Business - Shareholders (9) Flashcards
How does one become a shareholder?
Becoming a Shareholder: There are several ways to become a shareholder.
(1) Original Subscriber: An original subscriber on incorporation (s112).
(2) Transfer/Transmission: Buying or receiving shares from another member.
(3) Allotment: Buying newly allotted shares directly from the company (see equity finance).
(4) Administration: Companies have duties following new membership (see equity finance).
- Register: Members must be placed on the Register of Members (s113).
- Share Certificate: Shareholders must be issued a share certificate within 2 months (ss769-779).
What different types of shareholder are there?
(1) Standard: This is a normal shareholder with shares in the business.
(2) Corporate: This is a company with shares in a business, acting by an authorised party (s323).
(3) Joint: Shares may be held by multiple parties, which must be reflected on the Register of Members (s113).
What are the different types of company?
Types of Company: Companies will differ by share structure.
(1) Limited: Companies that cannot offer their shares to the public.
(2) Public: Companies that can offer their shares to the public (subject to additional duties).
(3) Single-Member: Companies with single shareholders, as reflected on the Register of Members (s123).
(4) Subsidiary: Companies whose shares are predominantly owned by another (holding) company.
Requirement: Holding company either: a) has majority of voting rights; b) can appoint or remove majority of board; or c) controls majority of voting rights by virtue of shareholder agreement.
- Wholly-Owned: Subsidiaries can be wholly owned by the holding company (and its holding company).
- Limited Liability: The group of companies have limited liability in respect of each individual company.
- Effect: Companies within groups can benefit from certain tax arrangements (see corporation tax).
What are the different types of shares?
Types of Share: Companies can offer different types of share (as well as multiple classes of the same type).
(1) Ordinary: Default share providing right to attend and vote at meetings. They may receive dividends.
(2) Preference: Share providing enhanced rights over ordinary shares, usually as a trade-off for voting rights.
- Cumulative: Shareholders must be paid missed dividends from loss years if current profits allow.
- Non-Cumulative: Shareholders must be paid profits from current year, but not missed loss years.
- Participating: Shareholders receive dividends equal to a specified rate, and additional dividends based on predetermined conditions, such as hitting a profit margin (will be cumulative/non-cumulative).
Example: 6% non-cumulative share is entitled to 6% of nominal share value when profits permit.
(3) Redeemable: Shares issued for a short-term, and then bought back.
- Type: Will still be ordinary or preference.
- Restriction: Can only be offered if non-redeemable shares are also in circulation (s684).
When can a company pay dividends?
Dividends: Companies can pay dividends to shareholders if distributable profits allow (ss829-830).
(1) Distributable Profit: Profit and loss account in surplus.
Prior Years: Companies may distribute from previous profits too.
(2) Interim Dividends: Dividends paid during the financial year (no shareholder approval required).
(3) Final Dividends: Dividends paid at end of financial year (requiring shareholder approval).
- BM 1: Board recommends dividend by BR (for ordinary shareholders).
- GM: Members approve the dividend by OR. Dividend then becomes a debt until paid.
- BM 2: Board resolves to pay the dividend.
(4) Illegal Dividends: Companies that pay dividends without distributable profits are personally and strictly liable for losses (i.e. the directors and benefitted members) (It’s a Wrap v Gula).
Where do shareholders derive their rights from?
A) Company Act 2006
Company Act 2006: Shareholders have rights by virtue of the companies act (subject to bespoke articles).
(1) Individual Rights: Individual rights include: a) right to notice of a GM; b) right to inspect minutes and registers for free; c) right to attend and vote at meetings; d) right to proxy.
(2) Collective Rights: Collective rights are the right by resolution to: a) change the name; b) change the articles; c) float as a public company; d) right to seek injunction to restrain action prohibited by articles (s40).
(3) Procedural Rights: Procedural rights are rights incidental to voting, depending on voting stock: a) right to demand poll vote; b) right to requisition a vote; c) right to consent to short notice etc.
B) Articles of Association
Articles of Association: Shareholders may bring claims against other members or the company under the articles of association (s33).
C) Shareholders’ Agreement
Shareholders’ Agreement: Shareholders may bring claims against other shareholders if party to and in breach of a shareholders’ agreement (see incorporation).
What are the two types of prejudiced shareholder claims?
Prejudiced Shareholder Claims: Shareholders prejudiced by the company (including majority and directors) can bring claims against the company by: a) unfair prejudice petition; and b) derivative claim.
