Chapter 4: The Members Flashcards
How does the Act define a member?
The subscriber of the company’s memorandum of association, deemed to have agreed to become members of it and become members upon registration of the company and are entered as such on the register of members;
Every other person who agrees to become a member of a company and whose name is entered in the register of members.
Who owns and controls a company?
A company is owned and controlled by its members, who have the right to appoint and remove directors and make changes to the company’s constitution (Articles).
How is ownership determined in a company with a share capital?
Ownership in a company with share capital is determined by the number of shares held by each member. The proportion of ownership is based on the number of shares owned.
Can a company limited by guarantee have a share capital?
No, a company limited by guarantee cannot have share capital. Since 22 December 1980 in Great Britain and 1 July 1983 in Northern Ireland, it has not been permitted for a company limited by guarantee to have share capital.
What happens if the Articles of a company limited by guarantee contain provisions for shares or interests?
If the Articles of a company limited by guarantee contain provisions dividing the company’s undertaking into shares or interests, it is deemed to be a provision for share capital, which is not allowed.
What determines the liability of members in a company?
The liability of members is determined by the type of company:
A limited company: The liability of members is limited by the constitution, either by shares or by guarantee.
An unlimited company: There is no limit on the liability of members.
What is a company limited by shares?
A company limited by shares has members whose liability is limited to the unpaid amount on the shares they hold. A company limited by shares must issue at least one share, but there is no maximum number of shares, subject to the company’s Articles.
What is a company limited by guarantee?
A company limited by guarantee has members whose liability is limited to the amount they agree to contribute to the company’s assets if the company is wound up. This amount is usually a nominal sum like £5 or £10. These companies do not issue shares, so they cannot distribute profits as dividends.
What is an unlimited company?
An unlimited company is one where there is no limit on the liability of its members. It can be constituted with or without shares.
What happens in an unlimited company without share capital?
In an unlimited company without share capital, the rights of members are determined by another method outlined in the company’s Articles.
What is a member in the context of a company?
A member is an individual or corporate entity that owns and controls a company. Members have rights to appoint and remove directors and make changes to the company’s constitution (Articles). In most cases, members are also the owners of the company.
Can any individual or entity become a member of a company?
Yes, subject to restrictions in the Act, any natural person or corporate entity can be a member of a company.
How are members and shareholders related?
While all companies have members, not all companies have shareholders. In companies with share capital, the terms member and shareholder are often used interchangeably because members hold shares. However, companies limited by guarantee or unlimited companies without share capital do not have shareholders.
How is ownership and control structured in companies with share capital?
In companies with share capital, ownership and control are divided between the members based on the proportion of shares they hold. This structure is formal and transparent.
How is ownership and control structured in companies limited by guarantee?
Companies limited by guarantee also have a formal structure of ownership and control, although it is often less transparent. These companies are popular among membership organizations and often have internal by-laws regulating how the organization is run and how directors are elected.
What are the two elements generally required to become a member of a company?
To become a member of a company, a person must:
Agree to become a member.
Have their details entered in the company’s register of members (CA2006 s. 112).
What is the exception to the general rule for becoming a member?
The exception is that the subscribers to the memorandum (those who sign the subscription clause) automatically become the first members of the company upon its registration (CA2006 s. 112(1)).
How can a person agree to become a member of a company?
The agreement to become a member can be either explicit (direct and clear) or implicit (implied through actions).
What happens when a person agrees to become a member in a company issuing new shares?
When a company issues new shares, the person must complete an application form, which includes:
Consent to become a member.
Agreement to pay the amounts due on the shares (either in full or in part on application).
Commitment to pay any balance due on fixed dates or when called upon by the company.
Consent to be bound by the company’s Articles.
What does an application form for becoming a guarantor in a company limited by guarantee involve?
For a company limited by guarantee, the application form includes:
Consent to become a member.
A guarantee to contribute a fixed amount to the company’s assets if the company is placed into an insolvent winding-up.
Agreement to be bound by the company’s Articles.
Can a person become a member without acquiring shares directly from the company?
Yes, a person can acquire an existing issued share through a share transfer from an existing member. In such cases, there is an implicit agreement to become a member by agreeing to purchase shares from a third party.
Who are the first members of a company?
The subscribers to the memorandum are the first members of a company immediately upon its registration. Their details must be entered in the register of members (CA2006 s. 112(1)).
What happens when a person applies for new shares in a company?
When a person applies for new shares, the shares are allotted to them by the directors. Once their details are entered in the register of members, they become members and the shares are considered issued.
How soon must a company enter the details of allotted shares in the register of members?
A company must enter the details of any shares allotted as soon as practical, and in any case, within two months of the date of allotment (CA2006 s. 554(1)).
What is the difference between the allotment and the issue of shares?
Allotment: The date when a person acquires an unconditional right to be entered in the register of members, usually occurring at the directors’ meeting to approve the allotment.
Issue: The date when a person acquires legal title to the shares, which happens when their details are entered in the register of members. The issue date can be the same as the allotment date or some time later.
How does the register of members handle share transfers?
If a person acquires shares through share transfer, the company must register the transfer by entering the details in its register of members or refuse to do so within two months of receiving a duly completed stock transfer form (CA2006 s. 771(1)).
How many members are required for a company?
All companies must have at least one member, subject to any contrary provisions in their Articles (CA2006 s. 7(1)).
What is the minimum share requirement for a private company limited by shares?
A private company limited by shares only needs to issue one share, and there is no minimum nominal or paid-up capital requirement.
What is the minimum share capital requirement for public companies limited by shares?
