Business (Shareholders)

Question 1

What are the membership rights under the Articles
(s.33 CA)?

Answer 1

Shareholder decisions are usually taken by majority rule.

An ordinary resolution will pass with 51% or more support, while a special resolution needs 75% or more.

Question 2

What is the effect of s.33 CA 2006?

Answer 2

Members can sue under s.33 CA 2006 if their membership rights are infringed.

The usual remedy for breach is damages, but the Articles do not concern personal rights and obligations.

Question 3

What are examples of membership rights?

Answer 3

• The right to a dividend once declared
• To share in surplus capital on winding up
• To vote at meetings
• To receive notice of GMs and AGMs.

Question 4

What if the right is not a membership right?

Answer 4

• Ask the court to prevent a breach of directors’ duties
• Commence a derivative claim
• Bring a petition for unfair prejudice
• Bring a petition for just and equitable winding up

Question 5

What is the purpose of Shareholder Agreements?

Answer 5

Shareholder Agreements govern company operations with provisions not allowed in Articles, creating a contract that defines how shareholders interact.

Provisions constitute personal rights and obligations.

Question 6

How are Shareholder Agreements enforced?

Answer 6

Terms can be enforced under general contract law principles, allowing claims for breach of contract or injunctions to prevent future breaches.

Question 7

How are amendments to Shareholder Agreements made?

Answer 7

Amendments require unanimous approval of all parties, giving minority parties a veto right.

Question 8

What are examples of provisions in Shareholder Agreements?

Answer 8

Provisions may include unanimous voting on director removal, quorum for GMs, dividend policies, and allotment of new shares.

Question 9

What is a removal resolution?

Answer 9

Shareholders can propose a removal resolution to remove a director by notifying the Board.

Question 10

What is the special notice period for a removal resolution?

Answer 10

At least 28 clear days before the General Meeting where the resolution will be voted on.

Question 11

What is the Board’s response to a removal resolution?

Answer 11

The Board can either place the resolution on the agenda or decide not to.

The resolution must be sent to the director being removed.

Question 12

What happens if the removal resolution is placed on the GM agenda?

Answer 12

Shareholders must be given at least 14 clear days notice of the removal resolution. If impractical, notice may be given via newspaper.

However, note that subsection (4) ‘saving provision’ states that a passed ordinary resolution is valid even if the special notice period is not observed (i.e only need 14 days not 28)

Question 13

When making a removal resolution, what happens if the 28 day notice period isn’t observed but the shareholders are given 14 days clear notice?

Answer 13

Subsection (4) ‘saving provision’ states that a passed ordinary resolution is valid even if the special notice period is not observed (i.e only need 14 days not 28)

Question 14

What if the Board does not place the removal resolution on the GM agenda?

Answer 14

Directors are not bound to place the resolution on the agenda. They may refuse.

Shareholders may need to force the directors to call a general meeting in accordance with s.303 CA.

Question 15

What is a s.303 request?

Answer 15

Shareholders holding at ** least 5% of paid-up voting share capital** can serve a request on the Board to call a GM.

Question 16

What must directors do upon receiving a s.303 request?

Answer 16

Directors must** call the GM within 21 days** and hold it no more than 28 days after the notice.

Question 17

What if the directors do not cooperate with the s.303 request?

Answer 17

If the directors fail to call the GM after the s.303 request, Shareholders can call the GM themselves ensuring …
* At least 14 clear days notice
* It is held within 3 months of the request.

Question 18

What rights does a director have when facing a removal resolution?

Answer 18

A director has the right to
* Make representation in writing of a reasonable length

• Right to be heard and speak in their defence at the General Meeting

Question 19

What is a ‘Bushell v Faith’ clause?

Answer 19

A clause that grants a director, if a shareholder, weighted voting rights at a GM where a removal resolution is proposed. This may mean the shareholders will be unable to pass an ordinary resolution to remove the director.

Question 20

What protections do shareholder agreements offer regarding director removal?

Answer 20

They may require unanimous consent for removal, providing protection for directors who are also shareholders.

