Chapter 6: Companies - Members

Question 1

Who are shareholders?

Answer 1

Members of the company, either through:
i. being one of the first subscribers for shares when the company is formed through the purchase of newly issued shares, or
ii. through having shares transferred by an existing shareholder

Question 2

What is a shareholder’s main role?

Answer 2

To provide financial backing for the company

Question 3

When does membership of the company take place?

Answer 3

Either:
i. on registration, or
ii. when the details of the member are entered onto the company’s register of members

Question 4

When might a shareholder of a company be classed as a person with significant control (PSC)?

Answer 4

If they:
1. Directly or indirectly hold more than 25% of the shares in the company,

2. Directly or indirectly hold more than 25% of the voting rights in the company,
3. Directly or indirectly hold the right to appoint or remove a majority of the board of directors of the company, or
4. Have the right to exercise, or actually exercise, significant influence or control over the company.

Question 5

What must be done if a shareholder is a PSC?

Answer 5

Certain information about the shareholder must be entered into the company’s PSC register

Question 6

What are the primary rights a shareholder acquires as a member of a company?

Answer 6

1. The right to receive a dividend
2. The right to vote on decisions taken by the company (resolutions)

Question 7

What does a member’s right to a dividend depend upon?

Answer 7

The particular class of shares held by the shareholder

Question 8

When may dividends be paid?

Answer 8

The Companies Act 2006 provides that a company must not make distributions to shareholders except out of profits available for the purpose.

In addition, payment of a dividend must not render the company insolvent.

Question 9

How is the term ‘profits available for the purpose’ defined?

Answer 9

Accumulated realised profits less accumulated realised losses.

Question 10

What are preference shares?

Answer 10

They are paid a dividend ahead of ordinary shareholders, and the shares can carry the right to a cumulative fixed percentage dividend.

This means that if there are no profits available for the purpose, the dividend would roll over to the next financial year.

Question 11

How might preference shareholders be treated in the event of the company’s insolvency?

Answer 11

The preference shareholders may receive a return of capital in priority to the ordinary shareholders

Question 12

What voting rights do preference shares typically have?

Answer 12

Usually none

Question 13

What is the procedure for declaring dividends?

Answer 13

It is the directors who will decide, having considered the accounts + whether there are profits available for the purpose, whether a dividend should be recommended for approval by the shareholders.

If a dividend is recommended, it is then up to the shareholders to approve it + declare the dividend by passing an ordinary resolution

Question 14

What options are option to the shareholders when asked to approve and declare a dividend?

Answer 14

It is open to the shareholders to decline to declare the dividend or declare a smaller amount, but they are not permitted to declare a dividend in excess of that recommended by the directors

Question 15

What is an unlawful dividend?

Answer 15

A dividend payable other than out of profits available for the purpose

Question 16

When will the shareholder be liable to repay a dividend?

Answer 16

If at the time of the distribution a shareholder knows or has reasonable grounds for believing that the distribution has been declared unlawfully.

Question 17

When might directors be personally liable for dividends declared?

Answer 17

May be personally liable if a dividend is declared unlawfully, as they will have recommended it to the shareholders in the first place

Question 18

What may be done if a shareholder believes a director has or is about to breach a duty owed to the company?

Answer 18

If it appears a director has or is about to breach a duty to the company + it appears the board will not assert the company’s rights to prevent or remedy the action, the shareholder may apply to the court to bring a derivative claim against the director on behalf of the company

Question 19

Who may bring a derivative claim?

Answer 19

Only a shareholder or a person to whom shares were transferred by operation of law (e..g, through inheritance) may bring a derivative claim

Question 20

Who may a derivative claim be brought against?

Answer 20

the director in breach or another person, or both

Question 21

How are shadow directors treated for purposes of derivative claims?

Answer 21

Treated as directors - and so such a claim may be made against a shadow director

Question 22

Is it permissible for a shareholder to asset a claim that arose prior to the shareholder becoming a shareholder?

Answer 22

Yes

Question 23

When must a court dismiss a derivative claim?

Answer 23

If the application + evidence submitted along with the application do not show a prima facie case.

Question 24

What will the court do if an application for a derivative claim shows a prima facie case?

Answer 24

The court must move to a second stage + must dismiss it if:

1. It is satisfied a person acting to promote the best interests of the company would not seek to continue the claim, or
2. The action was authorised by the company or authorisation would be likely.

Question 25

What must the court consider when deciding whether to allow a derivative claim?

Answer 25

the court must consider:

i. whether the shareholder is acting in good faith,
ii. the importance of the action in question to the success of the company, and
iii. whether the shareholder could seek a remedy in their own right rather than on behalf of the company (such as where the director has violated a duty owed personally to the shareholder)

Question 26

What happens if a derivative claim is successful?

Answer 26

Because such claims are brought on behalf of the company, any damages awarded belong to the company.

Although the Companies Act 2006 does not so provide, at common law the courts could require the company to indemnify the shareholder who brings a derivative claim.

Question 27

How can shareholder’s ratify a director’s breach?

Answer 27

By passing an ordinary resolution.

Question 28

What is a shareholder’s right to not be unfairly prejudiced?

Answer 28

A shareholder has a right not to be unfairly prejudiced.

If a shareholder feels that the company’s affairs are being conducted in a manner which is unfairly prejudicial to that shareholder, they can petition the court for a remedy.

Question 29

What are examples of unfair prejudice?

Answer 29

Could be:
- exclusion from the management of a quasi-partnership company,
- directors exercising their powers for an improper purpose,
- directors awarding themselves excessive remuneration, and non-payment of dividends.

Question 30

What happens if a minority shareholder petitions the court for a remedy in the face of unfair prejudice?

Answer 30

If the minority shareholder is successful in such a claim, the most common remedy is an order that the minority shareholder’s shares are purchased.

Question 31

Who can apply to have the company wound up?

Answer 31

Any shareholder can apply to have the company wound up if:
i. the company is solvent, and
ii. the shareholder can show it is just and equitable to do so.

Question 32

Why is having the company wound up a remedy of last resort?

Answer 32

Because the company will cease to exist + the shareholder is likely to receive back less money than if they had sold their shares.

Question 33

What is the best option if a minority shareholder has lost confidence in the board of directors?

Answer 33

It is usually a better solution to negotiate with the directors/ other shareholders to sell their shares.

Question 34

What right to inspect do shareholders have?

Answer 34

1. The right to inspect the service contracts of the directors, which the company must keep at the registered office for at least 1 year after the director leaves.
2. The right to inspect the register of members, which must typically be kept at the registered office.

Question 35

What is required of the register of members?

Answer 35

It must include:
i. their names,
ii. their addresses,
iii. the date on which each was registered, and
iv. the date at which any person ceased being a member, and
v. details of their shareholdings

Question 36

What is required if a company has more than 50 members?

Answer 36

Also required to have an index of the members

Question 37

What must a shareholder do if they wish to exercise their right to inspect?

Answer 37

The shareholder must:
i. request inspection, and
ii. include:
- their name and address,
- the purpose of the inspection, and
- the name and address of anyone with whom the information will be shared.

Question 38

What must the company do if a shareholder requests to exercise their right to inspect?

Answer 38

The company must comply with the request within 5 working days or apply to court claiming the purpose is improper.

The purpose must be related to the shareholder’s right as a shareholder as opposed to, e.g., getting names to create a commercial mailing list for personal gain.