A public company limited by shares must issue at least £50,000 (or the prescribed Euro equivalent) in nominal value of shares. Each share must be at least 25% paid up as to its nominal value, and 100% of any premium must be paid (CA2006 ss. 761 and 763). This minimum capital must be maintained at all times.
Can a public company issue only one share and meet the minimum capital requirement?
Yes, a public company could issue only one share, but the nominal value of that share must not be less than £50,000 (or the prescribed Euro equivalent) to meet the minimum capital requirement.
What is the distinction between the “allotment” and the “issue” of shares?
Allotment: The right granted to an applicant to have shares allotted to them.
Issue: The point at which the shares are formally issued, i.e., when the shareholder’s details are entered in the register of members, completing the title to the shares. The issue of shares requires registration or the issuance of a certificate (National Westminster Bank plc and another v Inland Revenue Commissioners: HL [1994]).
What two criteria must be met in order to be a member of a company?
Consent to be a member and be entered on the Register of Members.
Other than as a shareholder what other forms can company membership take?
Guarantor or, for an unlimited company without a share capital, some other method of dividing ownership.
Is there a minimum or maximum number of members that a company must have?
Minimum of 1, no maximum.
Who can be a member?
Any legal person holding shares in the company, provided there are no provisions to the contrary in the Articles, and the Act’s restrictions have been taken into account.
Are there any restrictions on who can become a member of a company?
Yes, there are a limited number of exceptions to the general rule that any legal person can become a member of a company.
What does CA2006 s. 126 say about trusts and membership?
CA2006 s. 126 prohibits companies from recognizing trusts over their shares (whether express, constructive, or implied). Shares cannot be registered in the name of a trust or settlement but must be held in the name(s) of the trustees. The exception is for companies whose name includes terms like “trust,” “trustee,” or “nominee,” where the corporate entity is seen as the legal owner of the shares, and the underlying trust or nominee relationship is not considered.
Can a subsidiary company be a member of its holding company?
A subsidiary company is generally not permitted to be a member of its holding company unless it is acting only as a personal representative or trustee without any beneficial interest in the shares or is acting as an authorized dealer in securities (CA2006 s. 136).
Can a subsidiary act as a trustee for a group employee share scheme or pension scheme?
Yes, under CA2006 s. 139, a subsidiary company can act as a trustee for a group employee share scheme or pension scheme.
Can a subsidiary company hold shares in its holding company?
A subsidiary company can hold shares in its holding company if it held shares in the holding company before it became a subsidiary. However, the subsidiary cannot vote at meetings of the holding company (CA2006 s. 137(4)). Additionally, it is not lawful for further shares to be allotted to the subsidiary in the holding company (except in specific circumstances like a capitalisation of reserves).
What is a legal person?
Only legal persons may become a member of a company. A legal person is any natural person or an incorporated entity
with legal capacity.
Who can become a member of a company?
Only legal persons can become members of a company. A legal person is either a natural person (an individual) or an incorporated entity (such as a company) with legal capacity.
What entities cannot be members of a company?
Entities without legal capacity cannot become members, including:
English partnerships (but not Scottish partnerships)
Sole traders
Unincorporated clubs and associations
These entities cannot be entered into the register of members as a company’s member. If they are mistakenly entered, a court order will be needed to correct the register.
How should entities without legal capacity acquire shares?
If these entities want to acquire shares, the shares must be registered in the name(s) of the individuals (e.g., partners or business owners) acting on behalf of the entity, as they do not have the legal authority to transfer shares themselves.
Can an officeholder be a member of a company?
Generally, a holder of an office cannot be accepted as a member unless the office is created by statute (e.g., the Treasury Solicitor or the Accountant General).
Which public officers can be members of a company?
Some public officers, such as the Public Trustee, are legally deemed to be corporations and can be registered as members of companies.
Can the Articles of a company place restrictions on who can be a member?
Yes, the Articles of a company can exclude certain categories of persons from membership.
Can nationality restrictions be included in the Articles?
Yes, some companies (e.g., airlines) may include restrictions in their Articles, such as requiring members to be nationals of a specific country or trading block (like the EU). For example, an airline may exclude persons who cannot declare British or EU nationality if the company needs to meet national ownership requirements.
Can the Articles require members to have a specific qualification?
Yes, in some cases, the Articles may require members to hold a particular professional qualification. This is common in industries where professionals trade through limited companies instead of partnerships, such as lawyers or accountants.
Can shares in a company be held jointly?
Yes, shares can be held in a joint account by multiple persons. However, the Articles may limit the number of joint holders. For a listed company, the maximum number of joint holders cannot be fewer than four.
Summary of Restrictions to Membership in Articles:
Nationality Restrictions: The Articles can exclude certain categories of persons from membership, such as requiring members to be nationals of a specific country or trading block (e.g., EU nationals for airlines).
Professional Qualifications: The Articles can require members to hold a particular professional qualification, especially for industries where professionals use limited companies instead of partnerships (e.g., lawyers, accountants).
Joint Holders of Shares: Shares in a company can be held by multiple persons in a joint account, but the Articles may limit the number of joint holders. For listed companies, there must be at least four joint holders.
Can minors become members of a company?
Minors (under 18 in England, Wales, and Northern Ireland) can technically become members of a company, but it is not good practice. Since the responsibilities tied to share ownership are voidable during their minority, any obligations, like paying for partly paid shares, may not be enforceable against them.
What can the company do if a minor becomes a member?
The company can reject the allotment or transfer of shares in the name of a minor. This can be done either through express power in the Articles or under general law. If a minor is mistakenly registered as a member, the company can repudiate the contract for share allotment or transfer. Rejection must occur while the person is still a minor.
