to be unfair.

Question 56

What are derivative claims?

Answer 56

This is a claim instigated by a shareholder for a wrong done to the company which has arisen from an act/omission of a director.

In these cases, the claimant can be the company but it will be the shareholders that bring the claim.

A claim can only be brought in relation to a cause of action arising from an actual/proposed act/omission involving negligence, default, breach of duty or breach of trust by a director. D in the claim is usually the director.

Stage 1: Shareholder applies to the court for permission to continue the claim.

The court will consider the application and the evidence in support of it without a hearing.

Court will only allow for the claim to continue if the application and evidence disclose a prima facie case for continuing.

If it does, the court may:
1) Give directions as to the evidence to be provided by the company or
2) Adjourn the proceedings to enable evidence to be obtained.

The court will then list a full hearing to determine the shareholder’s application for permission to continue the claim.

Question 57

In the full hearing, what are the circumstances which means the court MUST at the hearing stage refuse permission to continue?

Answer 57

Where the court is satisfied that a person acting in accordance with s 172 would not seek to continue the claim e.g. someone who is not promoting the success of the company would not be allowed to continue the claim.

Where the cause of action arises from an act or omission which has not yet occurred but which has already been authorised by the company or

Where the act/omission has already occurred and was authorised before it occurred or has been ratified by the company since it occurred.

Question 58

What other factors must the court take into account at the hearing stage?

Answer 58

Whether the shareholder is acting in good faith by seeking to continue the claim

The importance that someone acting in accordance with s172 (somebody who is acting in good faith to promote the company’s success) would attach to continuing.

Whether any past or future action or omission was authorised or if not, would likely to be ratified.

Whether the company has decided not to pursue the claim and

Whether the act or omission gives rise to a cause of action that a member could pursue in their own right.

The court is obliged to have particular regard to any evidence showing the views of the shareholders with no personal interest in the matter (objective people).

Question 59

How many directors are needed for private and public companies?

Answer 59

All companies need at least one director and public companies need two.

They do not need to be a human being but every company needs at least one director who is a human being and is 16 or older.

The other directors could also be human beings or could be corporate directors (companies).

If one or more of the directors are corporate, humans will come along to the meetings on behalf of the corporate directors.

Question 60

How can directors exercise their power?

Answer 60

They can exercise their power by passing board resolutions at board meetings.

Alternatively, can use written resolutions as long as everyone (all of the directors) are in unanimous agreement.

Question 61

How do directors delegate power?

Answer 61

This is done under MA 5 - directors will give employees the power to make decisions according to their role and they will exercise these delegated powers.

Question 62

Can the company shareholders override directors’ decisions?

Answer 62

No but they do have prior veto in certain circumstances e.g. if directors want to enter into a substantial property transaction, the shareholders must approve this first.