Chap 8

Question 0

The advantage of membership is that

Answer 0

The law accords certain rights to members but not to shareholders.

Question 1

Conditions of membership :

A person may become a member of a company by

Answer 1

(I) subscribing to the memorandum of a company to be incorporated
(II) subsequently agreeing to become a member

In both cases , their names must be entered into the company’s register of members

Question 2

A director is a person in charge of the management of a company . He is not necessarily a member unless he owns shares in the company & is also registered as a member.

Answer 2

Just to know

Question 3

The articles of association of a company usually empower the directors to manage the business of the company, and accordingly , the members , acting together as a GM of the company, may not interfere with the directors’ exercise of such powers.

Answer 3

Just to know

Question 4

Members may exercise powers of management if :

Answer 4

(A) the constitution or the Companies Act expressly requires them to supervise the directors in their exercise of those powers.
(B) the board of directors is incompetent , or unable to act ( eg: impossible to pass a directors’s resolution)

Question 5

Member’s rights / obligations

Answer 5

• to have every member comply with the provisions of the constitution of the company ; this is both a right and obligation
• to restrain any illegal or ultra Vires act
• to have access to the records of the company and certain information
• to attend and vote at general meetings ( and follow decisions of the majority)
• to be treated fairly . This is both a right and an obligation.

There is no absolute right to receive dividends even if there are profits available for distribution.
There is only a right to receive a proportional share of any dividends distributed by the company from profits. If a member insists on being paid a dividend when the majority of the company wants to retain the profits , he must satisfy the court that he has been unfairly treated .

Question 6

Since the constitution of a company form a contract between the members inter se ( between each other ) , every member is expected to observe and comply with them.

Every member is entitled to expect other members to observe and comply with them.

Answer 6

To know

Question 7

A threatened breach of the memorandum or articles may be restrained by

Answer 7

An injunction.

Question 8

Where a breach of memorandum has occurred , a court order may be sought to

Answer 8

Nullify it

Question 9

The court would only grant remedies if it is of the view that

Answer 9

Substantial injustice has been or will be done by such a breach.

Question 10

S392(4) (a)

Answer 10

Of the companies act empowers the court to validate breaches of the memorandum or articles if it thinks fit.
This is especially so when the court considers that the same result would be achieved even if there has been or would be no breach.
Eg: if a member was not allowed to vote , but the result would have been the same whichever way he voted.

Question 11

Restraint of illegal or ultra Vires acts

Answer 11

S409A (1)
Of the companies act empowers a member to apply to the court for an order to restrain the commission of any act which contravenes any provision of the Act( most commonly used to restrain breaches of S 157 - directors statutory duties ).

If the company engages in activities which are outside of its objects , S25(2) gives the member the right to apply to the court to restrain the company from engaging in them.

Question 12

Access to records and information

Answer 12

(1) A member has the right to inspect free of charge all the registers which a company is required under the Companies Act to maintain.

May also inspect the minutes of the GM of the company.

Entitled to copies of the minutes upon request at a charge not exceeding $1.
If the company fails to supply him , the company and every officer in default will have committed an offence.

(2) right to be informed about the financial position of the company.
For this reason , he is entitled to inspect and obtain copies of all documents relating to charges created over the company’s property and to receive a copy of the company’s past audited ( or unaudited , if the company satisfies exemption criteria ) profit and loss statement , balance sheet and the reports thereon by the auditors and directors.

However, the unaudited accounting records of the current accounting period are not accessible by him.

Question 13

Attending and voting at GM -
The right of every member of a company to attend , speak and vote at the general meetings of the company is protected under the Companies Act.

Answer 13

To know

Question 14

Attending and voting at GM -

His right to vote mah be suspended if

Answer 14

The article provide for the suspension on the grounds of failure to pay all calls or other sums personally payable by him in respect of shares in the company.

Question 15

Attending and voting at GM -
Generally , a member may vote on any resolution as he thinks fit , even if he is personally interested in the outcome of the vote. Unlike a director , he owes no duty ( fiduciary or otherwise ) to anyone , other than himself , when he exercises his voting rights.

Answer 15

Need to know

Question 16

Fair treatment - every member of a company expects to be treated and dealt with fairly.
Despite this exception , within every company the general principle for decision-making is majority rule.
If the majority of the members decide on a particular course of action , there is nothing which the minority can do to challenge them if the majority had exercised their rights fairly.