What rights does a minor have as a member?
A minor can enjoy full membership rights until the company repudiates their membership. However, any rejection of their membership can only occur during their minority.
What happens if shares are transferred to a minor?
If a minor holds shares, the transferor may be liable for any future calls on those shares, even if they were unaware the transfer was made to a minor. The person arranging the purchase and registration of shares in a minor’s name is responsible for indemnifying the transferor against future calls.
How can parents or guardians avoid issues with minors owning shares?
To avoid problems, parents or guardians can request that shares be registered in their own legal name (e.g., “Janet Williams A/C James Williams”). This way, the responsible adult retains the capacity and responsibility for the shares, while the minor’s ownership is indicated.
What is the position on minors in Scotland?
In Scotland, individuals are pupils until 12 (girls) or 14 (boys), after which they are considered minors until 18. Pupils have no capacity to contract, but their guardian may act on their behalf. Minors who live independently may have the capacity to contract. They can cancel any contract they entered into as minors until they turn 22, but this does not apply to business contracts.
What happens if shares are incorrectly registered in the name of a minor in Scotland?
If shares are registered in the name of a minor and need to be transferred or sold, a parent or guardian must obtain a court order (typically a vesting order) to proceed with the transaction, as minors cannot deal with such transactions themselves.
Can an unincorporated club own shares?
No, an unincorporated club cannot own shares since it does not have legal capacity. The shares should be registered in the name(s) of the club’s members or a corporate nominee. It is recommended to sign a declaration of trust and a stock transfer form to clarify ownership and ensure smooth transfer of shares if necessary.
What are the main disadvantages of registering shares for a long-term investment in children’s
names?
As minors, children can void any obligation to pay funds to the company, and a minor cannot deal with any transaction themselves which would require a court order to ensure it was in their interests.
Can anyone become a member of a company?
Subject to the Articles, any natural person or entity with legal capacity may be a member. However, subsidiaries are generally prohibited from owning shares in the parent entities.
A professional partnership wishes to acquire some shares. How should they be registered?
In the name of one or more partners, unless it is a Scottish partnership which can register the shares in the partnership name.
What is the role of shareholders in providing working capital to a company?
Shareholders provide the working capital to a company, often supplemented by bank loans or other forms of finance, to enable the company to operate.
What are the financial benefits and risks for shareholders?
Shareholders, as owners of the company, benefit from capital growth in proportion to the number of shares they hold. However, they also face the risk that the value of their shares may fall, potentially resulting in the loss of their investment. Their liability is limited to the amount paid or payable for their shares, and once the shares are fully paid, they have no further liability for any company losses.
What is meant by a “share class”?
When shares in a company have different rights, they form a separate share class. The majority of companies limited by shares typically have only one class of shares.
How many shareholders are required in a company?
A company limited by shares must have at least one share in issue at all times, meaning there must be at least one shareholder.
What provisions govern the relationship between the company and its shareholders?
The relationship between the company and its shareholders, as well as among shareholders, is governed by various provisions in the Act and the company’s Articles, including:
Allotment of shares
Transfer of shares
Buy-back of shares
Class meetings
Payments to shareholders
Disclosing ownership
Protection from oppression
Shareholder activism
In order to establish the rights of a shareholder which documents should be referred to?
The Articles or any separate terms stipulated at the time of issue of the shares.
Are members always shareholders?
No - some members are guarantors.
What is the role of guarantors in companies limited by guarantee?
In companies limited by guarantee, members (guarantors) guarantee the company’s debts, usually up to a nominal amount. They are not true owners of the business but can be viewed as temporary trustees holding ownership until it is passed to the next trustee.
Are guarantors entitled to profits or distribution of surplus assets?
Guarantors are generally not entitled to participate in profits or the distribution of surplus assets. If the company ceases to trade or is wound up, any remaining assets must typically be passed to another guarantee or charitable company with similar objectives. However, if a distribution of income or capital is proposed, it is necessary to check the Articles of the company to ensure it is allowed.
How is membership transferred in a company limited by guarantee?
Membership in a company limited by guarantee cannot be transferred. If a person wishes to resign, they must resign as a guarantor, and a new member must apply to take their place. The personal guarantee continues for one year after resignation (CA2006 s. 11(3)).
Are there any provisions specific to guarantors in the Companies Act 2006?
Other than the provisions related to incorporation, application to become a guarantor, or resignation as a guarantor (CA2006 s. 11), there are no other provisions in the Act that apply exclusively to guarantee companies.
Do guarantee companies have different provisions for members’ meetings and communication with members?
No, provisions related to convening and holding members’ meetings, as well as methods of communicating with members, apply equally to both companies limited by guarantee and those limited by shares.
What is the distribution of companies incorporated under the Companies Acts as of March 2021?
As of March 2021, there were 4,716,126 companies incorporated under the Companies Acts on the register maintained by Companies House. The distribution was as follows:
96.2% were private companies limited by shares
3.4% were private companies limited by guarantee
0.1% were public companies
0.1% were private unlimited companies
Why is it common to use the terms “member” and “shareholder” interchangeably?
It is common to use the terms “member” and “shareholder” interchangeably because the vast majority of companies (96.2%) are private companies limited by shares, where ownership is defined by shareholding, making the terms nearly synonymous in these cases.
How can a guarantor transfer their membership to someone else?
They can’t.
Does the guarantee cease immediately on the guarantor resigning?
No, it remains for one year.
Which type of organisation is best suited to use a guarantee company structure?
Not for profit.
How is ownership determined in unlimited companies without a share capital?