(1) Unfair Prejudice Petition: Protects the rights of individual shareholders.
(2) Derivative Claim: Addresses harms done to the company itself by directors.
What is an unfair prejudice claim?
Unfair Prejudice Petition: A claim against the company (in guise of board or majority shareholders) for unfairly prejudicing some of its members.
(1) Unfair Prejudice: This means the Company has made a decision (BR/OR/SR) which unfairly harms one or more shareholders in their capacity as shareholders, often a breach of a legitimate expectation.
-Diverting Opportunity: Company has diverted an opportunity to a competitor.
- Excessive Pay: Company has excessively paid a director.
- Management Exclusion: Company has excluded a member from management, despite offering the right.
- Removing Auditor: Company has removed an auditor for a divergence in opinion.
- Quasi-Partnerships: Company founded on but infringed a mutual understanding that members would trust one another and participate in management, usually following incorporation from a partnership (Ebrahimi v Westbourne Galleries).
(2) Objective Test: The ordinary bystander would believe the act or omission to unfairly harm one or more of the company’s shareholders.
Constraints: a) Difficult to acquire evidence; b) expensive/time-consuming; c) if the articles permit the behaviour, then difficult to argue as unfair.
Legitimate Expectation: Unfairness can also be held if there was a legitimate expectation or informal agreement not found in the articles, and the majority exercised the company’s legal rights to breach this agreement inequitably (O’Neill v Phillips).
(3) Remedies: A number of remedies exist.
Buyout: Court orders company to buyback the shares of the prejudiced members at a price determined by the court - this is the typical remedy (Grace v Biagioli).
- Article Restriction: Court may alter the articles, requiring leave of court for certain activities.
Derivative Claim: Court may allow members to bring a derivative claim.
What is a derivative claim?
Derivative Claim: A claim against a director made on behalf of the company in the shareholders own names, typically where the board refuses to do so (ss260-264). This is a standard litigation claim, but involves a strict preliminary permission stage.
(1) Breach: The director must have breached or proposed to breach their duties, harming the company (s260).
(2) Prima Facie Evidence: Court must have prima facie evidence of the breach to grant permission for claim, as determined on the application and evidence alone (s263).
(3) Prohibited Claim: Claims are refused by default if: a) members are not acting in the company’s best interests; b) the act has been authorised; or c) the act has been ratified.
(4) Relevant Factors: In deciding to grant permission, the court must consider:
- Good Faith: Whether the members are acting in good faith.
- Best Interests: Whether a claim would be in the best interests of the company.
- Ratification: Whether the breach is likely to be ratified.
- Board Claim: Whether or why the board has not brought a claim (acting as the company).
Personal Claim: Whether shareholders could bring a personal claim or unfair prejudice petition.
Non-Interests: The views of non-interested members, i.e. those with nothing lost (more objective).
(5) Hearing: If permission is granted, a full civil trial will commence.
Costs of Application: The unsuccessful party pays for the costs of the application.
(6) Remedies: Remedies are made to the company. It is typically damages for breach, but can include injunctions to restrain behaviour, an account of improper profits, and restoration of assets wrongly taken from the Company.
How do unfair prejudice claims compare to derivative claims in terms of their purpose?
Unfair Prejudice Petition: Remedy for minority shareholders unfairly treated by majority shareholders or board. Focuses on individual rights.
Derivative Claim: Remedy for shareholders on behalf of the company against directors or third parties for wronging the company itself.
How do unfair prejudice claims compare to derivative claims in terms of their nature?
Unfair Prejudice Petition: Personal claim by shareholder for being unfairly prejudiced in their shareholding rights. Remedy awarded to shareholder personally.
Derivative Claim: Brought by shareholders on behalf of company if director has breached duty or harmed company. Damages to company.
How do unfair prejudice claims compare to derivative claims in terms of the legal test?
Unfair Prejudice Petition: Conduct objectively unfair to shareholder, i.e. overly paid directors, breached a promise to them, excluded them from management.
Derivative Claim: Conduct was a breach of duty that harmed the company. Claim must be in the best interests of the company.
How do unfair prejudice claims compare to derivative claims in terms of the remedies?
Unfair Prejudice Petition: Remedies tend to be a buyout of shares, but may be a restriction on articles and compensation.
Derivative Claim: Typically includes damages payable to company, injunctions, restoration of assets.