Remember, this doesn’t remove the statutory right to remove a director under s.168. However, if they passed the resolution, the director would have a claim against the other shareholders for breach of shareholder agreement and should claim for damages or an injunction to prevent the breach of the terms.

Question 21

What are the compensation rules for removing a director?

Answer 21

Compensation for loss of office must be approved by shareholders by ordinary resolution unless unless

1. The payment doesn’t exceed £200; or
2. The payment is in discharge of an existing legal obligation, in settlement of compromise of a claim in connection with termination or employment

Question 22

What is a derivative claim under s.260 CA 2006?

Answer 22

The shareholder’s right of action is not personal, but derived from the company’s right of action, which the company has not exercised.

s260 allows shareholders to bring a derivative action where directors have breached their statutory duties. However if granted, the remedy is granted to the company not the shareholder personally.

Question 23

When can a shareholder bring a derivative claim?

Answer 23

When a director breaches a duty under common law or statutory duties, such as exercising reasonable care.

Question 24

Who can be sued in a derivative claim?

Answer 24

The claim can be against a director, another person, or both, including shadow and former directors.

Third parties may be defendants. For example, if the third party knew about the breach (e.g. knowing assistance).

Question 25

Who may bring a derivative claim?

Answer 25

A member of the company, which is a shareholder. They front the costs but do not receive personal rewards.

Question 26

Can a member who wasn’t a member at the time the cause of action arose bring a claim?

Answer 26

Yes. It does not matter if the cause of action arose before or after the person became a member.

Question 27

Can a member bring a derivative action after they leave?

Answer 27

No. A former member cannot bring a claim in relation to events which occurred when they were a member, if they are no longer a member.

Question 28

What are the two stages to bring a derivative claim?

Answer 28

Stage 1: Is there a prima facie case? The member must obtain court permission to bring a claim. The court must refuse permission if a criteria set out in s.263(2) is met. The court must consider factors listed in s.263(3) as to whether there is a case.
…
If no > Dismiss Claim
If yes > Stage 2
…
Stage 2: Detailed Consideration: the court must then have “particular regard” to any evidence it has as to the views of the members who have no personal interest in the matter.
…
If insufficient > Dismiss Case
If sufficient case > Proceed to Trial

Question 29

What does the court consider in Stage 1 of a derivative claim?

Answer 29

The court must refuse permission if satisfied that a person acting in accordance with s.172 (promoting the success of the company) would not continue the claim.

If there is no specific s.263(2) bar, the court proceeds to consider the factors listed in s.263(3):

• whether member is acting in good faith
• importance a person acting in accordance with s.172 would attach to continuing it;
• ratified by the company after it occurs;
• whether the company has decided not to pursue the claim;
• whether the act gives rise to a cause of action that the member could pursue in his own right rather than as the company.

Question 30

What is Stage 2 of bringing a derivative claim?

Answer 30

The court must regard the views of members who have no personal interest in the matter when deciding on permission. This is a detailed consideration of evidence from other members.

Question 31

What is unfair prejudice under s.994?

Answer 31

Unfair prejudice allows a member to sue if the company is run in a way that causes them unfair prejudice

Contrary to the derivative action, the shareholders sue for themselves.

Question 32

What are the requirements for an unfair prejudice claim?

Answer 32

The shareholder must show that the company’s affairs are conducted unfairly or that some act or omission has unfairly prejudiced them.

Question 33

What types of conduct may be unfairly prejudicial?

Answer 33

• Negligent management
• Breaches of articles
• Excessive remuneration
• Exclusion from management for legitimate expectations.

Note, there is no overriding requirement that the claimant come to court with “clean hands. Further, there is no need to show either bad faith or conscious intent for the conduct to be unfair

Question 34

What remedies does the court have for unfair prejudice claims?

Answer 34

The court can grant orders as it sees fit, commonly ordering the purchase of the petitioner’s shares by the wrongdoer.

Question 35

What is just and equitable winding up under s.122 IA 1968?

Answer 35

It allows a member to petition the court to wind up the company if it is just and equitable, a drastic remedy.