In unlimited companies without a share capital, ownership is typically determined through a members’ agreement, similar to a partnership agreement. This agreement sets out the members’ rights, including voting rights, share in profits, share in assets, and contributions to the company’s assets in the event of a winding up.
Are there any specific provisions in the Act regarding the members of an unlimited company?
Other than on incorporation, the Act does not contain specific provisions applicable to the members of an unlimited company.
What is member activism?
Member activism, often referred to as shareholder activism, involves various methods used by members to achieve different aims. Unlike directors who must manage the company for the benefit of all members, shareholders focus on their own individual interests.
How does shareholder activism differ from traditional corporate governance?
Traditional corporate governance focuses on aligning the interests of senior managers and shareholders, often referred to as vertical corporate governance. However, this is difficult to achieve because shareholders have different reasons for investing. Some invest for short-term price increase, others for long-term dividend yield, while some may invest based on share index composition. As a result, management often consults with their largest shareholders to determine what is best for the wider shareholder base.
How do institutional investors in the UK typically act regarding shareholder activism?
Institutional investors in the UK usually invest in companies whose strategy aligns with their own and are typically supportive of management. While they are not actively seeking changes, they are open to listening to ideas from activists.
Who are shareholder activists and what do they typically do?
Shareholder activists are often investment funds that invest in companies where they believe change is needed to increase shareholder value. Although they may not be the largest shareholder, they seek to disrupt the status quo and current corporate strategy. They use shareholder rights to push for changes, such as voting directors off the board, putting forward contrary resolutions at AGMs, and calling for informal shareholder meetings.
What are the broad categories of interest for activist investors?
The areas of interest for activist investors can be summarized into the following broad categories:
Corporate governance: Changes in governance, board changes, and directors’ remuneration.
Balance sheet: Share buybacks, dividends, divestment of non-core assets, and adding value to underperforming assets.
Strategic transactions: M&A (mergers and acquisitions), promoting or complicating strategic transactions, and influencing the strategic direction of the company.
How can companies manage investor engagement and activism?
For companies, particularly their company secretaries, managing investor engagement is key. This involves preparation, understanding the company’s advisory team, and being familiar with corporate processes. It’s important to monitor the shareholder base, engage early with new investors, and keep the board updated on changes in the investor base and their agendas. Investor relations messages should be aligned with the corporate strategy, and transparent, accurate, and clear communication is vital to build and maintain investor trust.
What is pressure group activism in the context of shareholder meetings?
Pressure group activism occurs when activist groups, often purchasing only a small number of shares, attend shareholder meetings with the intent of disrupting the meeting to gain publicity for their cause. These groups aim to force the company to change its behavior or strategy on a particular issue.
What are some common issues raised by pressure groups in shareholder meetings?
Pressure groups often focus on issues such as animal welfare, fossil fuel usage, climate change, environmental concerns, gender diversity, and equal pay.
How can companies manage disruption caused by pressure group activism during shareholder meetings?
Companies can take practical steps to prevent or minimize disruption during shareholder meetings. This could include adjourning the meeting or ejecting disruptive members if the disruption continues.
Why is aligning the interests of directors and shareholders difficult to achieve in practice?
Shareholders have many different reasons for becoming and remaining as shareholders so their interests are not aligned with each other.
What are the main differences between activist and pressure group shareholders?
Activist shareholders use their holding and influence to bring about change. Pressure Group shareholders try to bring about change through publicity achieved through campaigns and meeting disruption.
What role do the Articles of Association play in relation to membership rights?
The Articles of Association set out the specific rights and obligations that members (shareholders or guarantors) enjoy within a company. While the Companies Act outlines fundamental processes like the issue and transfer of membership, the Articles provide detailed information about the rights of members, such as voting rights, dividend entitlements, and other member-specific provisions.
What does the Companies Act cover in relation to membership?
The Companies Act provides fundamental processes for issuing and transferring membership, protection from membership dilution, and safeguards against directors unfairly prejudicing members’ rights. However, the Act does not go into detail about the specific rights of membership, which are instead outlined in the company’s Articles.
When does a company need to have different classes of shares or membership?
A company needs to have different classes of shares or membership when members or groups of members have different rights. If all members are to have equal rights, the company can have just one class of shares or membership (CA2006 s. 629).
Do companies limited by guarantee typically have different classes of members?
No, companies limited by guarantee usually have only one class of member. However, if the company is a membership organization, such as a sports club, by-laws may exist that allow members to have different rights, including the ability to elect directors, based on the type of membership they hold.
Ordinary Shares:
Full rights: Ordinary shares carry full rights to participate in dividends and capital distributions without an upper limit. These are the risk capital of the company, meaning the dividends fluctuate based on the company’s performance.
Rank: In liquidation, ordinary shares rank behind preference shares.
Alternative names: Sometimes called deferred shares, particularly if the company only has one share class.
Ordinary Non-Voting Shares:
Similar to ordinary shares: These shares typically have restricted or no voting rights, but otherwise hold the same rights to dividends and capital as ordinary shares.
Preference Shares:
Preferential rights: These shares offer a fixed dividend and preferential treatment in the return of capital on a winding up.
Dividend: The fixed rate of dividend is usually based on the nominal value of the shares, not the issue price.
Priority: Preference shares take priority over ordinary shares for dividends and capital repayment.
Deferred Shares:
Deferred rights: These shares have limited or no rights to dividends, or their dividends may only be paid once a certain profit level is reached.
Purpose: Often used when a company wants to allow new investors greater ownership, or to provide more rights to new investors without reducing capital.
Cumulative Preference Shares:
Similar to preference shares: These shares also have a fixed dividend, but if dividends are not paid in a particular year, they accumulate and must be paid before any dividends on ordinary shares.