There is always the risk of ‘ tyranny of the majority ‘. ( the right of a member to be treated fairly becomes especially important when the directors of the company own the majority of the shares and weird majority power. )

Answer 16

Need to know

Question 17

S216

Answer 17

Mainly used to protect the ‘minority’ ( or sometimes even majority ) members in closely- hoed companies if they are unfairly treated.

Question 18

‘Closely- held’

Answer 18

Hold a large proportion of the shares even though there are many shareholders

Question 19

An aggrieved member may apply to the court for relief in any of the following situations which are considered as unfair treatment :

Answer 19

• Oppressive conduct by directors
• Directors disregarding their interests
• Acts that are unfairly discriminatory
• acts that are prejudicial to one or more of the members of the company .

To save legal coasts and avoid multiple lawsuits , the application may be brought by one member as a representative of some of them.
Hence an action by one member under S216 , which seeks to protect the rights of other members as well , is called a representative action.
Nonetheless , successful actions under S216 are rare since the majority SH is in a very powerful position.

Question 20

Entrenched clauses -
To combat against unfair treatment , the companies act has recently been amended to allow the members to insert entrenched and entrenching provisions in the memorandum or articles. Eg : stating that some difficult procedure must be compiled with before a particular article can be altered.

Answer 20

Need to know

Question 21

Enforcing the rights of the company -

Proper plaintiff rule

Answer 21

Under the common law , it was decided in Foss v Harbottle (1843) that where the company was the direct victim of a tort , the members of the company had no right to commence legal action against the wrong doers in respect of that tort - even if the members would suffer ‘indirectly’ ( eg: the loss caused to the company would result in less profits being available for dividends )

On the principle of the doctrine of separate legal entity , the decision is correct.

Question 22

Enforcing the rights of the company : Foss vs Harbottle

Answer 22

Facts : two shareholders in a company called Victoria Park Company that was formed to buy land for a pleasure park , sued the defendants , being directors and other shareholders , for taking certain actions to defraud the company , including selling land at an increased price.

Held : The board of directors was still in existence , therefore the board should call a meeting to bring the legal action. The company is a separate legal entity. The company and not the SH should be the relevant party to bring the legal action

Question 23

Refer to notes pg 7 for examples where the proper plaintiff is actually the co

Answer 23

Must

Question 24

Rationale for proper plaintiff rule

Answer 24

Normally the decision of whether it is worthwhile for the company to commence legal action ( and bear the legal fees & other expenses , the distraction to the BOD from managing the business activities and the risk of losing the action ) is an exercise of management powers - not something that each individual member should have a say in .

Just to know not really important

Question 25

Exceptions to Foss & Harbottle

Answer 25

(1) S216 : it should be noted that S216 empowers the court to grant an aggrieved minority member ( who has succeeded in his personal claim ) the right to commence civil proceedings on behalf of the company - see point 3 on S216 ( this power has been expanded in S216A , which represents the statutory derivative action )

(2) S216A : applies to all companies . It allows for a member of such a company to apply to the court for leave to
(A) commence legal action or arbitration in the name and on behalf of the company or ,
(B) intervene in an action or arbitration to which the company is a party for the purpose of prosecuting , defending or discontinuing the action on behalf of the company.

Question 26

To obtain the right to commence the derivative action under S216A , the member must prove to the Court in his application that :

Answer 26

(A) he has given to the directors 14 days’ notice of his intention to apply to the Court under S216A if the directors did not bring , diligently prosecute or defend or discontinue the action.

(B) he is acting in good faith

(C) it is in the interest of the company that the action be brought , prosecuted , defended or discontinued.

This is only the First Step of getting authorisation to enforce the company’s rights.

Question 27

When granting leave under S216A, the court may make orders as it thinks fit in the interest of justice , including the following :

Answer 27

• an order authorising the complainant or any other person to control the conduct of the action
• an order giving directions for the conduct of the action and
• an order requiring the company to pay reasonable legal fees and disbursements incurred by the complainant in connection with the action.

Question 28

S216A To commence the action :

The member still has to state the _____ of his claim as a second step.

Eg:

Answer 28

Nature

• breach of directors duties ( eg if the defendant is a director )
• failure to comply with the M&A ( eg if the defendant is a member )
• breach of contract , or commission of tort.