Redeemable Shares:
Future redemption: Redeemable shares (including preference shares) can be redeemed by the company at a future date or on the achievement of a specific event, based on terms set in the Articles or by the directors (CA2006 s. 685).
Debentures and Loan Stocks:
Not shares: Debentures and loan stocks are loans to the company, not shares, and carry a fixed interest rate. They rank ahead of preference and ordinary shares in terms of repayment and interest.
Interest payment: Failure to pay interest on debentures can trigger default, and debentures rank ahead of other types of capital in liquidation.
No voting rights: These do not carry voting rights and are typically referred to as “loan capital.”
What are the three main categories of rights attached to shares?
Voting rights
Income rights (Dividends)
Capital rights (Distribution of assets)
What is the right to vote in relation to shares?
The right to attend and vote at meetings can be restricted, enhanced, or non-existent for certain share classes.
Some shares may be non-voting, except in special circumstances.
What is the right to receive a dividend?
A share class may have:
No dividend rights
Preferential rights to a fixed dividend
Cumulative dividends, meaning unpaid dividends accumulate to be paid later.
Non-cumulative dividends, meaning missed dividends are not carried forward.
Ordinary shares must have unrestricted dividend rights (CA2006 s. 560).
What are the rights related to capital?
Preference shares often have preferential rights to return capital during liquidation before ordinary shares.
Deferred shares might not have any rights to capital return unless other shares have been paid first.
Investors can sometimes have enhanced rights to capital returns, often tied to the company’s valuation or sale price.
What are pre-emption rights on transfer?
Pre-emption rights allow existing shareholders the right of first refusal if another shareholder wishes to sell their shares, before they are offered to external buyers.
These rights may limit how and when shares can be sold.
What are pre-emption rights on allotment?
These rights allow existing shareholders the ability to purchase newly issued shares in proportion to their existing holdings, preventing dilution of their ownership.
What are redemption rights?
Shares with redemption rights can be bought back by the company at a predetermined date or upon achieving a specific event, or based on a formula.
This right typically applies to preference shares with no capital return rights but enhanced dividend rights.
What are conversion rights?
Conversion rights allow a shareholder to convert their shares into another class (often into ordinary shares) under certain conditions, such as a company event or valuation.
The conversion ratio could be 1:1 or based on a ratchet mechanism to offer greater returns at higher company valuations.
Can the rights of shares be changed?
Yes, the rights of shares can generally be altered, even after issuance, but there are limitations. For example, redeemable shares cannot be converted into non-redeemable shares.
What is the requirement for non-redeemable shares under CA2006 s. 684(4)?
A company must always have at least one share in issue that is non-redeemable.
How can the rights attached to a class of shares or members be varied?
The rights can be varied as per the company’s Articles of Association, or, if no provision exists, in accordance with CA2006 ss. 629–640.
What does CA2006 s. 630 require for varying class rights?
Class rights can be varied with:
Written consent from at least three-quarters in nominal value of the shares of the relevant class, or
A special resolution passed by the holders of that class.
What happens if the company’s Articles impose a higher threshold than the statutory requirement for varying class rights?
The company must comply with the higher threshold specified in its Articles of Association.
Do restrictions on voting rights apply to class meetings?
No, restrictions on voting rights apply only to general meetings and not to class meetings of that class.
What is required for varying class rights in a company without share capital (CA2006 s. 631)?
Written consent from three-quarters of the members of the relevant class.
A special resolution passed at a separate class meeting of the members.
What can shareholders do if they disagree with a variation of class rights?
Shareholders holding 15% or more of the shares (or 15% of the members in a company without share capital) who did not consent can apply to the court to cancel the variation within 21 days of the resolution.
What will the court consider when deciding whether to cancel a variation of class rights?
The court will cancel the variation if it finds that it would unfairly prejudice the holders or members concerned.
If the variation does not unfairly prejudice, the court will confirm the alteration.
What must happen if the court confirms the variation?
A copy of the court order must be filed with the Registrar within 15 days of the order.
What other change usually occurs when varying class rights?
Varying class rights typically requires an amendment to the company’s Articles, which must be passed by a special resolution of the members at a general meeting.
What are companies required to do after varying the rights of shares or members?
The company must notify the Registrar of the variation and the particulars of the rights created or affected within one month.
How can a company amend or replace its Articles?
A company can amend its Articles of Association in the following ways:
Amending the wording of one or more of the clauses in the Articles.
Deleting or adding clauses to the existing Articles.
Adopting a completely new set of Articles, which will replace the original Articles entirely.
What are the limitations on amending the Articles?
The following limitations apply when amending the Articles of a company:
Court involvement for unfair prejudice: If the court is dealing with an unfair prejudice application under section 994, the court can alter the company’s Articles and also prohibit any future alterations of the amended Article without its prior consent.
Increasing liability of members: An amendment cannot increase the liability of any member unless the member agrees in writing to the change, either before or after the amendment has taken place (as per section 25 of CA2006).
Variation of class rights: If the amendment seeks to vary class rights, the variation will not be valid unless:
A resolution is passed at a class meeting of the members of that specific class.
Members who voted against the resolution and hold at least 15% of the shares in that class have 21 days to object to the court for the variation to be cancelled (under section 633).
Bona fide for the benefit of the company: Any amendment to the Articles must be genuine and in the best interest of the company. It cannot be done with the intent to fraudulently prejudice minority shareholders.
What is required to amend the Articles of a company?
To amend the Articles, the following process must be followed:
Board resolution: The directors must first meet and pass a resolution to either circulate a written resolution or convene a general meeting where the special resolution will be discussed and voted upon.
Notice to members: A circular should be sent to all members, explaining the reasons for the proposed changes to the Articles. This circular should also provide details of the proposed changes or the new set of Articles, and if applicable, a proxy form for listed companies (as per LR 9.3.6).
Main provisions summary: If the company intends to adopt new Articles, the circular will usually summarize the main provisions of the proposed new Articles. A copy of the full Articles should be available for inspection at the company’s registered office or at the office of the company’s solicitors from the time the notice is sent out until the date of the meeting.
Financial institution involvement: If a significant proportion of the company’s shares are held by financial institutions (such as pension funds or insurance companies), the company may wish to seek confirmation from these institutions that they approve of the proposed changes. This is especially relevant if the changes are intended to increase shareholder involvement or affect corporate governance.
Voting: A special resolution (requiring at least 75% approval of the members voting) is needed to amend the Articles.
What are the filing requirements after approval of the special resolution?
After the special resolution to amend the Articles is approved, the company must comply with the following filing requirements:
Send certified copies: A certified copy of the special resolution must be sent to the Registrar of Companies within 15 days of the meeting.
Certified copy of the amended Articles: Along with the special resolution, a certified copy of the amended Articles (or the new Articles, if a complete replacement is adopted) must also be sent to the Registrar.
Listed company notification: For listed companies, two copies of the resolution and the amended Articles must be sent to the Financial Conduct Authority (FCA) for publication through the document-viewing facility (as per LR 9.6.2).
Prepare reprints of Articles: The company should prepare a reprint of the Articles incorporating the amendments or the new Articles and distribute these to relevant parties such as the board of directors, auditors, solicitors, and others who regularly refer to the Articles.
What happens if a member requests a copy of the amended Articles?
After the amendment to the Articles is approved, the company must provide a copy of the amended Articles to any member who requests it. This requirement is set out under section 32 of the Companies Act
What is the significance of the Companies Act 2006 in relation to company constitutional documents?
The Companies Act 2006 (CA2006) changed the structure of companies’ constitutional documents by moving provisions that were previously in the memorandum of association into the articles of association.
This change means that provisions that were previously unalterable in the memorandum can now be changed by a special resolution.
What is entrenchment in the context of company law?
Entrenchment, introduced under CA2006 s. 22, allows companies to specify that certain provisions in the articles of association can only be altered using more restrictive procedures than a standard special resolution.
It ensures additional protection for key provisions, preventing them from being easily repealed or amended.
Can a company make a provision permanently unchangeable?
No, a company cannot provide that a certain provision can never be repealed or amended.
Instead, entrenchment can require stricter approval processes for amendments, such as a higher voting threshold or requiring court approval.
Why might a company use entrenchment?
Entrenchment can be used to protect core principles of the company, such as:
A charitable company ensuring that profits cannot be distributed to its members.
Companies wishing to protect specific governance structures or investor rights.
This avoids the need to rely solely on charity law or the community interest company (CIC) structure.
What issue arose with CA2006 s. 22(2)?
CA2006 s. 22(2) was not brought into force because of concerns that it could unintentionally interfere with the separate legal regime governing changes to class rights under CA2006 s. 630.
The government decided to delay its implementation to prevent unintended legal consequences.
What notification requirements exist for entrenchment provisions?
When must a company notify the Registrar?
A company must give notice to the Registrar of Companies when:
An entrenching provision is included in its articles of association (either at formation or later).
A court or other authority alters the articles to restrict or exclude the company’s power to amend certain provisions. (CA2006 s. 23)
What happens when an entrenched provision is amended?
The company must send the resolution or court order making the amendment to the Registrar of Companies (CA2006 s. 24).
The company must also submit a Statement of Compliance, using:
Form CC01 – If entrenchment is being included.
Form CC02 – If entrenchment is being removed.
What must the Statement of Compliance certify?
The Statement of Compliance must certify that the amendment was made:
In accordance with the company’s articles, including any entrenchment provisions.
Or, where applicable, in compliance with a court order or directive from another authority.
Rights attaching to shares can be divided into three broad categories, what are they?
Right to vote; right to dividends (distribution of profits) and rights to capital.
What protection is given to members holding non-voting class shares if the members holding
voting shares resolve to amend the Articles in general meeting to increase their dividend
rights?
Rights attaching to shares of a class cannot be amended without their consent, even if they are non-voting shares.
Can a company with two classes of shares, ordinary shares and redeemable shares, purchase
back all of the ordinary shares?
No, this is because a company cannot have only redeemable shares.
What is a director’s fiduciary duty regarding members’ interests?
Under common law and CA2006 s. 172(1), directors have a fiduciary duty to act in the interests of the members as a whole.
Directors cannot act for the benefit of:
A subgroup of members.
Themselves rather than the company.
No one at all (i.e., failing to act in the best interest of the company).
If they fail to do so, they can be held liable.
What is unfair prejudice?
CA2006 s. 994 allows a company member to apply to the court for an order if:
The company’s affairs are being or have been conducted in a way that is unfairly prejudicial to members (or a group of members).
A company’s actual or proposed act/omission is or would be unfairly prejudicial.
This protection exists to prevent abuse of power by directors or majority shareholders.
What are the two key tests to prove unfair prejudice?
A member must prove that the conduct:
Is unfair – It does not have to be intentional or in bad faith.
Has caused or is causing prejudice or harm – It must negatively affect the rights or interests of members.
How is “unfair conduct” determined?
The test for unfairness is objective.
Even if there is no bad faith or intent to harm, conduct can still be unfair.
The court applies the reasonable bystander test (i.e., would a neutral observer consider it unfair?).
What constitutes “prejudice to members’ rights”?
The conduct must unfairly prejudice the complainant’s interests as a company member.
The court takes a broad view of what constitutes members’ rights, including:
Legal rights (e.g., voting, dividends, participation in management).
Equitable considerations (e.g., expectations based on agreements or historical company practices).
In quasi-partnerships, members may have an expectation to be involved in management. Exclusion from management can be deemed prejudicial.
What must a complainant prove in court?
The complainant must show:
Abuse of power by directors; or
Infringement of members’ rights under the Companies Act 2006 or the Articles of Association.
Is unfair prejudice a rigid or flexible concept?
Unfair prejudice is a flexible concept that depends on the circumstances of the case.
The courts take a broad approach to determine what constitutes unfairly prejudicial conduct.
What are common examples of unfair prejudice?
Exclusion from management
If a member has an express or implied agreement to participate in management but is unfairly excluded, this may be unfairly prejudicial.
Majority shareholder receiving excessive financial benefits
If a majority shareholder takes excessive salary, bonuses, or dividends that are not justified, this can be unfair to minority shareholders.
Diversion of business opportunities
If directors or majority shareholders transfer business opportunities to another company in which they have an interest, this is an abuse of power.
Failure to respect pre-emption rights on share allotment
If shares are issued without offering them first to existing members, their stake in the company may be diluted unfairly.
Abuse of power and breaches of the Articles
Examples include:
Altering the Articles of Association through a special resolution in a way that unfairly disadvantages certain members.
Failing to circulate company accounts, preventing members from knowing the true financial position of the company.
What remedies are available to the court if it finds in favour of a complainant in an unfair prejudice case?
Under CA2006 s. 996(2), the court has several remedies at its disposal, in addition to the general provision to make any order it deems appropriate under CA2006 s. 996(1). These include:
Regulate the company’s future conduct
The court can direct how the company should conduct its affairs in the future to prevent unfair practices from continuing.
Refrain from continuing certain acts
The court may require the company to stop doing or continuing an act that is causing the prejudice or to do something that it has failed to do.
Authorise civil proceedings in the company’s name
The court may allow individuals (as directed by the court) to bring civil proceedings on behalf of the company, with the costs borne by the company itself.
Prohibit alterations to the Articles
The court may restrict the company from making certain alterations to its Articles without prior approval from the court.
Order the purchase of shares
The court can order the purchase of shares from the prejudiced members, either by other members or by the company itself. If the company buys the shares, this could result in a reduction of its capital.
What is the significance of the remedy where the court authorises civil proceedings in the company’s name?
This remedy is particularly beneficial for the complainant, as it allows the company to pursue legal action, and the costs of the action are borne by the company, rather than the individual.
What is the most common remedy in cases of unfair prejudice?
The most common remedy is for the court to order the purchase of shares held by the member(s) whose interests have been unfairly prejudiced.
This is often purchased by other members or, in some cases, by the company itself.
What issues arise when ordering the purchase of shares as a remedy for unfair prejudice?
One major issue is the valuation of shares, as there are different methods for valuation.
While the court may not stipulate the exact method, it will typically require the company to be valued at the time the unfair prejudice occurred and on the assumption that the prejudicial conduct had never taken place.
What two tests must be satisfied in order to bring a claim for unfair prejudice?
The conduct complained of must be unfair and the conduct must have caused or is causing prejudice or harm to the interests of the members or a group of the members.
What is a derivative action?
A derivative action is a lawsuit brought by a company’s member on behalf of the company, typically against directors or third parties. The aim is to address wrongs such as negligence, breach of duty, or breach of trust that negatively affect the company. The action is filed for the benefit of the company and not for personal gain by the member bringing the claim (CA2006 ss. 260–269).
What are the grounds for bringing a derivative action?
A derivative action can be brought for the following grounds:
Negligence: Failure to exercise reasonable care or skill in the management of the company.
Breach of duty: Violation of the legal or fiduciary duties owed by directors or others involved in the company.
Breach of trust: Misuse of the company’s assets or other trust-related violations by directors or third parties.
These claims can be brought whether the cause of action arose before or after the member became involved with the company (CA2006 ss. 260 and 265).
How does a member apply for permission to continue a derivative claim?
Before a derivative action can proceed, the member bringing the claim must apply to the court for permission to continue. To do so, the member must establish a prima facie case, meaning they must show there is a legitimate basis for the claim (sufficient grounds for proceeding with the action).
If the evidence presented doesn’t establish a prima facie case, the court will dismiss the claim and may impose a costs order (CA2006 ss. 261, 262, 266, 267).
What happens if the court grants permission to continue the claim?
If the court finds that the evidence establishes a prima facie case, it will grant permission to continue the action. The court may also issue directions for the company to provide evidence. The proceedings may be adjourned to allow the company time to gather and submit evidence (CA2006 ss. 261, 262, 266, 267).
Can a member continue a derivative claim initiated by another member?
Yes, a member can apply to continue a derivative action that was started by another member. The court will allow this if:
The original member’s actions are an abuse of the court process.
The original member is failing to prosecute the claim diligently.
It is appropriate for the second member to continue the claim (CA2006 ss. 264, 269).
What are the grounds for refusing permission to continue a derivative claim?
The court will refuse permission to continue the claim if:
Continuing the claim is unlikely to promote the success of the company for the benefit of its members.
The conduct that is being challenged has already been ratified or authorised by the company (i.e., the members have agreed to it) (CA2006 ss. 263).
In cases where a director’s negligence or breach of duty has been ratified by the members, the votes of those personally interested in the ratification must be disregarded.
What factors will the court consider when deciding whether to grant permission to continue the action?
When deciding whether to allow a derivative action to continue, the court will consider several factors:
The views of independent shareholders on whether the action should proceed.
Whether the member bringing the claim is acting in good faith.
The importance a director promoting the success of the company would place on continuing the claim.
Whether the conduct complained of is likely to be ratified or authorised by the company.
Whether the company has decided not to pursue the claim.
Whether the member should pursue a remedy in their own right instead of on the company’s behalf (CA2006 ss. 263 and 268).
What is the ‘prima facie case’ requirement in the context of derivative actions?
A prima facie case refers to evidence that is sufficient to establish a legally valid claim for the court to allow the case to proceed. The member bringing the claim must show that there is enough evidence to indicate that negligence, breach of duty, or breach of trust has occurred. If the court does not find such evidence, the case will be dismissed (CA2006 ss. 261, 262).
What is the alternative remedy to a derivative action?
An alternative remedy to a derivative action is a petition for just and equitable winding-up under the Insolvency Act 1986 s. 122(1)(g). This type of winding-up is used when disputes between members have caused a breakdown in mutual trust and confidence, making it impossible for the company to operate effectively.
What is a just and equitable winding-up, and when is it used?
A just and equitable winding-up is a legal petition used when a shareholder dispute significantly impedes the company’s operations. Common situations where this remedy is sought include:
A 50:50 deadlock between members.
Mismanagement by one party.
Exclusion from management of a party.
Loss of trust between members that prevents the company from operating properly.
The petition can be brought by the company, its directors, creditors, or any member with a stake in the company’s assets (IA1986 s. 122(1)(g)).
Who can bring a just and equitable winding-up petition?
A petition for just and equitable winding-up can be brought by:
The company itself.
The directors of the company.
A majority of creditors.
A member or other person with a financial interest in the company.
It is typically used in situations where there has been a breakdown in mutual trust between shareholders or directors, rendering it impossible for the company to continue functioning effectively.
How does a just and equitable winding-up differ from a derivative action?
A just and equitable winding-up is an appropriate remedy when internal disputes between members or directors have escalated to the point where the company cannot continue to function due to a breakdown in trust. It’s a final remedy to dissolve the company and settle the disputes.
On the other hand, a derivative action allows a member to bring a legal claim on behalf of the company against directors or third parties for wrongdoing, with the goal of remedying the wrongful conduct rather than dissolving the company.
These concepts are essential for understanding how members can challenge mismanagement or unfair conduct within a company and what legal options are available to resolve disputes. Derivative actions provide a method to address wrongdoing without requiring the dissolution of the company, while just and equitable winding-up is a remedy when company operations have broken down entirely.
Can anyone bring a derivative action claim against a company?
It must be brought by a member.
What is required to become a member of a company?
To become a member of a company, an individual or entity must give consent to join and have their details entered into the company’s register of members. This process makes the person a legal or registered member.
The consent can be expressed through actions such as agreeing to acquire shares or agreeing to become a member.
The register of members is the official list of all members, which is maintained by the company and must reflect those who are legally recognized as members.
Can trusts be noted in the company’s register of members?
No, companies are prohibited from recording trusts in their register of members. The registered member (the person whose name is officially listed in the register) is treated as the legal owner of the shares, even if the shares are held on behalf of a beneficial owner.
Trusts that may exist over shares, where the registered holder is a nominee for a beneficial owner, are not noted in the register.
Only the registered members (nominee holders) appear in the company’s records, while the actual beneficial owners remain anonymous to the company.
What is beneficial ownership in the context of company shares?
Beneficial ownership refers to the true or real ownership of shares, which may not always align with the name on the company’s register of members. In many cases, shares are held by nominees on behalf of the true, beneficial owner (CA2006 s. 126).
Nominee holders are the legal owners recorded in the company’s register, but they are holding the shares on behalf of the beneficial owner.
The beneficial owner is the person who ultimately enjoys the benefits of the shares (e.g., receiving dividends or voting rights) but is not listed as the shareholder in the company’s official records.
How do beneficial owners protect their interests?
To protect their interests, beneficial owners should ensure that they have a transfer form signed by the nominee. This form is essential because it allows the beneficial owner to:
Transfer the shares to themselves or another nominee in case of a dispute with the nominee or any issues concerning the shareholding.
Without this signed transfer form, the beneficial owner may find it difficult to prove their right to the shares in legal situations, such as disputes over ownership or control of the shares.
Key Takeaways:
To become a legal member of a company, a person must consent and be listed in the register of members.
Beneficial owners of shares are the true owners, but companies can only recognize the registered members (nominees) in their records.
Nominee arrangements are common, but beneficial owners must take steps (like obtaining a signed transfer form) to ensure they can assert their rights over the shares, especially in disputes.
This system ensures that companies keep a clear and legally recognized record of who is a member, but it allows flexibility for the actual economic interests (the beneficial owners) to remain protected and properly managed.
What is the difference between beneficial and legal ownership of shares?
Legal ownership is where the person is the registered member; beneficial owners retain the economic benefit of ownership but are not the legal owners as the shares are registered in a nominee’s name.
Differences between legal and beneficial ownership.
Legal ownership is about the formal registration of the shares in the company’s records and the exercise of rights like voting.
Beneficial ownership refers to the economic interest in the shares, where the person enjoys profits, dividends, and the right to transfer the shares, even if they are not listed as the shareholder in the company’s public records.
While the legal owner is officially recognized by the company, the beneficial owner is the person who truly owns and benefits from the shares.
